Africa’s Coming Crash and How the Green Economy can Prevent it

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By Michael Street

The future of the world is green and when we plan for our future we must do so on the basis of green technologies.  All the more so because we have not heavily invested in old technologies and we are as it were investing in a green field – Meles Zenawi, late Prime Minister of Ethiopia in a key note speech delivered to the 6th African Economic Conference on “Green Economy and Structural Transformation in Africa” — 25/10/11.

If anyone needed assurance that Africa is rising and that great opportunities lay ahead they need only look at the unprecedented global coverage of the continent during the first half of 2013. Through a record number of articles, comments, analyses, editorials, special reports, summits, conferences, meetings, debates, films, interviews and more, enough information and opinion has been assembled to show that Africa is indeed the Hopeful Continent. From resources to demographics Africa has the most promising fundamentals of any other region. With the rest of the world facing slower growth, the rise of Africa is now vital to the global economy. The message is clear: anyone not investing in Africa will be missing ‘the next big thing’.

Yet throughout the various ‘Africa Rising’ campaigns another message comes through. Although ‘this time is different’ in Africa, unfortunately so much is still the same and there is still no guarantee of success. Over and over we are reminded that the last great frontier for investment may not deliver what is expected, that the next big thing may be not so big after all. President Obama summed it up on his recent visit: Africa is rising, but on a fragile foundation.

One of the strongest warnings concerning Africa’s uncertainty comes from one of the most bullish of foreign analysts of Africa, Richard Walker writing in the June edition of African Business Magazine – ‘Africa’s coming crash – and how to avoid it’. Walker, who contributed to the 2012 book ‘The Fastest Billion – The Story Behind Africa’s Economic Revolution’, explains how Africa has greater opportunities for investors than any other region. ‘If you want growth, dynamism and innovation, Africa is the place to find it,’ he writes. And like many others he asserts, ‘Africa’s time is now’.

Yet as Afro-optimism turns into Afro-euphoria, when asked the question, what on earth could go wrong, Walker replies, ‘Unfortunately, the answer is plenty’. He doesn’t mince his words, ‘Africa is heading for a crash….It has happened before and it can happen again…and when it comes – if it comes – it will be very, very big.’

But he is quick to add that it can be avoided if Africa’s policy makers and business leaders ‘manage the moment…see the threats that are on the horizon, and act on them’. Although there are multiple ‘danger points’, as Walker calls them, he focuses on ‘the triumvirate of big risk factors’: commodities, infrastructure and China – Africa’s ‘Black Swans’.

Africa’s previous economic booms, like today’s, were driven by demand for Africa’s resources and each time they ended with a crash when demand fell according to economic cycles. While demand for Africa’s resources, in a resource-constrained world, over the long-term will remain strong, over the shorter-term recent high prices will naturally taper off as the global economy slows and rebalances. Although some economists believe the current commodity supercycle will continue and Africa’s growth rates will remain high, Walker advises us not to ‘rule out a commodity price crash that could turn Africa’s economic prospects upside down.’

Infrastructure is the second pressure point. Walker says that Africa’s infrastructure needs represent the biggest potential building boom in history, bigger even than China’s, yet the sums required are so huge (an estimated $100 billion a year for the next ten years) no one knows where the money will come from. Africa’s current infrastructure is already under-maintained, Walker adds, with a warning to Africans that if they don’t fix what they already have ‘the promises of future growth will crumble alongside your roads and bridges.’ Africa, he says, ‘will have to stop treating infrastructure as a resource to be consumed, and start treating it as an investment to be managed.’

The third danger is China. China has been investing in Africa for decades, but the ‘big push’ into the continent by the world’s second largest economy over the past ten years has created not only one of the greatest trade and investment surges in history but also a new economic dependency for Africa.  Many countries rely on Chinese inward investment to maintain growth levels and many commodity producers are particularly exposed to China’s export demand. In investment terms, says Walker, this is known as ‘concentration risk: it means that when China sneezes, Africa catches a cold.’ No one knows whether China’s landing will be soft or hard. Walker thinks it will probably ‘nose-dive’ in which case Africa had better be prepared.

The time to take measures to prevent Africa’s crash is now, he writes, ‘while the going is still good.’ Otherwise, ‘as a famous African once said, things may just fall apart.’ The big question is, what measures are needed to keep things together?

Walker’s has a remedy for ending the China dependency which if managed well could partially help solve the other two: “diversify exports, diversify investment sources and especially make sure there is enough surplus in domestic budgets to cover emergency spending to fill the demand gap [for when China slows].”

But it is not only the dependency aspect of China that puts Africa at risk. It is the development model China is following in Africa, and the type of economy it creates, that is the most fundamental threat on Africa’s horizon. It has the characteristics of the system that has been used in Africa since independence and it has failed before and can fail again.

