In this episode Kevin Coldiron is joined by bestselling author Joe Studwell who speaks about his new book How Africa Works: Success and Failure on the World’s Last Development Frontier. We discuss why many of our perceptions about Africa are wrong - why one big problem has been too few people, not too many and why the continent isn’t as resource-rich as we think. Joe talks us through some surprising success stories - like Rwanda’s emulation of Singapore and Botswana’s success in avoiding “the resource curse”. This is the time to begin researching and understanding the opportunities in a continent that has more land mass than the US, China and India combined and will eventually be home to the majority of the world’s young people.

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Episode TimeStamps:

00:01 - Introduction to the episode and guest

02:04 - Why the book was written and initial motivation

05:50 - Outsider perspective and reactions in Africa

07:22 - The core idea: population density and development

08:22 - Why Africa’s growth lagged historically

14:23 - Population growth and changing economic potential

15:39 - Colonialism in Africa vs Asia

20:14 - Land, agriculture, and development differences

23:55 - Rise of private sector and food production

25:57 - Resources and the limits of extractive growth

29:56 - Botswana and managing resource wealth

36:21 - Rwanda’s development model and governance

44:41 - Ethnic dynamics and future stability

50:24 - China’s role and manufacturing potential

56:04 - Investing in Africa and long term outlook

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You know, some of those strains and challenges are still emerging in African societies today. But, as I say in the book, the standards by which we judge things change. I mean, they probably should change. But if we look at Africa today and we see an ethnic conflict, we will condemn it. We will say that Africans are barbarous and all the rest of it. But we have absolutely no conception, or very little conception, or very little willingness to remember the kinds of conflicts that went on in our own societies, whether we're in North America or whether we're in Europe.

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence.

Welcome, everyone, to Top Traders Unplugged. My name is Kevin Coldiron. I'm host of the Ideas Lab series, here, on the platform, where we talk with authors of new books and research papers that help us better understand the global economy. Today I'm joined by Joe Studwell.

Joe, thanks so much for joining us today and welcome to the show.

Thank you for having me, Kevin.

So, the last paragraph of your book pretty much encapsulated why I wanted to have you on the show. So, if you don't mind, I want to start just by reading it out briefly for everyone.

“If you live outside Africa, whether it's in the Americas, Europe, or Asia, Africa is going to be a bigger part of your life. Trade, investment, tourism, literature and music; African integration into the world system is beginning in the way it did for Asia over a half century ago. Where Asia was the world's biggest receptacle of poverty, after the Second World War and eradicated that poverty, Africa is now home to the majority of the world's poor but is starting the process of removing that blight. The road will be long, hard and winding and led by a minority of outperforming states, but demographic, political, economic and educational change have reached a point where there is no turning back.”

So, if you're out there, and you're listening today, and you weren't convinced, you should try to understand how Africa works, hopefully you're convinced now. So, Joe, I can't recall reading a book before where the author says, right in the introduction, I'm not the right person to write the book, and I never intended to do it. What did you mean by that?

Well, the whole thing was totally unexpected and totally unplanned by me. So, the earlier book, How Asia Works, a big fan of that was Bill Gates, who wrote about it, and blogged about it, and whatever. And he got me over to Seattle to talk and we talked about Asia. But at the end of talking about Asia for an hour, he said, actually, what I'd really like to know is what you think about Africa, because that's where I'm spending all my money.

And I didn't think of anything, really, of it at the time. I just thought, well, you know, fine, but I don't know anything about Africa. And then just a few months later, I got invited by the government of Ethiopia to go there, and a couple of months after that by the government of Rwanda.

And, you know, they said, we want you to come and talk to us. And I said, well, this is ridiculous because I don't know anything about Africa. And they said, no, no, you don't need to know anything about Africa. You need to come and talk to us about Asian development policy. That's what we want to know about.

So, I went back to the Gates Foundation, I said, will you support a book? And they said, yes, so long as you've got another sponsor. And then Omidyar, who was started and was one of the eBay guys, said, well, we'll do the rest of it. And that's how it started.

