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The Fastest Path to African Prosperity

Wikimedia Commons user Cchrtian/Central Kigali, the capital of Rwanda, at night in 2021.

This article by Magatte Wade was published on Palladium Magazine on June 7, 2024.

The scale of the challenge in fostering a prosperous African continent is daunting. Africa remains the poorest region in the world, with the extreme poverty rate in sub-Saharan Africa in 2015 standing at 41%, significantly higher than the global average of 10%. The World Bank also estimates that over half the world’s extreme poor reside in sub-Saharan Africa, with a total of 413 million people living in extreme poverty. Most of the world’s poorest nations are in Africa, including Burundi, the Central African Republic, the Democratic Republic of the Congo, Malawi, Niger, Mozambique, Liberia, Guinea, and Sierra Leone. Indicators of human welfare, including life expectancy, child mortality, access to education or electricity, and much more, all tell a similar story.

Strikingly, these patterns are discernable too in the arena of business and enterprise. Africa’s share of global merchandise exports stands at 2.5%. In 2017, only 43% of adults in sub-Saharan Africa had a bank account. Sadly, these percentages are not surprising in a region where property rights are inconsistently protected and rule of law may be weak or missing altogether, but regulatory obstacles are nonetheless substantial. By multiple metrics, including the Doing Business Index and both the Fraser and Heritage Economic Freedom Indices, most African nations rank among the worst in the world.

Many would view these statistics as evidence of poor human empowerment, proposing improved education systems for the next generation. However, Africa is by far the youngest region of the world, yet it has high levels of youth unemployment among both educated and uneducated Africans. This fact alone should alert people to the fact that more education is not a solution to the youth unemployment problem in Africa. Africans often joke that the first job for a Ph.D. is taxi driver. Shockingly, almost 50% of students with some tertiary education are unemployed in resource-rich nations.

Moreover, the definition of “unemployment” significantly over-counts those in dissatisfaction with part-time work. Such statistical analysis also fails to capture the reality of poorer nations, as they count those “searching” for work, and fail to recognize that the majority of people are either engaged in agricultural labor, resource extraction, or are “hustling,” doing whatever they can to bring in money—selling on the street, in the market, begging, prostitution, and so forth. Thus, the number of under-employed are much higher than those who are officially counted as “unemployed.”

The belief that increasing educational provision is the key to unlocking prosperity in Africa is therefore incorrect. African economies instead need market opportunities to make use of their abundant human capital, especially those who are highly educated but remain unemployed. The scale of the challenge is immense: the working-age sub-Saharan African population numbered 587 million six years ago, in 2018, and has been increasing by 20 million every year since. Of that total, 200 million are between the ages of 15-24, a proportion that will only very gradually decline over the next decades as Africa begins its demographic shift towards fewer children. How can Africa create hundreds of millions of good jobs in the coming decades?

Nobel laureate Douglass North, in collaboration with Barry Weingast and John Wallis, made a distinction between “closed access” societies and “open access” societies as a means of understanding the different conditions of developing nations. The former, which they described as “the natural state,” is where political elites largely treat government as a spoils system, preventing market competition through rent-seeking restrictions on economic activity by outsiders. This is roughly the situation in most African nations today. Tariff rates above 10% are not uncommon for goods ranging from cardboard to computers. Labor is highly regulated in many African nations, as are capital inflows and outflows.

To avoid the obstacles put in place for legal businesses, many African entrepreneurs remain in the informal sector. This might work as long as they remain small, but as they grow government officials are likely either to prosecute them or to ask for bribes so they avoid doing so. Moreover, informal businesses don’t pay taxes, can’t have bank accounts, can’t buy insurance, can’t build credit worthiness, and thus can’t borrow from formal institutions. A precondition of prosperity around the world is a legal framework based on property rights, rule of law, and economic freedom. As a consequence, most African nations are poor, have high levels of youth unemployment, and most economic activity takes place in the informal sector. Occasionally, a leader makes a decisive attempt to remedy these issues.

