Minding Africa’s Business

Tuesday's World Events — Posted on October 6, 2009

(by Mindy Belz and Alisa Harris, WorldMag.com) – June Arunga watched mobile phone use in Africa skyrocket: “It was like the discovery of the wheel.” She and business partners at BSL Ghana Limited had an idea. With many parts of the continent cut off by poor electricity, nonexistent landlines, and too-expensive computers (or computers so old they operate on DOS), cell phones are the continent’s lead form of communication. Africa has the largest telecom market of any continent in the world-300 million of the world’s nearly 3.5 billion cell phones, and growing by the millions each year.

But while phone use has taken off, financial services lag: Eighty percent of African households have never opened a bank account. They wait in long lines to pay an electric bill with cash. Villagers making beautiful crafts have no way individually to market them beyond the village or to engage in ecommerce.

Arunga and associates saw a business opportunity: Turn mobile phones into mobile currency. The cards for prepaid phone service, called “scratch cards,” can be sold in denominations of $5-$1,000. Using an embedded code that can be sent as a text message, mobile phones can make online purchases and money transfers. A further selling point for state-owned telecoms: Phone numbers can serve as tax identification numbers, boosting government revenue normally lost in the continent’s vast cash-only economy.

The Kenyan-born Arunga, 28, has credentials and visibility to push a bold venture. With a law degree from the University of Buckingham, she founded a film company, Open Quest Media, and worked with a BBC film crew in 2003 to produce a documentary of her own 5,000-mile journey from Cairo to Cape Town called The Devil’s Footpath. She also has worked on behalf of business ventures across the continent. But government officials and overseas execs, who own most of the continent’s telecoms, stopped her and her partners cold: Pushing commerce via telecommunications, they told her, could risk foreign aid packages and overseas contracts. What Arunga discovered, she said, is that in the global competition for finance, “money will go to Africa for charity-with no prospect of accountability whatsoever-but no one can wrap their head around investing in African business.”

While Arunga has been pushing money-making proposals on investors, she and a new host of business-minded Africans-buoyed by a potent brew of homegrown ideas and Western financial savvy-are running head-on into what should by now be obvious: Government-to-government aid to Africa is hurting trade.

“Study after study after study . . . have shown that after many decades and many millions of dollars, aid has had no appreciable impact on development,” writes Dambisa Moyo in her 2009 book Dead Aid. “Aid has financed consumption rather than investment; and foreign aid was shown to increase unproductive public consumption and fail to promote investment.”

Like Arunga, Moyo grew up in Africa. Harvard- and Oxford-educated, she worked two years for the World Bank before joining Goldman Sachs. Ever since Dead Aid came out in March, it has been on the New York Times bestseller list.

At 40, Moyo represents a post-colonial generation of Africans that has firsthand knowledge of the cycle of poverty, has seen how free markets and the private sector work, and believes many Africans can escape impoverishment through economic growth rather than charity handouts.

“It bothers me that we would rather focus on what I call the four horsemen of Africa’s apocalypse-war, disease, poverty, and corruption,” says Moyo. “Everybody wants to have the photo-op with the starving baby, but the world is asking us to raise our children on this continent under a very negative perspective, and one that’s couched in pity. Any psychologist or psychiatrist will tell you that if you tell someone constantly and long enough they are not good enough, not equal, they are poor, they aren’t going to amount to anything, they need to be helped-that can’t be a formula for long-term sustainable development.”

Arunga, who now calls Ghana home, has been striking the same theme in lectures and interviews: “There is basic human dignity that comes from people being involved in the market and solving problems and making a living from being useful rather than receiving charity. I don’t think charity is a way to wealth, and I never heard of one telling their children it is either.”

The continent as a whole, according to Arunga, has a “branding problem.” Potential investors don’t comprehend its resources or capacity.

When Arunga pitched the mobile phone plan, one potential U.S. investor asked, “Do people have mobile phones?” When Arunga explained that they do by the millions, the investor asked, “But who do they call?”

As Arunga tells it: “This is a very well-educated person, a public figure, and I was shocked. She was liberal, and I expected her to have an international sensibility, but I had to explain by asking, ‘Who do you call?’. . . and then I explained, ‘That’s who they call too.'” As Arunga explained to an audience at New York University earlier this year, “The branding problem is a big one. The only pictures she’d seen are pictures of Africans begging and dying.”

That brand of Africa is where at least one in two people lives on less than a dollar a day; one-third of the population suffers from malnutrition, and one in six children dies before age 5.

Average annual GDP per capita in Sub-Saharan Africa is less than $2,000-the lowest of any of region in the world-and more than half the continent’s GDP comes from two countries, Nigeria and South Africa.

The brand of Africa that Arunga, Moyo, and others want more prominently displayed is where human and natural resources ignite to produce a legitimate trading partner and exporter of raw and finished goods for the future. Over 40 percent of Africa’s population is under age 15, meaning its share of the world’s labor force (given a leveling of HIV/AIDS and other diseases) is set to rise dramatically over the next decade.

Africa is a leading depository of in-demand minerals and metals like platinum, nickel, and cobalt (hosting 60 percent of the world’s cobalt reserves and 90 percent of its platinum)-raw materials vital to the production of automotives, computers, and satellite technology. In addition, it is a major producer of gold, diamonds, and uranium.

Africa’s proven oil reserves are nearly 10 percent of the world total (making up 12.5 percent of current supply). And it is the only continent to stretch from the northern temperate to southern temperate zones. As President Barack Obama noted at a G8 summit in July, “There is no reason why Africa cannot be self-sufficient when it comes to food. It has sufficient arable land.”

Yet for all that, most African governments remain 70 percent to 80 percent dependent on foreign aid (that is, government-to-government transfers of aid, not including most humanitarian aid and emergency relief). The United States sends approximately $40 billion in direct foreign aid to Africa each year, while the continent attracts less than 1 percent of the world’s foreign direct investment-about $17 billion.

