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What's Wrong with U.S. Economic Engagement in Africa?

· Africa

Sub-Saharan Africa is a land of enormous opportunities for impactful U.S. investments that can contribute to advancing shared development interests. U.S. relations with sub-Saharan Africa can no longer be driven by a “problem child” narrative of negative challenges that result in playing catch-up to others wooing Africa. Nor can the U.S. keep focusing on low hanging fruits that skew efforts to build constructive and enduring economic engagement.

The U.S. needs a more robust, cohesive and realistic approach to economic engagement that taps into shared American-African entrepreneurial potential, builds better partnerships for progress that don’t deplete resources that can best be used elsewhere and strategically focuses on facilitating U.S. foreign direct investments that put Africa on a more level playing field. More concerted efforts need to be made to align U.S. and African business genius and capacity through collaborative and mutually profitable engagement. It’s critically important to bridge the gap between exporting and foreign direct investment (FDI).

Economic engagement should be collaboratively profitable

U.S. economic engagement with the 47 countries comprising the region in Africa that lies South of the Sahara Desert is not, as discussed on November 6, 2019 at the Wilson Center’s Africa Program on “U.S. Africa Economic Relations at the State Level”, just about exporting U.S. goods and services to a growing consumer market. Nor is it about leveraging U.S. private sector capacity to compete with China in what will soon be the greatest integrated trade area in the world.

Neither is it about harnessing the African diaspora to bridge U.S.-Africa links by turning remittances for family support into a vehicle for creating a business development financing platform. And it’s not about better using young Africans who come to study in American universities as “feet on the ground” to facilitate transactions or business opportunities.

All these simply evidence a lack of U.S. political and private sector will to truly engage with Africa. They cannot serve as the basis for successful economic engagement with the fastest growing region in the world constructing the biggest free trade area in the world.

Successful U.S. economic engagement with sub-Saharan Africa requires a regional perspective focused on increasing freedom and diversity of investment and trade, instead of on aid and extraction, and on facilitating a level playing field that leverages partnerships, capacity building, knowledge sharing, and business models. Instead of focusing on low hanging fruits that can temporarily offset the opportunity costs of others wooing Africa (i.e. China, Europe, Japan, BRICS, Gulf countries), U.S. federal and state efforts should focus on how to best align U.S. and African business genius and capacity to design and deliver solutions that Africans need and demand. Improving American competitiveness on the continent requires that economic engagement ensure U.S. investment and trade also benefit Africans. It should therefore be collaborative and mutually profitable.

Africa’s business revolution calls for a new approach

Emerging from decades of inconsistent and negative growth or “shrinking”, the world is now coming to sub-Saharan Africa. The region represents the major emerging market of the future. As the uptick in the region’s global engagement reshapes the international trade and investment landscape, the United States needs to strategically rethink U.S.-Africa trade and investment relations beyond the sales cycle to a business development focus that can expand and deepen economic engagement.

Economic engagement is not about increasing market access for U.S. goods and services, promoting U.S. security interests and using financial development assistance. It’s about creating the right conditions for shared economic growth and success. The goal is to cultivate conditions for private sector growth, investment and trade throughout the region, not just in the big African economies that the U.S. has traditionally done business with and feels comfortable exporting to or extracting from.

Sub-Saharan Africa is much more than South Africa, Nigeria, Ethiopia, and Kenya. The region is vast and varied, and economic growth is projected to be stronger in countries that the U.S. does not traditionally do much business with. According to the IMF’s 2019 Regional Economic Outlook for the sub Saharan region, “Growth in sub-Saharan Africa is projected to remain at 3.2 percent in 2019 and rise to 3.6 percent in 2020”.

While growth is expected to move in slow gear in resource-intensive countries (2.5%) and growth in South Africa - the main U.S. trade and investment partner in sub-Saharan Africa - is anticipated to be weaker, non-resource-intensive countries are projected to grow at an average of about 6%. As a result, 24 countries, home to about 500 million people, will see their per capita income rise faster than the rest of the world, while 21 countries are projected to have per capita growth lower than the world average.

