Believe it or not – Africa is just a very good story

I am in Stockholm this morning – the main topic for today’s meeting is the prospects for the African economies. I have for a long time had the view that Africa could very well turn into the best investment story in the world.

There is no doubt that my view of Africa is to a large extent influenced by my having worked professionally on the Central and Eastern European economies for more than a decade and I see a lot of the same potential in Africa as the miracle we have seen in countries such as Poland and Slovakia over the past now more than 20 years.

In contrast to the common perception, I do not think Africa is destined always to do badly. Indeed, I believe that in 20 years we will be able to point to success stories in Africa in the same way we talk about the success of Poland or Slovakia today.

The end of the Cold War – now it is finally showing in Africa

It was the end of the Cold War and the collapse of communism that started the catch-up process in Central and Eastern Europe that led to most of the significant progress in living conditions for ordinary people in the former communist countries and led also to the spread of democracy and respect for human rights. Not everything is perfect in Central and Eastern Europe – far from it – but few would argue that life was better for Central and Eastern Europeans in 1989 than today.

The change in Central and Eastern Europe was very visible when the Cold War ended – the Berlin Wall disappeared, free elections were held, economic reforms were (mostly) swift and with the support of Western governments. However, what most people do not realise is that the end of the Cold War was equally – if not more – important for the African countries. While the Cold War was indeed cold in Europe, in Africa very hot wars had continued since the 1960s as a direct result of the Cold War.

Effectively the continent had been spilt between the East and the West and both parties had their own dictators running things (or rather mismanaging and looting). When the Cold War ended, the new democratic Russia stopped financing communist dictators in Africa and as communist regimes in countries such as Ethiopia or Angola opened up or collapsed, the West stopped funding ‘their’ dictators in Africa. This effectively meant that the number of dictatorships in Africa became a lot fewer in the 1990s.

As dictators fell across Africa and democracy spread (yes it is far from perfect anywhere in Africa), market reforms took off and the African economies gradually opened up.

So, as in Central and Eastern Europe, there is a direct line from the end of the Cold War to market reforms.

As in Central and Eastern Europe, the reforms sparked an economic take-off but unlike in Central and Eastern Europe the economic take-off in Africa has been much less noticed by commentators, policymakers and investors. However, it remains that over the past decade African countries such as Angola have been among the fastest growing countries in the world. Indeed, a country such as Angola has had a significantly more impressive growth record over the past 10 years than emerging market darlings such as Brazil, Turkey and Poland.

The best emerging markets story for the next decade

The picture of Africa is changing – over the past decade Africa has gone more or less unnoticed but more and more investors are now discovering it and more and more investors are realising that Africa could very well be the new catch-up story. Indeed, I would argue that the African story might very well become the best emerging markets story in the coming decade.

I believe there are numerous reasons why one should be optimistic about the medium- and long-term growth outlook for Africa.

First – the obvious reason – Africa remains very poor, so there is a lot of catch-up potential. Being the poorest continent in the world, the catch-up potential is the greatest.

Second, the catch-up potential is being unlocked, as reforms spread across the continent. Without these market reforms, Africa will not unlock its enormous potential. We have already seen serious reform across the continent but Africa is still lagging way behind when it comes to opening up and freeing up the economies. Africa should learn from countries such as Poland that moved swiftly when communism came to an end. African leaders should realise that if they want to be re-elected they should undertake economic reform to spur economic growth. Put another way, former Polish Finance Minister Leszek Balcerowicz should be a frequent visitor to Africa – as far as I know he is not.

Third, war raged Africa for nearly three decades. However, although over the past two years we have seen wars in North Africa and civil unrest in more places on the continent, the general picture is that Africa in general has become a peaceful (but not necessarily safe) continent.

Fourth, Prime Ministers and Presidents generally leave office when the lose elections in Africa. This did not used to be the case. Elections used to be rare. Today, they are common across Africa. They might not live up to the standards we are used to in Europe and North Africa but democracy is, nonetheless, spreading across the continent. With democracy comes accountability and with accountability comes better economic policies.

This is largely an overly rosy picture and we all know Africa’s problems: tribal conflicts, corruption, AIDS, bad infrastructure, an overreliance on foreign aid and so on. However, we all know this but it is all changing and in my view will continue to change in the coming decade. Therefore, I am optimistic.

Private provision of public goods – the case of money

One of the most interesting prospects for Africa in my view is how technology is helping to overcome some of Africa’s traditional problems.

For decades, Africa has been struggling with very weak government institutions. Consequently, the protection of property rights has been weak and, in general, there has been little respect for the rule of law. Even though this is changing, the process is often frustratingly slow. However, now it seems likely that technological developments could replace government institutions.