You know, it was just not planned in any kind of way. It took a long time because I was ignorant at the beginning. It took five years to do this book because there are 55 countries in Africa. Right? And there's a lot of complexity and I wasn't going to bang out something that I would later regret.

So, I took the time and hopefully, in the end, did a book that is useful as a kind of a single volume for anybody who wants to understand where Africa is at developmentally and what the rest of the century is likely to hold.

Did you get any kind of pushback as you were doing your research? Why is an outsider doing this? How can an outsider really try to understand us? That type of thing?

No, and I totally expected it, but it didn't happen. I mean, hopefully people took seriously the work that I put in. And then, also in Africa, when you get to Africa, one of the first things you realize is that you go to Tanzania, for instance, and you start talking to Tanzanians about what they think about what's going on in Kenya, and they don't really even know where Kenya is.

Africa is so big and so diverse that at this stage of development, particularly when people are poor, you're thinking about where your next meal's coming from. You're not thinking about how North African politics fits in with sub-Saharan or whatever. So, yeah, all of that.

And in the size, you know, just to give you the context, if you look at just the size of Africa, you can fit China, and India, and the US, and Europe, inside of Africa. I mean, you know, if you want to test it, get an atlas, cut those countries out and you'll see they fit. It's insanely big.

And, actually, that turned out to be the main kind of revelation, in terms of the economic history of Africa, which was understanding how big it is and how sparsely populated.

Yeah, that was a good segue, because that was going to be my next question. And really, there are a number of surprising things in the book, but this was particularly surprising. So, basically, you say that Africa's poverty is a function of three historical factors. There's low population density, what you call low budget colonialism. And then you kind of put the effect of those two things together and you get kind of dispersed, uneducated, and politically unorganized populations.

So, let's start with that first factor, low population density. Because, I guess, not knowing that much about Africa, I was surprised by that because I guess, initially, I think of kind of urban sprawl and fast-growing populations. But really the problem for Africa, historically, has been too few people, not too many. Could you talk us through that?

Yeah, that's right. And this was not something that struck me at the beginning at all. I think I had probably a similar kind of viewpoint to the one that you've just set out. But I read through the kind of academic literatures on developments and Africa's relative backwardness. I started there.

And you read through the literature about governance failure in Africa. You read through the literature on corruption and kleptocracy, and you read through the literature on civil disorder and ethnic violence. And I got to the end of all of that and I just thought, I find all this kind of a bit proximate in terms of what it's describing. It's not really fundamental.

And so, I went looking for more. And then I just found, going back to the ‘50s and ‘60s, a very small literature written by one or two economists and historians who said, you know, everybody, at the end of the Second World War, was quite optimistic about Africa, largely because of heavy mineral mining investment during the Second World War, which took place because supplies were cut off from Asian suppliers. And so, people were thinking, well, this is great, Africa's going to pick up.

And without people, you don't have markets. In particular, you don't have dense urban markets. At the beginning of the 20th century, the biggest African cities were Lagos and Dar es Salaam with 20,000 people each. It's just insane.

And it's the disease burden that causes all of this, of course, which is unique to Africa. But also, if you've got this massive continent, you need to exploit what's there with infrastructure. You've got to have water, you've got to have sewage, you've got to have roads, you've got to have railways and so on. But it doesn't work with such low population density because the cost per person is crazily high.

So, even today, Africa is reckoned, by the world bank, to have half of the world's remaining uncultivated agricultural land. But you can't exploit that until you can build the roads that means that the production is going to get to a market.

So, it was realizing all of that that made me decide that the population density was so important. And the reason the population density was so low was the disease burden, which is everything from malaria, to sleeping sickness, to all kinds of worms, hookworms, whatever, that just produced massively the highest death rates for under-fives in the world. I mean, no one could compare with Africa.

On top of that, one slightly odd thing was you had a huge population of elephants, which are a disaster. I don't know if you've ever confronted an African bull elephant, But I mean, unless you've got a gun, you can't do anything to scare them off and probably can't even scare them off with a gun. You've got to shoot the elephant if it's threatening you. And elephants eat everything that farmers grow or want to grow, Right?

