By: Roger Scher

Note: This post reflects the views of the author, not those of the Foreign Policy Association. The author is an independent contributor.

The recent FPA conference, Africa Emerging (see this link), touched on a number of important themes related to Africa’s improving economic performance and the formidable challenges that lie ahead. One theme echoed louder than all the rest — the necessity for investment in human capital — in education and health care. As in most discussions about country risk over the last thirty years, the issue of “sequencing” of reforms is critical to the African case. Should democracy precede economic liberalization or vice versa? No ready answer is apparent, but what is clear is that without strides in human development, sustainable progress on economic and democratic development will be much less likely in Africa. Investment in Africa’s people, so that jobs can be part of the region’s recent economic boom (with annual GDP growth rates above 5% in recent years, versus 2-3% per year in the 1980s-90s), will be critical to the Africa story.

Africa’s most nagging development challenges include:

Persistent corruption
Weak political and economic institutions
Low human development indicators
Poor infrastructure

A key engine of growth for Africa has been Chinese demand for the region’s commodities, especially oil, iron ore, copper, and coal, which has particularly benefitted Angola which provides 20% of China’s oil imports. Yet China has also been a source of cheap imports of manufactures, meeting demand from Africa’s rising middle class, and of financing, with China’s EXIM bank providing more loans over the last decade than the World Bank. China’s loans are attractive to African governments because they come with fewer political strings — i.e. requirements to make advances in democracy and human rights. Likewise, Chinese investment has gone into important infrastructure projects — roads, dams, ports, and electricity generations, whereas Western donors have focused on human capital development with loans for education and health care. Furthermore, Western aid — in the form of massive debt relief over the last decade — has been critical to many African governments emerging from virtual insolvency.

Improving human capital is critical. For African countries to truly reap the benefits of growth, populations need training and access to health care. This is the most formidable challenge. With the exception of South Africa (34) and Namibia (35), most sub-Saharan African nations have a human development ranking below 30, whereas China’s is 46 and Brazil’s is 55 (though India’s remains a low 28). This index produced by the UNDP measures and ranks countries based on education, health and other aspects of human development. Upgrading education and health care for Africa’s people will be critical to sustaining recent strides in economic development (see below a Fitch report on its negative outlook on South Africa, the region’s largest economy, and an Economist article on the dysfunctional South African education system); this will likewise be critical to avoiding backsliding on democracy (see the Economist article on African democracy below).

From Fitch Ratings:

Fitch Ratings-London-13 January 2012: Fitch Ratings has affirmed South Africa’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB+’ and ‘A’ respectively. The Outlooks on the Long-term IDRs have been revised to Negative from Stable. Fitch has simultaneously affirmed South Africa’s Short-term IDR at ‘F2’ and Country Ceiling at ‘A’.

“The Negative Outlook reflects the limited progress on several long-standing structural issues that have over time caused South Africa’s economic performance to fall behind its peers,” says Purvi Harlalka, Director in Fitch’s Sovereigns group. “Not least of the problems that require urgent attention is the economy’s inability to create sufficient jobs for its labour force. This inability has not only constrained growth and kept the tax base narrow but has also caused public finances to become increasingly redistributive in an effort to address the lack of social mobility. The resultant narrowing of fiscal space undermines a key support to South Africa’s creditworthiness,” adds Ms Harlalka.

GDP growth has averaged 2.7% over the past five years, compared to a ‘BBB’ peer group average of 3%. The gap in per capita growth is even wider. Estimates of potential growth have been revised down to around 4% and such a pace is unlikely to be achieved in the next few years without an acceleration of structural reforms. The employment rate is a low 40% and unemployment stuck at 25%. The political challenge presented by these issues will increase over time.

