'Africa's economy is set for take-off'

Joe Studwell is a development economist at Africa Urban Lab, a research centre at the African School of Economics, Zanzibar. He is also a founder and director of the Asian research and advisory firm Gavekal Dragonomics. His books include The China Dream, Asian Godfathers and How Asia Works. How Africa Works: Success and Failure on the World's Last Developmental Frontier is published by Profile Books (£25).

Matthew Partridge: The thesis of your book How Africa Works is that Africa is finally starting to take off economically.

Joe Studwell: We've already seen an uptick in growth in the last 20-30 years, as well as a move to more consistent growth as Africa becomes less dependent on minerals. We don't know at what level continental growth will settle, but I suspect across the 55 countries, we can now expect to see growth averaging something over 4% per annum, with some countries expanding at the sort of rates we associate with East Asia: 9%-10%.

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Matthew Partridge: There have been several occasions over the past few decades when it looked as though Africa had finally reached take-off speed, only for it to fall back. How is it different this time?

Joe Studwell: This time the demographic story is different. The central thesis of the book is that demographics have been the main constraint on the continent. African population density in 1960 was equal to Europe's in 1500, so it was unrealistic to expect sustained growth.

But by 2030 the population density of Africa will be equivalent to that of Asia in 1960, and of course Asian density then tripled during its period of fast growth. What's more, while most African countries still aren't well governed, a handful are – and even the poorly governed are still enjoying faster growth.

Matthew Partridge: So, is urbanisation going to drive growth?

Joe Studwell: Yes. Cities are the big drivers of growth in Africa, with the pace of urbanisation faster than anywhere else. You get a much more efficient division of labour within cities, as well as more affordable infrastructure, and then you get higher-yielding agriculture in the surrounding areas as the proximity to the market encourages people to put lots of fertiliser on the land.

Matthew Partridge: Returning to demographics, do you think Africa's younger population, compared with Asia's and Europe's ageing ones, is a positive?

Joe Studwell: It's a positive. But the sweet spot will be when Africa's population matures, so you get a lot of people aged 15-64, the most economically active age. That maybe a little way down the line. What's more, while you do get younger people pushing for political change, Africa is already more democratic than Asia was at the same level of economic development.

Part of the reason for that is the ethnic diversity in Africa. With the dominant ethnic groups accounting for less than 30% of the population in some cases, it makes autocracy much harder to maintain than in East Asia, where ethnic minorities comprise less than 5% of the population.

Matthew Partridge: Africa has received large amounts of investment from China and the Middle East. Do you think that's helping to drive growth?

Joe Studwell: Foreign direct investment is important. It's not just the hard currency that comes in, but also the knowledge. And Chinese firms often say they are interested in Africa because margins are better than they are in China, where manufacturing is phenomenally competitive. The Middle East is branching out into services such as ports and real estate. Hopefully this will be supplemented by more European and US investment down the road.

Matthew Partridge: Could Chinese investments be a Trojan horse? Does China secretly want to secure dominance of those areas?

Joe Studwell: I don't think there is any evidence of some grand strategy. I think that China today is like Korea and Japan before it. It has massive surplus manufacturing capacity and vast amounts of foreign exchange. It is keen to move into both foreign markets.

And just as the Koreans did in the Middle East in the 1970s and 1980s – and the Japanese in Southeast Asia in the 1960s and 1970s – China has decided that Africa is the most natural target for its manufacturing and foreign-exchange surplus. What's more, while there has been some investment by the Chinese state, most of it is spearheaded by China's private companies

Matthew Partridge: You talk about some of the biggest success stories: Botswana, Rwanda, Ethiopia, Mauritius. What do you think are the key lessons from their success?

Joe Studwell: The thing about Africa is that there is no special African recipe, just the approach that worked well in Asia and in Europe after World War II. This was the emphasis on smallholders' agriculture and raising the intensity of production and yields, combined with a focus on manufacturing as a major job creator.

What I found in Africa was that context is very different. All the successful countries have leaders who managed to forge cross-ethnic coalitions. While this wouldn't be necessary in a country such as China where 95% of the population is Han Chinese, it is necessary in Botswana or Ethiopia or Rwanda, as you've got to bridge these big ethnic gaps if you're going to get political traction and enduring policy.