So historically, in, for instance, Tanzania, they reckoned a quarter to a third of all crops every year were consumed by elephants. So, it was a very long process through the 20th century to cull a lot of them and then to contain the rest of the elephants in reserves.

So, you haven't got the people. So, governments, colonial governments could never raise the taxes to do anything. So, they didn't run hospital systems, which meant that people continued to die in huge numbers. And they didn't run schools.

So, you then you have to wait for the disease burden to be brought under control. It starts to happen from the ‘50s, really, population growth rate increases markedly, and you go from 220 million people at the end of the Second World War to 1.5 billion today. Everyone goes, oh my God, 1.5 billion Africans.

You say in the book that in Asia, colonialism was centralizing. So, it introduced the mechanism of governance. But in Africa, colonialism put political development (I think you say) in the freezer. So, can you just maybe contrast those two things for us? I know you kind of already alluded to it, but maybe just explain it a bit more, the differences between those two.

And it's only really today that you begin to see, now, just in the last 20 years, the growth of cities over half a million and a million people that give these developmental possibilities and allow governments to begin to raise a bit more money and therefore to do more things.

I think I've forgotten the other bit of what you were asking there.

Yeah, I mean, that was why, and I think you've kind of answered it, why the low budget colonialism in Africa put, as you say, political development in Africa in the freezer and made it more challenging.

Yeah, so, in Africa you get this kind of crazy situation where governments, there are no resources, right? And treasuries back home, like the UK treasury was always very unwilling to be sending money to colonies to pay for stuff. You know, they were supposed to be sending money back. So, Africa is just a potential drain on resources.

So, what colonial governments in Africa do is they say, well, okay, the lowest possible cost of operation we can do is we just control the capital city and the media environs, and we rule the rest of the territory through chiefs. And of course, there's this essentially, you know, racist view of Africa that everyone is in a tribe, every tribe has got a chief, and we find the chief and we say, okay, you bring us… Well, a lot of it was bring us labor, right? Because colonial governments were desperately short of labor to do anything.

So, you bring us labor, bring us a bit of cash, and we will back you militarily to remain in charge, and you can get what you can off your population. So that’s what I mean by putting political development in the freezer. And you've got these extraordinary cases with different European governments with the British, with the Belgians, of where they found tribes, as they called them, without leaders, or with the wrong kind of leaders, or with some kind of democratic system, as you got in some cases. They would impose a leader or they'd even, on occasion, invent a tribe if the people couldn't all say that they were that group.

So, I mean, just one example, in Nigeria the British came up with a concept in the southeast of the country of the Warrant Chief. Because there weren't chiefs, the villages there all operated led by sort of councils of elders. And the British didn't like this. They wanted to have one chief who they dealt with.

So, they came up with a system called the Warrant Chief. And the warrant's a piece of paper that says that the person who's got their name on it is the chief. So, this was all kind of developmentally regressive because there was no development of government that was able to project power out into the far reaches of African countries. That's still a big problem today.

I mean, I think one of the challenges that we have in Africa, with getting governments to be more effective in agricultural policy, is they're just not used to running the far reaches of their countries. They just think about, you stay in the capital and stay in power.

Yeah, I'm glad you brought that up because I do want to talk about land and agriculture. That plays a big role in your book. We had Mike Bird on the show last year. Mike wrote a great book called The Land Trap, and he dedicated a fair amount of that book to talking about the successful land reform that happened in Asia, after colonial times, and how that was a big driver eventually of development.

Can you contrast what happened there, in terms of land reform, to what's happened in Africa where there doesn't seem to have been much in the way of land reform or even really an attitude that there needs to be land reform?

Yeah, I mean, again, demographics are behind it all, because in East Asia you have dense population. At the end of the Second World War, land is a huge issue because there's a lot of farmers who are landless. In Japan, they are the key constituency that provided support for the proto fascist government that launched the attack on Pearl Harbor and entered the war.

