African Capitalism Part 1: Its Problems and Players

A few months ago, How We Made It In Africa published a talk from Aliko Dangote, CEO and founder of Dangote Group, a massive conglomerate spanning several African countries. Dangote spoke on why there are so few large companies like Dangote on the continent, and he gave a surprisingly frank answer, void of the “no one does it like we do” that might pass for an answer elsewhere. Dangote gave four answers: poor electricity access, government policy inconsistency (and the difficulties of attracting investment because of it), a dearth of skilled labor, and insufficient credit access.

These answers might be obvious to anyone who watches or does business in Africa, but it’s the way Dangote got around these problems that illuminate the issues of African capitalism:

  1. To deal with the inconsistent power grid, Dangote Group operates its own power plants. As he says, “We now produce over 1,000MW, but we don’t actually sell one single megawatt to anybody. We consume everything ourselves. So technically we are a power company by default because the power is not readily available.”
  2. To counter the lack of skilled labor, Dangote Group sends its staff to India for training, as well as runs its own school, which is training nearly 1,000 workers across various industries.
  3. Dangote Group, according to Dangote, has actually outgrown the capabilities of the local banks and hence has a stronger relationship with international banks or organizations, like the African Development Bank and International Finance Corporation.

Dangote’s creativity is to be applauded, but the solutions he found to sidestep Africa’s issues point to the extremely capital-intensive nature of doing business on the continent. While controlling your own power source and running your own schools have their benefits, they are obviously more expensive than just paying for reliable power or hiring already-skilled labor. And these aren’t the only expenses to running a company in Africa.

In many ways, the capital-intensive nature of business in Africa runs far deeper than many people realize. Tim Marshall summarizes in his book, Prisoners of Geography: Ten Maps That Explain Everything About the World, the difficulties Africa faces in its development:

Africa’s coastline? Great beaches — really, really lovely beaches — but terrible natural harbors. Rivers? Amazing rivers, but most of them are worthless for actually transporting anything, given that every few miles you go over a waterfall.

Marshall devotes a chapter to the continent and the geographic difficulties that have historically held it back, and continue to hold it back. These geographic handicaps feed into, and are compounded by, institutional handicaps. For example, the rough terrain and vast distances make it difficult enough to move goods, excessive red tape and corrupt border guards exasperate the issue.

Because of these problems, it requires high levels of capital to start and sustain a business in many African countries, much higher than the capital needed in the United States. But as the saying goes “you have to spend money to make money,” and many would-be businesspeople in Africa don’t have the start-up funds necessary. Essentially Africa has been dealing with a pervasive, ancient credit crunch, where the demand for credit far outstrips the supply available.

So where does that leave capitalism in Africa? While it’s possible for the average person on the continent to struggle, hustle, and build a Dangote-like conglomerate from scratch this will be the exception, not the rule. For the most part, there are three players who have the resources to build large companies on the continent.

  1. The State
South African state-owned power company Eskom

Though Dayo Olopade thoroughly ridiculed the state in her book Bright Continent, it remains the one player in Africa with access to enough capital to truly transform the landscape. Countries like Ethiopia and Angola lead the pack in using state-owned companies to develop, and despite calls of corruption and inefficiencies, Africa’s parastatals aren’t going anywhere.

2. The Elite

Akilo Dangote, CEO and founder of Dangote Group

Africa’s 1%, born into wealthy families or among the few who’ve built their wealth from scratch (legitimate or otherwise). Due to many factors the barrier between government and the private sector is more fluid in most of Africa than in other places, and thus Africa’s elite are often in or close to their respective governments. Africa’s elite have the capital and connections necessary to build up companies if they so choose, and there has been a new trend of some African elites choosing to go into business rather than the traditional route of politics.

3. The Diaspora

NOTE: Africa has “two” diasporas, the one largely created through the slave trade, and the modern diaspora of the past half-century. Though both populations have potential, today it is the modern diaspora that has the most immediate potential and the one we’ll be focusing on.

The continent has a huge, highly educated diaspora that in many cases already contributes to Africa through remittances, though diaspora numbers and remittances of course vary by country. Africa’s “brain drain” is a complex issue that has different circumstances and effects based on where you look, but there’s no question that Africa as a whole faces a skilled-labor shortage. Many African countries however are making greater efforts to engage their diaspora populations and convince them to invest back home, and this will likely see greater pay off as the continent continues to stabilize.

There is no question that African capitalism will be of greater benefit to the haves than the have-nots; socioeconomic inequality will remain an issue on the continent for some time. Whether or not the poor see their lot improve at all depends on government policies and the geographic luck of the draw, with the poor in landlocked countries or located deep inland likely to do worse than those along the coasts.

African capitalism is, and will continue to be, state-led by necessity, and this will be true across most of its countries. The continent simply is too capital-starved for private businesses to grow organically fast enough to handle Africa’s exploding population, and the low earnings of most of the population precludes consumer-led growth in most places. Whether this state-led capitalism takes the form of fully nationalized industries, parastatals, or other forms will depend on the time and place, but the government will remain the major investor and customer for large business concerns for the next few decades at least.

To break out of the credit crunch that has plagued Africa for so long, its leaders and businesspeople must minimize the effects of Africa’s geographic handicaps while removing institutional ones. Many countries have taken strong steps in this direction, while others fall behind. The details of what Africa’s countries can do (and are doing) in this regard will be the focus of our next articles.

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