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Afro-optimists have much work to do
African Emerging Markets. Contemporary Issues, Volume 1
Edited by Sam Mensah and Diery Seck
African Capital Markets Forum (ACMF)
2001
235 pages
Reviewed by Gavin O'Toole
Despite inconclusive skirmishes that might suggest a counterattack has been mounted against the Washington consensus of raw market reform, and efforts to refurbish "neoliberalism" as elemental to a Third Way or even, God forbid, to a social democratic transformation of the developing world, modernisation theory is alive and well.
Its advocates continue to insist that the problems of the developing world - a shortage of capital, inefficient structures, backwardness - remain merely evolutionary. Linear progress towards a Western model can be accelerated by imitating the latter's "modern" forms of capitalism and accepting uncritically its counsel. Indeed, development can be achieved by remaking one's economy in the image of Western capital.
As the optimism, indeed idealism, underpinning past incantations of the modernisation creed reflected more the inheritance of 19th-century positivism than scientific method, its contemporary apostles turn to science to resolve, or perhaps gloss over, its many flaws: the straightforward questions of dependence, human fallibility, greed.
Even their optimism seems a repetition of history: just as the second wave of modernisation theory that fed into anti-communism following the Second World War appeared to reflect a broad Western consensus about the "Third World", the optimism of the 1990s was constructed upon an apparent consensus that coincided with the collapse of socialism. Advocates still look hopefully towards Westernising elites schooled in the developed world's secular and entrepreneurial values to lead their wretched countries into an overdue modernity.
By this perspective, the "Afro-optimists" identified by Charles Kenny and Todd Moss in African Emerging Markets, Contemporary Issues, Vol. 1 would cite past policy explanations for the continent's dismal economic performance – faults "that indeed are being fixed". This position broadly parallels that advanced by modernisation theory, where an underlying optimism that the flaws in political economy can be rectified given the right policies and inputs underpins an evolutionary paradigm which, somewhat dishonestly, conceals the stark fact of imperialism.
Yet the underlying question that stubbornly refuses to go away in this collection about capital markets in Africa is of what value stock or share exchanges really are in a region whose profound levels of underdevelopment are so well known that they no longer warrant restatement. To their credit, Kenny and Moss address this question, asking whether African stock markets are emerging lions or white elephants. They also identify the position of the "Afro-pessimists" who argue that the continent is stuck in a quagmire of false starts.
In some respects, this book makes a contribution to the modernisation debate, although not as intended. In keeping with the normative hue of so much literature on economic reform in the developing world, Kenny and Moss and most of the contributors to this collection edited by Sam Mensah and Diery Seck inevitably rule in favour of the Afro-optimists that, while stock exchanges are currently marginal both to Africa's economies and international investors, they may not remain so.
Yet the evidence provided by several of the contributions in this collection itself would appear to challenge such optimism.
In his examination of the Botswana share market, Keith Jeffries argues that it has
had little impact on raising new finance for manufacturing and has had a limited impact on overall economic development. One obvious reason for this is that most Batswana, like most Africans in general, have no capital to invest. Although amounts raised by the Botswana share market are significant relative to long-term lending by commercial banks, both remain small compared with public-sector and overseas sources. Kofi Osei's examination of the Ghana stock market demonstrates that having a market is only half the battle: with severe limits on the amount of local or even regional capital that can be placed in it, its limited potential soon becomes evident. If anything, Osei's study draws attention to contingent developmental factors influencing the relevance of a stock market, such as general levels of poverty and education. Ayodeji Olowe's examination of the Nigerian stock market supports these broader conclusions, especially that problems affecting pricing efficiency include inadequate information flows and poor understanding of financial information by local investors.
"Botswana's share market has had little impact on new finance for manufacturing or on overall economic development"
Thus, one is left by the end of this book – which, admittedly, is a collection of technical articles largely reproduced from other sources that will not appeal to a general reader and is aimed at policymakers, regulators and market operators – with the sense that it both represents a lost opportunity, not so much to repudiate contemporary market solutions to Africa's many problems, but to test their suppositions to destruction; and that its unashamedly normative bias upholds a model of capitalism that, at the end of the day, will benefit the usual suspects. This collection is aimed at investors trying to assess the risks and potential of emerging markets: Dimitri Vittas explores the role of institutional investors in countries without well-developed securities markets; Claude Erb, Campbell Harvey and Tadas Viskanta devise a method for assessing what returns to expect in emerging markets; Stephen Godfrey and Ramon Espinosa construct a framework that can be used to evaluate investments in emerging markets. For its target audience, then, this book will be of great value.
