Hi, there! First off, I must extend my deepest apologies. It’s been a long time I sent something over. To kidnap J.P Morgan's statement from its original context, we all have two reasons: the real reason and the reason that sounds good. Regardless, welcome to Refined Insights, the newsletter where I analyse emerging trends to see whether they are worth the hype and to trace their ripple effects on the developing world. So, welcome once again, sit back, and enjoy.
Advice: One of the few things in life where the free version is better than the paid version.
NOT EVERYTHING THAT GLITTERS IS GLITTER.
I was browsing through YouTube the other day when I came upon an interesting video essay titled 'How Africa Could One Day Rival China’ by the influential newsprint outlet, The Economist. 'Just China,' I thought. I could almost imagine a voice saying 'did you seriously think our western countries would be available for competition.' But the title was sufficiently intriguing to reward a click.
And it was generally disappointing. The video focused entirely on Addis Ababa, which is far from being a comprehensive representation of Africa. But that wasn't the main problem. Generally, though not always, looking for balanced representation of Africa in foreign print is like searching for dictators in a human rights protest. What was truly troubling was the two industries that the Economist presumed were pivotal to Africa's development: solar energy and software technology.
And the Economist is not alone. The European Union is currently pursuing a comprehensive policy of foreign aid to Africa consisting almost entirely of financial support to these two industries alone. In February of this year, the EU approved a 1.8 billion dollar investment to transition Morocco's economy into software and green energy.
You often hear of how Africa needs a technological and green revolution. You hear it in the breathless announcements that greet venture capital investments in African Fintech; you hear it in the exhortations that Africa must join the digital and clean energy transition, that the world has gone flat, that Africa must participate or perish.
Solar energy really is a topic that deserves its own exclusive treatment. Software technology, on the other hand, has the honour of being today's sole focus.
Now, broadly speaking, every manmade thing is technology. But when technology is used in these contexts, it mostly means software applications and digital technology. And it's not surprising that a lot of people think this way. The wealthiest companies in the world are software companies. The world's wealthiest people are the pioneers of our digital world. Every developed country, excepting the USA, looks upon Silicon Valley with understandable envy.
But yet, the idea that digital technology is the key to Africa catching up with the West or China is wrong. And it's not just wrong in the sense that you are wrong if you think saving money under your mattress is better than saving it in a bank. No. It's wrong in the sense that you are wrong if you think putting your money in a Ponzi scheme is better than merely putting it in a bank. That is, it's dangerously wrong.
To see why, it's important to go all the way back to 1976, when the country the Economist predicts Africa can rival had just begun a journey of its own.
CHINA'S ECONOMIC MIRACLE
In 1976, China was quite literally in tatters. It had a GDP per Capita of 165 dollars. To put that in perspective, that's nearly eight times smaller than North Korea's GDP per Capita right now. Two decades earlier, Mao Zedong, China's then Head of State, had caused the greatest famine in history by declaring sparrows enemies of the state. Tom Philips writes in his delightful book Humans: A Brief History of How We F**cked It All Up:
Mao decided (without bothering to do anything like, you know, ask experts their opinion or anything) to add in two other species, as well. Flies were to be wiped out, on the grounds that flies are annoying. And the fourth pest? Sparrows.
The problem with sparrows, the thinking went, was that they ate grain. A single sparrow could eat as much as 4.5 kilograms of grain every single year—grain that could be used instead to feed the people of China. They did the math and determined that 60,000 extra people could be fed for every million sparrows that were eliminated. Who could argue with that?
The Four Pests campaign began in 1958, and it was a remarkable effort. A countrywide poster campaign demanded that every citizen, from the youngest to the oldest, do their duty and kill the shit out of as many animals as possible. “Birds,” it was declared, “are public animals of capitalism.” The people were armed with everything from flyswatters to rifles, with schoolchildren being trained in how to shoot down as many sparrows as possible. Jubilant sparrow-hating crowds took to the streets waving flags as they joined battle with the birds. Sparrows’ nests were destroyed and their eggs smashed, while citizens banging pots and pans would drive them from trees so they could never rest until, exhausted, they fell dead from the sky. In Shanghai alone, it was estimated that almost 200,000 sparrows died on the first day of hostilities. “No warrior shall be withdrawn,” the People’s Daily wrote, “until the battle is won.”