Take the telecom industry, for example. In most places in Africa, landlines have not worked well. This used to be a major problem. However, now mobile telephony is taking over. Private companies today are providing cheap and accessible telecom solutions to Africans. Today, more than half of all adult Africans own a mobile telephone.

In Kenya, today most economic transactions are carried out using the mobile-based electronic money M-pesa. In this sense, mobile-based money is taking over the role of cash-in-hand money and it is quite easy to imagine that mobile money will spread across Africa. Indeed, one could ask why M-pesa-style monetary regimes should not replace regular central banking – in the same way that mobile telephony has replaced out-dated dysfunctional landlines across Africa.

Another example is that mobile money has solved Zimbabwe’s so-called ‘coin problem’. After Zimbabwe effectively moved to dollarising the economy, the problem of a lack of dollar (and cent) coins emerged. However, this problem has now been solved with a private mobile phone-based solution.

Therefore, one could easily imagine the spreading of de facto Free Banking – private money issuance – across Africa as technological developments make this possible. In general, Africans are more likely to trust the money provided by international telecom providers such as Safaricom than they are to trust their own – often corrupt – central banks. Therefore, why not imagine a system of mobile-based free banking across Africa, with the mobile money being backed by, for example, the US dollar or even by Bitcoins or similar ‘quasi commodity’ money.

I am not trying to forecast what will happen to central banking in Africa but the development of M-pesa and the solution of the coin problem in Zimbabwe show that there are often private-based solutions to collective goods problems and as technology becomes cheaper and cheaper these solutions are increasingly likely to become accessible to African, which is likely to help boost African growth in the coming decade.

Project African Monetary Reform (PAMR)

Project African Monetary Reform (PAMR) – post 1

The blogoshere is full of debates about US monetary policy and the mistakes of the ECB are also hotly debated. However, other than that there is really not much debate in the blogoshere about monetary policy issues in other countries. I have from I started blogging said that I wanted to broaden the monetary debate and make it less US-centric. Unfortunately I must say I also tend to write a lot about US monetary policy and there is no doubt that most of my readers are primarily interested in US monetary affairs. However, I still want to have a broader perspective on monetary theory, policy and history. Therefore as of today I am launching Project African Monetary Reform (PAMR).

I have no clue where PAMR will lead me other than I have a large interest in the African continent and it’s economies so why not combine it with my interest in monetary policy? My regular readers will know that I already have produced a number of posts related to African monetary issues. PAMR as such will not be a major change and I will not promise any regularity in my posts in the PAMR “series”, but I hope PAMR can be a framework within which I can write a bit more on African monetary matters. I will not get into the business of forecasting central bank behavior and market movements (I spend time on that kind of thing in my day-job), but I will hope to contribute to the discussion about monetary reform in Africa. Something still badly needed in many African countries.

In the process of studying monetary reform issues in Africa – we might even learn some good lessons for more “developed” economies like the US and the euro zone. So even if you are not interested in what is going on in Africa you might learn from tracking PAMR.

I therefore also would like to invite other economists, academics and policy makers with interest in African monetary reform to get in contact with me so we might be able to build a network of people with such interests. Furthermore, I would as always welcome guest posts concerning African monetary issues from other economists with special knowledge or interest in African monetary reform. I can be contacted at lacsen@gmail.com

Furthermore, I will invite you my dear readers to give me suggestions for the next post in the PAMR series. I want to take a look at the monetary policy set-up in a “random” African country. You my dear readers will make the choice on what country I should start with. But I rule out writing something on the three large ones: South Africa, Nigeria and Egypt. You can write the suggestion here or drop me a mail. I am all hears.

Some of my previous posts related to African monetary issues:

The spike in Kenyan inflation and why it might offer a (partial) solution to the euro crisis

“Good E-money” can solve Zimbabwe’s ‘coin problem’

M-pesa – Free Banking in Africa?

 

“Good E-money” can solve Zimbabwe’s ‘coin problem’

The New York Times reports on the Zimbabwe’s so-called “coin problem”:

“When Zimbabweans say they are waiting for change, they are usually talking about politics. After all, the country has had the same leader since 1980.

But these days, Robson Madzumbara spends a lot of time quite literally waiting around for change. Pocket change, that is. He waits for it at supermarkets, on the bus, at the vegetable stall he runs and just about anywhere he buys or sells anything.

“We never have enough change,” he said, manning the vegetable stall he has run for the past two decades. “Change is a big problem in Zimbabwe.”

For years, Zimbabwe was infamous for the opposite problem: mind-boggling inflation. Trips to the supermarket required ridiculous boxloads of cash. By January 2009, the country was churning out bills worth 100 trillion Zimbabwean dollars, which were soon so worthless they would not buy a loaf of bread.

