Investment as a Catalyst for Governance Reform: Lessons from History and Implications for Africa

When discussing investment in emerging markets, a common refrain among U.S. investors is the need for improved governance and reduced corruption before committing capital. However, history challenges this notion. The reluctance to invest in Africa due to governance concerns starkly contrasts with the history of investment in the United States during its own periods of rampant corruption.

Furthermore, the narrative that Africa is universally plagued by poor governance and corruption not only oversimplifies a complex continent but also ignores its diversity. Africa is not a monolith; it comprises 54 nations, many of which outscore even some Western and Eastern European countries in governance metrics.

This historical and contextual understanding provides a compelling case for rethinking the “governance-first” approach to investment in Africa.

A Historical Parallel: Corruption in 19th-Century America

The United States during the 19th and early 20th centuries was far from a model of good governance. Corruption was rampant, institutions were weak, and political machines dominated entire cities. It was a hotbed of corruption, lawlessness, and governance failures that rival or even exceed the perceptions of contemporary governance challenges in emerging markets. From brazen political corruption and violent crime to entire regions operating with little to no law enforcement, the period offers a striking parallel to the governance issues often cited as barriers to investment in Africa today.

Despite these challenges, European investors remained undeterred, pouring capital into industries and infrastructure that would later drive America’s economic transformation.

Examples of Historical Corruption

1. Government Corruption

The Whiskey Ring Scandal (1870s): Government officials and distillers conspired to defraud the U.S. Treasury of millions in taxes. Despite such corruption, European investors continued to finance U.S. infrastructure projects and bonds.

2. Judicial Bribery

The Teapot Dome Scandal (1920s): Bribes were paid to judges and politicians to secure lucrative oil leases. This did not deter foreign investment but instead led to investor-driven demands for legal and institutional reforms.

3. Weak Institutions:

During the Gilded Age, regulatory bodies were nearly nonexistent, and monopolistic practices thrived. Yet British investors financed U.S. railroads heavily, even as corruption scandals like Crédit Mobilier emerged. Their continued involvement pushed for reforms like the creation of the Interstate Commerce Commission in 1887.

These examples demonstrate that investors saw potential despite corruption and actively pushed for reforms to protect their investments, fostering better governance as a byproduct of economic growth.

4. Civil War (1861–1865)

• The Civil War itself was a result of political and governance failures. During this period, corruption in both Union and Confederate governments was rampant, with embezzlement and fraudulent supply contracts widespread.

5. Post-Reconstruction Lawlessness (1877–1900)

The withdrawal of federal troops from the South after Reconstruction led to a power vacuum filled by violent, extra-legal groups like the White League and Red Shirts, who undermined democratic institutions.

6. Policing “No-Go Zones”:

• Some urban neighborhoods, such as the Five Points district in New York City, were virtually police-free zones, controlled by gangs.
• Example: In San Francisco, Chinatown was dominated by the Tong Wars, where rival Chinese-American gangs fought for control of opium dens and illegal gambling operations. Police rarely intervened.

Crime and Lawlessness

Violent Crime

1. Train Robberies

• The rise of railroads created new opportunities for crime. Notorious figures like Jesse James and the Dalton Gang conducted high-profile train and bank robberies. These criminals were often celebrated as anti-heroes, further undermining respect for law enforcement.
• Example: Jesse James and his gang robbed the Chicago, Rock Island, and Pacific Railroad train in 1873, killing the engineer and making off with $3,000.

2. Gang Violence

• Cities like New York, Chicago, and San Francisco were plagued by violent gangs such as the Five Points Gang and the Bowery Boys. These groups often controlled neighborhoods through extortion, robbery, and violence, with little interference from the police.

3. Outlaws and Frontier Lawlessness:

• The American frontier was rife with outlaws like Billy the Kid and Butch Cassidy, who operated with impunity in areas where law enforcement was sparse or nonexistent.
• Many territories and states lacked sufficient police forces, leaving justice in the hands of vigilante groups or local militias.

Africa: A Diverse and Dynamic Continent

Africa’s governance landscape is far more nuanced than many investors assume. The continent comprises 54 countries, with significant variations in governance, transparency, and corruption levels.

Governance Leaders in Africa

• Botswana: Consistently ranks among the least corrupt countries globally. According to Transparency International’s 2022 Corruption Perceptions Index (CPI), Botswana scored 60, placing it above several European nations.
• Rwanda: Known for its strong anti-corruption measures and efficient government, Rwanda has become a hub for investment in technology and infrastructure.
• Mauritius: With a stable democracy and a CPI score of 51, Mauritius outranks countries like Hungary (42) and Romania (46).

Comparisons to Europe/United Sates

Several African nations outperform some Western and Eastern European countries on governance and corruption metrics:

• Italy (CPI: 56) and Greece (CPI: 52) score below Botswana and are only slightly above Rwanda.
• Bulgaria (CPI: 43) and Serbia (CPI: 36) score lower than Mauritius and Namibia (49).

Senegal stands out as a country that performs far better on global corruption indices than its income level would predict — punching above its weight in terms of perceived governance quality. By contrast, the United States, with a GDP per capita nearly 50 times higher, is perceived as more corrupt than expected for a country of its wealth. This contrast matters because the most robust data shows that rising GDP per capita is the single most reliable long-term driver of reduced corruption.

And yet, the U.S. example shows that wealth isn’t everything — without strong institutions, transparency, and accountability, even the richest nations can fall short. Senegal’s performance proves that progress is possible even without vast resources — while the U.S. reminds us that good governance is never automatic.

The narrative of poor governance as a universal barrier to investment in Africa ignores these realities. Investors who focus solely on a continent-wide stereotype risk missing opportunities in countries with robust institutions and governance frameworks.

Investment as a Driver of Reform

Rather than waiting for governance to improve universally, history shows that investment can catalyze reform, just as it did in the United States during its formative years.

Case Studies of Investment-Driven Reform

1. Railroad Development in the U.S.

• British investors financed railroads despite rampant corruption in the industry. Over time, their influence led to the establishment of regulatory bodies like the Interstate Commerce Commission to stabilize markets and ensure fair practices.

2. Telecommunications in Kenya

• Investments in companies like Safaricom have transformed Kenya’s economy and promoted financial inclusion through innovations like M-Pesa. These investments have enhanced transparency and reduced corruption in financial transactions.

The Case Against “Governance-First” Thinking

Economic Growth Drives Governance

A study by Kaufmann and Kraay (2002) suggests that economic growth often precedes and catalyzes governance improvements. Investment creates jobs, generates revenue, and strengthens institutions, laying the groundwork for better governance over time.

The insistence on perfect governance as a prerequisite for investment in Africa reveals a double standard. Historical European investments in the U.S. occurred despite rampant corruption, driven by the promise of economic growth. This same opportunity exists in Africa today, where investments can drive governance reforms rather than waiting for reforms to precede investments.

Conclusion

The history of European investment in the United States during its most corrupt periods offers a clear lesson: investment can be a powerful catalyst for governance reform. Africa, with its 54 diverse nations, is no monolith. Countries like Botswana, Rwanda, and Mauritius demonstrate governance standards that rival or surpass those of some European nations. Investors who perpetuate the “governance-first” mindset risk not only missing lucrative opportunities but also failing to contribute to the transformative potential of investment-driven reform.

Africa’s economic promise, much like America’s in the 19th century, lies in its ability to attract bold investors willing to shape governance as a byproduct of growth. History shows us the path forward — it’s time to walk it.