Botswana is an example of a successful nation-wide development agenda, which embraced the right principles to create growth and prosperity. Botswana was for many years the most successful African nation post-independence, with the fastest growth rates from 1960-1980. The first post-colonial leader of Botswana, Seretse Khama, was firmly committed to respecting property rights and rule of law. The descendent of tribal leadership prior to independence, he was educated at Oxford and the Inner Temple, where he studied to become a barrister. The combination of continuity with traditional institutions and an informed commitment to British common law led to the most sensible pro-market policies on the continent for many decades.

While the rapid growth was due to the discovery of diamonds, unlike most African nations which squandered their resources, Botswana widely partnered with corporate mining interests and then devoted the government’s share of the revenues in ways that benefited the people more than any other resource extraction-based government on the continent. Diamond wealth was used to build roads, hospitals, and schools. The De Beers company prospered due to Botswana’s respect for contracts and the rule of law, and the people of Botswana benefited, unlike many African nations where natural resource wealth typically only benefited elites.

Seretse Khama’s newly-independent Botswana maintained respect for the kgotla, the traditional village governing structure that served as a judicial and administrative body in traditional culture, along with local chiefs. He very deliberately used the kgotla tradition of community debate to inform democratic institutions. And as a trained British lawyer, he knew the importance of property rights, respect for contract, and rule of law for prosperity. Seretse Khama’s combination of respect for indigenous institutions while integrating them into the best of the English common law tradition is a paradigm relevant to the broader discussion on options for Africa’s prosperity going forward.

The other striking nation-state success is Rwanda. Here the post-independence phase was much more difficult, with decades of extremist Hutu rhetoric towards the Tutsis culminating in the 1994 genocide in which roughly one million died. Paul Kagame was the Tutsi general who stopped the genocide, without much support from the outside world. Whether directly or indirectly, he has controlled the nation ever since. While there are ongoing, serious concerns regarding human rights and press freedoms in Rwanda, the economic success of Rwanda is unambiguous. 

Kagame has explicitly modeled his economic development on that of several “developmental dictators” found across the “Asian Tigers,” the most famous example being Lee Kuan Yew’s Singapore. These leaders combined a commitment to national economic growth and development with a harsh authoritarian form of governance. From 1995 to 2019 Rwandan economic growth averaged 6% annually, making it one of the fastest-growing economies in the world. In the 2020 Doing Business ranking, the last one published, Rwanda ranked 38th in the world, just behind Switzerland and Slovenia, and a few spots higher than the Netherlands.

Neighboring Burundi, which is very similar in size, population, and culture—including the Hutu-Tutsi tensions—had an economy roughly equivalent to that of Rwanda at independence. Today, Rwanda’s economy is almost three times as large and, as of 2012, it was attracting 264 times as much foreign direct investment. The average Rwandan citizen has almost four times the income as the average Burundi citizen. Burundi’s economy is highly controlled—as was Rwanda’s up until the genocide—ranking 166th on the 2020 Doing Business ranking. The differences between Rwanda and Burundi are not at the extreme of South Korea and North Korea, but they are headed in that direction.

But the challenges of conducting reforms at the nation-state level are severe. So many pieces need to be coordinated to have a significant impact—political coalitions, leadership, ethnic alliances, talented and honest bureaucrats and officials, a unified vision over many years—that this type of reform is rarely conducted successfully. It is by means of focusing on national, state-level reform alone that so many people have despaired of improvements in African governance.

Given the rarity of national leaders who possess such a drive for genuine national prosperity, is there another way to foster innovation and market institutions within a nation in the hope of their expansion? An alternative strategy is to create special economic zones that feature their own law, governance, tax, and regulatory systems within a small, city-scale region. This is most easily done on an unsettled and undeveloped site, to avoid having to shift the legal regime of an existing population. By reducing the scope of governance reform from the national level to the city-scale level, it will be possible to start anew without having to solve all the complexities of incumbent political interests and legal systems.

While the achievements of Botswana and Rwanda are impressive, Mauritius is the real economic star of Africa. Although Mauritius was regarded as being destined to poverty at independence in 1968, between 1977 and 2008 it averaged 4.6% annual growth, a significant figure for such an extended period of time. The IMF measured its 2021 GDP per capita as the highest in Africa adjusted for purchasing power; at about $29,000, just ahead of Uruguay and behind Chile and Bulgaria. Mauritius is ranked 13th on the 2020 Doing Business ranking, ahead of Australia and Taiwan. The use of special economic zones was an integral part of this success. 

