INTRODUCTION

As part of a recent presentation to a United States business group, South African minister of Finance, Trevor Manuel, extolled the extent and scope of South Africa’s blossoming taxi industry, emphasising the complexity of its systems for service and management.¹ Little if any of the extensive labour utilised in this local transport system is included in employment statistics. It is largely unregistered, untaxed and uncounted. In the discussion that followed the minister’s speech, the US businesspeople stated that the single most worrisome indicator discouraging expanded investment in South Africa was high unemployment. If taxi workers and others employed in similar informal economic spheres were counted, would they have responded differently? Perhaps, because unemployment markers would have been lower. This is not an isolated example; throughout the continent, vast sectors of economic activity are largely unaccounted for in any formal fashion. In fact, if unemployment, per capita income and other standard measures of economic activity for many African countries are taken at face value, it is difficult to see how these countries or their peoples survive.

This vignette provides a small illustration of why traditional economic theory, based on western models, has failed to capture the full extent or vibrancy of economic activity in Africa. Whether capitalist or socialist, traditional economic measures such as unemployment, inflation, industrial productivity or money growth normally reflect only those activities undertaken in the formal economic sector. Statistics produced by conventional tools usually exclude the production and exchange in the informal economy that forms the bedrock of most people’s survival, as well as the vast quantities of resources exiting the continent into the broader global economy. Although empirical data is sketchy and incomplete, it is estimated that more than half of Africa’s economic activity takes place outside the formal economy in either the informal or global spheres and is consequently not reflected in national accounts or statistics.² Without understanding the role of the informal economy, it is difficult to conceive how Africans survive the low growth raates and periodic disasters that afflict the continent, or devise effective strategies to realise its tremendous economic potential.³

This article argues that conventional economic tools are poorly suited to African economic realities, because they analyse only a small part of its economy — that which takes place in the formal sector. A more useful analytical framework conceptualises African economic activity as taking place in three separate if interlinked and interacting economies: the informal, the formal and the global.⁴ The treatment here is primarily descriptive, rather than normative, based on the assumption that this framework will be a useful tool to increase knowledge and awareness about actual economic operations on the ground and their interrelationships. While those directly involved in African economic activity are best placed to identify critical linkages and synergies between the three economies, some suggestions in this regard have been made at the conclusion of this article.

SETTING THE SCENE

Africa is a continent, not a country. This frequently ignored truism is important to keep in mind when discussing concepts supposedly applicable to the continent as a whole. An obverse for virtually any assumption can be found among the 48 countries of sub-Saharan Africa. This does not obviate the unfortunate need to generalise, but it does call for vigilance if concepts are applied at microlevel.

Tomes have been written about the effects of colonialism on Africa, ranging along a continuum from apologetics asserting that African countries were better off under rule from abroad, to strident pleas for reparations in compensation for the ‘rape of a continent’. Nevertheless, several basic legacies left their mark. A major motivation and goal of the colonialists was the extraction of goods and people.⁵ African wealth, from minerals and agricultural produce to captured slaves, was mined from the continent and sent north. On the ground in Africa, colonial masters, whether companies or countries, expected the colonies to pay for themselves and more; generating no real cost to the ‘parent’. Thus, the overriding atmosphere was ultimately one of exploitation.

People were used for labour either abroad or on the continent. Locally, this took numerous forms, of which the most long-lasting was found in the settler colonies where the highest level of education granted to Africans was training as clerks for commercial offices. The colonial state often managed to avoid paying even for basic services rendered by the indigenous population. Missionaries delivered education and health care, but primarily as an adjunct to converting the ‘heathen’. Ironically, this entire colonial construct was philosophically justified by the concept of the ‘white man’s burden’ — the obligation of northern cultures to ‘civilise’ the ‘natives’.

Many characteristics of the post-colonial African states that emerged amidst the ferment of post-World War II decolonisation were formed in reaction to the century-long experience of exploitation. Newly minted African leaders both rejected and mimicked their former ‘masters’. Aspiring to the wealth of their continent long denied them, the post-colonial leadership flooded into state houses across the continent to seek the ‘gold in the bottom desk drawer’ and distribute it to those most dependent upon them — their families, clients and members of their ethnic groups. In an oft-cited phrase, Frantz Fanon described them as "black men in white man’s shoes." Distribution was stressed over production and maintenance was largely ignored. Thus was sown the seed of the ‘dependency syndrome’ which has dogged African leadership over several decades. The first and second generation of African leaders all too often were afflicted with a belief that ‘the world owes Africa a living’, in compensation for the heritage of slavery, colonialism and western Cold War support for exploitative dictators. This philosophy justified the tendency to project responsibility outward to the omnipotent ‘international community’.

In the minds of African analysts, capitalism represented colonialism and was firmly rejected by most African countries during the polarised atmosphere of the Cold War. Multinational companies were considered the conduits of capitalism and their involvement in African economies was seriously suspect, if allowed at all. Even those countries which considered themselves nominally capitalist — Kenya and Côte d’Ivoire — nationalised so many businesses that their economies more closely resembled their African socialist neighbours than western market models.

At the same time, the semi-socialist policies of Africa’s new élite provided a poor basis for economic progress. Only President Julius Nyerere of Tanzania had the strength of his convictions to fully implement his African socialist beliefs. Sadly, the system of ujamaa or ‘villagisation’ he created was largely a failure, in part because Tanzanians preferred to live on their own land rather than in villages where social services could be consolidated. Although socialist doctrines such as government control of the ‘commanding heights’ of the economy or the universal obligation to participate in developing the rural areas were propagated at universities, students still flocked to education primarily to acquire wealth to fulfil their obligations to family and ethnic group. In practice, the mission to assist ‘the people’ became largely rhetorical.

