Breaking Down Monopolies: Key to Africa’s Economic Success

By Arnaud Gallet - 18 July 2017 at 1:19 pm
Breaking Down Monopolies: Key to Africa’s Economic Success

A new report from the Tony Blair Institute for Global Change in London should send shivers down the collective spine of the development community: On its current trajectory, sub-Saharan Africa (SSA) will face a projected shortfall of 50 million jobs by 2040. The paper argues – as have others – that flaws in the international community’s approach to development fails to support inclusive, market-based growth and calls for deep political reforms to stave off a potential humanitarian disaster that would make the current refugee crisis pale in comparison.

In spite of the hundreds of billions of dollars in development aid that were poured into SSA over the past fifty years, living standards have stagnated or, in some countries, even deteriorated. As many economists have pointed out, aid fractures the relationship between the ruling class and the citizens: instead of the government appealing to its constituents for support, it tries to please the foreign aid community. What this means is that individual rights and market driven growth solutions are not pursued, or are only paid lip service to.

If that 50-million+ job shortfall is to be addressed, the feedback link between aid, plummeting living standards and declining political freedoms has to be broken. And other than changing the way the development community operates, a crucial step is jump-starting innovation, widely seen as the engine of job creation. Even SSA countries with more open political systems, like South Africa or Tanzania, are suffering from the effects of crony capitalism. In the most recent Global Innovation Index, SSA countries were proudly occupying the last spots. South Africa (GDP per capita: $5,691) was the highest ranked country, and still it only managed to secure a spot behind the Republic of Moldova (GDP per capita: $1,843), Europe’s poorest country.

Breaking this vicious cycle has to come by breaking up some of Africa’s most successful monopolies: the remittances market and the power generation sector. If the latter is responsible for keeping energy prices artificially elevated, energy accessibility low and the costs of starting businesses high, the former has a more perverse effect. Costs for intra-SS remittances are the highest in the world, thereby pushing workers looking for economic opportunities in neighboring countries into near-slavery conditions and further throttling the economic development of their home countries.

Rethinking remittances

Africa’s banking sector – a key driver of economic growth, especially for would-be entrepreneurs in need of hard cash to establish a business – is deeply flawed. The continent saw some $60 billion in remittances in 2016, and in 19 countries those cash infusions from the diaspora accounted for at least 3 percent of GDP. For many African families, remittances are a lifeline for starting or keeping their own businesses, creating jobs within them, and investing in their own communities and local economies. So why are Africans being held hostage by the sky-high fees of global operators like Western Union and MoneyGram, instead of being viewed as assets – within the “demographic dividend” and jobs-gap context – who reflect a significant FDI transfer themselves?

While the United Nations Sustainable Development Goals (SDGs) establishes a target of no more than 3 percent fees for remittances, the global average for sending $200 remained at 7.45 percent in the first quarter of 2017, while sending the money to sub-Saharan Africa incurred the highest rate, at 9.8 percent. “Remittance costs across many African corridors and small islands remain above 10 percent, because of the low volumes of formal flows, inadequate penetration of new technologies, and lack of a competitive market environment,” explains the April 2017 trends report from the KNOMAD group.

Much like power monopolies, Western Union and MoneyGram engage in anti-competitive tactics by forcing partners to sign exclusivity arrangements, which stifle innovation and keep costs high. That lack of competition isn’t lost on the wire transfer companies, who see migration trends and remittance patterns in real time and know how to capitalize on every market. What is lost, though, is the demographic dividend, whether a few dollars at a time, or across decades of development plans and investment that failed to create opportunities for young, educated Africans to build their own countries.

Pressure in the power sector

Similarly, arguing the case for why powering up Africa represents an attractive investment opportunity is be overstating the obvious. There are nearly 600 million people without electricity now, just seven of the 55 African nations have access rates higher than 50 percent (nearly all of them on the West African coast, along with South Africa) and the demand is expected to quadruple by 2040. The “Brighter Africa” report from McKinsey Co. notes the interest of China and the United States, among others, in African power investment. It also notes the African Development Bank and other African-led initiatives to deliver the abundant, reliable and renewable energy that will support economies and job creation.

Yet it also warns that the market-liberalization models that the U.S. and Europe rely on to stimulate private sector investment don’t work in Africa, because they don’t function in supply-constrained settings. Meanwhile, state-owned utilities and private entities with sole authority for providing electricity, even in relatively developed South Africa, cut off more than just power in their chronic load-shedding cycles. At the peak of its load shedding program, Eskom, the country’s energy monopoly, was generating losses of up to €6 billion a month and played a large part in South Africa’s sluggish GDP growth in 2015 and 2016.

The impact of power-utility monopoly on Kenya is similar: It failed to improve access and slashed investment. In Tanzania, the arrangement with Tanesco, the company’s sole power distributor, limits sector growth and Tanzanian mines end up paying even $1 per kilowatt-hour, ten times more than their American counterparts.

If we’re to avoid the 50 million job shortfall, the shift to market-based growth that creates real jobs can’t be overlooked anymore. And breaking up the energy sector and remittance market monopolies should be at the top of the list for policymakers everywhere.

Arnaud Gallet

Arnaud Gallet

Arnaud is a French freelance writer with an African heart who has lived in 10 different Sub-Saharan countries in the past decade. He is currently based in Paris.

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