Free money creates bad government and bad government is the root cause for most of the continent’s anaemic economic growth

There is a great debate why Africa has not enjoyed greater economic growth. For me, the answer is simple: free money. Free money creates bad government and bad government is the root cause for most of anaemic economic growth.

The free money comes from two places, natural resources and aid. Africa has been blessed with vast mineral wealth. The small country of Guinea with a population of only 10 million holds up to half the world's reserves of bauxite.
 
It also has more than 4 billion tonnes of high-grade iron ore, significant amounts of diamond, gold deposits, uranium and even rare earths. Yet its per capita GDP of $991 is one of the lowest in the world. It ranks only 145th.

Even the relatively rich, democratic South Africa has problems. It ranks as the 26th wealthiest nation in the world. It has extraordinary mineral wealth, with 90% of the world's known platinum reserves, 80% of its manganese, 70% of its chrome and 40% of its gold, as well as a large amount of coal. Yet 50% of its citizens live below the poverty line. Its GINI coefficient (a measure of the relative equality of wealth) is the second highest in the world signifying that few of its people benefit from the geologic bonanza.

The free money from mineral reserves is known generally as the curse of oil. The paradox is that instead of generating wealth for the country often income from exploitation of commodities is squandered or stolen and the country ends up poorer. Perhaps the poster child for the curse of oil is Nigeria.

Nigeria has the 10th largest oil reserves in the world. Nigeria produces almost two million barrels of oil a day, and could potentially increase that by over 35%. It could refine the oil. Nigeria has four refineries that could produce around 500,000 barrels of oil a day, but only one is operational. Like Iran, Nigeria produces immense quantities of crude, but must rely on imports for much of its refined products.

Despite the vast flow of oil income, Nigeria has one of the lowest life expectancies in the world. It ranks near the bottom of the list in education spending (177th) and 70% of its citizens are below the poverty line. It ranks at 130 on the corruption index, which is at least above Guinea at 168.

Why does this happen? Why is such wealth wasted? Simple, the money belongs to the people. The people are represented by the government. So the money goes to the government and gives politicians colossal economic incentives to take it. This is not a question of national morality or culture. Politicians everywhere are caught with their hands in the public treasury.

The best method to stop them is a free press which has financial incentives to expose them. Scandals sell newspapers, television shows and websites. It is also good if the information unearthed by journalists is backed up by prosecutors with strong incentives to enforce the law. Government without a free press is like a football game without a referee. Without the red cards of legal disincentives, investment is impossible.

Sadly these disincentives rarely exist in Africa. On the contrary, the politicians often use the funds from natural resources to insure that any legal disincentives are suppressed either by building and paying for security forces to intimidate dissenters or by buying off the opposition. These problems are exacerbated especially in post-socialist countries where bureaucrats have economic incentives to maintain a discretionary regulatory infrastructure that serves their ambitions to become permanent rent-seekers.

The result is the same whether the money comes from mineral wealth or in the form of aid provided by well meaning, but foolish developed countries. Over $1 trillion of development aid has been given by rich countries to Africa in the past 60 years. Presently the gifts amount to about $50 billion a year. This free money has the same effect on governments as does the income from natural resources. It corrupts.

Of course if you can win using the Paradinha, you have a large incentive to keep doing it. The politicians who create weak legal infrastructures have enormous strong incentives to keep them in place. In addition, countries with poor legal systems tend to be more relationship-based than rule-based. So politicians need extremely large amounts of patronage to reward friends, family, party members, security forces and anyone else who keeps them in power.

The investment climate is changing, but at a cost. President Johnson-Sirleaf of Liberia forced her own brother to step down because of corruption and President Jakaya Kikwete of Tanzania is at least trying to curb corruption. But the really successful players are those most familiar with the pitch. The best ways to invest in Africa are through home grown companies, many from South Africa, who are aware of how the game is played on the continent and can navigate its problem successfully.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).