Africa's Human Capital

In Sub-Saharan Africa, the best resources are the people.

Sub-Saharan Africa is booming. Average purchasing power in the region once denigrated as the heart of "the hopeless continent" has risen by a third in the past decade, and foreign investment is gushing in. Yet it's easy to miss the enormous differences between these 48 countries. Some, like the Democratic Republic of Congo, are still stuck with conflict and poor governance, but others -- even countries that investors have neglected, such as Burundi -- are laying the groundwork for the next stage of growth by investing in their people.

The problem with Sub-Saharan Africa begins with the term itself, whose meaning has become more than geographic. Increasingly, it signifies a region that does not include South Africa, considered a fairly developed, middle-income country where the average purchasing power is about the same as in Serbia or Peru. By that measure, however, Mauritius should be dropped as well. Some other groupings leave out oil-rich Nigeria, too, despite its continued struggles with poverty.

No single aggregate makes sense in such a diverse area. Yet most global corporations and government agencies inevitably slice and dice the world into regions, thus putting sub-Saharan countries in competition with each other for the attention of the world's big investors and policymakers. Lately, that competition has become especially stiff.

The leaders in the region are not always the obvious ones. There are, of course, some established darlings that are simple to spot. For the ease of doing business as measured by the World Bank, Rwanda, Botswana, and Ghana all look better than several countries in the European Union. Rwanda and Ghana also score highly for protection of property rights -- crucial for attracting foreign investors.

Look below the surface, though, and many other contenders are worthy of investors' attention. The progress in these countries is not so much about the business climate today, or even the level of security or quality of governance. It's more about the economic potential being built for tomorrow. This potential is best measured not by the experiences of corporate managers and consultants who respond to global surveys, but rather the development of human capacity in the next generation of workers and consumers.

In terms of human capacity, there are some striking trends for companies looking to get into sub-Saharan markets on the ground floor. For example, in overall human development as judged by the United Nations Development Program (UNDP), Madagascar now sits where the Republic of Korea did in 1980, on the cusp of its export boom. And a closer look at the data reveals many more examples of progress.

In the past three decades, the biggest improvement in education has come in Burundi. In 1980, children under seven there could expect an average of only 1.7 years of schooling, according to UNDP. Today, they will receive 11, and so the next generation of Burundian workers will be unrecognizable compared to the last. Uganda, Mali, Guinea-Bissau, Ethiopia, Guinea, and Burkina Faso have all made jumps of at least five years of expected schooling in the past three decades.

Health is another area where some countries have separated themselves from the pack. In Eritrea, Ethiopia, Guinea, and Niger, life expectancy at birth has risen by at least 15 years since 1980. Much of this change came from reductions in infant mortality. It is all the more impressive given that it came against the tide of the AIDS epidemic. For these countries, higher life expectancy will mean less hardship for families, lower fertility rates, and more investment of resources in each child.

Some of these countries, like Burundi and Eritrea, may be too small to capture investors' imaginations. But in East Africa, Uganda and Ethiopia offer more than 100 million potential consumers. And in the west, homegrown multinational corporations are already starting to span the mid-sized francophone countries.

As Korea showed starting half a century ago, vast natural resources are not a prerequisite for rapid growth. With better education and health come higher productivity, rising wages, and greater buying power. To plan for this growth, companies will need to use a long time horizon. One way to do it is by laddering the marketing of their products in parallel with increases in living standards.

An excellent example of this kind of long-term planning is Honda's investment in Vietnam. Honda established a subsidiary there in 1996, and within a few years its stripped-down Dream scooters were ubiquitous in city streets. As Vietnam prospered, the scooters got fancier. Eventually, they got doors, too. In 2006, Honda opened its first auto plant in Vietnam, producing the compact Civic for local consumption. Vietnamese consumers were used to relying on Honda products, but it took a decade for them to be ready for the big-ticket items.

Some investors may still be nervous about Sub-Saharan Africa, given its history of political instability and humanitarian disasters. But things can turn around quickly. Vietnam, a nominally communist country involved in military conflicts until the early 1990s, saw a huge surge in foreign direct investment once it made peace with its neighbors and opened its doors to trade. The resulting economic growth helped to underpin that same stability and openness. More recently, Sri Lanka's economy has expanded by more than 8 percent annually since the end of its civil war.

