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Africa best left to help itself
* Max King, Business Day (SA)
July 12, 2005

http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A67306

THE Group of Eight (G-8) summit at Gleneagles has placed Africa in the foreground, but the result has only strengthened prejudices and misconceptions.

The mass protest by the Make Poverty History campaign is almost as futile as the summit itself. The campaigners have the absurd idea that a combination of extra government aid, debt forgiveness and trade protection can significantly reduce poverty. The politicians are determined to avoid the one measure — abolition of agricultural subsidies and quotas — that could both make a difference to developing countries and benefit the G-8 economies.

The origins of Make Poverty History lie in the guilt widely felt in the developed world. This attributes the economic problems of much of Africa and elsewhere to the imperialism that is supposed to have exploited these countries and left them unprepared for the modern world. Hence, the theory goes, Europe has a responsibility to sort out the mess that it created.

Academic historians debunked this myth decades ago, but it lives on. In Victorian times, Sir John Seeley opined that the British Empire had been acquired "in a fit of absence of mind" rather than as part of a coherent strategy.

In the 1960s, Jan Morris wrote that "the assumption that the empire made Britain rich was a misconception. While it was obviously true that individual firms and families had been enriched by imperial enterprise, Britain-s staggering wealth had been accumulated above all by free trade." The empire-s total foreign trade was more than four times its internal trade and far more capital was sunk in the US than in India.

As for the African scramble, Morris wrote, "the activists were the Germans and the French: the British, who really had quite enough empire already, grabbed by reaction". In 1897, tropical Africa took just 1,2% of British exports, and "Africa, the land of the new imperialism, was like a quagmire, leading the British ever more deeply into trouble".

If Britain-s wealth was based on free trade, and if its empire, acquired haphazardly, was an increasing economic burden, it might still be possible that the rest of Europe left its colonies in a mess. In some places, such as the Congo, this was true, but few doubt that Burma-s descent from the richest to almost the poorest country in Asia is entirely the consequence of its own governments. In Africa, Zimbabwe has followed the same path.

It is curious that the Make Poverty History campaign is focused entirely on Africa, and ignores countries such as Bolivia and Bangladesh, with equal or greater problems. The omitted countries should be grateful. They will make much greater progress in fighting poverty if they follow the examples set by their neighbours, Chile and India, than by placing their faith in the aid industry.

A survey published by India-s finance ministry shows that 55% of India-s population lived in poverty in 1973. By 1999, the proportion had fallen to 26%, and there has been a significant further reduction since then. The data show that the fall in poverty accelerated after 1990, when India opened up its economy, previously closely regulated, protected and state-controlled or owned, to international and domestic market forces.

Make Poverty History gives the impression that Africa-s economic future is dependent on foreign aid, and Africa is incapable of helping itself. This is wildly inaccurate. In the past five years, growth has been consistent but modest, averaging about 3% a year. This is only half the level of India, and not enough to have a major effect on living standards or poverty, but it is a step in the right direction.

Little, if any, of this growth is the result of aid, according to a recent report co-authored by Raghuram Rajan, the chief economist of the International Monetary Fund. Aid leads to an overvaluation of the real exchange rate and adversely affects a country-s competitiveness, particularly growth, wages and employment in labour-intensive and export sectors. Interestingly, private sector remittances do not have this effect, which suggests that aid is spent best where it bypasses governments altogether. Government-to-government debt relief, favoured by the G-8, may be the worst form of aid.

With or without aid, the economics team at Goldman Sachs is optimistic. "Sub-Saharan Africa is currently experiencing its best economic performance in many years", it writes. "We find that GDP (gross domestic product) growth could average 5% per annum over the next decade compared to less than 3% over the past 30 years. Its share of world GDP would increase from 1,3% to 2%."

Despite this, few professional investors, let alone private ones, give the idea of investing in Africa, outside SA, a moment-s thought. They are unaware that Africa contains no fewer than 18 stock markets. In 2003, three of them more than doubled in value, placing them among the world-s top 10 performers. Last year, four were among the top 10, each appreciating more than 75%. The average return in dollars was 41% in both years. More than 400 companies have listed on various markets in the past 10 years, yet there are few funds specialising in such a large, important and strongly performing region.

Companies and entrepreneurs are also defying the sceptics. Barclays is paying $5bn for control of Absa, a banking network spreading across Africa. South African Breweries, retailer Shoprite and others are investing across the continent. Celtel, the first African-led pan-African cellphone operator, has just been bought by a Kuwaiti company for $3,6bn, multiplying the money of investors including Actis and Blakeney fivefold.

Most of the investment interest is in the resources sector, but this only shows the potential wealth of much of Africa. With plentiful low-cost labour, an abundance of fertile land and underexploited potential for tourism, there is no reason why Africa-s economic potential should be limited to resources, or why agricultural protection in the west is an insurmountable barrier to development.

Western news coverage tends to focus on the disasters, such as Zimbabwe, which involve corrupt, incompetent and malevolent governments. The quiet, steady success of countries such as Uganda, Tunisia and Botswana attracts little attention. Their neighbours, however, are noticing. An increasing number of former problem countries, such as Zambia, Ghana, Mozambique and maybe even Ethiopia, have improved sufficiently to have become too boring for the world-s press.

The best way for people in the west to help is by investment in companies and projects offering a commercial rate of return. As the Victorians found out, free trade, investment and a market economy, not regulation, protection and paternalism, are the driving force of wealth creation. That, in turn, reduces poverty. When there are as many funds tempting investors into Africa as there are to India, Africa will be well on the way to really making poverty history by its own efforts.

* King is an investment strategist with Investec Asset Management, London.

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