But it is simply insufficient to allude optimistically to the potential vigour of Africa's infant capital markets in the hope that over time these may become engines of indigenous capitalist development if the first cited criterion upon which your commitment to development is based is poverty alleviation.
African Emerging Markets would seem to suggest that it is the novelty of stock exchanges in Africa – mostly just a decade old – and the tiny scale of foreign direct investment flows to the region that provide grounds for optimism. Yet, as in Latin America, it will be the continued dependence on external capital – now, additionally, through the resource of "internationally integrated" equity markets – that will be the fundamental developmental challenge and one that will, in fact, remain with us indefinitely. This becomes apparent from the chapters in this collection. Africa diverges from international trends to the extent that the expansion of its financial systems has been slower than in other developing regions, and banking systems have remained dominant. Thus, the average market capitalisation of Africa's stock markets remains small and the two most prominent markets, in Nigeria and Zimbabwe, languish at the bottom of international indices. While small overall amounts of direct foreign investment and dwindling aid are a factor explaining the recent spread of African exchanges, as outside interest in these has grown so, in turn, have the number of regional investment funds – and it is this that explains why between 1993-96 African equity markets ranked among the best-perfomers in the world.
Foreign investors are still the most crucial, yet least acknowledged, factor in predicting investment in the developing world. The resources at their disposal is staggering: in 1996 global institutional fund managers controlled more than $8 trillion in equity investments alone, compared with the $1.9 trillion aggregate market capitalisation of 100 emerging stock markets. Their herd-like stampedes can be an insuperable force bearing down upon entire regions. Their only mantra is: minimise risk and maximise returns.
And in the final analysis capital dependency is a political issue. It is the periodic sucking sound of capital flight – at times escaping speculation fuelled by political instability, at times merely smelling a better return, as it did in Eastern Europe following the fall of the Berlin Wall – that makes developing regions so vulnerable to international trends, and that remains so despite many weary years of structural reform and financial liberalisation. There is no better expression of this than the Western "political risk" industry, a progenitor of capital flight that constitutes a priestly caste existing to interpret the modernisation creed. As if on cue, in African Emerging Markets Robin Diamonte, John Liew and Ross Stevens examine how political risk in emerging markets affects stock returns. Their article supports the underlying optimism of this volume while confirming the herd instincts of international investors. They suggest that political risk declined at different rates between 1985-95 in the different regions of the world: perhaps most surprisingly, Africa became safer more rapidly than did Latin America, hinting at the former's long-term investment potential.
Capital dependence also imposes more subtle constraints on policy. Roy Smith and Ingo Walter's investigation of the behaviour of institutional investors draws attention to the traditional attributes they favour that can determine one country's success versus another's: sound macroeconomic policies, viable financial infrastructures and rational capital controls to avoid inflationary pressures. In such ways, the presence of significant amounts of foreign capital can distort policymaking seeking to address local priorities, and can exacerbate the democratic deficit in countries where citizens lack basic rights. It is already becoming clear, for example, how restricted Brazilian policy under the popular Luis Inacio Lula da Silva will be to the norms and demands of the institutions and speculators who manage the great investment flows of our time. Indeed, Latin America has remained locked in a condition of development shaped by a capital dependency so unforgiving that George Soros could remind the Brazilian people defiantly preparing to elect Lula that "in international capital, only Americans have the vote".
As a result, the main threat in Africa posed by efforts to nurture weak local capital markets dominated by international investors is the creation of a client capitalist class, a broker bourgeoisie akin to that of countries such as Peru whose interests lie not in resolving underdevelopment but in perpetuating a model shaped by the interventions of foreign capital and maximising comparative advantage – usually in the form of extractive or mono-crop commodity exportation, or low-wage assembly. In Peru, far from generating domestic industry, such enclave capitalism long served to inhibit it – to the great and secular detriment of the poor.
A product of this model elsewhere has been severely limited workers' rights and the survival of archaic political systems simply unable to escape the logic of corrupt elite clientelism and authoritarian populism. Given their crude faith that a relationship exists between capitalism and democracy, modernisation theorists would rather not be called into the dock to explain this – but if they are, they can always attribute it to indigenous political culture.
And so, just as in the case of Latin America, where dependency theory represented an angry reaction to modernisation theory, the questions posed by dependency in capital-starved regions such as Africa will continue to qualify the well-meaning, but ultimately naive, position which permeates this volume that reproducing the hardware of Western capitalism will somehow provide the continent with sufficiently meaningful autonomy within a system constructed to serve the former to enable it to escape its condition.
Gavin O'Toole teaches politics at Queen Mary college, University of London