In sharp contrast to the dreams of the early years, the consequences of these post-colonial trends have been predominantly negative. Socialism or state capitalism is now recognised as a fertile breeding ground for corruption, due in part to the subjective nature of economic decisionmaking. Socialism simply provides more opportunities to steal than a market system. Bent upon redistribution or personal profit, the leadership in many countries ignored the deterioration of public infrastructure. If pressed, some African leaders might have argued that it was the responsibility of the ‘former exploiters’ to maintain the infrastructure they originally built. As the decades passed into the 1990s, many African leaders faced increased poverty, low levels of production, and an attitude of dependency that undermined motivation to take responsibility for fixing their own problems.

Despite this unfortunate legacy, Africa has an ‘economy’ — indeed, an economy that provides very well for a fortunate few, adequately for most, and poorly for some. But, much of this ‘economy’ is hidden from outside scrutiny because of its peculiar features. In fact, Africa has three separate but interlinked economies: informal, formal and global.

THE INFORMAL ECONOMY

The informal economy includes the largest and most vibrant components of African economic activity. Historically, it sustained Africa and formed the basis of most commerce on the continent. In this treatment, the informal economy includes all economic activity left out of standard statistics and measures, remaining largely uncounted and unregulated, and depending primarily on personalised rather than legal guarantees. Encompassing both legal and ‘illegal’ activity, the informal economy runs along a continuum from benign exchanges of convenience to sophisticated crime networks transcending national borders. In addition to the traditional barter and subsistence activities usually associated with the term, the informal economy also includes monetary operations or other transactions for which regulations, if they exist, are ignored or compliance is largely unmonitored by state authorities. Given the very weak institutionalisation of western legal systems, personalised or traditional guarantees are still far more common than a western-style rule of law regime.

Africa’s informal economy has prospered in the late 20th century, in part because formal economic structures are irrelevant to the interests of much of the population. In many countries. the formal economy has been grafted on to, rather than integrated into existing systems. Thus, most citizens have little sense of involvement in or ownership of it. A genuine social contract between the bulk of the population and those who run the formal economy is lacking. Very few have confidence in the capacity of formal structures to satisfy their needs. In contrast, the social contract in western countries helps to ensure that taxes are paid and regulations observed because most people believe in the efficacy of the system, not just in its capacity to apprehend and punish wrongdoers. High unemployment statistics throughout Africa are one clear indication that most people are excluded from the formal economy and are thus driven into the informal. Others choose the environment of the informal economy because it allows them more freedom to manoeuvre or avoid regulations that could impinge upon profits.⁶

The informal economy includes numerous monetised transactions, but its bedrock is still the multitude of activities conducted through barter or for subsistence. Although they exist outside state control or rules, informal systems govern their own operations. In villages, local rules determine land allocation through traditional forms of ownership or communal tillage monitored by traditional leaders and customs. Conflict ensues when national governments attempt to superimpose ‘modern’ land allocation systems on practices retained through centuries. Subsistence agriculture sustains African populations when nothing else remains. During some of the most tortured days in Zaïre when unpaid security forces pillaged widely, people went back to the land to grow what they needed to survive or exchange, leaving little surplus to steal.

Sophisticated black markets, especially for currency exchange, have augmented barter as informal modes of exchange. In the last years of Mobutu’s Zaïre, when extreme inflation forced most people to use US dollars for significant transactions, a handful of illegal currency exchanges were set up on as many street corners in the capital city. They were known by colourful names such as Wall Street. Each of the local newspapers adopted a corner exchange and advertised the exchange rate for that day in the upper right hand corner of the front page. Thus, the informal system took over quite efficiently when formal structures collapsed.⁷

In a slightly more ‘legal’ if equally unregulated fashion, local industries operate in outdoor markets, vacant lots or backyards all over the continent. In Kenya this is called Jua-Kali or production in the hot sun. The ‘market mammies’ of West Africa are well known as clever businesswomen who support entire extended families and ensure that their sons are educated at good schools in the developed world. Janet MacGaffey documented in some detail the complex and sophisticated system run by market women in Kisangani which became, in effect, a clearing-house for much of the commerce of eastern Zaïre in the 1970s and early 1980s.⁸ Even some mineral production follows informal patterns. Today’s Democratic Republic of Congo (DRC) and Sierra Leone are full of illegal or paralegal mining operations authorised, if at all, by the warlord of the moment. In a manner reminiscent of the American gold rush, small-scale panners search for diamonds or gold in streambeds from Guinea to Angola.

Extensive trade and production networks form complex systems throughout the continent that are not mapped in any easily accessible way. These networks pass through porous national borders that become conduits rather than barriers and pay little heed to the strictures of the nation-state. Cashin describes the scene as the "colorful businessman following the ultimate deal,"⁹ with no holds barred. This informal economy has a rich history, starting with trade routes set up by African and Arab traders and augmented by European businessmen and colonialists of all types. Following on the heels of the Indian labourers imported to build the railroads were the East African Asian businessmen who quickly set up their own personalised chains of shops. African entrepreneurs of all stripes joined in, adding their own twists to the weave of economic activity. People as well as goods travel through this complex system. During a recent consultation in Libreville (February 2000) on Child trafficking for exploitative labor purposes, delegates discussed the extensive commerce in children conducted for both benign purposes such as household/herding help in exchange for support and schooling, to outright exploitation through prostitution or kidnapping. Then there is also the diamonds, oil or gold for weapons network that fuels the rebellions and wars that plague the continent.

