Importing Capitalism

The uber-capitalist vs. The future development worker

Among my pretty strenuous criticisms of Paul Romer’s Charter Cities concept, I did point out that there were genuinely interesting insights and ideas underpinning the idea. One of them was the idea that a functioning capitalism does not need to be generated domestically, but can simply be imported in the form of international capital, multi-national companies and so on. I spent last weekend in Nairobi with a couple of friends, one of whom is an entrepreneur there. He told me about recent developments in the Kenyan economy, positive and negative, and this issue of the source of the capitalist impulse came up again and again.

Take telecommunications. Telecoms is big business in populous countries with high rates of mobile ownership like Kenya, and the services available there are both expanding and becoming cheaper rapidly. The biggest players in Kenya’s market are Safaricom, which holds something close to 80% of the market; and Zain, which appears to be their main threat in the short term. Zain is aggressively pursuing a strategy of cutting prices to increase market share by offering phone calls to any network (and even international calls) for just 3 Kenyan Shillings a minute. That’s roughly 4 cents in dollar terms, and it’s being marketed as a permanent price change, not a promotion. Meanwhile, Safaricom have one major trump card that they are using to hold on to their market share: M-Pesa, which they run. M-Pesa is the great Kenyan success story so beloved of development workers, which allows people to transfer money instantaneously and very cheaply using mobile phones. This is all great for consumers, who are using more and more varied services on their telephones.

How great this is for the economy, though, is not as clear-cut as it seems. Safaricom, while marketed as a Kenyan entity, is actually majority owned by the UK telecoms company Vodaphone (much in the same way that Malawi’s Kuche Kuche is marketed as ‘Mowa Wathu Wathu’ – ‘Our Beer!’ – despite being brewed by Carlsberg). And M-Pesa was actually developed by Vodaphone and is administered largely in the UK, where all of the servers that it depends on for functionality are based. M-Pesa actually only have a handful of employees actually working in Kenya. Zain, too, are no longer an African company. They were sold by Mo Ibrahim a few years back and are now Kuwait-based. The profits generated from their business in Kenya are repatriated to foreign owners, minus corporate tax.

Instinctively, the mind recoils a little from this realization. Economic development is taken to mean the establishment of some kind of domestic capacity to produce goods and services and generate jobs. Often, the left assumes that multinational companies are damaging to domestic economic prospects, often painted as parasitic on the local economic resources or stifling the prospects of indigenous economic development. The knowledge that profits from business activities leave the country in which they are earned is also unsettling: it feels like the benefits of business are largely accruing to external players rather than the domestic economy, and hence reducing poverty within the country.

But while it’s true that economic development in almost every currently developed country involves and is ultimately powered by the emergence of a domestic capitalist class, looking at the issue from both the historical and the economic perspectives demonstrates that the dominance of international capital in emerging African economies is neither unusual nor necessarily a bad thing.

While we complain that the profits of business are being repatriated when foreign companies are the biggest players in an economy, how valid a criticism is this? In the first place, profits may actually be a relatively small proportion of the overall volume of money turned over in-country: wages, basic investment in technology and replacement, re-investment, taxation and so on are likely to be substantial. The volume of money repatriated might only be 10% or less of a company’s turnover annually. What’s more, these companies are often investing significantly. If they’re extracting natural resources, they are building roads, railroads, ports, and so on. If they’re exploiting an under-served consumer base, they are opening retail outlets, factories or other services and training staff in how to produce, market or develop products.

This supply-side investment is significant. Not only does it create jobs and increase the skills base in a country, it also produces secondary benefits to other businesses: if better infrastructure and a larger skilled workforce are produced, all companies benefit. Further, the staff who work in multinational companies gain valuable experience and in many cases may go on to found rival companies, which may be more successful. My friend gave me the example of Mexico: there, the Government allowed foreign companies to sell their automobiles only if they built some of the parts within Mexico. The result was, after several years, the Mexican automotive industry had developed to the extent that it was producing all of the buses used in Mexico domestically. In the same country, Carlos Slim partnered with French and American telecoms companies to successfully bid for the Mexican telecommunications provider Telmex. He used their expertise and support to branch out into mobile telecommunications. He is now the richest man in the world, according to Forbes.

Such examples are not limited to Mexico: historically other countries also boast companies that trace their roots to foreign investment or individuals who served time in similar foreign companies first: many manage to outgrow their partners, including those in Europe. The development of the US economy owed a great deal to significant investment by Britain, even after independence. Likewise, the development of Calcutta as a major centre of Indian commerce was due in large part to the investments of the British (though the application and enforcement of British property law was probably an even larger factor).

Interestingly, many companies are also developing the market from the consumer side through advertising, promotions and other activities designed to spark an increase in demand. What’s most intriguing about this aspect of foreign involvement in domestic economies is that it could result in a sort of ‘industrious revolution’, a demand side burst in the economy that results in greater demand for goods and stimulates a supply side response but also leads to a cultural change in the way working life is organised, to maximise the ability to purchase luxury goods and services. The idea of the industrious revolution warrants a post of its own, as its usefulness in economic history has evolved from Jan de Vries’ first conception of it, but here it is enough to say that the presence of multinational companies and their goods in poor developing countries may be stimulating a change in the behaviour of consumers which will have a long term positive effect on the economy.

