The Current Economic State of Africa

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Africa is seeing growth without development.

The African continent has played host to a multitude of social and political challenges in recent decades—all of which have culminated in a series of deep-rooted, structural obstacles to sustainable development. The domestic challenges are well-documented: outbreaks of disease, bureaucratic red tape and a rapidly disappearing skilled-labor pool have all contributed to the continent’s plummeting aggregate investor confidence. On the international scale, low-interest loans and other forms of conditional aid are also aggravating the issue. However, amidst the detrimental impact of political actors both at home and abroad, the private sector is wreaking havoc on a scale not seen since the “Scramble for Africa.”

Multinational corporations (MNCs) have been blurring the line between commercial and political influence in a manner that has often been called “a form of modern colonialism.” Exploitative business practices throughout the continent have resulted in a grossly inequitable income structure. As a result, most major economic indicators obscure the underlying issue. While Equatorial Guinea’s GDP per capita exceeds that of Poland, its life expectancy is 51 to Poland’s 76. The continent is seeing growth, but no development.

This problem has come about as result of the one-facet economy that has emerged in most post-Independence African nations. Governments are overly reliant on resource revenue, and so MNCs that dominate these primary-sector industries wield considerable political influence.

Take the Democratic Republic of Congo (DRC), for instance. In 2004, a civilian activist group took control of a mine belonging to Australian-run Anvil Mining. According to a UN report, Anvil Mining’s compensation for the local workforce was inadequate (and in some cases, non-existent), which is what instigated the action. However, as retaliation, a DRC armed contingent ended the occupation with the killing of 100 individuals (by summary execution).

Although in most cases African governments do not take such blatant military action, more often than not they are left with no choice but to concede defeat when MNCs apply pressure. It is estimated that in 2010 alone African administrations were deprived of around USD$10 billion by way of tax mispricing and other techniques. In fact, MNCs spend large sums of money lobbying for tax breaks, and are nearly always successful. Take Sierra Leone in 2014, where the sum of the tax breaks provided to the largest foreign mining companies was equivalent to 59% of the country’s budget.

That being said, the precarious balance between country and corporation can tip the other way as well. Often, corruption and badly implemented policies restrict the multiplier potential of MNCs. In some cases, ill-advised policies can discourage MNCs from setting up shop entirely. Recently, an ombudsman report revealed that a South African public utility firm was favoring a family that did business with President Zuma’s son when it came to awarding coal-supply contracts. Similar instances of nepotism influencing economic decisions has done little to encourage beneficial business activity.

Furthermore, the post-Independence focus on import substitution as a strategy to prepare African nations for international free trade exposure has proved to be causing side-effects even today.  Despite a modern-day shift to an “investment climate” policy, a Brookings study found that the current agenda is inadequate. This is in no small part due to the fact that African state-led industry development has historically resulted in inefficiently appropriated capital.

However, the relationship between MNCs and government is not always detrimental. Africa’s resource-rich land, combined with its social issues such as HIV/AIDS and malaria, has resulted in a powerful incentive for corporate social responsibility (CSR). In Equatorial Guinea, MNCs are running programs to improve educational services and increase the number of healthcare facilities. In Angola, Big Oil MNCs are resettling ex-soldiers and setting up microfinance institutions. Both these countries were named earlier in this paper as hotbeds of MNC exploitation.

The most pertinent question that is raised by the CSR phenomenon is whether its impact is truly a net positive in the long run. Some believe that these MNCs are providing merit goods and other essential functions that are the government’s responsibility. Ultimately, a state that is excessively reliant on private entities for goods and services (that it is obligated to produce) is an obstacle to sustainable development for the continent. Thus, when recommending policy to African administrations, it is important to consider the extent to which and the manner in which MNCs are regulated. Too much, and businesses are discouraged, leaving African economies without the external benefits of CSR. Too little, and businesses are free to continue with potentially harmful practices, leaving Africa to pay the price.

International attention to this issue has been far from sufficient. There have been no concrete policy recommendations to African administrations that address the problem. Meanwhile, the resource and labor exploitation continues unchecked. As ex-UN Secretary General Kofi Annan put it: “Africa loses twice as much in illicit financial outflows as it receives in international aid…It is unconscionable that some companies, often supported by dishonest officials, are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximize their profits, while millions of Africans go without adequate nutrition, health and education.”

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