The informal economy operates its own credit system. On the most basic level, people keep track of barter exchanges to ensure balance. Savings groups or collectives, common throughout the continent and frequently composed of women, convene periodically to pool resources.¹⁰ Every member contributes a set sum and the total is awarded to a different person at each meeting. In this way, all participants periodically have access to a pot of cash that enables them to purchase ‘capital’ goods such as tin roofs or animals. Some who are employed in the formal sector use borrowing as a form of savings in a system not dissimilar to credit cards. For most people, obligations to the extended family or clan are sacred, so an accumulated sum of money is fair game. But a loan from an employer with a repayment schedule linked to a salary can be used quickly to buy items too costly to be financed by a single salary instalment. Finally, in the time-honoured tradition of moneylenders, some Africans borrow from formal sector institutions and lend on at much higher rates in the informal systems.¹¹

This vast and teeming informal network runs according to its own rules based largely on a complex system of personalised guarantees backed up by peer group pressure or force. Most importantly, it functions outside any formal taxation, regulation or legal system. As a consequence, the informal economy encompasses many activities that are often considered and labelled as ‘corruption’. Bribes are skimmed off the top of lucrative deals, protection money is charged and paid for fear of exposure to the authorities, and inadequate formal sector salaries are supplemented by pay-offs at every level.

Formal banking establishments become skewed by loans contracted with no intention of repayment on either side. Such non-performing loans have threatened the viability of the national banking systems in Kenya and Ghana. Fundamentally, they penalise and discourage small depositors who lose their balances when banks collapse. In one notorious Kenyan case, the front man in the Goldenberg scam created his own Exchange Bank when more established institutions grew wary of transacting his business. When the scam was revealed, Exchange Bank went under.¹² Reliance upon informal economic systems also inhibits the development of capital markets and stock exchanges. In order to operate in the public realm, financial information must be revealed. Despite superior opportunities to raise capital through equity, many informal businesses continue to prefer the privacy of bank loans.

Finally, the informal economy is a comfortable milieu for numerous crime networks whose operations are greatly facilitated by its personalised and secretive nature. To name just a few examples, cars stolen in Kenya reach South Africa within days through informal trade routes, world-wide drug networks have spread their operations from Nigeria to South Africa, and financial networks abound to ferry ‘big men’ dollars out to protected bank accounts abroad. On the national level, guns for diamonds exchanges using informal trade routes continue to perpetuate lengthy conflicts in Angola and Sierra Leone. Although crime networks do not define the informal economy, but simply operate through it, they have besmirched the reputation of the entire informal network.

The bottom line is that the informal economy contains much of the most vibrant and far-reaching economic activity in Africa. Unlike the formal economy, many Africans feel a sense of ownership over operations that take place in the informal economy — the kind of identification essential to the successful functioning of economic systems over time. Nevertheless, it continues to be ignored by bureaucrats in African governments and formal sector institutions, and even by those committed to economic policy reform and development. Pundits and planners, modernisers and developers look only to wipe out, replace or tax informal systems. Ironically, the surest way to push informal activities further underground is unilaterally to attempt to tax or regulate them.¹³

Yet, the economies of Africa could not survive under the conditions described by formal statistics for employment, income, growth or anything else. These numbers simply do not reflect a vast block of throbbing economic activity. Equally important, business-people vested in the informal economy can create serious barriers to the accomplishment of reformers’ aims. People resist change when their interests are not taken into account, or if that change disrupts the way they have ‘always’ done business. Leaving informal economic actors out of reform efforts can doom these initiatives to failure. In summary, the informal economy generates an enormous pool of unregulated capital and activity that is largely unaccounted for in development analysis, even as it has a direct impact upon the implementation of development activities.

THE FORMAL ECONOMY

Of the three economies discussed in this article, the formal economy is the only one that is based specifically upon the nation-state and is identified usually as ‘the economy’ by outside observers. In contrast to the subjective environment of the informal economy, relationships within the formal economy are designed around objective guarantees using contracts, rule of law and accountancy regulations. Western foreign assistance, trade relations and most investment activities are conducted within the confines of the formal economies of African countries, which include the same components as their western counterparts: production, labour markets, taxation, government budgets, measures of economic growth and other common elements of a market system. Efforts at transformation from socialist to market economies are designed to structure the formal economy more effectively to function in a globalising world, but largely ignore informal economic activities. Most analysis and statistics on African economies are based on the formal economies of the countries in question. The familiar measure gross domestic product (GDP) is a composite of national economic activity in the formal sector.

The major western vehicle for dealing with African formal economies in the recent past has been structural adjustment or economic policy reform to create market systems. Such efforts have achieved a modicum of success in countries where governments embraced its principles, but positive outcomes have quickly dissipated if decision makers simply complied with donor demands in exchange for economic assistance. Several principles seem to be operative in the more successful cases. One of the most important is the recognition by the local leadership that the socialist or state capitalist model is outdated and should be rejected in favour of free enterprise. Given the anti-colonial roots of African socialism and the theoretical attractiveness of a system that ostensibly emphasises social welfare, this transition can be wrenching. The point is not that the market system is kinder or gentler; rather, it is far more efficient and less prone to corruption. In short, socialism did not work well for Africa, so change becomes imperative.

There has been a gradual recognition by African leaders that social initiatives, in health or education, located in rural or urban areas, could not be sustained without support from an economically viable superstructure. Well-meaning projects, foreign and domestic, fizzled when the wherewithal to finance recurrent costs or a genuine sense of community ownership was lacking. The early emphasis upon redistribution gradually decreased many countries’ capital stock, raided as it too often was by corrupt officials feathering their own nests. As the pie grew ever smaller, it became more urgent for African countries to expand their productive capacity beyond primary commodities. The promise imbedded in free enterprise philosophy was that transition to a market system would grow the economy, productivity would thrive under private ownership, and the market itself could ensure a higher level of transparency.

