Now is the time, and South Africa the place, to understand why Africa has been such an economic laggard.

Scars remain from nearly all of Africa having been aggressively colonised. Greed mixed with racism to crush long-standing social structures while looting resource wealth. 

However, many of today’s most dynamic economies are former colonies. Their impressive successes followed colonialism’s uprooting of conventions which were becoming outdated. Perhaps colonialism should be categorised as a particularly ugly phase among a long series of highly disruptive industrial-era advances. 

Some believe Africa has underperformed because Asians and Europeans are generally cleverer. Yet the intelligence rankings of random samples of people is normally distributed as depicted by a bell-shaped curve. Drawing such samples from a single ethnic group doesn’t change that. All large groups have many inherently bright people. Meanwhile, it keeps getting easier to overcome nutrition and education challenges.

Genetic differences among ethnic groups are meagre whereas the variations among national economies are huge. These economic variations had always been modest until about twenty generations ago. For thousands of generations, almost everyone had lived subsistence life-styles. This was still true for a majority of humans as recently as 1960. 

Mercantilism versus productivity

When Adam Smith, a professor of moral philosophy, wrote The Wealth of Nations in 1776, China had the world’s largest economy. Two hundred years later nearly everyone in China was extremely poor. Over the last forty years, per capita income in the world’s most populous nation has skyrocketed to exceed the global average. Whereas neither colonisation nor intelligence differentials can explain the rollercoaster path of China’s economic development over many centuries, Smith’s insights clarify much. 

Prior to The Wealth of Nations, mercantilism, the prevailing economic orthodoxy, presumed the world’s supply of wealth was fixed. While this might seem strange, those who attribute South Africa’s economic woes to ‘people having too many babies’ are making a similar presumption – as are the ANC’s redistribution-focused policy makers.

Whereas nowadays the term ‘mercantilism’ is used rather loosely, in Smith’s time it specifically referred to the popular practice in some European seafaring countries of purloining distant deposits of precious metals. Smith was Scottish and he sought to show that this didn’t grow the UK’s economy because increasing a nation’s wealth required increasing productivity.

Capturing another nation’s precious metals was similar to printing money today – as injudiciously advocated for by ‘modern monetary theory’ proponents. Such efforts do little more than increase the volume of currency or, back then, coinage in circulation, thus provoking inflation. Nor do today’s GDP calculations reflect a country depleting its resource deposits.

Smith argued that people pursuing their self-interests advanced the common good. This moral justification for capitalism has led many to interpret his book ideologically. Its famous account of a pin factory, along with its release corresponding with the beginning of the industrial revolution, encouraged others to see it as praise for industrialisation.

Smith referenced a pin factory to show that a group of people dividing tasks led to far greater output than if the same people operated independently. Specialisation of labour became associated with assembly lines and thus manufacturing, but it is no less applicable in the service sector.

NB: Smith also insisted that the productivity gains were proportional to the size of the market. Taking this on board is essential to understanding both the plunging of global poverty in recent decades and why South Africa’s obscene level of youth unemployment and widespread poverty are so entrenched. It also is central to why Africa is expected to be home to nearly 90% of the world’s extreme poverty within a decade.

Output can be expanded by increasing the number of hours worked, but it is clearly better to upgrade worker productivity. Yet for those in small, isolated villages, the efficiency benefits from industrialising clothes production versus home sewing are slight.

The plunging of global poverty largely reflects a massive migration of Asian peasants to industrial centres. While industrialisation has spurred meaningful gains, the still greater upliftment impetus traces to adding value within global supply chains.

Villages that remain isolated, remain poor. Poor communities that trade with other poor communities, remain poor. Trade has always been, and remains, integral to development, whereas industrialisation triggered world-changing productivity-driven upliftment – but gains from this path are waning.

Snow-capped mountain ranges 

The other continents benefit tremendously from having snow-capped mountain ranges which feed all-season navigable rivers. Where such rivers connect large fertile plains with an ocean harbour, prosperous cities emerge.

As most of inland Africa forms a giant plateau well above sea level, navigable rivers are rare. The Nile, which spawned one of the world’s first great civilisations, is an important exception.

Creating a robust civilisation requires specialisation of labour. If everyone grows their own food, this doesn’t happen. When navigable rivers inexpensively transport food to cities, the size of the market, and thus trade opportunities, flourish. When the rivers empty into deep harbours which can accommodate ocean-crossing ships, the size of the market and trade opportunities multiply. 

The vast majority of people in Africa have always lived far from oceans and navigable rivers. Meanwhile, most neighbours in every direction farmed similar sets of crops and raised similar animals. The advantages of trading were typically meagre relative to the costs.

Foxconn versus Massmart

It is as if South Africa’s policy makers had never heard of Adam Smith’s wise advice about productivity and markets while the rest of us missed his insights about the size of the market.

Foxconn, the Chinese company which manufactures most of Apple’s iPhones, epitomises how emerging market countries can achieve sustained high growth through carving out ever larger niches in global supply chains. Huge numbers of such niched companies are the major employers in many East Asian countries.

While industrialisation and the specialisation inherent to assembly lines boosts productivity, integrating within global supply chains also spurs a continual diffusion of knowledge around how global business practices are evolving – such as work-from-home challenges and opportunities inspired by the pandemic. Also, growth is not constrained by domestic purchasing power. 

An isolated economy must continuously constrain growth in consumption to fund investments while its productivity gains will be reduced due to less competitive pressures. For a country, such as South Africa, which has long had stagnating purchasing power and high unemployment, adopting ‘localisation’ policies is a recipe for long-term decline.

The worst case is to have very few young workers adding value to exports while foreign companies buy out domestic companies serving domestic consumers. Next generations will be failing to keep up while initial inflows of capital will be reversed by decades of outward dividends and interest payments. Having WalMart buy Massmart is the opposite of Asia growing companies like Foxconn through expanding niches within global supply chains.

South Africa is Africa’s most industrialised country but our poor prospects are depicted by our obscenely elevated youth unemployment. If patronage-induced corruption and incompetence were eradicated tomorrow, our prospects would remain deeply constrained.

Distance versus integration

South Africa is the country most distant from the world’s three largest national economies. Among continents, Africa holds the same distinction. So it is great news that services now lead global growth, with digitalisation playing a lead role. Distance has lost much relevance.

The massive poverty which surrounds us reflects isolationist policies which trace to geographically inspired biases mixing with much political opportunism.

Global growth is now becoming increasingly dominated by digital possibilities indifferent to geographic contours and distances. This region must appreciate how the global landscape has become more inviting for determined competitors.