The Nigerian Industrial Behemoth That Could Reshape the African Economy

31:29It took a long, a long time. One of the debates that's been going on that I see, I mean, part of, you know, like, obviously, like the Asia stuff is just very hot right now. People, you see the booming, you know, the booming Chinese economy, the booming Korean economy, etc. Something that I'm curious to hear your take on is one of the things people are saying is that China's manufacturing dominance, its absolute efficiency gains, et cetera, are sort of depriving other parts of the world from having climbed the same ladder. That, for example, China, yes, it can make some of the most advanced chips in the world, but there might still be an entire city that's devoted to making Christmas tinsel or something like that.

32:17And this is the extremely low margin types of manufacturing that historically might have been the first seeds of a more complex ecosystem in another country. But on the other hand, and some of this comes through in your book, you could argue that some of the gains that we are seeing and some of the encouraging African success stories are in part thanks to cheap inputs from China, I'm thinking like fertilizer and probably cheap machinery, et cetera, that allows for improving agricultural productivity, which in your view is very key. Why don't you talk to us like your take on the relationship between the incredible gains we've seen in Asia and China specifically, and the implications there for African prospects right now?

33:06yeah i so first of all i think that there's people tend to tend to perceive china as continuing to export absolutely everything that it's ever made but if you look at the trade data for china what you see is that china's actually exporting less and less of the low value added stuff that it that it began with um and quite a lot of that is going to places like cambodia which i just mentioned what china's really exporting at the moment is things like electrical electric vehicles and um and other other green energy products you know that are much more sort of cutting edge and capital intent intensive um in terms of what it did in the past so if africa's competing against garmenting exports for instance it's much more competing against um stuff coming out of myanmar out of Cambodia, out of Sri Lanka, out of India.

34:00So I think that Africa is capable of doing that. Its problem, its main problem is that it doesn't have much commitment from government to developing manufacturing sectors outside of, to an extent, Nigeria and Ethiopia, which has always had that commitment. Morocco to an extent as well, and then one or two other enclaves in places like Madagascar. And Africa needs to build that up. I think that telling Africans that they're not going to succeed in manufacturing is very dangerous and very bad advice. I absolutely think that they can succeed in manufacturing. And the places that I've seen them manufacturing, they seem to be doing fine.

34:46I don't buy into the idea that there's been a change, or there is an ongoing change now based around robotics and AI that means that there will be no manufacturing development in Africa. You're right that some cheap inputs from China have been helpful to development in Africa. But the thing I would emphasize much more than that that's come from China is large amounts of manufacturing investments. So if you look at the FT's micro database of FDI for last year, China put$12.5 billion into manufacturing investment in Africa. And if you then dig into like, why are they doing that? The answer is usually because they can get better margins manufacturing in Africa, particularly for African consumption, than they can in China.

35:40I mean, an awful lot of manufacturing in China today has very, very low margins. So Chinese money is looking, you know, steel is one example. Steel in China at the moment sells for about $500 to$600 a ton. In Africa, it sells for about$1 ,000. So unsurprisingly, a number of Chinese firms have relocated steel mills to Africa. There's one in Zimbabwe, there's one in South Africa, there's one in Algeria, and there's one that's just been signed in Ethiopia. And it's all about margins in the end. And then, you know, Chinese firms also investing widely in all kinds of other businesses, ceramics, you know, to produce bathroom stuff that's consumed in vast quantities in developing countries, all sorts of things.

36:35So I don't buy the idea that there's this paradigm change in manufacturing. And I think the final point there I would make is that, you know, when you get conversations about robotics and AI and the effect on manufacturing, they tend to never introduce the question of cost, all right? So robots cost a lot of money, and they are also a sunk cost that when you buy them for your factory, you pay for the whole thing up front. On the other hand, in Africa at the moment, somewhere like Madagascar, you can get labor for$60 a month, right? What it cost in China in the mid-90s, not adjusted for inflation.

37:16so as my feeling is that any manufacturer who can make use of labor instead of paying up front for robots is likely to continue to do so you know not least again because people don't talk about the inflexibility of robots okay they can do a certain amount when your demand goes up You can't turn the speed up on most robots in factories, okay? They continue to do the same amount. You've got to get new robots, but that's not quick. Whereas when you need to hire and fire labor, that is very quick in developing countries. So I have a bunch of questions, specific questions on Africa's manufacturing potential, but just a step back question first.