The ‘China model’ in Africa today dates from the 1980s and like in the 1980s is subject to a great number of externalities or ‘hidden costs’, only this time investments and development strategies are on far greater scales with potentially far greater hidden costs. If the China model in China, as the country’s former leaders often reminded us, is ‘unstable, unbalanced, uncoordinated and unsustainable’ in Africa’s far more complex and challenging conditions, these hidden costs will be greatly magnified.

Essentially, Chinese investments in Africa and the thinking behind them are little different to those of the Western model that went before. They are high carbon, resource intensive, ecologically degrading, socially divisive and therefore unsustainable. They are adding to what is now called a ‘brown’ economy, an economy that is dividing societies and destroying the planet. Debt-fuelled, short term and speculative, based on one-size-fits-all projects and trickle-down economics, ‘this time’ in Africa is not so different after all.And it is not only the Chinese who are stuck in the 20th century. Most investors from the emerging economies pouring into Africa’s ‘gold rush’ are following the same system, as are most of the new and old investors from the West. Business-as-usual is still the dominant force on the continent. The Fastest Billion are in danger of becoming victims of the Fastest Bubble.

The brown economy perpetuates the illusion that Africa can catch up with China trying to catch up with the West on their unsustainable production and consumption path. How many times have we heard of Africa being ‘the New Asia’ or of ‘African Lions overtaking Asian Tigers?’ Anyone investing in Africa who does not account for the hidden environmental, social and economic costs to the country is investing in an unsustainable system which is running out of time. The economic transformation and liberalisation of Africa is not possible without turning the brown economy to green.

The good news is that over the past 20 years, since the failure of the post-colonial system, Africa has been building the foundations on which green economies can be built. In the five years since the darkest days of the financial crisis Africa’s leaders have been expanding their green economies and calling for more green investment. The African Development Bank, the continent’s main triple-A-rated institution, is behind this drive. Africa’s Consensus Statement to the UN’s Rio+20 ‘Earth Summit’ in June 2012 confirmed the need to go green by calling on the international community ‘to put an international investment strategy into place to facilitate [Africa’s] transition towards a green economy.’

This call represents an opportunity for Africa. Instead of waiting for the international community, preoccupied as it is with multiple crises, to deliver a meaningful green investment strategy on time, Africa, as the new growth engine full of ‘dynamism and innovation’, is in a unique position to propose its own. Its green growth potential is colossal and within reach.

The first step towards such an investment strategy could be a green stimulus for Africa from the international community, a new kind of Green New Deal, not to rescue the continent but to ensure that it progresses on the green path to sustainability in ways that will help rebalance the global economy.

Three essential and interconnected areas need to be studied for a green stimulus to be effective in Africa, each of which were major themes of Rio+20: institutional frameworks, green accounting and sustainable development goals. For each of these Africa has distinct advantages.

The institutions inherited by Africans at independence were hopelessly inadequate for sustainable development in the world’s most challenging continent. Although considerablereforms have been made over the past 20 years, much more can be done. Africa’s Least Developed status, including its least developed institutions, is now Africa’s greatest advantage in creating new frameworks for the 21st century.

It is now clear that gross domestic product (GDP) as the world’s main measure of economic performance tells us nothing about sustainability. In the past 20 years great progress has been made on green accounting, or green GDP. Africa’s natural wealth and underdeveloped brown economy are other advantages in developing new systems. Now is the time to experiment with green accounting in Africa before the brown economy becomes more entrenched.

The African politicians’ mantra ‘development at all costs’ is no longer valid. Africa’s development goals must be sustainable. The Sustainable Development Goals (SDGs)which are due to replace the MDGs in 2015 are another group of powerful tools for establishing green economies that can lead to sustainability. Against terrible odds, since 2000 Africa’s success in the MDGs gives it a huge advantage in influencing the framework of the SDGs.Africa’s most fundamental problem is systemic. Reforming institutions, developing green accounting and having sustainable development goals are three essential steps towards adapting the system to suit Africa’s unique challenges.

Concerns for Africa come not only from western observers like Richard Walker. At the World Economic Forum Africa 2012 held in Addis Ababa, a senior Chinese official warned Africans: “Do not necessarily do what we did”. Policies of “sheer economic growth” should be avoided, he said. “We now suffer pollution and an unequal distribution of wealth and opportunities…You have a clean sheet of paper here. Try to write something beautiful.”

Over the past 20 years the first chapter of ‘something beautiful’ in Africa has been written. It could be called Africa and the Green Economy. The next chapter can now be written. Everything is ready. As Wangari Maathai, one of Africa’s great green pioneers often said: ‘We know what to do: why don’t we do it?’

About the Author: Michael Street’s connections with Africa began 40 years ago. In the 1970s and 1980s he worked in a number of African and Asian countries as a ‘brown’ development expert on various agro-industrial projects. He first visited Ethiopia in 1975. During the 1990s and early 2000s he travelled extensively in Ethiopia and lectured widely on the country’s history and ecology. Since 2001 he has been based in Sicily where he is establishing two small biosphere reserves as part of an initiative to understand and expand Sicily’s green economy.