Playbook for Africa
I am currently reading How Asia Works, and I am eager to pass on my experience. I will split my summary of this book into three articles. In this first one, I will cover land reform in Asia. Next time I will write on manufacturing and export discipline, and finally, I will touch on financial repression.
Being an entrepreneur with a vested interest in the future of my continent, I couldn’t resist taking an analysis of the situation through this particular book.
Developing an economy requires the involvement of the state and its economic policies aimed at creating sustainable growth. However, historically speaking, the states intervene and act on behalf of their interests only under the threat of existential crisis. The states in Asia became rich because they were facing the choice of either developing or perishing. There was no room for failure for these governments.
What is even more interesting is the fact that much of the factors behind these developments are directly contradicting the principles of free market economy. Government controlled economies were being regulated through strict control of capital movements, bank lending, and industrial development. History tells us that almost no country has become rich only as a result of implementation of free market policies. The free market orthodoxy works only after the nation becomes rich. The developed countries preach and impose the open market policies to the developing countries, effectively destroying the ladder they climbed themselves to the top. That was done not out of spiteful motives but just as an effort to protect their own interest.
Today much of what used to work before is simply illegal. Today, developing countries trying the described policies would be sanctioned and punished by international bodies such as World Trade Organization. For example, the technology transfers that Japanese companies like Toshiba had from the USA giant IBM would now bring massive international trade sanctions.
That makes the situation of Africa quite challenging. We cannot just copy and apply the historical Asian playbook.
Many people suggested that Africa could simply skip the traditional industrialization and build its economy around the service industry. Indeed, I made my start as an entrepreneur by providing my services in tech industry as a software engineer. Many people cited the model of India as an example of how digital services industry could be used for building national wealth. However, with the advent of AI, many jobs of that industry will be automated and this opportunity closes very quickly.
On top of it, the majority of today’s African political leaders do not have that kind of existential pressure which made them to undertake the radical economic actions after the war in Asia. With the combination of geopolitical limitations, illegal economic policy playbook, and AI disrupting the industries, what exactly does the industrialization and wealth creation look like for Africa?
I believe we need to come up with a completely different playbook. We need to design a unique path for Africa in order to succeed in the current environment.
Even though it might seem pessimistic, the dynamics remained the same since the system has always worked this way. Nothing has been taken away from us that could not be contested anyway. It just takes a new generation of entrepreneurs and leaders to design a different economic playbook for Africa.
Notes from How Asia Works
The author describes how Asian countries such as Japan, South Korea, Taiwan, and China were able to transition from being poor economies to becoming wealthy economies.
The author says that these countries went through a certain development strategy that could be split into three major steps. The first step was land reform.
Before these countries started industrialization, most of the agricultural lands were owned by rich landlords who hired peasants for their labor in exchange for money or the part of the crops. Leaders of these countries understood that this structure was not necessarily efficient for the poor economy because of factor endowment concept.
Factor endowment is basically the productive resources of the economy. These are land, labor, and capital.
Land is usually fixed. Labor is the amount of people available and willing to work and capital is all kinds of equipment, machines, buildings, money, and other means that are used to get productive assets.
The key point here is that the method of production depends on the abundance or scarcity of each factor.
For example, in the USA, labor is relatively expensive since there are many options available for workers, while capital is relatively abundant. Therefore, it makes economic sense to spend on a $500,000 machine and hire 1 or 2 people instead of hiring 20 or 30 workers to do the job.
In the poor country, the situation is the opposite. Labor is relatively abundant and cheap while capital is scarce and expensive. Therefore, it makes sense to use more labor and less capital.
Having a huge landlord own large lands and work with machinery while the rest of the population does not work makes absolutely no sense for the poor country, which has abundant labor and scarce capital. Therefore, the country needs to find ways to make use of labor.
That is why the land reform took place. The government distributed the lands between the farming households, and each of these households would have several family members work on a relatively small land area. In a capital intensive perspective, this might look inefficient, but in the economy where labor is abundant and capital is scarce, this could actually make sense.
Moreover, farmers started getting the larger part of agricultural surplus. They earned more money, which allowed them to become a part of rural middle class, who would afford to educate their children who then became part of industrial workforce in the future.
These rural households became consumers, and when manufacturing industries developed, there were already people with some purchasing power who could purchase the goods manufactured.
Also, this process prevented the excessive migration into cities. Since people could earn a reasonable income from their farms, they did not have much motivation to move to cities and create massive urban slums until enough industrial jobs were available.
Moreover, governments played the role of protection of agricultural incentives. For example, if American agricultural products or food aid came into these countries at extremely low prices, it would destroy the economic sense of local farmers. If you were a farmer producing rice, and suddenly large quantities of rice were imported into the country for free, it would obviously affect the price you could sell your rice for.
Therefore, the governments protected the interests of farmers through tariffs, import controls, price supports and other measures so that farmers would have enough incentive to produce.
The idea here is that the land reform was not only about redistributing the land but also about restructure the economy of the country based on its factor endowment.
Poor country has abundant labor and scarce capital, therefore, instead of trying to follow the capital intensive production method of rich country like the USA, it first creates an economic structure which allows to make productive use of the resources it actually has.
And this creates the base for the next step: industrialization and manufacturing.