Why Do Resources ≠ Riches on the African Farm? Pt. II

So why have Africa's resources not been turned to riches?

There are many compounding factors, and I won’t go into them all here, but near the core is lack of stable property rights, which in turn translates to people finding little gain from investment, and in the end few companies find an incentive to be there to buy the raw materials of people like James.

Without enforced property rights, two key things can happen, which have interrelated effects:

1. A strong-armed government, such as Angola or Zimbabwe, can capture export rents and fail to spend it on the public, alienating business and not supporting public infrastructure and social goods. Botswana’s equitable partnership with De Beers, the diamond company, is one reason for the country’s success.
2. The mindset of people like James becomes consume now, save later. As higher demand chases a constrained amount of goods, inflation ensues, and the central bank raises interest rates to combat it. This high cost of capital, a key symptom of weak property rights I’ll hit upon next, compounded by corruption, lack of infrastructure, and other factors, isn’t the most inviting scenario for investors, foreign or domestic.

When at a USAID conference in Mozambique, I remember the Standard Bank official tell the delegates, point blank, something to the extent of, “There’s no way we can give your farmers lower rates than 16% or reduce the 40-60% equity requirement. It’s just not possible.” At the root of what he was talking about was property rights: in Mozambique, the government owns all property, so private individuals have no equity in their property with which to take out loans.

As a result of these factors, the cost of capital in Sub-Saharan Africa is enormous. The average commercial lending rate for all SSA countries with data available is 17% (CIA Factbook, 2010), and you can imagine that countries without data likely have higher rates.

Business investment is sorely needed, for both agricultural innovation (higher yields for farmers) and to serve as an outlet to which farmers can sell. When I was in the village for those few weeks, I almost ran out of money from people trying to sell me things – pineapple, pumpkin, fish. I was like the United States of village trade – heavy on the imports.

It’s also no coincidence that while doing my work with TechnoServe in Ghana, I heard villagers singing the same song, telling me they loved having a “ready buyer” in Guinness Brewery, even though the price was slightly lower.

The villagers need agricultural business to start up, and it’s starting to happen in Liberia. Attracting large commercial investors can be a powerful way to grow an economy and help people like James, but if property rights and cultural traditions aren’t respected when business comes, as this NY Times article points out, it can lead to foreign companies and dictators running away with the loot. In a few posts I’ll talk about people in the village who are looking to serve the business need from the ground up on a much smaller scale.