Matthew Partridge: What went wrong in the African countries that haven't succeeded?

Joe Studwell: The application of developmental policy requires leaders who believe in the possibilities of development, and many of the countries that failed couldn't construct cross-ethnic national coalitions to that end.

Worse, you had some utterly dysfunctional countries, such as Sudan or Somalia today where there's so much political disagreement and violence that there's no chance to get anything moving to promote development. This is a tragedy. Sudan has agricultural and manufacturing resources that could easily translate into a 10% growth rate.

But between the failed states at one extreme and a country such as Ethiopia (which will grow at 10% this year) at the other, there's an awful lot in the middle. Nigeria had a horrific civil war in the 1960s and has had governments that have since struggled to bind the ethnically diverse population together. But there is nonetheless a private sector going from strength to strength, with Aliko Dangote, the richest man in Africa, building the first economically successful petroleum refinery in Lagos, something that the government has struggled to do. He is active in a host of other businesses as well.

I'd urge everybody to go to Lagos because it's such a wild and remarkable place, with more than a fifth of the Nigerian economy in just one city. It is often said that everybody in Lagos wakes up that morning not quite sure how they'll eat that day, yet everybody seems to. Kenya would be another example. It is a largely mismanaged state, but with a vibrant private sector and lots of growing firms doing very interesting things.

Matthew Partridge: You talk about the role of governments in promoting manufacturing and industrialisation, but hasn't the state been very bad at picking winners?

Joe Studwell: Nobody who ran a good industrial policy ever set out to pick winners. Instead, you provide a subsidy and support in the context of competition between firms that are receiving that subsidy, and then you let the market decide who wins. You also pressure them to export, as manufactured exports are the most competitive part of the world economy.

But it's true that where it goes wrong, it tends to go wrong because governments fail to understand the role of competition and they do indeed try to pick winners. We had a case of that in Ethiopia with the huge state conglomerate Metals and Engineering Corporation (Metec), which was working on all the sugar mills for the sugar plantations that were being built. But the government has learned there, and is now splitting Metec up into four divisions, which will compete with each other and against other firms.

Matthew Partridge: Which African countries look the most interesting now from an investor's point of view?

Joe Studwell: I'd be reluctant to say. What's more, as we saw in East Asia, the most successful developing countries will take quite a long time to produce a good return for portfolio investors because they retain capital controls and they manage their banking system to direct credit to manufacturing and smallholder agriculture – policies that focus on the long-term good of the country rather than simply maximising investors' returns.

So, you could put money into African banks in countries with liberalised financial systems and you'll probably do quite well. But generally, Africa requires a lot of hard work because top-quality information about African companies is in relatively short supply. I think financial-services firms should be opening small offices and just having a look around rather than trying to woo people to put their money into what remain broadly frontier markets.

Matthew Partridge: How can the rest of the world help Africa to keep growing?

Joe Studwell: I hope that multilateral and bilateral institutions talk to African governments about what they really need and what their ambitions are, rather than turning up with shopping lists of what they think governments should be doing, which has been the weakness of all those institutions around the world.

Moreover, there's not much appetite in multilateral and bilateral institutions for supporting smallholders' agriculture or industrial policy. The latest trend in aid seems to be to treat aid like private equity. Bilateral donors give money to private-equity firms today on the basis that this constitutes a useful contribution to economic development, and I'm not sure that it does. Still, it doesn't matter too much, as the good news about African economies is coming from within Africa.

Matthew Partridge: In 20 years or so, once growth has started to feed through, how do you think the rise of Africa is going to reshape global politics?

Joe Studwell: In 2050, Africa is likely to have 2.5 billion people, up from 1.5 billion today. When we reach 2100, there will be four billion people in Africa, four billion people in Asia, and only two billion in the rest of the world. So, Africans will be demanding to be heard.

But I think what we need to recognise is that Africa is also going to take Asia's crown as the most diverse region of the world in terms of development. There is a huge difference today between the situation in Myanmar and that of Japan, Taiwan or South Korea. That's what we should expect with Africa in the future. We won't talk about Africa as a single monolithic entity; we will discuss it in the same way we tend to talk about East Asia or Southeast Asia.

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