The battle was, indeed, won. In terms of achieving its stated goals, it was a triumph—an overwhelming victory for humanity against the forces of small animals. In total, the Four Pests campaign is estimated to have killed 1.5 billion rats, 11 million kilograms of mosquitoes, 100 million kilograms of flies...and a billion sparrows.
Unfortunately, it quickly became apparent what the problem with this was: those billion sparrows hadn’t just been eating grain. They’d also been eating insects. In particular, they ate locusts.
Suddenly freed from the constraints of a billion predators keeping their numbers down, the locusts of China celebrated like it was New Year every day. Unlike sparrows—who’d eat a bit of grain here and there—the locusts tore through the crops of China in vast, relentless devouring clouds. In 1959, an actual expert (ornithologist Tso-hsin Cheng, who had been trying to warn people how bad an idea this all was) was finally listened to, and sparrows were replaced on the list of official pests-we-want-to-kill by bedbugs. But by then it was too late; you can’t just replace a billion sparrows on a whim once you’ve wiped them out.
To be clear, the destruction of the sparrows wasn’t the only cause of the great famine that struck China in the years between 1959 and 1962—a perfect storm of terrible decisions helped to cause it. A Party-mandated shift from traditional subsistence farming to high-value cash crops, a suite of destructive new agricultural techniques based on the pseudoscience of the Soviet biologist Trofim Lysenko and the central government appropriating all produce and diverting it away from local communities each played its part. Incentives that pushed officials at every level to report positive results led to the delusion on the part of the country’s leaders that, basically, Everything Was Fine and the nation had more than enough food. This meant that when several years of terrible weather hit (flooding in some parts of the country, drought in others), there were no reserves to see them through.
But all that sparrow-murdering, and the subsequent obliteration of crops by the real pests, was a crucial component of the disaster that struck. Estimates of the number of deaths in the famine range from 15 million to 30 million, and the fact that we don’t even know whether or not 15 million human beings died just adds an extra layer of horror to it.
Four years later, Mao Zedong almost equalled his earlier feat. He instigated the cultural revolution, a strange cocktail of communist propaganda and anti-intellectual resentment. Hundreds of thousands of Chinese academics were humiliated. Students were given the right to punish their teachers. Fathers fought sons. People accused neighbours of being enemies of the state. Two million people died as a result. The social turmoil and heavy loss of life devastated the Chinese economy.
The good news was Zedong was now dead. The bad news was China had 500 million people in poverty, a looming environmental crisis, a comatose economy, and the possibility of further collapse. In place of Mao Zedong came Deng Xiaoping, a vastly different man and a strong contender for the greatest leader of the twentieth century.
Where Mao had rigid totalitarianism, Deng had strategic pragmatism. Under his leadership, China established several economic development zones. The point of these zones was to create safe spaces for capitalist experiments. They were explicit invitations to foreign and local companies to take advantage of China's cheap and massive labour base and its regulatory friendliness(corporate speak for bad working conditions)
Success was an understatement. Between 1978 and now, the Chinese economy grew at an astounding rate. This graph by Peter Zeidin of the Brookings institute puts the trajectory in clear terms:
In 1978, China's GDP per Capita was $156. Last year, it was $12,556. It's a percentage improvement of eight thousand percent. The secret to China's explosive growth is a label pretty much everyone is familiar with: Made in China. Within those three word lies the transformation from agrarian third world nation into industrial superpower. Today, China's percentage of global manufacturing output is 28.7 percent, distancing the USA by a considerable gap. China probably produces more goods than every country in Europe put together.
