How market failures are holding Africa back

GRAMHANA HAS curious problem: it produces too much electricity. Under the terms of opaque contracts with generating companies, the government has been paying more than $500 million a year for power that is never used. That’s strange, because the country is barely awash in power. The average Ghanaian uses as much electricity in a year as an American uses in a fortnight. Although access has expanded rapidly, more than a quarter of rural households are not connected to the network.

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The biggest obstacle to economic development is often insufficient resources. But not always. In Ghana, generating power has proven to be much easier than distributing it. So too, in several East African countries, including Uganda, where installed capacity is nearly double peak demand, and your correspondent sits down to write this in a blackout. Electricity is not the only industry where resources are sometimes plentiful and needs are obvious, but demand is not matched by supply. Call it the paradox of untapped riches: surplus and scarcity, existing side by side.

looking to hide

This conundrum is most evident in parts of the economy where the market should link supply and demand. However, in many cases, trucks sit idle on roadsides even when traders cannot find vehicles to transport their goods. Or factories run out of supplies even though the resources they need seem plentiful. Ethiopia has more cattle than anywhere else in Africa and tanneries to turn hides into leather. However, some of its shoe and glove manufacturers import leather from as far away as China. “Most of the raw hides and skins come from the domestic slaughterhouse,” explains Tesfaye Birhanu of the Leather Industry Development Institute in Addis Ababa, the capital. These can be ruined by bacteria within six hours of slaughter if not treated properly.

Even Aliko Dangote, the richest man in Africa, cannot escape the paradox. In 2016, his conglomerate opened a tomato processing plant in northern Nigeria to turn the country’s vast fresh fruit crop, half of which rots each year due to poor handling and storage, into the canned paste that is currently imported. But the shortage of tomatoes forced the factory to close after a few months due to a poor harvest caused by a ravenous moth. Several years later, the factory was still operating at a fraction of capacity due to problems getting enough tomatoes of the right quality.

A different variation of this paradox also arises in state-run markets like electricity, where governments have struggled to forecast supply and demand, and to build the infrastructure that links them. It also appears within government institutions themselves. Due to mismanagement, health ministries in Africa are not using about a fifth of the budget allocated to them, even though hospitals are running out of medicines. Underspending is similar in ministries of agriculture, sometimes for the simple reason that money for agricultural inputs, such as subsidized fertilizer, is released after crops have been planted.

Another imbalance is in the infrastructure. Governments and investors often have money to spend. And the demand for roads, ports and the like continues to grow. But bankable projects, the link between the two, are scarce. “There is funding, a large portfolio and a need to spend, but not enough money is being spent,” argue analysts at McKinsey, a consultancy. They estimate that 80% of African infrastructure projects fail at the feasibility and business plan stage; less than 10% reach the funding point. Even high-profile schemes can stutter. By 2020, at the end of the eight-year first phase of the Africa Infrastructure Development Programme, an initiative led by the African Development Bank, construction had started on less than half of the planned projects.

In a survey by the European Investment Bank, more than 60% of African banks say that the lack of “bankable” projects significantly limits their lending to small businesses; a similar proportion of entrepreneurs tell World Bank researchers that they can’t get a loan when they need it.

What do these various examples have in common? One obvious issue is literally broken connections in the case of power grids. A quarter of the electricity sold in Ghana is lost due to abandoned distribution infrastructure and theft, estimates Theo Acheampong, an energy economist at the University of Aberdeen. Bad roads and greedy middlemen stand between farmers and buyers.

Sometimes the missing link is information, such as credit histories, that would help banks assess the risk of potential borrowers. A second lesson is that quality trumps quantity. Yes, Ethiopia has a lot of cows, but they need to be kept healthy and skillfully slaughtered if their skins are to be made into brogues.

some rotten tomatoes

None of these obstacles is insurmountable. Farmerline, a Ghanaian company, uses technology to connect farmers, their suppliers, truckers, warehouses and buyers. “We know in advance how much food people are growing, we know the location,” says Alloysius Attah, its co-founder. “It gives us a head start on how we plan our supply chain.” Tomato Jos, a startup in central Nigeria, is trying to solve the tomato paste conundrum. He spent years talking to and then training farmers before his first can rolled off the production line. “It’s not as simple as setting up a factory and shutting down the supply,” says Mira Mehta, its American founder. “Roads are horrible, market information is bad, tomatoes are perishable. You have to really control your supply chain.”

Uncovering bottlenecks is often an expensive and unglamorous job that companies are reluctant to do on their own because it will benefit free-riding competitors. “There has to be an intentional government effort to support the market,” says Ed Brown of the African Center for Economic Transformation, a think tank in Accra, the Ghanaian capital. In agriculture, that can mean enforcing standards or providing support and credit to help build an entire supply chain. Mr. Brown highlights the success of Ethiopia and Kenya in developing cold stores at airports, enabling farmers to export fresh flowers and vegetables to Europe.

Economists have long known that resources alone do not make a country rich. African economies already have many of the pieces of the growth puzzle. What matters is how they fit together.

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