So, you get this focus on trying to deal with this and you have these land reforms that take all agricultural land, essentially, and divvy it up in Japan, in China, in Taiwan, in Korea, among the farming population, and you then supply them with hybrid seeds and synthetic fertilizer. And it works really well because they get very focused on increasing yields, increasing output based on higher yields.

Well, Africa is the opposite situation because you've got this massive continent, you've got not enough people, and of course they farm because they have to feed. But in order to increase output in Africa, the tradition is…

I should preface this by saying, so obviously there's no demand for land reform. I mean, Che Guevara went to the Congo in the ‘60s to start a revolution. And he got there and he wrote in his diary, what are you supposed to do? There's too much land here and too few farmers. You know, the standard way to start a revolution is impossible.

And so, as I was saying, what you have in Africa is when people want to grow more, they do what agronomists call they extensify. So, they don't produce at higher yield, they just farm more land because more land is available to everyone. But this is actually not really what you want developmentally because you want production more concentrated and then being shipped to urban markets that provide consistent demand and good prices.

So, why is that? Well, suddenly you’ve got a lot more people and there hasn't been great GDP growth, but there's been a bit of GDP growth. And a bit of GDP, growth over 25 years, is enough to give you a situation where population doubles and demand for food triples.

And so, the most kind of diverse, broad-based action that we're seeing in the African economy, at the moment, is in agriculture, which means growing the stuff. And then downstream from growing the stuff, which is the mills and the production of processed foods. It the last 20 years there’s been a massive boom in consumption of processed foods. And if you go into a shop in any African city, you'll have no idea what this stuff is because locally desired, processed food that is made to different tastes than ours. But the point is, it's all produced by African companies.

Have those African companies been just kind of local entrepreneurs, kind of stepping into the opportunity, or has that been kind of state directed?

It's been overwhelmingly private sector. So, the IMF came in with structural adjustment programs in the ‘80s and the ‘90s and forced a lot of governments, in return for loans, required a lot of governments to sell off investments that they'd made in milling and processing capacity. And these were bought up by private entrepreneurs, some of whom are now running businesses that turn over billions of dollars a year.

And okay, billions of dollars a year is not so much in our world, but it's an awful lot in Africa. And by comparison with 20, 30 years previously. Yeah, it's unknown in terms of the scale of the operations of some of these firms that work frequently across six, seven, eight different countries.

So, agriculture does, I guess, especially toward the end of your books is kind of one of the brighter spots. Resources, I guess, is the other area that I think when people think about economic development in Africa, they think about. And again, this is an area that I was surprised about.

You say, to the outside world Africa looks to be resource rich, but really that's not the case. I mean, there are resources, but relative to other places, it's not because Africa has an abundance of resources, more like that's just where the economic activity has taken place. And you kind of think… You seem… I don't know what the right word is, but you're fairly skeptical, I think, about the impact of resource on development.

So, maybe you could just tell us about, number one, you know, what is the endowment of resources in Africa, broadly speaking?And why has it been more of a curse, I guess, than a blessing in trying to use that as a development tool?

Yeah, so, yeah, this also surprised me. So, I mean, I think you're probably not unusual being surprised. From the outside we think that's what Africa's got. It's got loads of resources. Really, it's perceived as having loads of resources because that's the only economic action that there's been until very recently.

And that's the point I made about the enthusiasm around the time after the Second World War when there had been a lot of mineral mine investment during the Second World War and people saying, oh, Africa's going to do great. Well, no, partly because mining minerals doesn't create many jobs and is only really of interest if you then process those minerals locally because that's how you'll create more employment and add more value. But also, because as I say, Africa doesn't have a lot of minerals anyway.

I mean, across Sub-Saharan Africa you're in the low thousands of US dollars of minerals and hydrocarbons per person, which isn't that much. It's nothing compared with a country like the United States, which is genuinely resource rich.

So yeah, I mean, I don't think that the minerals are the story, but I think, as I say, that if governments get better at getting the firms that extract them to process those minerals locally, that it will be much more positive for Africa. And the area where there's most activity at the moment is around the seven main minerals that are used in batteries. So, there's an effort of some African governments now to say you've got to process these minerals locally and produce batteries if you want to have the mine access.

