JOHANNESBURG (Business Day) – In the 1990s, one of the great mysteries of economics was why — against the “logic” of neoclassical economics — did capital flow mainly from the periphery of the global economy to its core, rather than vice versa, “as it should”. Then, around the turn of the millennium, it became necessary to qualify even this exception as China overtook the U.S. to become the world’s largest recipient of foreign direct investment.
More recently, the previously denuded global periphery — especially here in Africa — has started to see capital tentatively return.
What has changed and why, in particular, is Africa back on the radar screen of global capital?
My analysis of the period up until 2000 has led me to conclude that most of the products that Africa exported had been “commoditised” and, by extension, so had the countries that exported them. Commoditisation is a dark secret rarely talked about in the public arena but it is well understood in the world of finance. It signifies the end of the road in the product life cycle, a world shunned by capital as it is value-destructive rather than value-creative.
The best description I have come across that captures the essence of commoditisation comes from the most unlikely of sources: the legendary American baseball player, Yogi Berra. Describing a particular restaurant, he once said: “Nobody goes there, it is too crowded.”
And so it is with a commoditised industry and, by extension, a commoditised region. New capital does not go there; given the profit that the residual in situ capital is capable of generating, there is already too much capital employed in that activity. New capital would rather go somewhere else where the risk-adjusted returns above the cost of capital look better.
The epiphany in my research on commoditisation occurred almost by chance. While doing my doctorate in economics, I became fascinated with the etymology of the name of my chosen subject. Tradition has it that “oikonomia” came about when Aristotle fused the two Greek words oikos (a household) and nemein (to manage) to create the concept of “household management”.
My research unearthed a deeper meaning: in Mycenaean Greece, an “oika” or clan was identified by the land over which it had grazing rights; subsequently the “oika” became the prototypical family farm and thereafter the family firm. For its part, “nemein” was derived from the word “nomas” (which is itself derived from Hebrew) meaning “to wander in search of pasture”, hence the English word “nomad”.
Separately, I established that the words “cattle” and “capital” both derive via the Latin “capita” and the Greek “kephale” from the Hebrew root “caphar” meaning “to count”, a verb describing arguably the essential financial characteristic required of both cattle and capital: their being countable and thereby accountable.
From this, I concluded that “raw” capitalism is the economic system that details how and where capital grazes and why and when capital’s owners — the modern-day “oika”, namely a company or even a hedge fund — herd it on in search of greener pastures.
It was in this context that I was able to understand the essence of commoditisation. And it is an essence that is deeply understood in virtually every African culture.
Nomads dread overgrazing. Their cattle risk weight loss, even death. When overgrazing threatens, nomads herd their cattle on in search of greener pastures.
So it is with capitalists. They dread commoditisation. Their capital risks value reduction, even destruction. When commoditisation threatens, capitalists migrate their capital in search of better returns.
In this light, the “nice idea” embedded in especially Raoul Prebisch’s neoclassical economic notion that capital “should” flow from the developed core to the underdeveloped periphery in the global economy was exposed as being wishful thinking. What if the pastures in the periphery were overgrazed? What if the greenest grass was rather to be found in the core? Were this to be the case — and it unequivocally was until 2000 (and even today it is still largely the case) — then free cash flow generated in the periphery would migrate to the core, and not vice versa.
It might not seem fair that those who have only limited capital would see it drain towards those who have the most, but that — ironically — appears to be the natural rhythm of capitalism.
From a 20th-century perspective, therefore, one might have been able to conclude that Africa was forever cursed to be on the commoditised periphery of the global economy and that Afropessimists’ worst fears were justified. But since 2000 there has been a momentous change in the overall character of the global economy which has rendered that conclusion 180° wrong: China’s economy has reached sufficient size to change the very nature of what is value adding and what is not.
For Africa, this fact has had life-changing implications: simply put, commodities are no longer commoditised. The grass is again green in Africa’s pastures. The herds of capital are starting to return. And the net result is that — for the first time in decades — Africa’s gross domestic product is growing at a faster rate than the world average.
You have to be in Africa to appreciate the fullness of what this change means. Where there was desperation and fear, there is now a real sense of expectation that the future will get better. Truly, the green shoots of optimism are everywhere to be seen.