In this century as in previous ones, much of the investment boom in Sub-Saharan Africa has come from companies seeking to extract natural resources. Resource booms come and go, though, and commodities are eventually exhausted. What endures is human capacity, the greatest economic engine of all.


Daniel Altman

Turning Japanese

Is this the end of the South Korean miracle?

Can China avoid becoming Japan? In a few decades' time, we may be talking about how today's up-and-coming economic superpower is starting to look like the Land of the Rising Sun and Falling Expectations. But before that, another country is first in line: the Republic of Korea.

Despite differences in politics and size, China can be seen as representing South Korea's past and Japan its possible future. Like China, Korea prospered by picking the low-hanging fruit of globalization; its growth was driven by the rural-to-urban migration of its population and the successful pursuit of export markets using low-wage labor. And as in Japan's case, Korea's exports started out with a less-than-savory reputation -- such as when Hyundai cars first reached the United States -- but eventually became accepted global brands. But after Japan exhausted the economic engines of urbanization and low-cost exports, it stopped growing -- and now may be slipping into recession again.

In some ways, South Korea is already on the same track. There are a number of ominous parallels: Korea's rate of economic growth has been falling since the early 1990s, and its overall trend tracks Japan's with a delay of about 20 years. In terms of urbanization, the lag may be closer to 15 years, but the resemblance is clear. Also, the age profile of Korea's population 15 years from now will likely be very close to Japan's today. You can make similar comparisons between Korea and China, which sits another 15 or 20 years behind.

These countries have more in common than their geography and economic trends. In all three, the biggest spurts of industrial growth were managed by their central governments. During these spurts, their living standards converged quickly to those of more economically advanced countries -- up to a point.

The hard part has been closing the remaining gap. Beginning with the government of Prime Minister Junichiro Koizumi, Japan has made a halfhearted effort to find a new path by embracing free markets, dismantling the corporate behemoths known as keiretsu, cracking down on corruption, and even teaching its young people the value of competition. Ultimately, however, Japan has failed to become a global hub for entrepreneurship -- an essential driver of post-convergence growth. With a rapidly aging population that will soon begin to shrink, the prospects for further expansion in the Japanese economy are less than sunny.

Korea is next in line to face these challenges. Like Japan's economy and the keiretsu, Korea's economy is dominated by a handful of chaebol -- enormous conglomerates that cover many industries (excluding banks) and whose share of GDP, after climbing steadily for the past 10 years, may be higher than 75 percent. At the very moment that Korea needs dynamic small and medium-sized businesses to flourish, the private sector as a whole is becoming more dominated by lumbering oligopolies.

In addition to the chaebol's dominance, Koreans should be worried about the state of their underlying economic institutions. Academics and think tanks rate South Korea's level of economic freedom, the robustness of its property rights, and its protection of equity investors below those of Japan, Taiwan, and many other wealthy countries. Although the day-to-day processes of doing business may be relatively easy in Korea, its economic environment offers few advantages to a small contender pitted against much bigger players.

Other traditional gripes about the East Asian powerhouses also apply to Korea. Its business culture has Confucian roots, so seniority and personal networks can mean more than merit and written contracts. Its education system emphasizes memorization, instills a pressure to conform, and mainly prepares students to work as cogs in big corporate or government machines. Its creative class is underdeveloped by international standards, and its culture is reticent about new ideas and new people, though immigration has ticked upward thanks to the policies of former President Roh Moo-hyun.

Of course, Korea has many economic assets as well. Its scientific research institutions rank among the best funded and most productive in the world, and its education system does produce high scores in science, math, and problem-solving. Its people's work ethic and their commitment to the national project are exceptional. In fact, the latter can be fervent enough to recall the republic's estranged neighbor to the north, which seems at times to differ in ideology but little else.

Yet the best thing Korea has going for it may be the opportunity to see and learn from its neighbors' mistakes. Japan had the chance to reinvent its economy and chose, explicitly or otherwise, not to follow through. China arguably has it tougher than Korea: Its political system may still be entrenched after its breakneck growth subsides, constraining the free flow of capital and ideas.

Korea, in contrast, is a democracy with several years left to prepare for the next stage of its economic development. If all goes well, the big question in East Asia will change from, "Can China avoid becoming Japan?" to "Can China follow Korea?"