38:03You emphasize the development of manufacturing as like this important step in the growth of an economy. And you do this both in how Asia works and how Africa works. Explain what it is that seems to make manufacturing in some sense special when it comes to economic development. And could you ever have a situation in Africa where, I don't know, maybe a government is like, I don't want to mass produce a bunch of toilet ceramics. I want to leapfrog ahead to a service industry and just start there. yeah so what makes manufacturing special is that you can take people usually out of the rural economy out of the farm economy and bring them into the modern urban economy and you can do that with relatively low levels of education they just need to be numerate and literate and they're in a factory and then they largely learn on the job and factories become the kind of vocational training schools for developing economies.

39:03So the whole process is affordable to the developing economy. The problem that you have when you want to jump into value-added services is that value-added services almost always require a higher level of education and training. So who's going to pay for that? The person who's coming out of agriculture hasn't got the money to pay for that. And, you know, is the employer, you know, so the government's going to come with the money? You know, the The government's not going to have the money because definitionally it's the government of a poor country. And the best example really to look to is always India for where you go with value-added services.

39:44Because of the Indian Institutes of Technology, the history there, they've always had a supply of highly trained tech graduates who allowed entrepreneurs to build very successful IT businesses. But that IT sector in India still only employs about 6 million people. It's just nothing compared with the employment generated by manufacturing. And then you look at the overall impact on growth. India, which has never really had a serious manufacturing strategy, although Modi kind of talks it up at the moment, but he's never really had one. If you look back to the period since 1991 when India's reforms began, India's grown at 4.2 % a year average.

40:31If you look at China, which really maxed out support for manufacturing, that's an economy that grew for 30 years at 10 % a year. That, to me, is the difference. And so I often say to people in countries like Nigeria and Ethiopia, what do you want to be? Do you want to be India or do you want to be something more like China? Huh. I'm curious, like you mentioned that one of the issues is that the sort of like the developmentalist mindset, as you understand it, or the optimal developmentalist mindset is unevenly distributed throughout Africa. So there are leaders who might want to talk to you about like, well, what is a realistic way in which we can develop along the East Asian path and then others not?

41:21When you look at the uneven distribution of this, is this just about like some people have different opinions or is this about like there is something endemic to the politics in certain countries such that whoever is going to be the person that winds up in the seat, winds up as president and so forth, is maybe going to be more likely to fundamentally say, oh, their political allegiance to, say, medium sized farms or something like that. that such that the developmentalist approach is going to be off the table because that is not the politics out from which they come? Well, I have never managed to get data to sort of nail this down very well.

42:06But my personal view is that endemic to the politics of Africa is that politics in Africa are particularly aristocratic. So you particularly have leaders and the people around them who are aristocrats with all the kind of prejudices that go with that. They don't like small farmers, they like big farms. They're not terribly interested in manufacturing. It's kind of, you know, sit in my office and wait for people to come to me. That has been to me the reality and the tradition. But I think that what is also very important is that demonstration, what economists called demonstration effects count for a lot.

42:49And that as countries see places like Lagos or economies like Ethiopia moving fast, right? Ethiopia has not grown less than 5 % for 25 years now. It was the poorest country in the world. That's why it's taking a long time to get on the radar. When you're 100 bucks GDP per capita to start, the maths are pretty ugly for a long period. But now, it's still growing 10 % a year, and it's at a couple of thousand dollars. So, that makes some difference. So, the point is that when people see what's going on in these countries, as was the case in East Asia, when people first saw what was going on in Japan, and subsequently saw what was going on in Korea and Taiwan, it makes a difference.

43:39It becomes a self-reinforcing positive spiral. Since you brought up Ethiopia, your book came out earlier this year. Before, I think it was in 2020, there was a civil war that broke out in Ethiopia. So I'm curious how you think of the relationship between economic development, the Ethiopian economic success story versus political stability. Because I imagine, you know, had you maybe written this book in 2019 or something like that, you already hold out Ethiopia as a success story in the current version. But maybe it would have been even more of a success story before the Civil War. to be honest i mean the remarkable thing is that the policy tracks that were laid in ethiopia prior to the civil war combined with some adjustments and more opening to the private sector that's come under i'll be the current pm have just meant that the i mean the economy kept growing five six percent through the civil war so you know that is that's what happens when you build institutional capability and you get the right policies in place.