The interesting thing is China's story is the historical norm. With the exception of tiny petrostates subsidized by natural resource rents and satellite states like Hong Kong, every first world country has achieved that status through manufacturing prowess. Factories have always been the key to substantial economic development. Indeed, countries that have gone on to neglect this truth have faced severe consequences.
It was the extensive levels of financialization in the Western economies which created the great recession of 2008. It was the continuous hollowing of America's manufacturing sector by offshoring and automation that energized its blue collar demographic with resentment and fear without which Donald Trump would never have been president.
Indeed, the stalled Build Back Better bill proposed by the Biden Administration could be interpreted as an effort to restore America's manufacturing preeminence. The same could be said for the increasing number of tariffs placed by the American government on Chinese exports. You can measure the importance of something by how much pain you eventually go through when you neglect it.
In contrast to these examples from past and present, Africa's manufacturing sector is pretty much in shambles. The entire continent produces fewer goods as a whole than the relatively small island nation of South Korea.
So, we are confronted with a paradox. If every major first world country got that way by manufacturing and industrialization, why do many influential foreign observers insist instead against all evidence that Africa's number one necessity is building its digital economy.
Well, for one thing, recommending and investing in digital economy initiatives is just way more fun than recommending the tried and true method of manufacturing a bunch of things. People routinely underestimate how much of a factor novelty and FOMO play in Public policy. We need look no further than Sri Lanka's disastrous implementation of the trendy ESG and clean energy programmes or El Salvador's economic fallout upon adopting cryptocurrency as its official currency.
There are also subtle conflicts of interest. People who made their wealth and name through the digital economy will have nothing but praise and recommendation for it to the rest of the world. To the man selling nails, everyone should have an hammer. Even in the face of evidence that these policies do way more harm than good, invested parties take a long time to change their tune. These are policy recommendations along the lines of people are dying, therefore we need more people to die, from the Chairman of the International Vulture Syndicate.
WHY DIGITAL IS NOT THE ANSWER … NOT NEARLY YET.
Let me be clear: the digital economy is a powerful engine of growth and there are few doubts in my mind that it will and should play some role in Africa moving forwards. But it's one thing to put salt and pepper in a meal and another thing to have a meal consisting entirely of salt and pepper.
Take, for instance, Jumia. Jumia is the largest e-commerce platform in Africa with a corporate presence in 14 African countries. Its existence for ten years in a relatively hostile business environment is clear proof of corporate competence. Yet although Nigeria's area is less than 10 percent of America's total surface area, Jumia's delivery time in Nigeria, with exceptions for the two major Nigerian cities of Abuja and Lagos, is an entire week. In contrast, Amazon regularly delivers goods anywhere in America in two days.
Amazon deserves a lot of credit for its logistical excellence. But a lot of credit also has to go to the far superior state of American infrastructure relative to Nigeria. It is the extensive network of ports, roads, and airports that are the silent reason for Amazon's success.
The truth is you can't have a successful e-commerce company without a functioning and extensive public infrastructure. And you can't have that without a functioning manufacturing sector.
Indeed, this applies to everything else. The glass and semiconductors that make up each and every one of the smartphones we use everyday are possible only because of high-end manufacturing in companies like Corning Glass and Taiwan Semiconductor Manufacturing Company. The masts and fiber optic wires that transmit the information these devices exchange with each other are possible only because of manufacturing. The processed components that make up each and every digital commodity is possible only because of manufacturing.
You can have a manufacturing sector without a software sector but you can't have a software sector without a manufacturing sector. Without the flood of processed components streaming out of manufacturing companies all over the world, software applications quite literally cease to exist.
But that's not the only problem with a Digital-First, Flat World strategy. There are also issues of headcount. Software companies employ fewer people than manufacturing companies. In America which has the most sophisticated software industry on the planet, there are 4.4 million software engineers and developers in contrast to the nearly 13 million people that work in its manufacturing industry. Africa has a far more staggering asymmetry.