And, you know, that we've seen in Asia, in not brilliantly well-run countries like Indonesia, that you can take that strategy and it will work usually if you have a sufficiently substantial share of global supplies. So, this may also require African governments to work together to some extent.

But overall, I don't see minerals and hydrocarbon as being game changers for Africa. In the past they've created sort of terrible problems, as they do in many parts of the world, because you get an influx of hard currency when you sell your minerals and your hydrocarbons. Your exchange rate goes sky high and that makes it impossible for agricultural and manufacturing exporters to sell abroad.

So, it can actually perversely be detrimental. But generally, there's marginal improvement in the quality of governance in Africa, I think. So, I would hope that going forward that kind of thing gets better.

Yeah. What you're describing there, I think a lot of people, it's the Dutch disease, isn't it? The exchange rate rises and that makes the other industries uncompetitive.

You do talk about, toward the middle of the book there are four, I guess I would call them, case studies. You call them early movers, countries that have had some success in development. And they're really fascinating. And given that we're just talking about the Dutch disease and the difficulty in avoiding them, maybe we could talk a little bit about Botswana as the first example, because that seems to be an example of a country that has managed their resource wealth fairly well. Could you tell us about their experience, I guess, with the mineral mining?

And so, Botswana, I mean, all of the different ethnic groups, or most of the different ethnic groups in Botswana, are fairly closely related. They're all Swana groups. But nonetheless, they had different leaderships, they had different territories. You know, it was like a bunch of little states within a state.

But what they did in Botswana, after independence, was to agree that mineral resources, which had previously been vested in the territories of the eight different subgroups, or the eight different Swana groups, would be national resources. They also agreed that the traditional tribal leaders would only have an honorary role in governance. So, they got them out of the picture. And, as I say, they produced this cross ethnic coalition which ran the country and did so very effectively. Negotiated with South Africa's De Beers very effectively, and with other mining companies for copper and nickel very effectively. And it was just a case of where you can get if you've got mineral resources and you just concentrate on the development of your country.

But in, in developmental terms, what they did in Botswana was very much to take orthodox economic advice from The World Bank and other groups, and they spent the money on infrastructure in the form of roads, particularly schools, and a health system. And the orthodox system says, you know, everything else in the economy will take care of itself.

In Botswana, it wasn't the case that everything else took care of itself. And they failed to develop any significant manufacturing capacity, which meant that they were unable to take people out of rural areas and into the urban economy. And they did concentrate on agriculture, but they only concentrated on the traditional large herds owned by Botswana aristocrats. So, there was no meaningful support for smallholders.

And the result was that, you know, Botswana's growth rate was fantastic for 20 years it was better than China. But at the end of the day, because of the failure to look at smallholder agriculture, and the failure to develop any manufacturing, they have one of the most unequal societies in the world. And if you believe the data from the UN's World Happiness Survey, also one of the most unhappy societies in the world. But the GDP numbers are great.

It seems like what they've ended up doing is just creating a very large kind of public sector, or public sector related economy. So, the money that gets to the central government that is sort of used in… not make work jobs necessarily, but very kind of, I got the sense, kind of a bloated civil service, is that right?

Yeah, that's what you've got. So, you either have a nice job in the civil service or you're in a very small private sector, smaller than government employment, or you're basically living in a shed and poor.

Is there potential that they could develop manufacturing or do you feel like that's just kind of, I don't know, beyond them at this stage?

No, I think that there is, but it needs a new kind of lens from government. And you're probably aware that they have, for the first time since independence, had a change in government. So, it's not impossible that there will be a new direction. I mean, I wouldn't accuse the Botswana Democratic Party, which ruled for five decades or whatever it was, I wouldn't accuse them of being, over that period, characterized by bad governance or dishonesty or whatever, but I just think that they had their lens that they looked at development through and they were never able to change that.

