Dr Kingsley Chiedu Moghalu, Deputy Governor of the Central Bank of Nigeria (CBN), recently delivered a public lecture on Africa’s development at the London School of Economics (LSE). The lecture, entitled “Beyond Africa Rising”, drew on his recent book, “Emerging Africa: How the Global Economy’s ‘Last Frontier’ Can Prosper and Matter.”

Dr Moghalu was on a mission to challenge the current orthodoxy about Africa’s development and to articulate a new vision for the continent. Africa, he began, may be emerging, but it is far from rising. He argued that recent macroeconomic stability, including low inflation, high GDP growth, and high returns on investment, has led to the growth of the “Africa rising industry,” and to an “opportunistic” focus on Africa as the ‘last frontier’ of profit. Yet, Africa has not emerged, let alone risen as a co-creator of global prosperity: its share of world trade is just 3%; it attracts less than 4% of total world FDI; and its total GDP, at $1.6 trillion, is just about the GDP of Brazil.

So, why has Africa failed to rise? Dr Moghalu advanced two reasons. Africa is underdeveloped, he said, because it lacks a worldview in its economies and in its governance, noting that worldview is the secret of the rise of West and the East. Secondly, globalisation has hurt the continent more than it has helped it. Africa, he said, is not ready for globalisation. From these two “fundamental understandings,” as he put it, came his big ideas, his ‘new’ paradigm for Africa’s development. He urged African countries to adopt an inward looking, self-sufficient industrialisation policy. To this end, he recommended that African countries should combine state capitalism and crony capitalism, adding that cronyism is “particularly suited to African countries; it’s a reality of our lives.”

Dr Moghalu may not be a Marxist or even a neo-Marxist, but he is certainly of the radical and structuralist school of international relations. He believes that globalisation has condemned Africa to the periphery of the global economy, and favours a more muscular state hand on the levers of capitalism. His thesis is that Africa needs to be self-sufficient so that it can “short-circuit” globalisation and “liberate itself from the oppressive dominance of globalisation.” 

These are profound ideas that can have paradigmatic effects, and define the terrain of policy discourse. The fact that the proponent of these ideas has significant institutional access to critical policy making arenas as deputy governor of CBN also gives the ideas a lot of potency as they can feed into and shape policy making.

It is for these reasons that we need to examine the worldview that Dr Moghalu has constructed to correct for any error. After all, as a scholar once said, “(e)ven the genius in drafting a worldview sometimes fails to avoid contradictions”, and the philosophical systems constructed by great thinkers are not always without fissures and flaws. It is in this context that I review in this piece Dr Moghalu’s LSE lecture.

Globalisation is Dr Moghalu’s biggest bugbear. He presents it as a dangerous phenomenon that African countries should cut loose from through a self-reliant economic policy. These anti-globalisation and self-sufficiency worldviews, however, pose enormous challenges. For instance, the idea that, in a world of complex interdependence and linkages, a nation-state can ignore global economic realities and do what it wants at home is nothing but a false prospectus. As a central banker, Dr Moghalu will be familiar with the standard Mundell-Fleming theory, which is the starting point for analysing the effects of global finance on national macroeconomic policy. Global interconnectedness has changed the world, and the glory of independence is nothing but a mirage.

But globalisation is not just about the constraints it places on policy autonomy; it’s also about the huge opportunities it creates. Since the 1990s, globalisation has helped to liberate economies and spread prosperity across the world, including in Africa. Recently, Nigeria rebased its economy, due to new economic activities in the telecommunication and entertainment sectors, and suddenly became the largest in Africa. These new sectors owe their emergence and growth to globalisation. For example, Nigerian musicians and actors are able to perform in London, New York and other world capitals because of the performing, recording, and broadcast rights that countries are obliged to protect under the rules of the World Trade Organisation (WTO) and the World Intellectual Property Organisation (WIPO). The use of mobile phones and the internet has transformed lives and business in Africa, with Nigeria having 56 million internet users, and Egypt 35 million. The global interconnection and interoperability of telecommunications traffic across national borders are facilitated by global telecommunications rules under the International Telecommunication Union (ITU). So, when Dr Moghalu criticised the “uncritical embrace of globalisation and its institutions and agents in the mistaken belief that African countries are obliged to do so as members of some presumed international community or global village”, one would assume he is not suggesting that African countries should withdraw from global economic institutions, such as the WTO, WIPO or the ITU, or ignore their rules.

There is another contradiction in Dr Moghalu’s view of globalisation. The secret for Africa’s development, he said, is innovation. Nothing can be truer; after all, the key mechanism for convergence at the international level is the diffusion of knowledge. Poor countries can catch up with rich ones to the extent that they achieve the same level of technological know-how, skill and education. So, Dr Moghalu is right to privilege innovation as one of the key drivers of progress. However, his view on innovation cannot square with his argument that Africa is not ready for globalisation. You need openness and, by extension, globalisation to achieve technological convergence. As Thomas Piketty powerfully puts in his recent book, Capital in the Twenty-First Century, “The diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade”, adding that “autarky does not encourage technological transfer.” Dr Moghalu will, of course, protest that he is not advocating autarky, but it’s difficult to read anything different from his prescription of an inward-looking economic policy and self-sufficiency.

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.