At independence, Mauritius was largely dependent on sugarcane, and required a major shift towards diversification if its economy were to grow. In the 1970s, “Export Processing Zones” were introduced and began to allow diversification to take root, as new industries grew through their facilitation of exporting to the global market. These environments then attracted foreign direct investment in higher value sectors such as manufacturing in the 1970s, and as this sector grew, financial services and tourism were also drawing in investment by the 1980s as well. In the last two decades Mauritius has added a successful information and communications industry, with winners in international coding and hackathons based in Mauritius.

The success of special economic zones in countries such as Mauritius warrants pausing and considering the reasons for their success, and their potential to become such a potent force for development around the world. Robert Haywood, former director of the World Economic Processing Zones Association, observed that zones allow for a faster path for transitioning from a “closed access” society to an “open access” society. Haywood observed that in a typical closed access society, any additional increments of economic freedom were perceived as threatening to existing elites because they required dismantling their rent-seeking privileges. They could no longer benefit from airport, banking, or media concessions if the government was truly open to competitive bidders and if the economy was open to entrepreneurial initiative without restriction. Special economic zones are a way around this challenge because export zones on unoccupied land do not threaten the local structure of rent-seeking.

Speaking socially, Haywood observed that often such zone initiatives were led by people on the periphery of the oligarchy. That is, they were not the true insiders who were currently benefiting from the existing rent seeking structure, but they were close enough to those insiders that they could persuade them to support the zone initiatives. Haywood characterized them as “younger brothers, cousins, nephews, in-laws, etc.” That is, someone close enough to have directly trust-based communications—and thus neither foreigners nor the unconnected middle class—but not so connected that they already benefited from the rent-seeking establishment. 

By relying on private investment rather than on foreign aid or government funds, the zones are more likely to be located in locations that make strategic business sense and less likely to serve as opportunities for insiders to channel funds to cronies. Insofar as foreign aid to central governments may be a cause of conflict and bad governance, this approach also avoids the “foreign aid curse.” In Somalia, the Central African Republic, and elsewhere, conflicts have been exacerbated due to the monetary prize associated with being the entity with formal access to foreign aid largesse.

Once a nation begins experiencing economic growth through such zones, then a broader path to economic liberalization may begin to open. The elites invest in the zones and realize they can earn more from economic liberalization than through hoarding opportunities, and gradually they agree to open up the economy. In some cases, such zones may be able to combine greater respect for indigenous cultures and traditions while also providing access to world-class commercial law.

Export processing zones and special economic zones have a long and mixed history in the 20th century, with some succeeding and some failing. But in the 21st century, we are seeing significant learning with respect to the key features of success. Perhaps one of the most important facets is independent law and governance of special economic zones, in addition to reduced taxes and regulations. In other words, “startup cities.”

The first model of such zones is the Dubai International Financial Centre, which established a common law jurisdiction in the midst of the United Arab Emirates’ Sharia law starting in 2004. It has since made Dubai a top global financial center. The model was partially copied in Kuwait and directly copied in Abu Dhabi. Since then, we have seen common law zones established in Honduras, Kazakhstan, Rwanda, and Colombia. Interestingly, the common law zone in Colombia is being co-designed and developed by the Dubai Multi Commodities Centre (DMCC). Dubai is thus transferring its common law zone expertise to other nations.

The biggest promise for African nations lies in zones with significant legal and regulatory autonomy. There are multiple reasons for this. To begin with, the current legal landscape requires a massive overall change. When most African nations have hundreds of laws that result in their business environments being ranked among the worst in the world, it is a very long, hard, sustained legislative and administrative slog to move to the top. Another challenge of piecemeal reforms is that changing any particular law is unlikely to have a significant impact on economic growth. Thus reformers are stuck in the challenging position of changing hundreds of laws to improve the business environment over perhaps decades. 