South Africa’s public finances, though still a rating strength, are no longer such a stand out strength compared to peers. Fiscal space has been used up in the recession. By Q113, the budget deficit will have averaged 5% of GDP for four years running and debt will have risen to 42% of GDP, where it will be in line with the ‘BBB’ median but 1.6x higher than in 2008 and back up to levels last seen in fiscal year 1999/2000 (FY00), when South Africa’s rating was two notches lower. In Fitch’s view, the higher debt level, together with the fact that the wage bill and social transfers consume 52% of the budget, has substantially reduced the fiscal room available to South Africa to counteract any significant economic shocks.

Although they remain better than peer medians, South Africa’s external finances are also deteriorating. In 2010 South Africa became a net external debtor, albeit a small one (1.3% of GDP), from having been a net external creditor during 2004-2009. The increase in external indebtedness reflects the fact that South Africa’s current account has been in deficit since 2004 despite the fact that there has been a commodity price boom for most of this period. The saving ratio is relatively low and foreign direct investment (FDI) has averaged just 1.5% of GDP over this period. The current account deficit (CAD) is set to widen to 4.4% of GDP in 2012 from 4% in 2011 and 2.8% in 2010, following a weakened outlook for exports, so the increase in net debt will continue. However, the CAD is unlikely to reach the 7% of GDP levels recorded in 2007 and 2008 due to a slowdown in consumption.

South Africa’s ‘BBB+’ rating remains underpinned by the strength of its institutions relative to its peers. These include a robust macroeconomic and regulatory framework, an independent and objective judicial system, and able governance. The resulting favourable business climate has enabled the development of a sophisticated corporate and financial sector. The depth and liquidity of the latter has enabled South Africa to borrow mainly in its own currency – 90% of government debt is rand denominated – which is a key rating strength.

South Africa’s macroeconomic framework derives important strength from the credibility of the South African Reserve Bank (SARB), which has successfully managed inflation down over the last decade. Inflation will exceed its target range (3%-6%) in 2012 but in Fitch’s view that owes partly to exogenous factors like food and administered prices and does not diminish the SARB’s inflation fighting credentials. However, inflation is typically higher than in peers as is exchange rate volatility, the latter due to portfolio flows. Despite this, domestic confidence in the currency is high as evident in the low dollarisation of contracts. The sound financial system is also a rating strength.

Political noise has increased in recent months and is set to continue this year. However, Fitch sees the threat of nationalisation – a key focus of debate – as being remote. Although the African National Congress (ANC) has historically favoured a large role for the state, it is unlikely to expropriate assets. However, its entertaining of the nationalisation debate has upset investor confidence. ANC policy towards this issue will only be clarified in the wake of the policy conference in May 2012. Any move to nationalise mines would adversely affect the business climate and have immediate and negative consequences for the rating.

Failure to accelerate growth and make it more labour-intensive on a sustained basis will gradually weaken South Africa’s credit fundamentals and have negative implications for the rating. Conversely creditworthiness would benefit from structural reforms that increase growth and employment prospects. High unemployment already fosters widespread criminal violence and deters foreign investment. Over time it could also threaten social and political stability, damaging the investment climate further.

Further increases in spending, especially the wage bill or social transfers, will limit South Africa’s already diminished fiscal space. It will also push up debt and the interest bill to levels beyond those commensurate with its current rating.

From the Economist. January 21, 2012: Education in South Africa: Still Dysfunctional

FORTE HIGH SCHOOL in Soweto, the sprawling black township outside Johannesburg, was once one of South Africa’s notoriously ill-equipped and poorly performing schools. Five years ago it had no running water, no functioning library, no computers and no sports ground. Designed for 800 pupils, it had to cater for 1,300. Only half those who reached the final year matriculated, gaining the most basic certificate for finishing school. But thanks to philanthropists “adopting” it, Forte has turned itself around. Last year it achieved an 80% pass rate, and half of its matric candidates qualified for university.

Among them was Albert Dove, a black student living with his unemployed, disabled father and poor enough to qualify for free school lunches. He got six distinctions in his exams, including 100% in physical science. Every weekend and throughout the holidays he attended extra maths and science classes at a centre in Soweto run by an international charity.