Finally, many African leaders decided the time had come to claim ownership of their own destiny. While the heritage of slavery/colonialism and the Cold War had not changed, and many continued to believe the west should compensate Africa for these wrongs, the west was not acting upon this view. Hence, it was time for Africans to get on with the task, however difficult this might be.

While economic policy reform regimes differ from country to country and over time, they fall roughly into three categories: the elimination of controls and liberalisation of trade, privatisation, and civil service reform. The implicit promise from reform advocates was that successful implementation would attract private investment, both foreign and domestic.

The most straightforward task has been the elimination of controls. Many countries have lifted exchange controls and allowed their currencies to float either freely or within a pegged system. While some still maintain restrictions on capital transfers or foreign investment in stock markets, capital and monetary instruments, in large part, move more freely across borders than they did in the past. Interest rate and price controls have also been eliminated in many countries, although high interest rates continue to inhibit domestic borrowing for productive purposes in some. The reform of personalised banking systems has been particularly controversial, because it often resulted in the closure of indigenous banks leaving the country largely dependent upon unpopular multinational entities.

Both privatisation and civil service reform have been more difficult. The government-owned parastatal system was a lucrative source of jobs and capital for the élite, despite their indifferent record of service to the public. Resistance to their downfall was therefore widespread and creative. The advocates of privatisation, foreign and domestic, often came from the public sector with little or no understanding of private business and even less inclination to include private sector representatives in the planning process. Many state-run businesses were inefficient if not bankrupt, and buyers were thus hard to find. Without a relatively sophisticated capital market system, the transparent sale of lucrative enterprises has been difficult to arrange and charges of cronyism and corrupt exchanges have been legion. Finally, in some cases, there were strong objections to the privatisation of public entities like utilities or transport networks ostensibly designed to ‘serve the people’. In short, this has been a tougher process than originally envisaged. Nevertheless, there are some important success cases. Both Kenya Airways and the Airports Company of South Africa are models of combining multinational company involvement and stock market offerings with ownership opportunities for employees and the general public. Both are running successfully several years after full privatisation.

Civil service reform is often a euphemism for downsizing or firing a large number of salaried employees whose livelihood has long been in the public domain. African public service bureaucracies are notoriously bloated as the only employment alternative for university graduates in economically weak states, or almost anyone else seeking work in the formal economy. After paying the salary bill, little remained to pay for services, repair infrastructure or administer programmes. Yet the existing formal private sector was too small to provide alternative employment for retrenched public officials. People without specialised skills or connections were thrown back into the informal sector. Public service reform is also psychological. Trained for decades to be suspicious of or to administer controls over activities in the private domain, the remaining public officials were all of a sudden expected to do a 180o turn and become private sector advocates and facilitators. The endless search for the perfect ‘one-stop shop’ for investors to guide them through government controls is exemplary of how difficult this transition has been.

What about the implicit promise that reform would bring with it private capital and greater prosperity? The results to date have been mixed at best. Foreign private investment flows during the 1990s varied, increasing respectably in the middle of the decade and then falling off as world-wide financial crises and increased African conflict augmented risks.¹⁴ Likewise, GDP growth rose to the 4 to 5% range in half of sub-Saharan Africa in the mid-1990s, only to fall off to an average of 3% in 1999. Current projections for 2000 are not much better, which is not surprising given the massive floods in Southern Africa in April 2000, the drought and war in the Horn of Africa and continuing acute instability in West Africa.¹⁵

Even these figures must be put into perspective: GDP growth rates of at least 7% are believed necessary for real progress, given population growth rates of 3 to 4%.¹⁶ During a period of massive increases in world trade, Africa’s share has fallen from 3% in the 1960s to between 1.5 and 2% today. While foreign capital is beginning to flow into Africa, albeit at a slower than expected pace, it all too often goes into portfolio or equity rather than direct or productive investment. Equity investment utilising African stock exchanges is a good way for investors to get their feet wet, but the transition to direct investment in productive enterprises has been painfully slow. Africans themselves still send much of their own money abroad both for mandatory debt payments and private transfers. In some countries, debt repayments exceed export earnings. Finally, economic policy reform may exacerbate poverty in the short-term by eliminating subsidies from social services. The political and social costs of this policy have forced even the international financial institutions to reassess their programmes. Nevertheless, when US Secretary of the Treasury, Robert Rubin quizzed Finance ministers during his trip to Africa in the summer of 1998, none of them wanted to abandon reforms; they thought it better to stay the course.¹⁷

In addition to the more obvious problems of poverty, disease, deteriorating infrastructure, inadequate investment capital and conflict, many African countries face a number of underlying or fundamental conditions that continue to threaten the development of viable formal economies based on free market principles. Hidden among them is a continuation of the dependency mentality. Although some among Africa’s leadership are shouldering full responsibility for the destiny of their countries, others still revert to an almost knee-jerk stance of blaming outsiders for problems and rejecting their own responsibility for finding solutions. Assistance becomes entitlement and the all-encompassing ‘international community’ is constantly exhorted to ‘do something’. Examples can be found throughout the continent from the Zimbabwe government’s unmoving stance that Britain is exclusively responsible to compensate white farmers for confiscated land, to DRC strongman Kabila’s unwillingness to adhere to the Lusaka agreement because the international community has not forced the ‘invaders’ out of his country. While the dependency mentality is explained by historical reality, it nevertheless interferes with the kind of concerted problemsolving that can only occur when perceived self-interest intersects with the assumption of responsibility to take action.¹⁸