44:54But it's a fact of life in Africa. And again, it goes back to demographics, that ethnic cleavage is present in pretty much every society on the continent, right? Because historically, population was so sparse in Africa, that different tribal, for want of a better term, groups didn't, it seems, from what historians can make out, come into conflict very much. Because whenever conflict was brewing, one group or the other would just take off and there was always more land available. There was always massive amounts of land for people. And so all these thousands of different groups with 3 ,000 different languages continue to survive.

45:39But of course, today, with population up to 1.5 billion, going to 2.5 billion in 2050, these ethnic groups now are pushing up against each other in a manner that they never have before. And they have to find ways of getting past these these kind of visceral ethnic reactions that they sometimes have. You mentioned something there that reminded me of what I wanted to ask you about export manufacturing in particular, which is, again, you think of Africa, and as you said, it's just this huge amount of land, including like some very, very remote tracks of land and nations, landlocked nations in the middle of the continent where it takes days and days and days to actually travel anywhere else.

46:27How much of a limitation is that on manufacturing for export purposes in particular, especially since in a lot of these countries, we're talking about places that don't have a lot of infrastructure. And so I would imagine that some of your labor competitive edge starts to wear off once you start factoring in the need to put manufactured goods on a train for three weeks or something like that. Yeah. So just start by contextualizing the bigness of Africa. You can fit China, India, Europe, and the United States inside Africa. That's how big it is. It's crazy big. And then your question, I think, makes a lot of sense so long as what we are thinking about is Africa exporting to other parts of the world.

47:18But my response to that would be that I think that a lot of export growth in Africa, most export growth in Africa is going to come from exporting to other states within the African continent. And the data are beginning to show that the rate of growth of exports within the continent is already growing faster than to other parts of the world. It doesn't mean that Africa won't export to other parts of the world. It just kind of depends where you are on this huge continent. If you're up in North Africa, if you're in Morocco, and you're only 14 kilometers away from Europe, it makes sense to be exporting, you know, which is why two of the biggest French car companies are making their cars there now, and aerospace and other manufacturers that need to be close to Europe at what low costs have gone there.

48:15To Morocco? To Morocco, yeah. Yeah. Up in, there's a development called Tangier Med, Tangier up there, just basically near the closest bit to Europe. And they've opened industrial parks. Not huge, but there's, you know, 100 ,000 plus people working in the industrial parks there doing cars and aerospace stuff and other things. Can you talk a little bit more about, I think it was in your book that I saw, or maybe it was something, it was probably in your book, maybe it was something that I saw after reading it, but like this phenomenon that what makes Africa or what had made Africa unusual is that you didn't have this great landless peasant movement.

49:01That there wasn't, you know, because in part of the stories of Asia, it's like land reform, right? You have like some big transfer from wealthy landholders to the public. And that in Africa, that had never really been the issue. And that makes it a fundamentally different story. Can you talk a little bit more about just the sort of weird reverberations that come from a underlying condition where land is just not a particularly scarce resource? Yeah, it's very un-Asian. So after the Second World War in East Asia, land was the most explosive issue because there just wasn't enough of it. And that's why the Chinese Communist Party won control of the country largely by redistributing land and giving land to people who agreed to fight for the People's Liberation Army.

49:51And then why the United States reacted by supporting land reform programs in Japan and in Korea and in Taiwan. And even in the 70s when the US was losing in Vietnam, sent people in to start doing land reform just before the fall of Saigon. But it was too late. So that is demographics. And then the demographics of Africa, as we've been saying, is a very sparse population. So everybody's got land. The only place that I'm aware of in Africa, in 55 countries that ever had any kind of land reform, was, oh, well, there was Kenya. I suppose there was in the highlands in Kenya, there was. But I was thinking of Zanzibar, which was a very particular case because you had this sort of feudal Armani elite who owned all the land when it became independent.

50:51But no, that's been the case. And there are still large parts of countries that have super abundant land. I mean, somewhere like Tanzania, there's still loads of land left. But because of population growth, there are other parts of the African continent where there is now some rising land pressure. So around the Great Lakes, in the Ethiopian highlands, and some bits of West Africa as well. But yes, as you say, it's not been an issue, scarcity of land in Africa. The problem in Africa was scarcity of people. Well, but there is still scarcity of assets that make the land viable as well, right? And the only reason I know that is because I read the chapter on Botswana where you talk about how there's loads of land, there's loads of cattle, but all the elites own the boreholes that produce the water for the cattle.

