How to get ahead in Africa

Africa’s development is still patchy despite decades of foreign investment. Why?


This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.

It seems like a no-brainer: take a country, add some tried-and-tested institutions, then sit back and wait for the economic development that will surely follow. The problem with Africa is that – all too often – this just hasn’t happened.

Conventional wisdom has it that poor-quality national institutions lead to failure; that a country cannot succeed economically if its government, legislation and judiciary are not sound. Researchers have cited factors such as a lack of constraints on the country’s leaders, poor property-rights protection, the absence of checks and balances and legal systems that are inefficient at best. Others have pointed to the geographical issues that make it harder to implement institutions effectively, such as high mountain ranges and virtually impenetrable forests. And other influential scholars stress the role of cultural traits, related to family ties, religious norms and trust, on the process of development.

While there is a strong correlation between institutions such as the rule of law, the protection of property rights and control of corruption and economic development, it does not follow that the former lead to the latter. In fact, many political scientists suggest that, actually, development leads to good institutions rather than the other way round. The so-called “modernization hypothesis” – asserting that economic development, human capital, commerce and industrialisation lead to capable, strong institutions – goes back to Aristotle, Marx, and Lipset. So we’re left none the wiser. 

What’s really going on in Africa? Elias Papaioannou, Professor of Economics at London Business School, and Stelios Michalopoulos, Associate Professor of Economics at Brown University, have shed some light on the underlying causes for the seemingly unpredictable, certainly unreliable rates of development across the continent, by reassessing development and innovation using both historical data and contemporary satellite imagery. 

"While there is a strong correlation between institutions and economic development, it does not mean that the former leads to the latter."

Anyone who is thinking of investing in a business in Africa must first look back at the continent’s history, says Professor Papaioannou – specifically, at the ongoing legacy of the Scramble for Africa that led to the creation of artificial states. Out of ignorance, if not malice, the Europeans inadvertently split numerous African ethnicities between their neat new countries.  

“It’s a mistake to approach Nigeria as if it were Germany or France. What we see today as Nigeria on the map is an amalgam of dozens of pre-colonial societies that share neither the same history nor the same local ethnic institutions. Rather than thinking, ‘the firm is doing a big investment in Nigeria’, you need to understand where exactly in Nigeria it is doing so.” 

Most African states are new states (Ethiopia being a notable exception). If you ask individuals whether they identify with their nation or their ethnicity, a significant number will solely identify with the latter, while the majority of Africans will identify with both their country and ethnicity. Chiefs and other ethnic leaders – rather than national courts – settle disputes in most parts of the countryside and ethnic rules and norms govern land rights. So it’s vital for foreign investors and local entrepreneurs to understand the cross-ethnic differences.

At the same time, many African states are very large (such as Sudan, Angola, and the Democratic Republic of Congo), with very varied geography, which makes implementing state power and democracy challenging. 

During the colonial era, this didn’t have much impact on the locals, who moved freely across borders that were rarely properly demarcated. But, post-independence, these ethnic groups remained split, many in almost equal numbers across national borders. For example, the Masai were split roughly in half between Tanzania and Kenya, the Ambo between Angola and Namibia and the Ewe between Togo and Ghana. So people from the same ethnic background, with the same cultural traits, were subject to different national institutions in the colonial era and post-independence.

This makes Africa an ideal place to assess the role of institutions on development. But measuring the comparative development of, say, the Masai in Tanzania versus their counterparts in Kenya is tricky. For a start, it’s virtually impossible to come up with reliable aggregate statistics for productivity in agriculture-based countries with large shadow economies.

Professor Papaioannou and Michalopoulos hit on the idea of constructing proxies of regional development and innovation using satellite images showing light densities at night – big data yielding valuable detail down to the nearest sq km. By overlaying this information onto an old ethnographic map of Africa that portrays the spatial distribution of ethnicities at the time of colonization, they were able to glean a unique view of the difference that institutions have made. The results were startling, to say the least. 

“Comparing light density in the homeland of the Ewe in Togo with luminosity in the homeland of the Ewe in Ghana, and doing this across 220 ethnic groups, we found, paradoxically, that there is no such thing as a correlation between regional development and regional institutions,” Professor Papaioannou says. “Differences in national institutions across the border do not map, on average, to differences in economic performance across the border.”

While this result sounds paradoxical to economists and policy makers, it is consistent with the African historiography that stresses the salience of ethnic formal and informal norms and institutions. However, this average effect masks non-negligible heterogeneity. Across the 220 ethnic groups studied, there were some expected examples of higher regional development on the side of the border with better institutions – but there were also areas where the opposite was true. 

When Papaioannou and Michalopoulos investigated further they found that national institutions can explain differences in regional development across borders, when the split homelands are close to the respective capital cities. This result implies that the penetration of national institutions in Africa is limited to areas close to the capitals; their influence weakens sharply in rural areas. 

To make sense of this the researchers drew on the work of the comparative ethnologist George Peter Murdock, who, in 1959, drew up a map depicting the spatial distribution of African ethnicities before colonisation. There are 54 countries in Africa today. In the mid-to-late 19th century, according to Murdock’s map, there were no fewer than 834 ethnic regions. Murdock also provided quantitative information about the institutions and societal arrangements of around 500 different ethnic groups in the continent.

So we can learn, for example, that the Zulu had an organised state with a supreme king and subordinate chiefs, while other ethnicities, such as the Alur in Congo and the Nuer in Sudan, lacked any political organisation above village level. Some societies had an elected hierarchy, while others were egalitarian. Some had communal property rights, others had individualistic property rights. 

In Botswana, for example, the Tswana were organised as a state before the Europeans arrived. They had chiefs, subordinate chiefs and a local assembly – the Kgotla – to organise themselves and settle disputes. Not a modern democracy as such, but, crucially, they had some ethnic-specific institutions that allowed them to grow organically when the British left. Even during the colonial period, the Tswana institutions kept their importance as the British wisely decided to use them in their “indirect rule” strategy. 

This is the key to understanding why some African countries are doing so much better than others. “There is much higher regional development today across the homelands of those ethnic groups that, before Europeans arrived, used to be organised as strong states. This applies even when we compare ethnic homelands in the same country and even in the same geographic region.”

Moreover, the ethnic chiefs still have huge legitimacy. “People trust them, people perceive them to be much less corrupt than national politicians and this has significance both for consumer habits and to understand how property rights are being shaped in the place where you are planning to invest.” 

The great hope for innovation and economic progress in Africa is the massive investment that’s happening in education. “A new generation of Africans is going to school and acquiring skills. Growth happens because of brilliant ideas – an educated individual will adopt technologies that exist elsewhere, import them and modify them to the needs of the local clientele.” 

Education, then, is the one mechanism that can make a difference in Africa – whoever is sitting in the classroom, whatever their tribal roots.


Institute of Entrepreneurship and Private Capital

This article was provided by the Institute of Entrepreneurship and Private Capital whose aim is to inspire entrepreneurs and investors to pursue impactful innovation by equipping them with the tools, expertise and insights to drive growth.


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