Private Sector Is the Key to African Development

The United Nations and the Commission for Africa, a British government group headed by the Prime Minister Tony Blair, have recently called for massive increases in foreign aid to Africa.

But past aid to African governments achieved little. Economic growth in Africa, as in the rest of the world, depends on a vibrant private sector. African entrepreneurs, however, face daunting constraints. They are prevented from creating wealth by predatory political elites who control the state. African political elites divert private sector savings to finance their own consumption and to strengthen the repressive apparatus of the state.

Unfortunately, Western aid continues to flow to the source of Africa's problems — the African governments.

When the colonies in Africa and Asia became independent of colonial rule, many observers, the 1974 winner of the Nobel Prize for economics Gunnar Myrdal (search) among them, expected Asia to remain mired in poverty while Africa steamed ahead. The opposite has happened. Although Asian countries went through many conflicts in the early years, by 1965 most of those conflicts had been resolved. Asian leaders then turned to developing and diversifying their countries' economies.

In Africa, many old conflicts, including wars in Sudan, Ethiopia and Eritrea, continue. More recent conflicts, such as the wars in the Great Lakes region, continue to erupt on a scale and ferocity that is difficult to fathom. Most of African economies have either stagnated or contracted. The percentage of people in Africa living on less than $1 a day increased from 47.4 percent in 1990 to 49 percent in 1999. In 1970, the National Bureau of Economic Research estimated that 1 in 10 of the people who subsist on less than $1 a day lived in Africa. In 2004 that number was close to 1 in 2.

At the root of Africa’s problems is economic mismanagement by the political elites that took over African countries in the 1960s. The elites saw government as a source of personal enrichment. One of the great pioneers of this scramble for power on the eve of Africa's independence, Ghana's Kwame Nkrumah (search), urged the emerging political elites, "Seek ye first the political kingdom and all else shall be given."

African political elites extract the savings produced by the agricultural and mining sectors. Were the peasants free to retain their capital surplus, they could invest it in improving their production techniques or diversifying their economic activities. Similarly, mineral extraction earnings could be used to expand Africa's mining sector and upgrade Africa's dilapidated infrastructure.

Instead, the political elites use marketing boards, taxes, and regulations to divert private sector savings to finance their own consumption and strengthen the repressive instruments of the state.

In addition to bolstering their standard of living to Western levels, African political elites used the wealth created by the private sector to undertake loss-making industrialization projects that were not supported by the necessary level of technical, managerial and educational development. They also transferred vast amounts of money to overseas private bank accounts. All the while, they borrowed money from developed countries, leaving the African people with huge debt.

Development in Africa requires a new type of democracy — one that empowers not just the political elite but Africa's private sector producers as well. It is therefore necessary that peasants who constitute the core of the private sector in Africa become the real owners of their primary asset: land.

In addition to generating wealth, private ownership of land is the only way in which rampant deforestation and accelerating desertification can be addressed. Moreover, peasants must gain direct access to world markets. Producers must be able to auction their own cash crops, including coffee, tea, cotton, sugar, cocoa, and rubber, rather than being forced to sell them, at heavily discounted prices, to state-controlled marketing boards.

Africa also needs new financial institutions that are independent of the political elite and can address the financial needs not only of peasants but of other small- to medium-scale producers as well. Those could be co-operatives, credit unions and savings banks. In addition to providing financial services, those institutions could undertake all the other technical services that are not being provided at present by African governments, such as crop research, extension services, livestock improvement, storage, transportation, distribution, and many other services that would make agriculture in Africa more productive.

These changes, rather than continued financial transfers to African governments, could for the first time bring into being a market economy that answers to the needs of African producers and consumers.

Moeletsi Mbeki is deputy chairman of the South African Institute of International Affairs, an independent think tank based at the University of the Witwatersrand. He is the author of a new Cato Institute study entitled, “Underdevelopment in Sub-Saharan Africa: The Role of the Private Sector and Political Elites.”