51:46And so you still end up with a very inequal economic society. Yes, exactly. You can still get that. And there's a tendency all over Africa today as demand for foodstuffs increases, as Africa has now had for 25 years, the fastest rate of, the whole continent has had the fastest rate of agricultural growth in the world, just over 4%. There is the tendency for urban wealthy people, what I refer to as African kulaks in the book, to buy up chunks of land or lease chunks of land and displace peasant farmers. So for the first time now in Africa, you're beginning to see a kind of landless peasantry, something that has never existed before.

52:36Tracy, do you know what the etymological root of the word kulak is? No. Do you know, Joe? I don't know, no. It's good. You've stumped us. Yeah, it means fist, as in they were perceived to be tight-fisted. And so that they were like, yeah, Yeah, that's like where that word came from. That's like the one thing I know about them. All right, last question for me. You know, like I've never been, I do want to travel to Africa, but it's a whole continent. I've never been particularly interested in the past because I'm not interested like going on, you know, seeing wild animals or something like that.

53:13I want to visit a city. I like to see how people live and how urban economies are happening, etc. Where would you recommend I buy a ticket to? I think you've got to see Lagos. It's just insane. I mean, just the people, the chaos, you know, and yeah, you just... I got my son a jersey from when we were in Madrid. I got my son a jersey from the team Atletico Madrid. And on the jersey, they're sponsored by the Rwanda Tourism Board. And so on his jersey that he wears, it says Visit Rwanda. Would you recommend also Kigali Chop? Yeah, I mean, that then will blow your mind because it's about the cleanest city in the world.

54:04You know, Kagame sends people out on Saturday morning picking up litter. There isn't much litter to pick up, but I mean, you know, polishing, polishing the city. We haven't really talked about Rwanda much, but as we famously know, its president has talked about this country could be the Singapore of Africa. And obviously, when you talk about... He himself is very Lee Kuan Yew coded, right? Yeah, right. Right. And so, right. So when you mentioned the cleanliness aspect, that's interesting. Where is Rwanda on that trajectory? And could you see a plausibility where it's a tiny landlocked country, unlike Singapore that has ports and stuff like that?

54:46But could it be the sort of like financial capital of Africa where that's the first stop for money, which then is invested elsewhere? it? I don't know that it will be. I mean, I don't think there'll be a single financial center for Africa. I think that's unlikely, but I think that Kigali can be one of them. They've done a very good job bringing in tech people. They've done a very good job making it a conference center. They've done a very good job bringing in various multilateral organizations to be headquartered there. And of course, what no one talks about is the fact that Kagame has expanded his country by essentially manipulating Eastern DRC, separating it from the rest of the DRC, and running it as a sort of Rwandan colony, which is handy because it's got you know some pretty decent mineral reserves which all get run through rwanda i mean the world has got a little bit more tough in in diplomatic terms on kagami in the last sort of two three years but not not very tough and yeah he's he he plays an extraordinary but I think utterly ruthless.

56:14Well, actually, this just reminded me, there's a through line between how Asia works and how Africa works. There's a bunch of them, but the other one we haven't talked about yet is the importance of finance and I guess directed lending to developmental projects. And it seems like Rwanda in particular setting itself up as the sort of Singaporean model. I think they chose not to have capital controls at all. But talk to us a little bit about how finance plays out in all of this. And also, when you think about finance in developing economies, you might often think about corruption and the difference between a legitimate developmental loan to an up-and-coming company versus a crony of the president or something can sometimes be very narrow.

57:02But what's the importance of finance here and how are you thinking about it? Okay. Well, I mean, first on Rwanda, you're right. So Rwanda wants to be Singapore. So they are looking to have no capital controls so that money can freely come in and out because they want to get all money related to Eastern DRC, money from other wealthy people who are going to feel secure about keeping it in Kigali. So they're not in a developmental game whereby they want to control their domestic finances for development. But that is what the tradition from East Asia is when you have a developmental state. One of the key things that you do is that you have capital control so that your domestic savings are locked down and your population can't decide to move its money to New York to get a better rate of return.

