It is tempting to believe that if only there was sufficient political will, a country’s most pressing challenges could be resolved. Rather, governing elites typically benefit from the status quo. But this time is different.
Senior decision makers of resource exporters – corporations and countries - must now confront how technological advancements are teaming with ecological limitations to constrict demand for raw materials.
When a mining operation in the middle of nowhere is closed, it might prove impossible to maintain the mining town’s viability. Buildings and infrastructure don’t compensate for a poorly educated work force.
Usually a mine is closed because its value has been extracted. Today however, top economists and bankers have suddenly become greatly concerned by “stranded assets”. Not only do coal mine closings provoke financial distress in that sector but it is now broadly presumed that exploring for new coal deposits might never again be justified.
This is ecologically encouraging but the shift is far broader than coal and the implication is that much of sub Saharan Africa (SSA) will be endangered by ghost-town economics. Manufacturing has propelled global economic growth for two centuries but there was never a scenario whereby the global economy could just continue to double every twenty years through factory led growth.
The days of reckoning would have arrived more subtly and sooner had China not masked the global shift to a service sector economy through its accelerating from a standing start to become the world’s top manufacturer. China’s phenomenal industrial growth reflects its driving down prices – thus spurring greater demand - while vastly expanding emissions by offering “regulatory arbitrage” profits. Its leaders have, however, recently pivoted to pursue a more sustainable, less ecologically demanding, growth path.
The region least well positioned to cope with this pivot is SSA. The political economies of the region’s commodity producers reflect patronage systems reliant on strong commodity demand. The region’s political elites and their support bases must now contend with ghost-town styled economics.
Ghost-towns cannot generate sufficient income to buy what they need from distant sources nor can they typically afford to maintain infrastructure. Such nationwide challenges demand forms of enlightened decision making which typically elude patronage-supported ruling elites of commodity endowed countries.
SA’s ruling party draws support from patronage-enriching and patronage-dependency strategies. Politics suffused with “tender-preneurialism” mixed with widespread social grants are inimical to the tools necessary to combat ghost-town economics: education and competitiveness. As SA’s domestic consumption is overly burdened by debts and eroded by job losses, exports of goods and services into neighbouring countries was to have been a bright spot.
SA’s political and economic foundations are aggressively positioned around the presumption of strong demand in commodities. Perhaps the corporate equivalent is Glencore. SA’s policy makers must restructure even more intensely than that troubled commodity behemoth. The country must either suddenly become internationally competitive or it must solve a huge problem which leads to meaningful revenue generation.
There is a long list of difficult things to do for SA’s economy to become broadly competitive. Every component should be vigorously pursued. The payoffs however would arrive slowly and in the meantime the political and economic stresses would risk substantial setbacks.
There is also an opportunity for SA to play a lead role in helping to resolve a formidable international problems and this could quickly pay substantial dividends.
Public opinion is only now accepting how perceptions of Africa rising failed to acknowledge its destabilising reliance on China-led commodity demand. The region’s commodity exporters are now wrong-footed by China’s slowing demand for resources. Importantly, its long standing engagement strategy with SSA’s commodity exporters is also deeply problematic for China.
A net oil exporter as recently as 1993, China became the world’s top oil importer earlier this year. The impact on other commodities of its steep economic trajectory has been as abrupt. Countries which were early to industrialise had tied up supply relationships with the most stable commodity exporters long before China emerged. China then chose an engagement style where it aligned with, and supported, despotic governments that most industrialised countries had hoped to tame through isolation.
China’s economy is now the world’s second largest and it is the largest manufacturer and exporter. While it seems destined to become the world’s number one economy, among its top vulnerabilities is reliance on raw materials from unstable countries.
That China is pursuing a more exposed policy stance through two new development banks thickens the plot. China will probably do some things better than the World Bank, but as China is now such a major player, it should not defy the global order which has served it so well. It is aggressively risky to lend money to despots of resource endowed countries who live lavishly while failing to invest in their impoverished people. This base reality is intensified by China’s economic restructuring.
A lurid scenario for China’s decision makers is that tyrannical leaders of key supplier nations are replaced by legitimate leaders who declare that the obligations to China are invalid as they were never intended to serve their general populations. The doctrine of odious debts provides supporting legal precedents, though such legal threats are unlikely to advance beyond background murmurings amid loan restructuring negotiations.
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The global economy is struggling to achieve prolonged high growth due primarily to inadequate final demand. China’s high growth fed on the demand of wealthy western consumers. Its centrally commanded economy is not transitioning easily toward greater reliance on its own consumers as they are reluctant to spend.
China merits boundless admiration for its extraordinary poverty alleviation at home. Yet its successes have been far from uniformly helpful elsewhere. It has benefited consumers through lower prices while pushing commodity prices up and low-skill wages down. Ruling elites of resource endowed countries have been big winners while education and competitiveness wither from Angola to Zimbabwe - and in SA.
China’s supply chain vulnerability concerns are evidenced when it bullys its South China Sea neighbours and expands its naval capabilities in the Indian Ocean. Unsurprisingly, various nations have sought to collectively balance against China.
China’s international policies routinely reflect 19th century views about rising powers. Yet as the Second World War ended, the global order was fundamentally reconstructed. This was fully confirmed when the last empire fell on Christmas Day 1991.
Today’s world order seeks to have raw materials accessed not through imperialism or intimidation but through healthy competition and negotiations. This world order has supported phenomenal poverty alleviation and growth across Asia and beyond; it has been least beneficial in SSA. So how can it be prudent for the top beneficiary of today’s world order, China, to seek advantages in SSA through clandestine dealings - which often lever its UN veto power - with leaders accused by UN organisations of atrocities, even genocide?
This question becomes still harder to answer given President Xi’s aggressive anti-corruption campaign which extends to the executives of its huge state-owned enterprises being paid civil servant wages.
China is amply motivated to walk back its engagement modus operandi with SSA resource suppliers. This can be done in ways which benefit everyone - other than the next wave of despots.
Current leaders can be eased out of office timeously and on terms which make retirement appealing. Who could be better qualified to lead such an initiative than SA’s sitting president as he gradually transitions toward an on-going special ambassador role?
While such thinking will strike some as implausible, how else can SSA or SA move forward? The primary impediment to the region’s future is poor governance made worse by commodity wealth encouraging devious deal-making.
SA’s policies are currently so inward focused and anti-business that international commercial strategies don’t take shape. Yet the global economy is becoming much less interested in SA’s key exports. Meanwhile, entrepreneurial minded SA business people are anxious to work with their regional counterparts to unlock SSA’s potential. SA’s political leaders can entrench the core problems or pursue the opportunities arising from China’s restructuring.
Shawn Hagedorn is a strategy adviser. He can be followed on Twitter @shawnhagedorn
This article first appeared in Business Day.