Reality trumps news headlines

In a new era of African economic diplomacy, there is an imperative for the U.S. to step out of traditional trade and investment patterns. While foreign assistance, through USAID and MCC, must support African nations’ own efforts to improve their economic climate, economic engagement requires working closely with the African private sector to harness the region’s business revolution and build on it to diversify U.S. private sector engagement.

Policymakers must widen the range of options to bolster U.S investment and African growth. It’s time to start establishing lasting U.S. interests and expanding business interests in Africa. Economic engagement requires both greenfield and brownfield foreign direct investment (FDI). Greenfield investments entail building the business from scratch, for example a new industrial facility or a new services outlet. Brownfield investments can be horizontal, by merging with an African company to achieve a bigger and reduce competition, or vertical, by merging with or acquiring an African company to add more value to its value chain.

Relative to FDI, exporting may involve lower sunk costs, but it also carries higher per-unit costs and therefore entails a weaker competitive advantage vis-à-vis cheaper Chinese options. However, the decision to export or invest should be made in relation to domestic and foreign market sizes, rather than based on a lack of knowledge or information. And U.S. companies shouldn’t shy away from Africa because of the generalized stereotypical media images of Africa as a dark and dangerous business destination marked by insecurity, corruption and lawlessness. Lack of knowledge, familiarity, direct market knowledge, or language skills are no excuse for missed opportunities.

Better technical assistance and bolder business needed

If the U.S. wants to strengthen and deepen its economic engagement with sub-Saharan Africa, federal and state agencies need to urgently reform how they focus the services they provide. Instead of demand driven export assistance centers

  • International trade agencies and assistance centers need to be more proactive in reaching out to small U.S. businesses and provide international business awareness and education, market data and information on key investment sectors throughout the sub-Saharan region on a country-by-country basis.
  • U.S. federal or state agencies need to provide technical assistance to identify and explore business opportunities beyond exporting, by providing information, training and support on how to overcome challenges to developing a winning market entry strategy, a working business model, as well as help in carrying out due diligence when searching for a local partner.
  • Trade missions have to be hands-on so U.S. businesses can get a feel for reality on the ground.
  • Business summits need to diversify beyond the limited choices dictated by the immediate U.S. business community’s choice of countries of interest; diaspora interests only partially represent viable opportunities.
  • States need to start talking to each other and collaborating more in order to define common approaches and better outreach to the greater business community, not just the businesses who are already engaged in international business.
  • More collaboration and coordination needs to be done with African agencies, such as investment promotion agencies and with sector-specific business and trade associations.
  • More joint events need to be organized in Africa to facilitate U.S.-Africa-U.S. concept pitches to provide made-with America-in-Africa solutions.
  • Establish a regular yearly U.S.-Africa Summit to demonstrate that Africa does matter for America, beyond just being seen as a growing middle-class consumer market for commercial and intellectual goods.

U.S. businesses also need to be bolder. You don’t need millions of dollars to reach out and identify business opportunities in Africa. But you do need to be open-minded and flexible. Of course there are cultural differences in doing business, and market expectations are different. But the end game is the same: profitable business with a positive impact for economic development in Africa and the America.

Refocus or lose out

The U.S. cannot continue to miss out on African business gems. Failure to refocus U.S. economic engagement with Africa and deepen business relations beyond exports and extractives means American businesses will lose out in the most dynamically growing and diversifying market in the world. Instead of playing catch-up to China or pursuing misguided buccaneer business adventures, engagement needs to be built on an in-depth, contextualized, grounded understanding of the drivers and amplifiers of the dynamic transformations playing out on the continent. Not doing so will mean increasing opportunity costs.

Sub-Saharan Africa matters in its own right and requires a different approach for successful U.S. economic engagement. It’s time to construct a new approach by challenging conventional thinking, taking a regional perspective and facilitating collaborative business development that can generate shared prosperity.

Astrid Ruiz Thierry, Principal, Upboost LLC

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