Sunday, June 23, 2024
CommentaryThree Eastern European answers for three African issues

Three Eastern European answers for three African issues

Scientists and people who think about the future agree that every country’s development follows a four-part model called the “quad-core” development process.

The first component involves improving hygiene and basic health, which helps people live longer and raises the survival rate of infants. The second involves increasing agricultural productivity and introducing advanced agro-technologies.

The third component is the industrial revolution, which brings about a new quality of life and economic growth, while the fourth component involves a transition towards renewable energy sources that can support a radical increase in energy intensity and meet the energy demands of industrial production.

These four components—improved healthcare and nutrition, intensified agricultural production, industrialization, and energy production—contribute significantly to human development and eventually lead to urbanization and other related processes.

“Quad-core” development came to Britain in the mid-18th century, then to other European countries, then to the Americas, and is still rolling out in different parts of the world, causing exponential growth for economies and therefore for capital and private investments.

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Most of Sub-Saharan Africa is yet to jump-start its economic development. At the same time, more than 40 million new Africans will be born in the 54 countries of that vast and young continent. It is expected that by 2050, there will be 2.5 billion people living in Africa, and there will be at least 1000 African companies with USD one billion or more in sales. Africa is offering investment opportunities in such core industrial sectors as energy, transportation, agriculture, and mining — an opportunity that is rare in the modern world.

African markets present striking differences from other markets. Challenges and opportunities in Africa are also very distinct but not unlike those that were present in the early 1990s when free market economies were emerging in former Warsaw Pact countries and the Soviet Union.

We can list three major issues that African economies will face in 2023. Basic infrastructure, which is yet to be built, is one of them. Africa needs energy generation, an energy grid (nation-wide or local), asphalt roads, railroads, airfields, and logistical infrastructure: warehouses, transportation hubs, communication lines, and transmission stations. Many such projects will be government-related, and foreign investors need to be able to assess the risks and proper structures involved.

The other is that sub-Saharan Africa is a land of low productivity and very little depth of processing. Extremely underpowered agriculture, agro-processing, and light industries are using primitive technologies (if any) and therefore present 20–40 times less productivity than in Western countries. This situation presents an obvious opportunity for investors to start local operations with imported technologies and machinery, mostly with clear export potential.

Africa possesses a unique set of risks. African risk profiles are different from those of other markets. Risk assessment and risk mitigation techniques should be designed in a way that reflects this difference and complies with international standards at the same time.

The economic puzzle of Africa has a dual nature, requiring both “smart money” in the form of investors and founders who possess the necessary technologies, experience, skills, and management practices as well as “passionate money” from investors who possess a deep understanding of societal factors and the patience required to succeed in developing markets.

Based on this premise, I believe that the most appropriate investors for African projects may be those who have achieved success as businesspeople in Eastern Europe during the 1990s and 2000s. There are three compelling reasons to support this claim.

One is that during the 1990s and 2000s, Eastern Europe was undergoing a transition towards a market-based economy, where market forces were just beginning to take effect. While sub-Saharan Africa may not have been rebuilding after a communist regime, its market mechanisms have not been operational for many years due to factors such as autocratic and corrupt rulers in some countries and overly restrictive economies that were effectively closed off to the outside world in others.

People in business with experience in Eastern Europe understand what it’s like to operate in a highly bureaucratic, unfriendly environment for business, where it takes much more perseverance and patience to achieve your objectives.

The other reason is that the emergence of multi-billion-dollar business empires in former socialist countries occurred in a petri dish of an extremely turbulent legal and business environment, a rapidly changing regulatory landscape, and a notable lack of trusted agents and intermediaries. Businesspeople with Eastern European experience possess a high risk tolerance and are not shy about making business pivots when the environment calls for it.

Further, the fall of the Soviet Union and its allies left a trail of economic devastation across Eastern Europe. The region was plagued by high unemployment, hyperinflation, and a lack of economic infrastructure. However, amidst the turmoil, a new generation of entrepreneurs emerged, determined to build businesses that could survive and thrive in this challenging environment.

One of the key characteristics of these entrepreneurs was their ability to create simple and effective solutions. The low level of economic complexity in the region meant that they had to focus on business and technology solutions that were fast, efficient, and easy to understand. This required them to think creatively and to come up with innovative ideas that could be implemented quickly and without the need for extensive resources.

Many have compared Africa’s potential for economic growth to that of China, which has made large investors and multinational corporations very wealthy. However, this growth will take at least 30 years to fully realize, and in the meantime, smaller investors have a chance to enter the African market.

In about 15 years, larger investors and corporations will begin looking toward Africa. Thus, now is a good time for investors with small and midsize investments to get involved. While some of the companies created today will become successful and remain a part of an open African economy, most will likely be acquired by larger corporations aiming for future development.

(Mikael Alemu is the general manager and co-founder of 10 Green Gigawatt for Ethiopia.)

Contributed by Mikael Alemu

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