Insofar as most of these changes are likely to be invisible to the people, while also not having immediately visible impact, it is hard to sustain long-term political support for such a reform agenda. If it were the case that political leaders, elites, and citizens largely shared a long-term vision for pro-market legal reforms, perhaps such change could be sustained. But that does not currently seem likely in Africa.

Moreover, it is not just the types of laws that must be changed, but the system of laws itself. Most observers would agree that a common law legal system is more favorable to business than are civil law legal systems. For instance, in most common law legal systems, a notary public is simply a clerk who certifies that a signature is official. In the United States, the cost of getting a documented notarized is typically $25 or less, often free. In civil law countries, a notary public is an attorney who charges hefty fees, often $1,000 or more. In low-income nations, insofar as notaries are required to start a business—which they usually are—the cost of a notarization alone prohibits all but the elites from being able to open a legal business.

In general, the premise of common law is that two or more parties are free to make the agreements they find mutually beneficial. They can look to case law to learn how their contracts are likely to be decided in case there is a dispute. But insofar as parties have extensive freedom to design arrangements suited to particular situations, the system is flexible and open to innovations. By contrast, the premise of civil law is that that which is not permitted, is forbidden. Statutes define the law, and if a statute does not permit an arrangement, it is unlawful. As a consequence, business in civil law countries has considerably less flexibility and may inadvertently forbid valuable innovations. The influence of common law is especially significant in commercial law, which is most critical for investment. It is not an accident that the leading tech hubs of Africa are all Anglophone: South Africa, Nigeria, Kenya, and Ghana. Botswana also uses common law.

Rwanda, originally using civil law, began shifting towards common law in 2001, with more progress in recent years. The Kigali Financial Center, launched in 2018, uses a common law framework to position itself as a world class financial center. Meanwhile, former French, Portuguese, Belgian, and Spanish colonies are burdened with civil law systems that reduce their attractiveness for investment and business creation. After their civil law colonizers left, the newly-independent nations preserved the legal systems of their colonizers. But there is no reason why any African should feel any loyalty to a particular inherited colonial legal system, especially if there are better systems that lead to greater prosperity.

Such charter cities should also reduce the incentive for unproductive conflict and unstable politics. Right now, insofar as natural resource revenues and foreign aid dominate national budgets, there is an ongoing incentive for ethnic conflict as every group wants to capture the central government and reward their partisans and ethnic allies with the legal and illegal capture of government revenues. Such conflicts can turn very bloody. In oil-rich southeastern Nigeria, the Igbos attempted to secede into the nation-state of Biafra in the 1970s, resulting in a civil war—and many say a genocide—that ultimately left millions dead. A zone on empty land in which the only source of revenue is manufacturing or services, which will only continue to bring in revenue if properly managed, avoids the natural resource and foreign aid curse.

Attracting capital investment and talent is a key ingredient to market-based growth. One of the challenges in attracting capital is that long-term investors need to be confident that their investment will not be compromised by means of confiscation, either directly or through confiscatory taxes or regulations. They need to know that if they invest $50 million in a factory, that they will be able to recover their investment decades into the future. They can’t survive in an environment in which labor costs may be arbitrarily increased without warning, tariffs for essential components coming in or products being exported might change dramatically, and so forth.

At a minimum, of course, the nation needs to be stable enough to avoid civil wars or coups over a long time horizon. Not all African nations are at present even that stable. But even those with relative political stability may be subject to dramatic changes in policy or political landscape, inflation, and other disruption to the business environment. In nations in which changes in political leadership bring about abrupt changes in who has access to what, or what is regarded as legal, it is impossible to build businesses. In some nations, a change in leadership results in previous legal business being confiscated.

One of the disadvantages of informality is that while friendly powers reign, the government won’t crack down on grey market economic activity. But when, for whatever reason, the new regime is less friendly, all of a sudden they may prosecute their enemy’s violations of law with a vengeance, or demand bribes to be allowed to escape such prosecutions. This dynamic slowly incentivizes all economic activity to become extractive by making social proximity to powerful government officials the most important factor for long-term business success. Cities or special economic zones with sufficient legal autonomy that they are explicitly separate from routine executive, administrative, or legislative decisions solve this problem. But such startup cities are not just geared to overcome typically African disadvantages, but also to unleash uniquely African advantages.