How is it that China has transformed Africa’s prospects when — in an Organisation for Economic Co-operation and Development-centric world — Africa had effectively commoditised? The fact is that, when it comes to economic development, China is “living in a different world”, and here is why. Even as Deng Xiaoping’s Open Door policy was rolled out in China during the 1980s, China continued to adopt a Closed Door policy when it came to capital flows, particularly resident outflows. The result has been that, while trade has flowed freely with the rest of the world, capital has flooded essentially only one way: into China.
The upshot is that China has managed to create its own “atmosphere” for capital, an economic zone protected by exchange controls and reinforced by a managed exchange rate. This means that China’s “atmospheric pressure” is lower than is found in most other parts of the world where nomadic capital can migrate freely across borders. This allows the China of today to be far more suited to producing profit from the earlier dynasties of the value-adding hierarchy of economic development (essentially those of land, labour and machine capital). It also means that, in China’s atmosphere, these earlier dynasties have not — yet — commoditised, as had largely happened in a more economically advanced, U.S.-centred, brand-oriented, intellectual property-driven global economy.
As everyone now knows, the result has been spectacular economic growth for China since 1980. This growth has been driven primarily by a combination of the harvesting and exploitation of land, the harnessing of abundant low-cost labour and now the large-scale mobilisation of machine capital. Profits, where they have been earned in China, are far more likely to have been made from these three more traditional dynasties of economic activity.
By contrast, profits from more modern dynasties — the world of brands, for instance — have been far harder to come by. This is attested to by most western multinationals that have invested in the Chinese market in the hope of exploiting this purported economic Shangri-La of a billion-plus consumers.
There is one qualification to this generalisation. Where western multinationals have had supply chains that have allowed them to straddle both these worlds — creating a structure some call “platform companies” — they have done particularly well. This is because they have sourced product in the low-cost Chinese atmosphere and sold it in the high purchasing- power western atmosphere, capturing the intermediate margin as profit.
So how does Africa fit into this multi-atmospheric world? The simple answer is it far prefers the new economic order defined by China to the old economic order centred upon the U.S.. Why? Because it will profit far more from trading with the East than it has from trade with the West.
Marc Faber, the famed Hong Kong-based investor, recently noted that, “There is no continent better suited to China than Africa.” In this context “suited” primarily means having the relatively unusual status of “producing products that China needs”. This means that Africa at its current state of economic development is much more in sync with China than virtually every western country, except perhaps for those few who, like Africa, are commodity-rich — such as Norway, Canada, New Zealand and Australia.
In terms of historical precedent, Africa is to China today what Australia and Argentina were to the U.S. and continental Europe in the late 19th century: a resource-rich region supplying resource-short regions going through their most resource-intensive stage of economic development — industrial takeoff and the massive urbanisation associated with it. Such provision of inputs can be immensely profitable: hence the belle époque simile of “as rich as an Argentine”.
And it should therefore come as no surprise that it is the Chinese, closely trailed by the Indians, who are today leading the new scramble for Africa’s natural resources.
By maintaining its own atmosphere for capital, China has succeeded in turning back Africa’s economic clock to an era that is more suited to its natural endowments. This has also allowed China to develop at its own pace — albeit following a well-trodden path — and to serve its own immediate needs. China has deliberately excluded itself from being a fully-fledged participant in the western-designed “free trade and free capital flow” construct that forces the lion’s share of capital to flow from the periphery to the core — the U.S. alone consumes two-thirds of the world’s mobile savings.
By preventing that migration of capital and rather supplying the core with manufactured goods for which it must be paid, China has found a formula that instead facilitates the transfer of capital from the West to the East.
Extending the atmospheric metaphor, this process appears to be allowing China to “build up a head of steam” that, if and when released, could well carry it through to being the world’s next economic hegemon. One aspect of that “steam” is a foreign exchange reserve cache that has recently topped $1-trillion.
So as the 21st century progresses, Asia is throwing Africa a lifeline. But it is not a lifeline with an unlimited shelf life. The march of commoditisation will continue, even in the fresher atmosphere for financial capital now being created by Beijing. How wisely Africa uses this oriental lifeline over the next two decades will determine whether it can yet escape that overgrazed destiny towards which so many Afropessimists still feel it is marching.
Africa now has a once-in-a-century opportunity to hitch its resource-rich wagon to that rising eastern star.
In a western-centred global economy, Africa was commoditised; in an eastern-centred one, it is not. The rise of China — and Asia at large — has given Africa the chance to be economically relevant again.
Michael Power is a strategist with Investec Asset Management. This article summarises the economic argument contained in the recently published title, The Scramble for Africa in the 21st Century — a View from the South.