So ,we have to see if now we get a more promising outcome from this new government. But it's a big ask to be the first new government since independence in the late ‘60s.

So, look, maybe we could talk about a couple of the other case studies. I mean, they're all really fascinating in their own right, but two of the other early movers (as you call them), are places that, you know, I think in the West or everywhere really are associated with some just gruesome wars and terrible privation; Ethiopia and Rwanda. And yet, as you say, those are the two countries where you first kind of went there and discovered, hey, there's development activity going on here that's surprising.

So perhaps we could talk about Rwanda. Obviously, the genocide there is just so gruesome. And you talk about that in the book. It's almost difficult to read really, but yet somehow they are actually pursuing a development strategy that you say is kind of modeled on Singapore, and they've had some success with that.

Could you tell us a little bit about that history and how they ended up as, I guess, trying to replicate or imitate the Singapore development model?

Yeah, I mean, the Singapore ambition seems, at first, extremely strange because Singapore is a small island and Rwanda is a small country in the middle of the African continent. But actually, their logic is not necessarily off, I think, because what they say is right. We're right in the middle of the African continent. And in Central Africa, logistics costs of moving things from ports to here are a multiple of the cost of shipping goods from, say, China to Mombasa or Dar es Salaam.

So, you know, you can ship a container from, from China to Mombasa for US$1,000, but it will cost you about US$5,000 to get it on a truck and all the way to Kigali, in Rwanda, or somewhere in the surrounding region. So, their idea is that actually, given those logistics costs, which are unlikely to plummet anytime soon, given the distances involved, because you're looking at 1,500, you know, well, 1,200 miles, something like that, to the coast. Because of that, we can have some limited manufacturing in Rwanda and the prices of output will be competitive even if we're not as efficient as the Chinese at producing the goods.

And also, we can sell a whole range of services, most obviously things like logistics services, but also tourism to the surrounding region. And for the Rwandans, the main surrounding region, of course, is the east of the DRC, the Democratic Republic of Congo, which is why Kagame, who leads Rwanda, has meddled in Eastern DRC ever since he came to power.

And what the Rwandans do, on top of this, is to take a very developmental kind of attitude, by which I mean people are absolutely judged on execution, on getting things done. Kagame took a very interesting approach to his administration by promoting a share of women in parliament, in the judiciary, in the civil service. That is not only unusual in Africa, it's unusual anywhere in the world, I think. I can't remember whether it's fourth or sixth that Rwanda ranks in the main gender index, which I think is done by the UN.

So, on all those fronts, you know, they've been quite successful. Aid groups love them because of the execution thing, you know, because aid groups are always desperately looking for people who will take the money and get the job done so they can tick the box when they report back to the donors.

And it began after the ‘94 genocide. It began with Kagame, as a project, to restore cross ethnic cooperation. So, Kagame pushed forward a mostly Hutu (He's a Tutsi and these are the two main groups), mostly Hutu ministers in the cabinet and mostly Hutu people in other leading positions.

But as time has gone by, since ‘94, it's become apparent that this is a largely sort of fake cross ethnic coalition. Because Kagame, who just started out as the defense minister, has ended up essentially being the supreme leader publicly as well as privately.

And I think, yeah, Rwanda does beg a question as to what happens in terms of ethnic relations post Kagame, because it's very much held together by this very effective security state that he's created.

Ethiopia is a much bigger country, but also a much better example, I think, of a cross ethnic coalition in operation.

How do you, I guess, contrast the two, then?

Because I think that from the beginning it was more genuine. After the ‘91 defeat of the Derg Maoist regime by Mengistu, I think it was a more genuine attempt at a cross ethnic coalition in a country that is extraordinarily ethnically diverse because Ethiopia is historically an empire. So, they've overrun all these surrounding groups and incorporated them into the empire.

Again, it's the demographics. Historically, it's low demographic density has allowed 2,000 or 3,000 different ethnic groups (depending on how you define different ethnic groups) to coexist on the African continent. Because there was so much space relative to people that there was actually, historically, way less conflict than there was in other parts of the world.