But since Zimbabwe started using the United States dollar as its currency in 2009, it has run into a surprising quandary. Once worth too little, money in Zimbabwe is now worth too much.

“For your average Zimbabwean, a dollar is a lot of money,” said Tony Hawkins, an economist at the University of Zimbabwe.

Zimbabweans call it “the coin problem.” Simply put, the country hardly has any. Coins are heavy, making them expensive to ship here. But in a nation where millions of people live on a dollar or two a day, trying to get every transaction to add up to a whole dollar has proved a national headache.”

This is of course is a very visible monetary disequilibrium – the demand for coins simply is outpacing the supply of coins. As a consequence Zimbabwe is now struggling with a quasi-deflationary problem. Somewhat paradoxically taking recent Zimbabwean monetary history into account.

Monetary history is full of this kind of “coin problems” that we now have in Zimbabwe and there are numerous solutions to the problem. In the NYT article one such solution is suggested is that the Zimbabwe government should start minting coins again. However, in Zimbabwe nobody is willing to accept in coins made produced by the government and who can blame them for that?

Good E-money

However, there is another solution that would make a lot more sense and that is simply to allow for private minting of coins. George Selgin in his 2010 masterpiece “Good Money” describe how Britain’s ‘coin problem’ in the 1780s was solved. Here is the book description:

“In the 1780s, when the Industrial Revolution was gathering momentum, the Royal Mint failed to produce enough small-denomination coinage for factory owners to pay their workers. As the currency shortage threatened to derail industrial progress, manufacturers began to mint custom-made coins, called “tradesman’s tokens.” Rapidly gaining wide acceptance, these tokens served as the nation’s most popular currency for wages and retail sales until 1821, when the Crown outlawed all moneys except its own.”

In fact we are already seeing this happening in Zimbabwe in a very primitive form – again from the NYT:

“Zimbabweans have devised a variety of solutions to get around the change problem, none of them entirely satisfactory. At supermarkets, impulse purchases have become almost compulsory. When the total is less than a dollar, the customer is offered candy, a pen or matches to make up the difference. Some shops offer credit slips, a kind of scrip that has begun to circulate here.”

So credit slips, candy, pens and matches are used as coins. Obviously this is not a very good solution. Mostly because the “storage” quality of these quasi-coins is very bad. The quality of candy after all deteriorates rather fast is you walk around with it in your pockets for a couple of days.

Among the problems in Zimbabwe is also that there is really not any local “manufacturers” that would be able to issue coins which would be trusted by the wider public and as the general “trust” level in Zimbabwean society is very low it is questionable whether any local “agent” would be able to produce a trustworthy coin.

However, a solution might be found in another African country – Kenya. In Kenya the so-called M-pesa has become a widely accepted “coin”. The M-pesa is mobile telephone based payments. Today it is very common that Kenyans use there cell phone to make payments in shops with M-pesa – even with very small amounts. Hence, one can say that this technological development is making “normal” coins irrelevant. You don’t need coins in Kenya. You can basically pay with M-pesa anywhere also in small village shops. M-pesa is Good Money – or rather Good E-Money.

Therefore, the Zimbabwean authorities should invite international telecoms operators to introduce telephone based payments in Zimbabwe. The mobile penetration in Zimbabwe is much lower than in Kenya, but nonetheless even in very poor Zimbabwe mobile telephones are fairly widespread. Furthermore, if it could help solve the “coin problem” more Zimbabwean’s would likely invest in mobile phones.

Hence, if private telecom operators were allowed to introduce (lets call it) M-Mari (Mari is shona for ‘money’ as Pesa is swahili for money) then the coin problem could easily be solved. In Kenya M-pesa is backed by Kenyan shilling. In Zimbabwe it M-Mari could be backed by US dollars (or something else for that matter).

The future African monetary regime – M-pesa meets Bitcoin

This might all seem like fantasy, but the fact remains that there today are around 500 million cell phones in Africa and there is 1 billion Africans. In the near future most Africans will own their own cell phone. This could lay the foundation for the formation of what would be a continent wide mobile telephone based Free Banking system.

Few Africans trust their governments and the quality of government institutions like central bankers is very weak. However, international companies like Coca Cola or the major international telecom companies are much more trusted. Therefore, it is much more likely that Africans in the future (probably a relatively near future) would trust money (or near-money) issued by international telecom companies – or Coca Cola for that matter.

In fact why not imagine a situation where Bitcoin merges with M-pesa so you get mobile telephone money backed by a quasi-commodity standard like the Bitcoin? I think most Africans readily would accept that money – at least their experience with government issued money has not exactly been so great.

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