African bureaucracies have been asked to change overnight. They are accustomed to the ‘assistance game’, having played it for many years. Now the mantra is ‘trade and investment’, an area little emphasised in the past within African bureaucracies. Few if any Africans made their voices heard at the Uruguay Round trade talks on agriculture in the late 1980s; yet, the resulting increase in world food prices was devastating for African food importers. Africans who did participate in these talks limited themselves to the Committee on Special and Differential Treatment. Many African governments have inadequate expertise to take advantage of the benefits from the new textiles and Generalised System of Preferences (GSP) regimes instituted by the recently enacted US African Growth and Opportunity Act. The current renegotiation of the Lomé Treaty with the European Union (EU) emphasises trade and will require more technical sophistication from African interlocutors. Even South Africa found its negotiations for a Free Trade Area with the European Union laborious and time-consuming. Bureaucracies, like people, tend to settle at their comfort level — for most African bureaucrats, this is still aid, not trade.

A final, but highly significant issue is the problem of debt. The debt owed by many African governments to other countries, international institutions and the private sector has reached a level at which it cannot be repaid; in fact, some analysts claim that the only solution is the creation of an international bankruptcy system. The numbers vary depending upon calculation method and source, but sub-Saharan African debt continues to be in the US $200 billion range with approximately 25% in arrears. Africa has held 11% of world debt, but produces only 5% of world income. Even worse, much of the borrowed money disappeared without a trace; it was seldom invested in productive enterprises that could generate the means for repayment.

In the immediate post-colonial heyday when primary commodity prices were high and western banks flush with petro-dollars, African leaders found it easy to borrow for showy, nationalistic projects or private benefit. But, when the oil shocks of the mid-1970s hit, western commercial banks holding shaky loans persuaded the international financial institutions to lend large sums to African countries to service commercial loans. Cold War competition led to further borrowing (20% of the total debt by some estimates) to pay for the weapons that the east and west showered on their proxies. Finally, even economic policy reform added to debt; assistance funds were given as loans, albeit on soft terms. Now, even these debts are coming due.

Africa’s debt was not entirely of its own making, but a product of particular historical trends. The world has changed. Once, twice or three times burned, lenders are more cautious and Cold War rhetoric no longer fuels the urge to supply the ally of the moment. African leadership is changing and the ‘big men’ of the past who fed their images with showy projects are no longer so prominent. Today’s leaders are more likely to look toward reform, self-sufficiency and investment. But, they are hampered by debt levels that annually force more money out of Africa than is returned in new assistance.

Numerous plans have been put forward to deal with African debt and these approaches are becoming more flexible as time passes. A major stumbling block is the serious philosophical differences between those who believe debt should be forgiven and those who hold debt repayment sacrosanct for fear of moral hazard or the destruction of credit ratings. The International Monetary Fund/World Bank plan for highly indebted poor countries (HIPC) tried to straddle this debate by creating a complex formula with conditionalities requiring years to fulfil. Mozambique and Uganda were the first African countries to qualify for HIPC debt adjustment, but the process in both countries demonstrated the unwieldy and cumbersome nature of the exercise. As the 21st century began, the almost universal conclusion that HIPC relief was too little and too slow was fuelling the momentum to cut both the debt stock and time period in half or better. Meanwhile, individual donors such as the US, Britain and the EU are increasingly forgiving old bilateral debt and limiting new funding to grants.

In the spirit of many religious traditions, Jubilee 2000¹⁹ continues to call for a one-time comprehensive debt forgiveness to celebrate the new millennium. Moral hazard would be mitigated by the one-time limitation, but countries could still start off with a clean slate. Despite the surface attractiveness of Jubilee proposals, there are pitfalls involved in viewing debt forgiveness as a comprehensive solution. In the short-term, it can erode the credit ratings upon which new private sector finance is based and thus undermine access to capital from international lenders. More fundamentally, isolated gifts such as obligation-free debt forgiveness may not impart a sense of ownership to the recipient, or induce changes in behaviour that will avoid the repetition of past patterns. Nevertheless, whatever the exact modalities of the solution, something must be done about African debt and the systems that created it. Debt negates development efforts by robbing social programmes to pay international lenders, it discourages private investors who anticipate increased taxation or strangling restrictions to help pay old debt, and it diverts African leaders from dealing with the human problems in their countries. In short, unsustainable debt fundamentally undermines economic policy reform and stymies the development of the formal economy.

THE GLOBAL ECONOMY

The global market economy has not touched Africa as much as other continents. Notably, the only country seriously impacted by the world-wide financial crisis of 1998 was South Africa, whose stock exchange is one of the largest in the developing world.²⁰ But African infrastructure to facilitate interaction with the global economy is increasing, in part as a result of the economic policy reform occurring within the formal economy. It includes, inter alia, a gradually evolving regulatory environment, liberalisation of investment codes, government debt conversion schemes, political risk insurance, pan-African mutual funds and initial, if hesitant, discussions about sovereign credit ratings. Most apparent is the rise of capital markets and stock exchanges. Some 20 countries now have stock markets ranging from the Johannesburg Stock Exchange, which transacts business regularly with its larger counterparts across the globe, to brand-new, largely self-contained systems in Tanzania and Uganda. The need for more transparent mechanisms to facilitate privatisation in countries such as Zambia, Tanzania and Malawi has helped to stimulate this trend. Once considered unreasonable restrictions on the free market, African attempts to develop legal and institutional limitations on outside investments as protection from the consequences of erratic foreign financial flows have gained more respect in the wake of the Asian financial crisis. Francophone West Africa has recently established a regional stock exchange in Abidjan and plans for consolidating national stock markets into an East African regional exchange are moving along. Rates of return have been highly variable by year and country, but are often quite substantial in helping to compensate for the perceived high risk in the untried African environment. In short, there is money to be made from investing in African capital markets.