The data is harder to find but as of a few years ago, there were 500 thousand people directly enployed by the digital economy in Africa. As a percentage of African population at the time, that comes down to 0.04 percent of the entire population. And although the Brookings Institute claims that the digital economy is responsible for 9.6 percent of Africa's GDP, a number drastically enlarged by subjective productivity estimates, the manufacturing industry despite not having grown at all between 2008 and 2017 still contributed more to Africa's overall GDP.
Africa has an unemployment problem. Ironically, the two largest economies in the continent, South Africa and Nigeria, have the first and third highest unemployment rates in the world. The economics of software businesses simply demand far fewer resources in labour. There are intriguing models by the economist Thomas Philippon showing how this need for a much smaller headcount is one reason why software companies benefit the larger economy far less than the monopolies of the past which had to employ many more people and so spread their profits over a much larger ‘surface area’.
The costs and benefits of this feature really depends on your perspective. The point is it is a pure negative for a continent that needs to employ vastly more of its people. The digital economy just isn't capable of ever going to be able to do that.
There is a final reason why manufacturing is a superior course of action. African currencies are quite weak because the structural problems of their economy reflect in supply-demand patterns.
Since African economies don't manufacture many things, many African countries in truth have no manufacturing sector at all to speak of, foreign demand for their local currencies is almost nonexistent. But the problem cuts even deeper: what isn't manufactured must be bought. And so the demand for foreign currencies in African economies is massively higher than the demand for their local currencies abroad.
Whether African countries are borrowing from the CCP or from the IMF, it's almost always to fix a balance of payments crisis ( possible bankruptcy) or to finance local infrastructure development.
The sad truth is most of that money simply just goes back into the foreigners' pockets both through debt repayments and through hefty salaries to employed foreigners. Where local natives are hired, their input is often minimal. A powerful local manufacturing sector can alleviate these problems.
Software services are simply not exportable in the same way that manufactured goods are. And they do not have the same broad class of potential customers that manufactured goods do. More people need shoes and cars than they need digital banking and ride-sharing. By prioritizing the latter over the former, economic growth is prioritized over economic development.
The latter industries take the economy as it already is and layer on top of it - digital banking doesn't make people richer and ride sharing apps don't make new cars. Economic development, on the other hand, is about productive capability( the divisions are not perfectly strict). Every economy needs both eventually, but eventually is the key word here.
EVERY DAY IS FOR THE ADVICE, ONE DAY IS FOR THE CONSEQUENCE
Bad policy and African history go hand in hand. It was not that long ago that foreign organizations and investors were hawking neoliberalism and structural adjustment programmes. Nobody is under any pretence that those policies bore fruit.
Economics is wrong about many things but its central concept is as true as 2 plus 2 is 4: resources are finite. Time itself, the ultimate resource, is finite. By pursuing policies and ideas like flat world digitalism and ESG, African countries set themselves on a journey that can only take them backwards. The lessons from history are several. Perhaps, the most important one is this: if you ignore history, it's not history that will endure the suffering.
I suppose you can look at petrochemicals and power generation.
Africa, or at least some countries within it, have oil but no refining capacity. So they have to buy it back in as refined products.
The ubiquitous imported diesel or petrol generators are everywhere in Africa at the back of houses and businesses and switched on when the power load shedding takes place. They also run on imported refined oil products. Yet they are an easily manufactured product.
Software engineers are useful but not critical to the basic energy needs of a country without which a country cannot develop. And renewables are expensive and unreliable.
Still why is manufacturing not there. It can be available capital, few entrepeneurs or corruption.
The people who import make a lot of money out of it and can discourage local manufacturing. An idea is around in Africa that states are gatekeeper states or run on gatekeeper principles. Part of the thought is that the policy was inherited from colonialism. It has been debated by Swedish economists and others though the idea originally came from a New York historian. Botswana and Nigeria amongst others have been discussed in its context. I don't know if you have ever looked at it.