Ideally, Africans would be able to create hybrids between their local ethnic legal traditions, on the one hand, and world-class commercial law. While Botswana’s history is the best real world example of this, the appendix to Michael Van Notten’s 2005 book The Law of the Somalis provides a sketch for how traditional Somali clan law could be integrated into contemporary British common law to create a competitive free city. A case may be made that Somali clans are more fundamental than is the artificially-imposed state in Somalia. 

The clans had arrangements for adjudicating disputes that were based on a system of judge-made law; structurally, this is very similar to the origins of British common law, which in its purest form is also judge-made law. Rather than impose a colonial system that is inconsistent with the traditional dispute resolution mechanisms of Somali culture, it would make more sense to build upward from traditional Somali judge-made law and then, insofar as it doesn’t have modern contract law, graft British commercial law onto a fundamentally Somali foundation. 

In Senegal, the religious city of Touba is substantially autonomous, with the laws internal to Touba determined more by the religious leaders of the Sufi order of the Mourides than by the central government in Dakar. This local autonomy, as with the Somalis, could be extended again by adding modern commercial law onto traditional law. Moreover, Islam has a long tradition of recognizing distinctive legal enclaves, due to allowing Jewish and Christian communities to rule their affairs with their own laws within the Islamic world for centuries. This legal approach to creating legal enclaves may be a natural option for many Muslim African nations.

A separate local ethnic, regional, or religious identity may support the autonomy of charter cities or special economic zones against central governments or extractive outsiders, if worked out according to local ethnic and legal tradition. In Honduras, a previous government passed laws allowing charter cities, before a new government repealed them to the detriment of several charter city projects that have since been left in legal limbo. The Honduran government has been able to rally feelings around national sovereignty being violated by the law. But insofar as some communities in Africa do not have a strong sense of national identity, that which has traditionally been regarded as a weakness of African states could be turned into a strength. Certainly the Somali clans and Mourides of Touba, and the Igbo of Nigeria, would also welcome greater local autonomy and governance. No doubt dozens, if not hundreds, of other examples across the continent could be identified.

Special economic zones with their own law and governance can allow African nations to experiment with such legal hybrids, allowing both for greater respect for indigenous traditions while also surpassing other African nations through enclaves with the most competitive business environments in the world. Greater regulatory innovation and arbitrage is, in many ways, the most exciting feature of such zones. It is the means by which African nations can not just match but leapfrog other jurisdictions around the world. Legacy legal and regulatory systems are renowned for the ways in which they prevent innovation. They are typically designed to protect incumbent businesses with existing business models. Many Silicon Valley tech entrepreneurs and investors have made this point in various ways.

To give just one example, there is an entire literature on how the U.S. Food and Drug Administration (FDA) delays the introduction of new medicines and medical devices. The manner in which land use regulation increases the cost of housing is likewise well-known. New technologies such as drones and driverless cars are being adopted far more slowly than is needed due to regulatory obstacles. Nuclear energy has been adopted far more slowly than is desirable in most nations due to regulatory obstacles. Cryptocurrencies would benefit from a transparent regulatory system. And so forth.

The unique advantage of Africa is precisely that such regulatory obstacles and the powerful bureaucratic institutions that enforce them do not exist. If charter cities or special economic zones can be carved out, there will be far less pressure and interference in innovating new technology or businesses than one might find in a developed country. African people themselves, moreover, are forward-looking when it comes to innovation and technology. Africans are leading early adopters of cryptocurrency because the banking and financial sector is so heavily regulated and the legal fiat currencies are often inflationary. Recent years have seen some progress in reforming Africa’s business environments. But it is way too slow. Why not skip ahead, and just create zones with state-of-the-art e-government, fair laws, and common-sense regulation, leapfrogging from some of the worst business environments in the world to the best?

Magatte Wade, co-founder of Prospera Africa, is an entrepreneur from Senegal who has a commitment to bringing world class business environments to Africa. She is also the author of The Heart of a Cheetah. You can follow her at @magattew.



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