Africa’s prosperity relies on taking control of investment in its infrastructure
Relying on foreign investment for economic development always comes at a price
To safeguard its economic future, SA needs to be involved in as many current investment and finance conversations and initiatives as possible – especially regarding infrastructure.
Last month, President Cyril Ramaphosa took part in a World Economic Forum round table in Johannesburg. This month, Brazil, Russia, India, China and SA will come together at the three-day Brics Summit in the same city, followed by a big investor conference in SA before the end of the year, as suggested by Ramaphosa.
The president has also embarked on an investment drive to raise about R1.3-trillion for the next five years. Africa overall needs to invest more than $114bn (R1.5-trillion) per year to connect the continent with the arteries of global trade.
The Brics Think-Tank Council held a meeting on urgent socioeconomic challenges earlier this year in Johannesburg with the theme “Envisioning inclusive development through a socially responsive economy”. Meanwhile, the Brics Business Council has nine working groups focused on infrastructure, connectivity, skills development and regulation.
Developing countries are short of capital. Sometimes an inﬂux of capital will help them grow faster, though that is not always the case.
Capital-market liberalisation, aimed at facilitating short-term capital ﬂows, may actually inhibit economic growth, according to US economist Eugene Stiglitz. One cannot create sustainable new jobs and enterprises when money ﬂows in and out of the country overnight.
And when it comes to the development of infrastructure, a major challenge remains the mismatch between investment demand and the supply of finance. SA’s Achilles heel is its inability to take control of its infrastructure funding needs.
For example, the country has missed out on R22bn in savings (1% of gross domestic product) by not moving national freight traffic from road to rail – which has the added benefit of reducing greenhouse gas emissions. We recently invested more than R100bn in our two rail operators – only 8.4% of the required investment suggested by Ramaphosa.
Overhauling Eskom’s ageing power plants has accumulated debt of more than R367bn to equity of R183bn. Our local municipalities have a collective budget of more than R350bn per year, though only 7% of them function as required by the law. And where do we invest the pension funds of employees at our struggling state-owned enterprises? The Public Investment Corporation shows little evidence of executing its developmental mandate.
Foreign investment is often entangled in value chains in the investor country: optimising sourcing while minimising financing costs results in optimal financing. When one applies this equation, SA will remain locked in a trade deficit forever.
Also controversial is SA’s all-time high ratio of debt to GDP of 53.1% – with no evidence of externalities in the domestic economy. This can easily translate to so-called financialisation, when debt-to-equity ratios rise and financial services start accounting for an larger share of national income relative to other sectors.
According to US economist Thomas Palley, the principal effects of financialisation are to elevate the relative significance of the financial sector relative to the real sector; to transfer income from the real sector to the financial sector; and to increase income inequality and contribute to wage stagnation. Simply put, it is the capture of a sovereign economy via its financial sector.
Financialisation also leaves the economy open to the risks of debt deflation and a prolonged recession.
The structural transformation of the African economy must instead be built on the principles of self-reliance and self-sustainability by efficiently sweating our assets.
Nigerian economist Prof Adebayo Adedeji believes autarky in Africa will internalise demand. That, in turn, will stimulate economic growth and development; increase the substitution of indigenous factor inputs for expatriate inputs; and grow mass participation in the development chain, leading to a more equitable distribution of the social benefits.
The status quo favours opportunities for corruption, and our society will keep toiling to service the trade deficit and the debts inherited from previous generations.
As Kenyan lawyer Patrick Loch Otieno Lumumba has observed, Africa will forever remain on the economic superpowers’ dinner table – all due to the failure of our analytical nerve.
This article was paid for the TBE Group.