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Africa’s Economy Needs to Come out of the Shadows

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Westerners used to call sub-Saharan Africa “the Dark Continent.” That epithet reflected a willful ignorance of the continent’s civilizations, cultures, and history, and helped justify a shameful period of colonization, exploitation, and oppression. Yet in two respects the characterization is accurate – much of the Sub Sahara’s economy exists in the shadows, and energy infrastructure to light the continent is supbar. Correcting these two problems will go a long way to improving the lot of every African.

In the international development community, there is much talk of an “informal” sector in developing economies. That means that businesses and individuals operating in it do so without the protection of law, and are probably doing so illegally. They may well thrive through some combination of corruption, benevolent neglect by the government, or the public holding the laws in question in general disrepute. Yet if a problem arises, “informal” entrepreneurs have no leg to stand on in front of a court of law.

This is a massive problem. As Daniel Press and I write in a new Competitive Enterprise Institute study: “Studies conducted across Sub-Saharan Africa estimate that the informal economy accounts for some 50 to 80 percent of the region’s GDP, 60 to 80 per cent of employment, and as much as 90 per cent of new jobs.” Having that many people dependent essentially on luck for their livelihood grossly exacerbates Africa’s longstanding problems of business climate uncertainty and lack of investment.

Most development agencies tend to blame lack of infrastructure, education and skills training, and limited access to technology for the problem of the informal economy. But what Africa really suffers from is oppressive government. Taxes are high, regulations are either strict or nonsensical (sometimes both), and property rights lack protection. So people take the rational approach and work around the problem – which means operating in the informal economy.

Responsible African governments can follow the example of Botswana, which has worked to establish a reliable rule of law (although its courts are still backlogged), allow businesses more freedom, and provide an expedited process for entrepreneurs to set up businesses. As a result, it is one of the richest countries in Africa per capita, with one of the world’s fastest growth rates.

However, allowing entrepreneurs to run their businesses free from government interference will not be enough to propel the continent to the next level of development. That will require access to affordable energy, which is the lifeblood of large-scale business, and a sure provider of real wealth.

Unfortunately, too many Western development officials see Africa as a testing ground for unproven renewable energy technologies. Their goal? To see if African nations can industrialize without fossil fuels. That is a fool’s errand. As the World Bank has noted, “there’s never been a country that has developed with intermittent power.”

Climate concerns are also overblown. Africa is currently responsible for just 4 percent of global emissions of greenhouse gases. Even if Africa were to develop entirely on fossil fuels, the International Association for Energy Economics finds that will increase total global emissions by as little as 2 percent over current levels.

Western governments owe Africa a huge debt for the way they have treated it in the past. One of the best ways of repaying this debt is to encourage their African counterparts to solve these two problems, and empower – figuratively and literally – the African entrepreneur to light the way forward.

Originally posted to The Huffington Post