57:53The money stays at home. And then you have a banking system, which, and there are a number of ways, there are a number of ways in which it's successfully been done, but essentially you have a banking system which takes a lot of direction from government and also gets a bit of subsidy, fiscal subsidy as well, to support it for losses that may be incurred in supporting industrial policy. So, you know, inevitably money is very important. And I wouldn't say that things have changed much in terms of what you want to do if you are more of a developmental state. So, I mean, I've been very intrigued by the reporting of Ethiopia over the last couple of years, which has been, I don't know, on Bloomberg, but widely reported to have got rid of capital controls, which is completely untrue.

58:40They've basically moved to where China is, right, which, as we all know, has capital controls. and so you know that but they're opening they're open on the on the trade account so that investors in ethiopia now know that the foreign exchange they can get it in and they can remit it to their ultimate owners however across africa if we look across 55 countries what we see is that most countries got rid of capital controls and they did so on the advice of the imf and the World Bank. That means that then you get private banks that are interested to come in and invest, and they go, oh, look, all these foreign banks have come and invested.

59:21Isn't that good? But what the private banks do that come and invest is basically just push out consumer credit. And it's not conducive to development of domestic industrial capacity, just to have your banks lending people money to buy imported motorcycles. cool. Joe Studwell, this is fascinating. We could go on for a very long time. It's a shame that it took us so long for us to get you on the podcast, but very fascinating new book, very fascinating new work. And I think something that maybe, you know, I feel as though so many of the stories we hear these days are just over and over again. China does this.

1:00:02AI does this. China. Trump did this. I find it refreshing to hear this topic that I kind of feels un-zeitgeisty, but also very interesting and important. So I really appreciate you taking your time. Thank you. See you guys.

1:00:28I thought that was super interesting. I thought it was like really, you know, look, you're talking about like it's just such a cliche and you have to mention Africa as a place is just extraordinarily diverse and like there's no common geography or common anything the point about like land abundance over abundance yeah and labor sparsity as this sort of like defining aspect and then the way I hadn't really like put it together which is like if you can have the unfortunate you know tribes that are like totally separate and then suddenly you draw a big square around them or you're drawing shape around them and they have like no internal cohesiveness you can understand how that creates this sort of like permanent permanent political problem right well the thing i find really interesting about joe the other joe's argument is the population density aspect of it because that that feels to me like something which is changing you can see it in the numbers that it's starting to change.

1:01:30And if you do get more dense cities, I guess just more customers for potential goods produced within Africa, then that takes care of a lot of the manufacturing challenges that you could foresee. When you think about manufacturing, you think normally like, okay, we're going to produce stuff cheaply and we're going to export it. And then we're going to do the flying geese thing. And then we're going to do the monkeys swinging from the trees thing. And that's how we become a developed economy. But then, as you were pointing out, you know, development doesn't happen in a vacuum. You have huge competition from places like China.

1:02:07You also have a broad landscape globally of just people becoming more protective with their own trade, right? So that would be a massive challenge for a place like Africa. Again, not a monolith, but we're talking about it as such. But if the population density means that the domestic market actually increases, then that's a huge market. It could be a huge market. Totally. By the way, did you see this story? It didn't come up that Morocco named a highway after President Trump. No, I didn't. Okay, so there's a story that is funny. And for whatever reason, there's a Trump highway. And then I saw several weeks later after that news that there is an attempt to build a coastal East African natural gas pipeline that would go up through Morocco into Europe.

1:03:03And this is the key bit, that they're hoping to get financing from the American Export-Import Bank to build that. But and suddenly I was like, oh, maybe I do get why you would want to name your your highway after President Trump. But like, anyway, I can I say one thing about Moroccan highways? I know you're a fan of Buc-ee's. Oh, yeah. Moroccan gas stations are amazing. I got to go. You would love them. And they actually have really, really good food and are extremely dependable and for the most part clean. But the food is the thing to go for. I really want to go. So, okay, we're going to do live Odd Lots at the Dengote.

1:03:39Or, you know, we'll take a tour of the Dengote refinery. I'll go to Lagos with you. I'd love to go to Lagos. We should go. And great. We'll make that happen. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wazenthal. You can follow me at The Stalward. Follow our guest, Joe Studwell. He's at Joe Studwell. Follow our producers, Kerman Rodriguez at Kerman, Armand Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, you should check out our daily newsletter.

1:04:14You can find that at Bloomberg.com forward slash OddLots. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you like this episode, if you want us to go on a trip to Lagos, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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