The 3C’s: Capital, China, Corruption

This week we had the pleasure of having Gaiv Tata, Director of the Growth Solutions for Development, speak to the class on capital formation in Africa. Echoing my blog from last week, he concluded that “African countries provide promising investment opportunities, but knowledge of local context is crucial”. He also argued that despite of the immense investment opportunities, domestic savings is lacking, and private equity, foreign aid, and sovereign bond issuances are plugging the gap.

1) Capital: Relying on foreign money has risks

Of the 4 sources of capital discussed – domestic savings, FDI/private equity, external debt and foreign aid – I am a strong believer in the former two.

–  Domestic savings in Africa have remained low and little changed, due in part to financial illiteracy, mistrust of the banking system, and an under-developed banking infrastructure. The emergence of sovereign wealth funds in countries such as Angola, Nigeria, and Ghana, as well as public pension plans such as the PIC of South Africa is an highly encouraging trend, as these institutional investors amass savings and provide economies of scale in investing and investment expertise. Governance in these institutions, however, is something to watch.

– I have lumped private equity and FDI into a category as these are foreign money that take huge equity stakes in local companies. Of the $1 trillion unspent private equity funds globally, only $4 billion are earmarked for Africa. Obstacles include the lack of deals that meet PE funds’ criteria, unwillingness of local businesses to cede control, and black swan events such as Boko Haram and ebola. Encouraging more FDI and private equity investment in Africa should be policymaker’s priority. As I have argued in my previous blog, private equity firms not only provide capital, but also management expertise that could improve rule of law and corporate governance in African companies.

– Debt has become a dirty word in Western economies. Yet, African sovereigns are accessing debt capital markets like never before: in 2013 and 2014, $14 billion was raised through the issuance of sovereign bonds, compared to $1 billion in 2000. While access to international capital markets is a stamp of approval for the sovereign, there several risks if African countries over-borrow. Fundamentally, relying on foreign debt means interest payments leak out of the country, rather than get paid to domestic investors who then re-invest in the economy.

– Foreign aid continue to play a major role in financing investments in Africa. To get more bang for the buck, aid earmarked for development (as opposed to humanitarian) should adopt stricter investing criteria. The nice feeling of “doing good”sometimes overtake the need to make sure money is well-spent.

In short, there is a lesson from the Asian growth story that Africa could learn, that is, the importance of encouraging domestic savings. Domestic savings are stable, give citizens a stake in the economy, and channel interests back into the economy. However, a strong financial infrastructure needs to develop, as is property rights to encourage capital accumulation by private citizens.

2) China’s overture in Africa is not new

Thanks to Khadija Jallow (MBA 2015), I came across this article on a speech by Macharia Kamau (Kenyan Ambassador to the UN) on China’s investments in Africa. Like me, he wonders why Western politicians and newspapers are “panicky” over Chinese investments in Africa; some have even pointed to China’s attempted colonization of Africa (see this and this).

Mr. Kamau’s argument was elegant, “We had the Portuguese in the 14th century, we had the Arabs, we had the Europeans right through the 19th century, in the 20th century we had the Americans…. If you are a historian, you’ll know that China has been coming to Africa since forever.”

To which, I add: the Chinese mariner Zheng He (1371-1435) made seven voyages to places across the South Pacific, Indian Ocean, Taiwan, Persian Gulf, modern-day Southeast Asia, and Africa from 1405 to 1423, but he never tried to colonize any of them.

3) Corruption: Where is the line drawn?

The adverse effect of corruption on growth is well-developed in the literature and supported by data. Few would also be familiar with the argument that if bribery gets things done faster in emerging economies, it could be a necessary evil. This debate was humanized for me when a Sloanie shared that story of how his refusal to bow to a demand for bribe cost him an important signature from the government official.

As a student at Harvard’s Kennedy School of Government, I’ve been perplexed by how the same people who approve lobbying activities on Capitol Hill would also decry bribery in a developing country. Perhaps the dilemma here is more than a moralistic argument, but a wealth distribution concern. At the risk of over-generalization, stories of corruption in developing countries are usually associated with government officials living a lavish lifestyle amongst slums; here in America, lobbying money is spent on advertisements, research, etc, and not into pockets of the lawmaker. If so, there is a system to identify and indict.

Damien Niam

MBA at MIT and MPA at Harvard. Interested in value investing, economic policy, financial regulation/reform, and economic thought. BA in Economics from the University of Cambridge.

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  1. Great piece Damien, very insightful. I would agree encouraging more foreign investment in Africa should be a priority. I’m particularly excited about investment in solar and renewables. These industries could be a boon for not only business but also the broader society.

    • Hello Dr. Brown, thanks for your kind words! We met a government agency that does just this: to attract foreign investment. And I agree that solar power is an area the country should pursue, given its (lack of) power situation and sunny skies.

  2. Great insight, Africa countries to attract more investors, they should create a conducive environment and good governance. Solar power for Africa is the way to go with tropical climate they cannot go wrong and it also an alternative for other energy sources.

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