Much of his success, he said, is thanks to a school-feeding scheme set up by the Art of Living Foundation, an international outfit. “I have enough food in my stomach,” he explained. “I will not go out and steal from other children or go and gamble in the streets. I will not go out looking for a girlfriend or boyfriend to give me money for food…I will not smoke drugs to keep away the stress of having no food at home.” He wants to study nanotechnology but must first find funds. A university science course costs around 30,000 rand ($3,740) a year, excluding board and keep.

Low school standards and university fees that are too high for the poor majority help explain why South Africa, the continent’s biggest and most advanced economy, has so low a rate of university attendance. Only one in six gets that far, a much lower proportion than in other middle-income countries. A third drop out within a year. With a few notable exceptions, university standards in South Africa are pretty low. Employers often complain that universities are churning out graduates who are largely unemployable.

Three million South Africans aged 18-24, more than half the total, are outside education, training or employment. Seven in ten have no qualifications at all. Even among those with matric, only 17% are likely to get a job within a year of leaving school, according to Adcorp, a recruitment agency. After five years, 60% will still be jobless. Officially, 25% of South Africans are unemployed; the real figure is probably nearer 40%. Yet there are more than 800,000 vacancies crying out for suitable applicants in the private sector alone, even as 600,000 university graduates sit twiddling their thumbs at home.

The government claims things are improving since last year’s pass rate went up. But the proportion who pass has fluctuated wildly over the years, and often depends on how many of the weaker pupils are prevented from sitting the exam. Besides, the pass mark for many matric subjects is a mere 30%.

Teachers in black state schools work an average of 3.5 hours a day, compared with 6.5 hours in the former white state schools known as “Model C”. A fifth of teachers are absent on Fridays, rising to a third at the end of the month. The education minister herself admits that 80% of schools are still “dysfunctional”.

From the Economist. March 31, 2012: African Democracy: A Glass Half-fullWHICH way will African politics go? The way of Senegal, where the president conceded electoral defeat on March 25th to a younger rival, extending a democratic tradition unbroken since independence in 1960? Or is nearby Mali a more troubling bellwether? A few days before Senegal’s vote, junior army officers stormed and looted the presidential palace in the Malian capital, Bamako, abruptly ending a 20-year stretch of democracy that had raised hopes for the wider regionSad tales like Mali’s dominate news from Africa, yet in the longer term its political norms have evolved more towards politicians in suits than mutineers in battle fatigues. Democracy south of the Sahara may be sloppy and haphazard, but electoral contests and term limits are increasingly accepted as fixed rules, to be flouted at a would-be ruler’s peril, rather than distant ideals. Today only one African state, Eritrea, holds no elections. Even Mali’s coup-plotters have sworn to hold them soon. Tellingly, the country’s neighbours united in a storm of protest. “We cannot allow this country endowed with such precious democratic instruments, dating back at least two decades, to leave history by regressing,” said Alassane Ouattara, the president of Côte d’Ivoire.Yet many Africa-watchers perceive a gradual erosion of democratic standards. In last year’s Liberian election, the former warlord Prince Yormie Johnson cruised the countryside wearing a red fez. Winding down a window of his Ford Expedition, he would toss banknotes at assembled voters and then speed off to the next village. At one campaign event he lambasted the sitting president for corruption, while an aide fretted about running out of cash to pay off journalists for good coverage.African elections do not necessarily produce representative governments. In oil-rich but poverty-ridden Equatorial Guinea, President Teodoro Obiang was “elected” with 95% of the vote. His party “won” 99% of seats in parliament. Many opposition parties in Gambia planned to boycott elections on March 29th, assuming they would be rigged. In Zambia, another democratic standard-bearer, the government has tried to shoo the opposition out of parliament for failing to pay a party fee.Academic studies also paint a gloomy picture. The Economist Intelligence Unit’s annual democracy index ranks only one African country, Mauritius, as a “full” democracy, though it uses tough criteria that count countries like much-praised Botswana as “flawed” democracies. The Mo Ibrahim Index, a quantitative measure of good governance, shows a decline of 5% since 2007 in African political participation. Freedom House, an American think-tank, says the number of full “electoral democracies” among the 49 sub-Saharan countries has fallen from 24 in 2005 to 19 today.Southern Africa, historically the best-performing region, is now a problem child. Nepotism and corruption increasingly mar politics in the regional giant, South Africa. The president of Madagascar, André Rajoelina, has remained in power for three years after a bloodless coup. President Bingu wa Mutharika of Malawi is behaving ever more despotically, provoking Western donors to suspend aid. But even here the news is not all bad. Madagascar may have elections later this year. Angola, where President José Eduardo Dos Santos has ruled since 1979, making him Africa’s longest-serving leader, will soon run parliamentary polls, and its ruling party may push Mr Dos Santos into retirement.Still, Africa has come a long way. In 1990 Freedom House recorded just three African countries with multiparty political systems, universal suffrage, regular fraud-free elections and secret ballots. “Progress comes in waves,” says Alex Vines, head of the Africa programme at Chatham House, a London-based think-tank. Mali aside, the rest of West Africa has enjoyed a democratic boom. Sierra Leone and Liberia, both violent basket-cases not long ago, have set up respectable if imperfect political systems. Guinea and Côte d’Ivoire overcame spasms of strife and returned to democratic rule. Coup-prone Guinea-Bissau held a calm election on March 18th. Nigeria and Niger ran their best polls in recent memory last year. Ghanaian democracy has been praised by President Barack Obama.Yet the poor, illiterate electorates of many African countries are obviously keen on handouts, and thus easy to manipulate. Election violence has also become more common. Congo, Côte d’Ivoire, Kenya, Nigeria and Zimbabwe saw serious clashes after their most recent polls, driven by longstanding ethnic and sectarian rifts.All these came to a more or less swift end, unlike Africa’s civil wars of previous decades. Political progress during the next decade may be slower than in the past one. The easy post-cold-war advances have been made. Reformers must now set their sights higher. Ensuring better governance by building firm institutions is harder than putting ballots in a box.