So, some of those strains and challenges are still emerging in African societies today. But, as I say in the book, the standards by which we judge things change. I mean, they probably should change. But if we look at Africa today and we see an ethnic conflict, we will condemn it. We will say that Africans are barbarous and all the rest of it. But we have absolutely no conception, or very little conception, or very little willingness to remember the kinds of conflicts that went on in our own societies, whether we're in North America or whether we're in Europe.

Yeah, well, of course, the Romans wiped out hundreds of thousands of people, tribes, and Belgium and so on, and France when they marched through that 2,000 years ago. You're right. I mean, history, with distance we kind of lose the ability to really compare with the present.

If we think about that and we think about the kind of growing population, the growing urbanization of Africa, does that mean… Do you think we should expect more conflict or less?

I mean, you could argue that we could expect more conflict, right, as these ethnic groups kind of are, “forced to live together” in, kind of, more condensed spaces. On the other hand, maybe the fact that people are, you know, kind of forced to live together, maybe they mix and become more unified. I don't know. Do you have a view on that? Should we expect more?

I'd make two observations there, Kevin. I mean, one is that in recent civil unrest in Africa, for instance, in Kenya last year, what are sometimes referred to as Gen Z riots in Kenya against Ruto's government, it was very noticeable that the rioting was cross ethnic. I'd make the point, I think, that there's generational change in Africa. That younger people identify themselves much less in ethnic terms than their parents did. So, that process will go on.

Yeah, I mean, it's a very interesting point. And so far, I'm not aware of the case studies of countries building such coalitions after the sort of early stages of independence. I think it's difficult, but I don't think that it's impossible. I think we may even get cases where it happens almost by mistake, that they don't sort of announce a big cross-ethnic coalition, but there is a coalition. And then after that, think, well, actually we are able to work together.

And again, Kevin, what I'd say is that in a continent of 55 countries, and a bit like what happened in Asia, demonstration effects, what economists call demonstration effects, are terribly important. And I think that if we get a positive demonstration effect from…

What's a demonstration effect?

A demonstration effect is simply where something happens in economic terms that is positive and then other people latch onto that. Those signals are important. It's like the person next door gets some fancy new car and suddenly everyone in the street wants that car. And this kind of very human transition is important among leaders.

So, if we get a positive transition, a positive demonstration effect from one of the big two, in population terms, which are Ethiopia, And Nigeria, that would have a colossal impact. But equally, you know, you can get demonstration effects from smaller countries. We saw this in Asia. We saw this with Malaysia, which had a big impact on Indonesia, which is a far more populous country. And Suharto, when he was running Indonesia, was so outraged that the Malaysians had an industrial policy and were doing stuff, that he got his ministers and said, you know, get me one.

So, I can see in West Africa, I mean, there's some interesting things going on in Togo, some interesting things going on in Benin, both very small countries. But, I mean, if they start steaming ahead and growing 10% a year, you can be sure Nigerian politicians and Ghanaian politicians will pay attention.

I wanted to ask you about the role of China. I mean, there's a lot of stories we read about China lending money to African countries on terms that we don't really understand, but also investing a lot.

Is there any evidence of this happening of China, not just lending money to African countries, but actually investing in developing local manufacturing capabilities there?

Yes, it's certainly happening. There was a McKinsey estimate that perhaps 12% of African manufacturing is accounted for by Chinese firms at the moment. And I've been and visited Chinese firms that are producing in Africa.

I remember going into a textile business in Ethiopia and talking to one of the guys managing it and he was saying, oh, it's just like China in the ‘90s here. And it kind of is, in a way, because I was living in China in the ‘90s and I remember that then the factory labor wage rate was about US$60 a month. It's now about US$600 to US$700. But the factory labor rate in Ethiopia is now US$60 a month. So, if you're doing something like garments that are most sensitive to the labor rate, then it's certainly of interest.

But I think you have to say that Africa is competing with bits of Southeast Asia that have been getting phenomenal amounts of manufacturing investment, some of them from China, like Cambodia competing with Indonesia. The Indians are a bit more serious about manufacturing now.

