Solutions for alleviating poverty and spurring growth in Africa – World Economic Forum for Africa

Wildu du Plessis, partner and Africa Head at Baker McKenzie.

The World Economic Forum (WEF) for Africa, held in Durban in early May was convened to discuss ways to eradicate poverty and promote shared growth and opportunities for all Africans. In this context, Wildu du Plessis, partner and Africa Head at Baker McKenzie law firm in Johannesburg, said at the event that it was important to note that the fundamentals of the global economy had shifted and investors were now looking towards developing economies for higher rates of return as developed nations have become low growth economies.

He said that although China, Brazil and India had received much of the spotlight, China was transitioning to a developed economy while Brazil and India faced major structural issues to deliver on their potential. This means Africa, despite its own challenges, was definitively the last frontier for capitalist opportunities.

Du Plessis suggested that despite its imperfections, capitalism had lifted billions of people out of subsistence poverty in the past three decades alone.

“Capitalism delivers good things when allowed to function as it should,” he said.

Du Plessis noted that governments and legislators in African nations should act as enablers of the basic principles of capitalism as an economic system, such as free market competition, private ownership and investment of capital to make a return.

“Treat capitalism as an economic system that has been empirically proven to work and everyone will benefit through the emergence of a large and more affluent middle class. However, if it is twisted it into so-called "crony capitalism”, only the elite will benefit and the very concept of capitalism becomes misunderstood and vilified,” he explained.

Du Plessis said that colonialists had set the tone for this in Africa.

“While Britain and others were embracing free trade, industrialisation, liberalism, competition and the development of a market economy, the story in Africa was of conquest by European nations and the handing of de facto monopolies to powerful individuals to extract valuable natural resources. This benefited small elites rather than the collective interest, creating an inaccurate view among many governments of what capitalism is and the vast benefits it can deliver to the many, not just the few,” du Plessis noted.

“More recently, the combination of Africa's fertile land, abundance of natural resources, and governments that hope to benefit from foreigners' investment but without the technical expertise to retain and direct the benefits of such investment, have made the continent an easy target for exploitation by unscrupulous investors and politicians.

“This leaves the continent in a strange hinterland between development opportunity and crisis. This is, of course, a gross generalisation - many countries have made enormous progress,” he said.

Du Plessis explained that the majority of today's African leaders wanted the best for their people. Investors wanted to invest but needed legal certainty to take commercial risks. He said that potential investors were not looking for guaranteed profits, but legal certainty simply allowed them to assess opportunities and risks on a commercial basis. This was essential for drawing in the capital Africa desperately needed to develop the infrastructure necessary to deliver on its growth potential. The question was how to do this.

To address these issues, growth and capitalism needed to be facilitated by many things, but du Plessis said the three essentials were:

• Strengthening the rule of law. Foreign investors will only ramp up their investments if they are confident no government can simply take away their assets on a whim.
• Cooperation. The emergence of nascent trading blocs such as the East African Union for example. As parts of the world seem to be fragmenting (for example, Brexit and the EU) or turning inward (the US), there is an opportunity for African nations to collaborate. Speaking with one voice means a strong hand in trade negotiations.
• Energy and Infrastructure in Africa and for Africa. It is the same old issue but it is an unavoidable fact that Africa cannot reach its potential without more and better energy and infrastructure.

“To fully leverage the continent's wealth potential, legal structures need to be put in place to guide Africa's development agenda from within by enabling entrepreneurship, cutting red tape and bureaucracy, supporting success and selling opportunities to the wider world of foreign investors.

“The world is moving increasingly towards mixed models of capitalism and what is certain is that Africa needs one that both caters for its unique advantages and addresses its equally unique challenges. As Africans, we must be open to new ideas and redirect the positive energy of capitalism to meet the genuine development needs of Africans, while understanding we cannot do this alone. Foreign expertise and capital will be a necessity whatever the approach,” du Plessis said.

In terms of foreign investment Africa, Morne van der Merwe, the Co-Managing Partner, Baker McKenzie Johannesburg noted that according to Baker McKenzie’s first quarter 2017 Cross-Border M&A Index, Africa saw 14 outbound cross-border transactions worth US$704 million and 29 inbound cross-border deals totalling US$6.2 billion in the first three months of this year. The deal values have dropped in comparison to the last quarter of 2016, where there were 11 outbound cross-border deals in Africa, worth US$ 4.6 billion and 22 inbound M&A transactions, worth US$11.4 billion.

Van der Merwe noted that the interest displayed by bidders targeting African investments should and could be higher than US$6.2 billion for the first quarter of 2017.

“There are many untapped opportunities for attracting foreign direct investment in Africa, The South African government acknowledged this in the 2017 budget speech, where it was indicated that the relaxation of several foreign exchange controls and tax penalties may be implemented to allow for South Africa to be more agile regarding inflows and outflows of capital, whilst still protecting its currency reserves.

“The Middle East and the EU are specific areas where Africa could substantively increase its attractiveness as an investment destination. According to the Index, bidders in the Middle East invested only US$7 million in Africa in the first quarter of 2017 and investors from the EU spent US$481 million in Africa in the same time frame,” he said.

“The primary drivers for investment in Africa including a ballooning consumer market and rapid increase in middle class households in certain regional African economies. In addition, an increase in development in African telecoms industries and the opportunities for business this creates, as well as the opportunities presented by a rapidly developing financial services sector, are also key drivers of investment activity. Mining, as always, plays a crucial role as a driver for African investment and the changing winds regarding global commodities will continue to influence African deal flow,” he explained.

“It seems that despite political and regulatory uncertainty, Africa remains rich with possibilities,” van der Merwe added.