Africa’s development: the fallacy of self-sufficiency (2)

Of state and crony capitalism

Now, that takes me to state and crony capitalism. Dr Moghalu argued that cronyism is a reality of our lives, and that Africa can invent an economic model based on crony capitalism and actually transform its economy. He credited the Chaebol-centred industrialisation strategy in South Korea for that country’s economic success, and suggested that Nigeria, for example, could create 10 to 15 Aliko Dangotes in strategic sectors of the economy on the basis that this would have a trickle-down effect. Leaving aside the contradiction inherent in Dr Moghalu’s view on crony capitalism and his proposition that Africa needs good governance, rule of law and strong institutions to prosper, it would seem that he has not thought through the consequences of crony capitalism.  For instance, he failed to acknowledge, despite all the informed criticisms of the South Korean model, that crony capitalism creates deep corruption, inefficiencies and inequalities.

South Korea is Dr Moghalu’s exemplar for the benefits of crony capitalism. However, he did not tell us that crony capitalism produced massive corruption in South Korea or that the Asian financial crisis of 1997 was widely blamed on cronyism and the inefficiencies of the chaebol economy. In his book, Crony Capitalism: Corruption and Development in South Korea, David Kang noted that “even in South Korea, corruption was far greater than the conventional wisdom allows.” It is therefore surprising that Dr Moghalu would recommend this tainted model to Africa and make such a heroic assumption that African politicians and bureaucrats would suddenly become angels and use crony capitalism to serve the national interest.

Of course, crony capitalism cannot serve the national interest, whatever strategic thinking is behind it.  When used with state capitalism, cronyism tends to favour conglomerates that often become too powerful and uncontrollable because of their embedded self-interested relationships with politicians and bureaucrats. They use their monopoly positions to accumulate capital infinitely, create barriers to entry, and crowd out small- and medium- sized enterprises (SMEs) that are the real drivers of growth. A recent study shows that corruption and inequalities were deeper and more widespread in South Korea than in Taiwan – two of the top Asian Tigers – because of the differences in their approach to state capitalism. While South Korea promoted conglomerates or chaebols, Taiwan pursued growth and equity and favoured SME-friendly policies. As a result, SMEs became the main force of Taiwanese economy. Subsequent South Korean governments tried to break up the conglomerates, even introducing the Monopoly Regulation and Fair Trade Law in 1981, but with little success, because big business often knows how to play the political game.

A more sustainable, equitable and, ultimately, efficient growth model is one built on entrepreneurial capitalism. To be fair, Dr Moghalu recognised this strand of capitalism, but he played down its role in favour of state and crony capitalism. Entrepreneurial capitalism entails the creation of an enabling environment for SMEs to operate, compete and grow in every sector of the economy without being victims of the state picking winners, playing favourites or supporting the so-called “national champions.” As the Economist magazine noted in a recent edition, “(t) he world’s greatest centres of innovation are usually networks of small start-ups.” SMEs are the engine of economic growth. For example, according to a 2009 Eurostat figure, SMEs accounted for 53% of the UK’s goods exports. So, any policy that favours or prioritises conglomerates over SMEs is misguided and cannot serve the national interest.

Of course, every government must develop a collaborative but challenging strategic partnership with industry, but this must be driven by a commitment to open and competitive markets as a means to stimulate innovation and growth. Western governments use industrial strategy to help their business compete and grow. They use horizontal and sector level interventions, such as investments in soft and hard infrastructures, support for science and innovation as well as research and development, and reduction of regulatory burdens, to create the enabling environment for business to innovate, expand and export. So, no government ever abandons its business, and industrial strategy can be a benign form of state capitalism. However, where state capitalism descends into cronyism or crowds out the entrepreneurs that are the real drivers of growth, it has to be said that its dangers outweigh its advantages.

For Africa, state capitalism is even more problematic because the continent does not have the competent state or the strong bureaucratic culture that is required to make it work. I spent some time in South Africa in 2003 and was exposed to the limitations of its public sector, which were a constant source of friction between the government and white-controlled private sector. Nigeria does not fare better. Furthermore, state capitalism, especially the pervasive type practised by China and other dirigiste economies, will provoke retaliation from Western countries.  For instance, because of its state capitalism, China does not have a market economy status (MES) in the WTO, which exposes its exporters to trade defence measures, such as anti-dumping penalties, in major trading countries. China’s campaign to gain recognition as a market economy has so far proved unsuccessful, rebuffed by its major trading partners.  Africa cannot go down that route, to be sure.

So, Dr Moghalu is right to remind us that Africa has not emerged, let alone risen in the world economy. But he is wrong to recommend an inward-looking economic policy, coupled with state and crony capitalism, as the way forward. If globalisation is evil, self-sufficiency is a greater evil; and if market-based capitalism is bad, state capitalism and crony capitalism are even worse. And, as the saying goes, of two evils choose the less. So, Africa should embrace the competition and opportunities that globalisation and particularly openness to trade bring. To this end, Africa needs to embark on supply-side reforms to improve the productive capacities of its industries and enable them to produce goods and develop services that can compete in international markets. The aim of every African business should be to produce goods that it can sell to overseas customers, and the role of every African government should be to create the enabling environment for businesses to produce and export goods.

To be sure, there are still distortions in international trade that disadvantage Africa, but the continent’s response to this should not be to turn inwards. Africa must engage actively at the WTO to set trade agendas, build necessary coalitions, so as to change the rules of international trade where they are unfavourable to African exports. 

OluFasan