African exports and economic development

What does it take to develop Africa? To enable it to take its pride of place in the world, and reduce its dependence on foreign aid? Is such a thing possible in our lifetimes or merely a dream? How does one create the mythical “Wakanda”? For what is this curse of underdevelopment that bedevils Africa, and what can be done to break it?

Why do African governments make implementing solutions so difficult? Why does power (and by extension politics) appear to be the bane of Africa? There is a saying that we rarely experience natural disasters. Instead, our leaders appear to be our cataclysms.

Africa still rising
In an earlier article, I stated six prescriptions for Africa’s resurgence, but a basic precondition was clear – Everything rises and falls on politics.

This is because, in Africa, the main currency of exchange seems to be power, not money. African governments are in a constant state of negotiation with power blocks. And the people (and their votes) are rarely one of those blocks. Hence, this is why African democracies evolve slowly. The people rarely have leverage and are too poor and hungry to fight for their rights. In many Sub-Saharan nations, literacy levels are such that the people do not even know those rights.

Better political minds than mine have suggested ways to overcome this power imbalance, in order to make the will of the people sovereign. They have presented evidence to explain how a free press can form a Fourth Estate, so the government cannot hijack political narratives.

So, in this write-up, instead of dwelling on politics, I’d rather turn my attention to Africa’s economic growth, which ironically depends on both politics and policy.

Venture funding and export
In 2023, about 11 per cent of America’s GDP comprised venture-backed businesses. Today, those businesses are some of the world’s most successful brands, and America’s global exports bring billions in revenue, taxes, and jobs to the U.S.

In fact, the market values of companies dwarf the GDPs of African nations. While market cap is an estimate of a company’s size and value, GDP reflects the economic health and size of an economy.

Government or private sector
The thing is, you don’t always need private capital to kickstart national brands. South Korea and China have shown us that government banks can initiate the process.

In 2020, the South Korean government launched a KRW 4 trillion (about $3.3 billion) fund aimed at supporting SMEs and large corporations alike, ensuring liquidity and operational stability across various sectors, including technology and manufacturing.

Also, in 2023, Korea Development Bank agreed to a share swap with Hyundai Heavy Industries (HHI), transferring its controlling stake in Daewoo Shipbuilding and Marine Engineering (DSME) in exchange for about KRW 1.5 trillion (about $1.4 billion) worth of new shares from HHI. This deal included an additional commitment from KDB to extend KRW 1 trillion in financing to support DSME.

In recent years, China has heavily subsidised companies in green technology. For instance, BYD, a leading electric vehicle manufacturer, received direct subsidies amounting to EUR 2.1 billion in 2022 alone, facilitating its growth in both domestic and international markets.

The China Development Bank has also been instrumental in financing projects for state-owned enterprises (SOEs). For example, it provided a $10 billion credit line to Huawei in 2004, allowing the company to offer competitive pricing and expand its market share significantly.

Companies like Huawei, Sinopec, and China National Petroleum Corporation exemplify how government backing has enabled Chinese firms to expand globally. These enterprises benefit from financial resources and favourable regulations that promote international operations and competitiveness.

What the data suggests is, there is no one way for developing exports. It can be market-driven or government-driven. African governments must take a deliberate approach to financing and supporting export businesses, and the ecosystems that support them.

This is particularly pertinent because export businesses provide the much-needed foreign exchange and balance of trade that’s required to stabilise local currencies. Brands also house important intellectual property that maximises a country’s global dominance, recognition, and influence.

The curious case of Winston Leather
Winston Leather is a Nigerian manufacturer that has highlighted longstanding issues with the misattribution of its high-quality leather as “Italian” by luxury fashion brands.

For over 30 years, Winston supplied leather to major fashion houses without receiving proper credit, leading to a perception that Italian leather is superior, when much of it actually originates from Nigeria.

The situation gained global attention when a TikTok user revealed that many luxury goods labelled as Italian are sourced from Nigeria, prompting a push for transparency about the true origins of materials. Despite this push, the Italian leather industry would rather label these products as “genuine leather” instead of acknowledging their Nigerian roots. This controversy underscores the broader challenges African manufacturers face in establishing their brands and gaining recognition globally.

In view of this recent case study, one should ask, “What should the Nigerian Government do by way of funding, tax incentives, export assistance, and global IP advocacy for companies like Winston Leather?” When a nation finds a potential global brand, it ought to publicly support it.
Building local venture funding capacity

In Africa, it doesn’t seem right to use foreign-sourced Dollar-denominated venture capital to fund local businesses that earn in local currency. This is a mismatch of funding sources.

Instead, dollar venture funding should be used for export businesses that can earn Forex. So, we must encourage local venture capital firms and banks to provide the funding that’s required for domestic businesses.

In 2022, African startups raised about $6.5 billion in venture capital (VC) funding across 853 deals. However, African-based investors represented only around 23 per cent of the total investor base, meaning that about 77 per cent of funding came from foreign investors​.

To build Africa’s global brands, we need long-term domestic capital.

Venture debt
African investors may explore long-term venture debt, instead of equity financing alone.
Venture debt is a form of private equity that allows an investor to form an SPV with a business, and to participate in profit sharing. The investor gains view-access to project bank accounts to ensure transparent use of funds. They can also inspect and verify projects.

This form of funding is useful in low-trust societies where contracts are rarely honored, enforced or adjudicated on time.

Exits and liquidity matter
If you consider the value chain of venture funding, it culminates in IPOs with multiple liquidity events in between.

A question for African policymakers is how to build domestic capital markets with sufficient liquidity to reward those who bring in long-term capital.

There’s a reason why Jumia is listed on the New York Stock Exchange, rather than the Nigerian Stock Exchange. First, the initial VC funding was dollar-based, so the investors’ exits had to be in dollars. Our Nigerian capital markets also do not have the liquidity or trading volume to support large exits.

The manufacturing path to prosperity
Currently, African labour is relatively cheap in relation to the West. So, should we put that labour to work on Services or Products?

While we need both, there are limitations to African manufacturing.

First, it will take decades to build the infrastructure required to power manufacturing. And with Development Finance’s obsession with clean energy, Africa will be hard-pressed to raise cheap financing for gas-powered plants, for instance. Meanwhile, some African countries have an abundance of gas like Nigeria. The expectation that Africa will make the immediate leap to clean energy, without first tapping into readily available sources is unrealistic.

To be continued tomorrow.

Plumptre is the CEO of Volition Cap, an African SEC-licensed asset management firm working to bring financial prosperity to middle-class Africans and Diasporans.