Fuelling this trend is a growing, if still sluggish, flow of foreign and domestic private capital. Asian investors now compete briskly with more traditional European sources. US investors have been slower to respond, despite the existence of substantial returns on direct investment. Privatisation and the introduction of new technologies in telecommunications are some of the most lucrative areas for outside investors. Even in Mogadishu, Somalia, three telecommunication companies joined together in September 2000 to establish the first Internet service provider.²¹ Hard-fought battles over competitive bids for telecommunications systems in over a dozen countries have been well, if not always favourably publicised.²²

Private investors frequently find African national markets too small to be cost-effective. Thus, the trend toward regionalisation is essential to create expanded markets for intra-African trade, as well as interaction with the wider global economy. To name just a few, the Southern African Development Community (SADC) provides an important arena to expand investment north from South Africa, East African Co-operation (EAC) is slowly emerging from the ashes of the old East African Community, and the Economic Community of West African States (ECOWAS) is beginning to focus more broadly on economic initiatives. In the final analysis, however, foreign private investment in Africa is still very small. While net private flows may have more than doubled since 1980, Africa’s share of foreign private investment to all developing countries is still less than 5%.

The clearest, if most disturbing manifestation of African interaction with the global economy is the amount of African wealth held offshore. Paul Collier of the World Bank puts the figure at 39% percent of total African capital²³ and Chester Crocker identified a very tentative figure of US $150 billion. Crocker points out further that, if one-tenth of this sum were returned annually, it would equal current foreign investment inflows. Eighteen countries have a capital flight/debt ratio figure of over 40% and some reach 100%.²⁴ This phenomenon tends to conceal the extent and degree of the continent’s wealth not only from the west, whose press consistently emphasises African poverty, but also from African analysts and planners.

Africans are sending their wealth away. Why? Some of the money comes from trade, normal or irregular, in natural resources like oil, gold, diamonds and other minerals. US oil imports from the Gulf of Guinea now surpass those from the Caspian Sea and are beginning to approach Middle Eastern levels. African domestic capital also flees its country of origin for a variety of relatively benign reasons that would influence investors anywhere. Many Africans seek to escape negative interest rates, avoid exchange rate risk, circumvent high taxes (and even higher anticipated taxes to pay debt), avoid perceived favouritism to foreign investors, and get out of the line of fire of ethnic tension. Some are simply seeking a way to ensure adequate resources to educate their children. In short, Africans, like people anywhere, try to protect their money from undue risk and all too often find this easier outside the continent. There are also all kinds of patently illegal flows. Trade-faking of various kinds involving under and overinvoicing, or false duties and subsidies on imports or exports are favourite techniques. Flows from the ill-gotten gains of corruption are legion from the ‘big man’ fortunes of Mobutu and Abacha to money-laundering for drugs or garden-variety illegal transfers. The capital that fuels these transfers and enriches foreign banks and countries originates throughout Africa, generated from both the formal and informal economies. It is lost to the continent for productive purposes, unless or until it can be attracted back.

Bringing African capital back to Africa for investment will take much more than exhortation, however sincere. It may require putting a higher premium on acquiring capital than on punishing those who took it out in the first place. Some intermediate or short-term measures can be adapted from the global economy. Specially designed financial instruments such as bearer bonds sold off-shore for domestic investment, or off-shore intermediation in the form of African mutual funds offered on overseas markets may lure some capital back. Repatriation holidays with no questions asked could stimulate action on the part of those who already seek a means to bring their money home. Sometimes, these measures can have unintended consequences. In the early 1990s, Kenya sold foreign exchange certificates with a commitment to redeem them with foreign exchange upon demand. A secondary market developed and Kenya ended up with a legal dual exchange rate. Limited amounts of capital can also be retrieved by going after the ‘big men-bad guys’. Unfortunately, in too many cases, the ‘bad guys’ spent or dispersed the funds so widely that they have all but evaporated. But, the utlimate answer is to restructure African economies to create an environment attractive to African investors, as well as foreigners. This will involve continued economic policy reforms, greater efforts to involve and integrate the informal economy, and serious efforts to stem corruption and create a transparent justice system to protect the security of both resources and people.

CONVERGENCE OF THE THREE ECONOMIES

Africa’s three economies have operated historically within relatively discrete environments, but, when thrown together, have tended to conflict rather than co-operate. Individuals moved from one economy to another, not always adhering to the established norms of behaviour in each one. To the surprise of western business people, Africans sometimes expect recognition of subjective guarantees even in formal economy transactions. Or business linkages may be forged between the informal and global economies with total disregard for any formal economy regulatory regime. Only one of the three, the formal economy, is really based upon the nation-state; the informal and global economies pay little heed to the strictures of national borders. The people of Africa have a sense of ownership of the economic activities in the informal economy, but little of the formal economy and even less of the global. Yet, national statistics, almost by definition, are based on the formal economy; seldom do they encompass informal economy transactions, or make reference to capital held offshore in the global economy. Each of the three economies has an impact on and even feeds upon the operations of the others, but active awareness of their interconnectedness is limited at best. Some examples may be helpful.