So, it's a competitive world and it will depend on African governments taking manufacturing seriously, which, you know, they need to up their game there. They need to recognize that there is no substitute like manufacturing for bringing poor rural people into the modern economy. You just can't do it with services because, if you want to do value added services, almost always you've got to train people before you can set them to work.

The great thing about manufacturing is you can put people into factories, almost sweeping the floor to start with or whatever, but it requires very little training to do low-end manufacturing jobs because most of the intellectual property is vested in the machine that you're working with. So, you don't need to know much. The machine knows most of the game.

But my understanding is, and a number of guests we've had on the show before have said this, that that might be the case initially. But to develop a manufacturing heavy economy you need an educated workforce because to improve on the processes and then to get the kind of follow on investment in the local, I guess the local ecosystem of firms to service the manufacturing companies, provide the logistics, etc., that can't be built out without an educated workforce. So, if you really want to use manufacturing as a development tool, it has to go hand in hand with a serious investment in secondary education. Do you agree with that?

And the World Bank did a long report on African education and said nowhere in the world has built out a public education system as fast or as effectively as Africa. So, I think that's an area in which African governments have been under recognized for what they've achieved.

I mean, some of them, and I relate them, but all kinds of stories from different countries, you know, that had like three engineers and three doctors or whatever, you know, in the 60s, and now have way, way more than that. So, I don't think that the educational capability will be the biggest constraint on Africa building out manufacturing capacity.

For me, the biggest thing is that governments have really got to start to believe that if they don't take manufacturing seriously, their societies are not going to develop to the extent that they hope.

Yeah, and we've seen that in India as well. I mean obviously India has developed but it's been a very bifurcated development compared to China. They have some very, very high-end industries, but still a very poor majority of the population. They've never really been able to get kind of large-scale, low-cost manufacturing going on any kind of meaningful scale. So, we'll see with Africa.

We're kind of winding down here and I wanted to ask you, I think what is kind of an unfair question, but I'm going to ask it anyway (a lot of our listeners are professional investors, private investors), if you were a kind of believer in African development, broadly, how do you look to follow that up as an investor?

I mean, are the listed companies on the local exchanges, are they, I don't know… Oftentimes in emerging markets those companies are just kind of big state or quasi state enterprises that aren't that dynamic. So, I'm kind of curious if you know much about those local stock exchanges and are they a place where kind of the more faster growing local companies are listed or do you need to look elsewhere if you are interested in putting capital into Africa?

Yeah, I mean it's still early days for capital markets and, as you say, the kind of range of investable companies isn't that great. A lot of what you can invest in is based in South Africa, but that's not really giving you Africa. And it's putting you into an economy that is nothing like as dynamic as the rest of Sub-Saharan Africa, growing only like 1% a year at the moment.

But I mean, nonetheless, there's a lot going on. There's a lot going on with venture capital, there's a lot going on with private equity. And by that I mean that they are growing at impressive rates but from a very low base. So, there's a lot of activity there.

Should you take Africa seriously? I think that if, as I said at the beginning, the human input into any economy is the biggest single input. And if you're going from 1.5 billion people now, to 4 billion at the end of the century, which will be 40% of all the people on earth, yeah, you're going to have to take it seriously. To me, I don't think that this is the moment where you want to jump in. This should be the era of research. Just start to have a think about that there are various ETFs and other things that are dedicated to Africa.

Right. Well, I appreciate that perspective and I think that's a good place to leave it for today. Joe, thanks so much for joining us. I mean, it was a fascinating conversation and a topic that, as you just said, and we said at the beginning, is going to be important for all of us. So, thanks for helping us at least get a starting point for thinking about Africa and Africa's role in the economy. We really appreciate it.

Thank you very much, Kevin.

Okay, the book is called How Africa Works. Please make sure to get a copy and to follow Joe's work because I think you can tell from today's conversation that many of these topics are not yet being discussed on mainstream media. So, for all of us here at Top Traders Unplugged, thanks for listening and we'll see you next time.

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