Africa (and Britain) needs development, but it does not need capital!

I worry about a world in which the rich get to write the rules which the rest of us have to obey

These are the wise words of Angus Deaton, an economist who received a “Nobel” Prize earlier this week. He was awarded his prize for measuring things, mainly how to allocate our money for consumption, how consumption is affected by income, and how we measure poverty

Measuring poverty is, of course, not eliminating poverty, which, if anybody finds the solution, should really have won the Nobel prize.

Ever since classical economics began with Adam Smith and David Ricardo, there have been three main factors of production. Land, labour and capital. Whereas Africa has plenty of the first two, the third, capital is lacking. So, hence the debates about whether to give aid to Africa, This would enable it to build up capital.  Or should we give loans to African countries, through the World bank, for example, to purchase or build the necessary capital, for example, transport infrastructure to bring goods to markets.

If we think that both aid and loans are a bad idea, what else is there? Here is the suggestion of my lecturer at the School of Economiic Science, where I currently study for the Economics with Justice course. Use MOT1.

Now, as all lecturers at the School of Economic Science, my lecturer is a a volunteer. And an architect. He therefore knows something about building. His suggestion is to use MOT1 to build roads. Apparently, if you do not know what MOT1 is, it is an aggregate mix of stones of various sizes, which is the underpinning for roads. Although normally it would be the base layer for tarmac, it can be used as a road by itself, once compacted.

MOT1 is just a collection of stones and rocks of appropriate sizes, it should be available in all countries in Africa. In addition, man-power is available to build the roads. The only problem is the organisation to get the people to build them. So the actual building can be done by hand. hence no capital is needed, the MOT 1 aggregate compacted by hand-held rams, if need be.

The point of our lecturer was this, if Africa wanted to improve its infrastructure, like roads, it could, without the need for outside capital, if it could organize its workforce to build roads.  Yes, it would be quicker by machines, but it would be entirely possible without any capital, if a particular African country wanted to do so.

Better infrastructure should increase GDP growth in Africa by 2% per year, argued the Economist back in February.

So if that is true, and my lecturer is right, that it only needs MOT1 to build roads, maybe my lecturer should have had the Nobel prize for economics?

Clearly, any African country using only MOT1 could only build rudimentary roads, and not railways, or pipelines, or motorways, which Africa could also use. And is currently building.

But, it would be able to build up its own resources to build its infrastructure in time.

Other countries have done it. China was probably just as poor 30 years ago. But China has managed over time to build up infrastructure which is the envy of the world. Britain has difficulty coming to terms with building a new nuclear power station, or high speed railway lines, as the costs seem to be enormous. China, however, a country with only 1/5th of the GDP per person, has built 28 nuclear power stations and close to 10,000 of new high speed railway lines. All built in the last 30 years.
Much of the spending on infrastructure in China is only possible if it has the engineers to build and maintain power stations and high-speed railway lines. Again, that expertise is part of the infrastructure in a country. To gain that expertise, one needs good education systems. None of that needs foreign finance. It is a matter of organising and paying for it internally in the country, whether it is Britain, China, or a country in Africa.

The point is this, foreign development in terms of capital projects will get wasted, if the country does not have the internal structures to use it wisely, a point which the Nobel prize winner Deaton makes. Sometimes it does not need any capital at all to bring more wealth, as my lecturer argues, when proposing that Africa should build a lot of roads itself, by getting organised, and use the MOT1 aggregates.

So is money for the establishment of capital not necessary? The UK could not build power stations or new railway lines without the necessary money. But why does it not do as China has done, and make sure internal cheap finance is available? In China it is state-run banks lending to the state railway companies. We have made some suggestions for the UK before, to borrow at 0.5% per year or finance infrastructure through PQE. As a trading economy, the UK or any African country should make sure, its currency is not under potential pressure from excessive current account deficits. But then it can afford to buy what it needs.

The real constraint, is not capital, as China has demonstrated. The real constraint of development, and increasing wealth is the organisation of resources, mainly manpower to build the infrastructure it needs. Whether that is bags of MOT1 to build roads, or high speed train techonology imported from the West, the money for capital should always be available.

The organisation of resources and manpower is something else. Nations have to  organise their state in such a way, as to be able to pay for capital through taxes, or government finances. And keep their external trade in balance, to have a balanced current account. Then, organised, well educated man-power will always be the main driver of development. The constraints are therefore good government, and good government institutions allowing for education, taxes, and government infrastructure development.

If you read this Economist article, it will talk about the way new infrastructure it is financed in Africa, It will not talk about the fact that good governance is necessary to ensure that infrastructure is maintained and developed. Which is not automatic. Neither in Africa nor in Britain.

The money to buy capital is secondary and should be able to be organised as we want it. It is the rich which have given us the rules, we should remember, and for them it seems capital is paramount. The rich are wrong.

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2 thoughts on “Africa (and Britain) needs development, but it does not need capital!

  1. Very good and thought-provoking post!

    Plain-vanilla textbook economics indeed knows three main factors of production…

    (1) Land
    (2) Labour
    (3) Capital

    The remainder of the text illustrates that two more factors are absolutely essential.

    These could be captured as:

    (4) “Know-how” (technical and organisational; contributed by entrepreneurs and management)
    (5) “Law” (legal security, including the legal framework for contract enforcement)

    In this conceptual framework, each of the contributing production factors is financially compensated…
    (1) rents (2) wages (3) dividends & interests (4) management fees & royalties (5) taxes

    Also note that (3) “capital” can mean two very different things:
    * capital as “produce used for production”, i.e. “capital goods” (tools, machinery, facilities etc.)
    * capital as “financial resource” (money), e.g. in a production firm needed to finance the “capital goods” and to finance the “working capital” (roughly for inventory and work-in-process)

    Regarding “capital” for developing countries: while Africa may not need “much” capital, at least “some” is required for whichever economic activity. Besides institutions and NGO’s, there are also various private initiatives that provide microcredits to self-employed individuals and cooperatives such as e.g.
    https://www.incofin.com/en
    http://www.oikocredit.coop/

    In the third world, a microcredit to a small entrepreneur in the order of 1000 (a thousand) euros, granted with yearly interest rates of 20, 30 and even up to 50 percent, can make the difference for a whole family between lifelong extreme poverty or a more or less decent, human-worthy existence. These people (often NINJA) have no negotiation power on loan terms, it’s take it or leave it, and they’re still proud to work hard and pay back.

    Like

    • Agree with most of it, although the classical economic definition of “capital” is only the first one which you mention.

      And not sure if all micro-credit is successful. Many are, but many are not, although the micro-credit helps to provide a better standard of living while you consume it, rather than invest it. The high interest rates are not justifiable, IMO. But I do not know enough about micro-credits, the principle are the same as the any credit in the west. Some are useful, some not.

      As far as Africa is concerned, if anybody is interested, @calestous on twitter provides good info,

      Including this one about lending in Africa for agriculture, showing again it is not crucial to have credit or finance to produce:

      :

      Like

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