Rational determination of military force levels would be enhanced if planners recognised that payment of inadequate salaries can put unbearable pressure on extended families to support soldiers through subsistence agriculture or barter trade. Ultimately, these soldiers may use their access to the means of force to raid those subsisting in the informal economy, especially if the formal structure continues to neglect them. A spiral effect threatening overall security can take place when a formal economy goes into decline. Rising unemployment that throws more people into the informal market can increase insecurity. This may convince the government to spend scarce resources on maintaining order, rather than on arresting the economic decline. If, in the process, inadequately compensated soldiers are turned loose on the informal economy, the level of security can diminish even further.

Development planners seldom ask what has worked in the informal economy. Instead, they swoop in, superimpose new westernised systems without adequate consultation, and are then perplexed by the resistance from the people they claim to be helping. Resources such as gold and diamonds are mined informally and then sent through covert trade routes into the global economy to buy weapons that fuel the wars devastating the continent. As the effort to impose formal international sanctions against blood diamonds has shown, the requisite routes are almost impossible to track or control because they are so firmly entrenched in informal economy networks. High-ranking business, government or military leaders seldom make a direct connection between the money they send off-shore for safekeeping, and the lack of resources available for the programmes they promote at home.

The operations of each of the three economies would be facilitated if the individuals doing business in each were more actively aware of existing or potential connections with the others. In shorthand terms, what happens in each of the three economies can have a negative or positive affect on the other two. The resources of the global economy are essential for Africa, particularly capital from the private sector. Claims that official assistance can fill the gap between local resources and needs are no longer credible; thus development itself may be ultimately dependent upon levels of private capital investment that have yet to materialise. But, the global market, in turn, requires African resources: minerals, markets, agricultural produce and the talents of its people. Lester Brown of World Watch once predicted that, as prosperity brings a higher demand for animal protein, China could swallow up the world’s existing grain exports.²⁵ Africa has vast tracks of underused but potentially productive land that might be co-opted to help feed the world’s people.

he long-ignored capabilities and creativities of the informal sector could be made more productive through the application of modern efficiencies and greater integration into the formal economy. Nevertheless, attempts to tax informal entities must be a culminating rather than an initiating part of this process or the requisite businesses will simply retreat further underground. Those who are building formal economy structures might benefit, in turn, by modelling the informal economy characteristics that engender a sense of ownership among its participants. The lack of ownership or identification with the formal economy by the majority of the population undermines essential compliance with regulations or taxation. On the other hand, informal personalised systems may distort reform efforts in the formal sector and feed corruption. Conscious co-operation between actors in the two economies could help to ameliorate some of these conditions.

Crosscutting tools for convergence do exist and others are probably there for the finding. At the cutting edge are a new group of young Africans, educated in the formal economies of the west, competent in the newest information technologies of the global world, but also deeply connected to the roots of the informal economies that form the backbone of their homelands. These are the systems integrators, the new leadership trained and anxious to discover solutions outside the box. Rather than just take over old industries, these young Africans, like their counterparts elsewhere, will establish new businesses in the modern service sector. For funding, they will turn to emerging global stock markets like the new London-Frankfurt-NASDAQ exchange, which will gradually eliminate nationality as a major factor in finding finance for exciting new ideas.²⁶ Their command of computer technology will enable them not only to utilise modern communications, but to develop and control independent data systems, an arena which has been the exclusive purview of international financial institutions to date. With this data goes power to predict, to project, to attract capital and ultimately to be in control of one’s economic environment.

Capital and stock markets, essential infrastructure for the global economy, are rapidly emerging in African formal economies to attract financial resources from both the global and informal economies. Conditionalities frequently accompany such finance, but this time from private sector actors who can walk away rather than cajole if their interlocutors do not comply. It could be that market forces will be more persuasive in stimulating reform than donors’ exhortations. As the attraction of equity finance convinces more informal businesses to open their books for inspection, the availability of stock markets will also help to augment transparency. Other financial tools such as investment funds can attract capital from the global and even the informal economy to promote development in the formal sector. These funds offer as yet largely untapped potential to bring African capital home. Government treasury bills and debt conversion schemes, regional political risk insurance and even sovereign credit ratings all provide means to attract global capital to formal economies and to begin to formalise informal commerce.

Personalised guarantees, the hallmark of the informal economy, are now being used as collateral for microfinance programmes that serve as a bridge for small producers into the formal economy. It is possible that these programmes will stimulate new and improved indigenous banking systems to replace those destroyed during the implementation of economic policy reform. A last, but extremely important tool is the widespread efforts to promote greater transparency or to control corruption. With sufficient openness and legal protections, many more informal businesses could risk being exposed to the light of day, global holders of capital both African and foreign, would be more likely to invest, and formal sector resources could be concentrated on development, not protection.

Greater articulation or the establishment of more conscious linkages between the three economies of Africa could provide widespread benefits in the long run, especially as global economic systems change the face of the world economy. National borders are becoming less relevant as companies ignore them in the pursuit of global business. Of the three African economies, only the formal economy is based on national borders, and economic regionalisation is beginning to blur even these perimeters. Harnessing Africa’s resources from all three economies and taking advantage of the inherent synergies between them will have a favourable impact on Africa’s development. Conversely, continuation of the status quo in which activities in one economy clash with or even cancel out those in another may only contribute to Africa’s poverty.

NOTES

This article was originally prepared for the African Center for Strategic Studies Leadership Seminars curriculum. The Center runs programmes for African military and civilian defence personnel designed to explore new roles for the military in emerging African democracies. It was established in June 1999 and conducted its first two seminars in Dakar, Senegal in November 1999 and Gaborone, Botswana in July 2000. High-ranking personnel from almost 50 African countries participated in these courses.

South African Finance minister, Trevor Manuel’s remarks were made at a US-South Africa Business Council reception held in his honour at the South African Embassy in Washington DC on 17 April 2000.