This aid regime started about 60 years ago as African countries began to move out from colonial rule, creating self-perpetuating bureaucracies and disincentives for development. The results are hard to argue: Sixty years ago roughly 10 percent of the continent’s population lived on a dollar a day, and today over 70 percent live on a dollar a day. As Moyo writes in the introduction to her book, “Aid has been, and continues to be, an unmitigated political, economic, and humanitarian disaster for most parts of the developing world.”

Ironically, that alarm bell began to sound just as celebrity advocates like Bono, Madonna, Bob Geldof, and others began a global aid crusade. The U2 frontman and singer-songwriter Geldof launched a campaign that culminated with the Live 8 benefit concerts in 2005-a campaign that notably failed to bring in the desired G8 donations but gave popular credence to the belief that what Africa needed was more charity.

“By the late 1990s, most of us in the aid world knew traditional aid wasn’t working,” said William Duggan, senior lecturer at Columbia Business School and author of the just-released book, The Aid Trap: Hard Truths About Ending Poverty. “After 30 years and trillions of dollars, most countries receiving aid were just as poor as when the aid started.” Meanwhile, China, he noted, took off without aid: “But instead of an aid re-think, Jeffrey Sachs and Bono, Bill Gates and Angelina Jolie whipped up popular support for ‘more aid.’ This knocked the wind out of any true reform.”

Lost in a media frenzy, the anti-aid camp took to giving lectures and writing books: American University’s George Ayittey wrote Africa Unchained in 2004, followed by former World Bank economist William Easterly’s best-selling The White Man’s Burden in 2006. By 2009, with a global recession forcing Western governments to reconsider aid expenditures, a convergence among those in the anti-aid camp took place, with Moyo’s Dead Aid and numerous other books (see sidebar, left) along with Duggan’s Aid Trap, which he co-authored with Glenn Hubbard, and a burst of new watchdog websites and blogs.

Suddenly Africans like Moyo and Arunga found themselves with publicists and worldwide lecture tours and an appearance on Oprah!-achieving along with a growing group of prominent entrepreneurs (see sidebar, next page) their own kind of celebrity status.

Moyo remains notably hard on people like Bono: “I think they are wrong in their fundamental approach to ask for more aid to Africa,” she said in New York in March, “and they actually have taken over the space of becoming the face of Africa, and spokespeople on behalf of the African continent.” Many Africans may appreciate the attention, she said, but they also wonder, “What’s the point of having a democratic society, albeit in a nascent form, if at the end of the day someone else outside of the continent is designing the future?”

In 2006 Bono upbraided the church in America for its slow response to global poverty and the AIDS epidemic. But at the Willow Creek’s Leadership Summit two months ago he said, “The church has done incredible things. . . . I think we referred to it as the sleeping giant but I didn’t know the giant could run that fast.”

Beyond celebrities, evangelical leaders like Willow Creek’s Bill Hybels and Rick Warren have “sharpened Christians’ awareness,” according to Brian Fikkert, director of the Chalmers Center at Covenant College and author of this year’s When Helping Hurts: “We have seen in the past 30 years an enormous increase in the willingness of evangelicals to combine words and deeds.” But Fikkert said he worries that some of these efforts keep the poor in a state of inferiority and shame while elevating the giver. Fikkert’s book is headed to a fourth printing since its July 1 release, representing sales Fikkert said “are well exceeding our expectations” and show the “tidal wave of energy and interest.” by the church. “We are trying to say to that tidal wave, there may be some better way of doing things than what you’re trying to do right now.”

One better way, according to George Ayittey: smart aid, or “aid that empowers the African people.” The United States should give aid not based on the promises of governments to reform, he said, but based on the formation of independent, critical institutions, like central banks, judicial systems, media, electoral commissions, and neutral and professional armed forces.

He and other experts say that the United States could do more to bring down trade barriers, too. In 2000 Congress passed the African Growth and Opportunity Act, giving tangible incentives for African governments to open up their economies and create free markets. But the bill largely has freed up petroleum exports from Africa while other trade barriers remain, most notably in agriculture (most U.S. food assistance must be U.S. grown) and textiles (African textile exports to the United States must contain U.S. fiber).

African governments also must get serious about reform, according to Ayittey: “They don’t want to give up power.”

And that’s where Africa’s entrepreneurs come in. “One has to remember that it is Africans who have to come up with their own solutions for their problems,” said Ayittey.

Ghana BSL, the communications firm that Arunga co-founded, has chipped away at opposition to its venture and is now months into the launch of its mobile phone banking venture. It’s too early to measure success, but Arunga’s business partner, Herman Chinery-Hesse, is being called the Bill Gates of Ghana.

Background

In "The Aid Trap: Hard Truths About Ending Poverty" by R. Glenn Hubbard and Colombia University School of Business professor William Duggan, the authors introduce a bold idea for the world's poorest countries. Over the past twenty years, more citizens in China and India have raised themselves out of poverty than anywhere else at any time in history. They accomplished this through the local business sector-the leading source of prosperity for all rich countries. In most of Africa and other poor regions, the business sector is weak, but foreign aid continues to fund government and NGOs. Switching aid to the local business sector in order to cultivate an ordinary middle class is the oldest, surest, and only way to eliminate poverty in poor countries.

A bold fusion of ethics and smart business, this book shows how the same energy, goodwill, and money that we devote to charity can help business save the world. By diverting a major share of charitable aid into the local business sector of poor countries, citizens take the lead in the growth of their own economies. While the aid system supports noble goals, a local well-digging company cannot compete with a foreign charity that digs wells for free. By investing in that local company, a sustainable system of development can take root.