Reformers have plenty of reasons to be hopeful, among them the growing sophistication of opposition groups. These used to be a mess—divided, undemocratic and starved of resources. One observer called them “the skunks at the democratic zoo”. Many are still hopeless, but some have learnt that discipline can put them within striking distance of power. Zambia and Senegal are recent examples.

Opposition parties also benefit from the general absence of ideological fault-lines in African politics since the demise of Marxism. More than in the West, voters there are swayed by evidence of individual competence, not party affiliation. This is useful for hungry opposition members competing with complacent governments. Africa’s high birth rates produce a pool of young voters who are more likely to take a chance on political newcomers. In many countries a president or party can win office even where all the supporters are under 30, so long as polls are fair.

At the same time, impressively high economic growth rates in many African countries have fuelled a communications explosion. Political campaigns need no longer depend on government-owned media or the ability to travel to far-flung places. They can reach voters directly and remotely via the internet and, especially, the ubiquitous mobile telephone. They can expose political skulduggery and also tabulate poll results instantaneously, making fraud easier to detect. In Nigeria’s 2011 election, tens of thousands of monitors recorded local results and fed them by text message into a central system run by volunteers. Devious governments have to invent ever more complicated and hence less effective ways of manipulating results.

The lack of voter data is a costly obstacle everywhere. Most Africans have no identity documents, so electoral rolls often need to be drafted from scratch for every poll. In Congo the government spent more than $500m on elections last year, making them the world’s most costly after America’s. High rates of illiteracy and a lack of capable institutions do not help. In Sierra Leone’s border regions, officials judge who should get a voting card by listening to people’s accents.

But setting aside the quality of African democracy, all but a few of the continent’s 1 billion people now expect to vote in regular national polls. That is something which 1.5 billion Asians, for all their impressive economic performance, cannot do.

Africa: The Human Challenge

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