Throughout this article, Africa will refer to the 48 countries of sub-Saharan Africa. North African economies that are more closely tied to Mediterranean or Middle Eastern systems have not been included.



I am grateful to Princeton Lyman, former US Ambassador to Nigeria and South Africa and long-time analyst of African economics for making this point when he reviewed an initial draft of this article.



Stephen Cashin, Managing Director of the Modern Africa Fund Managers, developed the original concept that African economic activity could usefully be divided into three interacting economies: the informal, formal and global. The first explication of this idea was contained in Integrating the three African economies, Perspectives on Africa: A Quarterly Journal of Dialogue and Opinion 2(3), Fall 1998.



Rampant nationalism, religious conversion and geographic exploration were also factors.



I am indebted to Dr Peter Batchelor, Director of the United Nations Small Arms Survey and prominent South African defence economist, and Stephen Cashin for the insights contained in this paragraph.



I was struck by the completely open manner in which these black market currency exchanges operated when I investigated them during a State Department trip to Kinshasa in 1995.



J MacGaffey, Entrepreneurs and parasites: The struggle for indigenous capitalism in Zaire, Cambridge University Press, Cambridge, 1987.



Cashin, op cit, p 25.



The terms and names for these groups differ from place to place. In South Africa, they are called stokvels. The principle behind them is nevertheless the same: periodically to allow people with no access to formal sources of credit to assemble enough capital to make large purchases. Anyone failing to attend meetings, or pay up is strongly censured by the group.



In the mining communities of the Congolese Copperbelt, this is called Banc Lambert or kongolo yu interet. D Henk, Kazi Ya Shaba: Choice, continuity, and social change in an industrial community of southern Zaire, unpublished dissertation, University of Florida, 1988.



I investigated the Goldenberg case in some detail while serving as Economic Counsellor at the US Embassy in Nairobi from 1991-1995. The court cases associated with this corruption case are still ongoing in 2000, but the Exchange Bank collapsed in 1993.



On 26 September 2000, the UN Information Network (IRIN) reported that the Angolan government was requiring small-scale diamond miners to register and start paying taxes in 60 days. While this is part of the effort to block the sale of ‘blood diamonds’ on international markets, it seems unlikely that Angola will be able to enforce these new requirements, especially as they include paying taxes.



Foreign private investment more than doubled between 1994 and 1996, but dropped by one-third between 1995 and 1998.



Throughout this article, statistics like those contained in this paragraph will be used to illustrate a point or indicate an order of magnitude. Generally, these are commonly cited numbers that can be found in many sources, but can often be traced back to World Bank/IMF statistics. It would be misleading, however, to accredit them to a single source, since they are used so widely.



HIV/AIDS will have an impact on population growth rates, but the extent is difficult to measure. HIV/AIDS incidence rates may result in massive premature deaths of adults during their productive and procreative period leaving orphaned children whose capacity to raise families will be seriously hindered. Nevertheless, even if population growth rates actually fall as low as 2%, a GDP growth rate of 7% would still be needed.



When I debriefed Secretary Rubin’s staff after his 1998 Africa trip, they expressed amazement that not a single Finance minister had expressed a desire to backtrack on economic reform, despite the amount of political heat they were experiencing.



The Zimbabwe Financial Gazette reported on 14 September that Edison Zvobgo, long-time ZANU/PF cabinet member, directly applied the dependency mentality to Zimbabwe’s current problems: "We have behaved over the last few years as if the world owes us a living. It does not. We have blamed other people for each and every ill that befell us." Zimbabwe: Three months after the elections, International Crisis Group Africa Briefing, Harare/Brussels, 25 September 2000.



Jubilee 2000 is an organisation that has promoted a one-time comprehensive debt forgiveness plan to celebrate the turn of the millennium. This is consistent with various religious practices that advocate debt forgiveness to celebrate particular anniversaries. Jubilee is currently still going strong. Among its advocates must be those who believe that the real millennium will not begin until 2001.



For example, in May 2000, the market cap for the Johannesburg Stock Exchange was US $85.8 billion. International Herald Tribune, 12 May 2000, p 13.



The Somali Internet Company, a joint effort of the Olympic, Barakat and NationLink telecommunications companies, had 100 subscribers after the first three weeks. This system builds upon the already thriving mobile phone business. If it works in Somalia after all its troubles, it can work anywhere. Horn of Africa update, IRIN News Service, 21 September 2000



Telecommunications may be most popular with aggressive foreign investors, but mining and banking still dominate African stock exchanges and are the largest businesses in Africa according to the Financial Times. Ashanti Goldfields was the top sub-Saharan company by market capitalisation at the end of 1999 followed by Barclays Bank Zimbabwe, Delta Corporation, Barclays of Botswana and Nigerian Breweries. T Hawkins, Big brother dominates, Financial Time, 4 May 2000, p 54.



P Collier, A Hoffler & C Pattillo, World Bank working paper 2066, February 1999.



C Crocker & M P Taylor, Mobilizing African resources for African development, unpublished paper, 1999.



Lester Brown used this example in his speeches several years ago. Those who believe that US grain exports will always be adequate to fill world-wide demand over time have disputed it. Others question the fertility of much of the currently unutilised agricultural land in Africa. The point is that inadequate research has been done to determine what can be grown, using what kind of technology in many areas of Africa.



D Ignatius, An unlimited stock market ..., The Washington Post, 10 May 2000, p A29. In this article, Ignatius predicts "that through global markets, good ideas won’t have to carry a flag anymore. Smart people will be able to create jobs and wealth around the world, not just in the handful of countries where an entrepreneur can today launch an IPO."