However, none of this means that investment from overseas and the establishment of multinationals is always a good thing. Much depends on the way in which they engage. As another friend pointed out to me, Argentina’s agricultural sector was the recipient of vast amounts of foreign investment, but didn’t demonstrate significant productivity gains in the long run, and so the economy benefited little. Equally, awareness of exactly how and where the companies seeking natural resources wish to conduct their business is crucial. Yes, they are building valuable infrastructure, but if they’re not producing anything there and employing labour from their own countries, the benefits of this won’t be nearly as great as they could be. Countries which have the natural resources are in a position of power. They should be monitoring the actions of those who want to extract those resources and mandate that at least part of the refinement or finishing process be conducted in-country using local labour.

Ultimately, the economics and history of it seem to make it clear that with the exception of a small cabal of first movers in industrialisation (the UK and a couple of contemporary industrialising nations), almost all countries who have developed or are beginning to develop have done so with significant foreign investment, with rewards being split between domestic and foreign actors. Even though it might strictly be preferable for an entirely domestic generation of economic progress to ensure that the gains from economic development contribute as much as possible to domestic poverty reduction, this will likely take far longer, except in very few cases. The biggest problem facing most developing countries is the development of a viable capitalism; importing it might not be ideal but it at least circumvents the problem in the short term, and if managed correctly will lead to a domestic capitalist class emerging as well.

6 thoughts on “Importing Capitalism

  1. Luis

    October 1, 2010 at 10:13am

    Ranil, even thought I don’t have the relevant data at hand, I am sure Argentina’s agricultural sector has had large productivity gains over the years.
    The speculative point I made is that focusing on agriculture might by an overall bad strategy even in the light of significant productivity gains in the sector if they compare poorly with the productivity gains in the manufacturing sector or the service sector. In addition, productivity gains in a specific sector will only translate into economy-wide productivity gains if the sector’s share of employment increases or at least does not decrease. In the case of Argentina, the opposite seems to have happened. Productivity gains went hand in had with (and were presumably in no small measure caused by) a decrease in agriculture’s share of the labour force, and thus were not translated into satisfactory productivity gains for the economy at large since the service sector into which labour went exhibited relatively small productivity gains. The latter point is taken from Rodrik and illustrated here:

  2. Ranil Dissanayake

    October 1, 2010 at 1:06pm

    Ah, understood. My brain was like fudge that day, so I pretty much abbreviated all of that into what I wrote above. All makes sense. Thanks for the comment.

  3. Will

    October 1, 2010 at 2:26pm

    Ranil, thanks for the interesting post.

    I visited with a few Zain managers in Tanzania a while back and was struck by how much emphasis they placed on the consumer benefits derived from their services, rather than supply side effects. There was certainly some discussion of human capital development, but I do not recall that being the focus from their PR people.

    I am sure that if profits remained within Tanzania, Kenya, or wherever, we would expect more local investment and productivity. But there are also considerable gains to consumers in the immediate term from new multinational investment, which would take longer to realize if investment was largely constrained to local partners.

    Foregone consumer benefits are very important in my view. Although locally owned companies would be more ideal, I am skeptical that there are as many opportunities to quickly meet heavy infrastructural requirements without government support, which I view as a third-best choice.

    This is all a roundabout way of getting to my question: wouldn’t it be a better middle ground approach to encourage investors from developing countries to invest in foreign companies that do business in their area? Perhaps it is tough to get enough capital to start a new Zain, or Safaricom based on local resources alone, but that does not mean that local capital is inconsequential, and companies could be encouraged to ease stock purchases etc. I know that in many cases there are government-imposed requirements for local ownership and so forth which have been met with mixed success (I do not know what this looks like in the East African context), but intuitively, some degree of this type of relationship sounds reasonable to me.

    Another thing that came to mind was how often local banks were involved in financing projects for such companies. I can see this as being easily abused if required by governments, but from a PR and development point of view it sounds like a reasonable thing to do.

  4. Ranil Dissanayake

    October 1, 2010 at 3:14pm

    Hi Will,

    thanks for the thoughtful comment. I completely agree that consumer benefits are important, so foreign investment might well be the best way forward.

    Intuitively, I’m not sure how well a local ownership law would work – for one thing massive publicly listed companies would have difficulty meeting such requirements, and these are probably more likely to make a significant difference to the supply chain than smaller, private, companies.

    That said, some requirement for local management (a % of local mgt board members), local staffing and/or local production would be great. Continuing with the mobile phone market, a request that the big companies locate the servers for some of their products in-country might be feasible, or that they locate a tech support service in country. This could lead to increased training and skills development.

    Again the banking this is difficult too – the reason why foreign banks and sources of capital are used is often that the local banking sector is under-developed or under-capitalised and can’t provide the large loans at low-ish cost that significant local investment might require. There are probably other ways to stimulate this, but we’ve got to be wary, too – too many conditions will simply discourage investment. Best to stick to the most important ones, chief among which is probably the requirement to make investments in the local supply chain.

    btw – I use Zain in TZ, so I’m hoping I get some of the those consumer benefits soon. Most of my friends use other networks, so I pay more than I should for my texts and calls!

  5. Alberto

    October 2, 2010 at 6:32pm

    In regard your argument i would like to suggest the following reading.
    My thougt is still concern if in both the way you have explained the expansion of big companies can be beneficial in the long term for the country where they invest. As outlined in the FA article China invesments in Congo and Angola are also for building several infrstructure, but are those alone for the long term development of the country if the country still governed by a corrupt political view?’s-eastern-promise?page=2

  6. Ranil Dissanayake

    October 3, 2010 at 10:06am

    Alberto, if the country is inherently corrupt and the elites are using it as a playground for their personal accumulation, no it won’t grow, despite foreign investment. But that’s a separate issue. The point is that foreign profit-seeking investment is likely to make it easier for a country to develop and to make a positive economic contribution. It’s not enough on its own, but it can play an important part. The argument is not ‘invest and leave the rest be’, but ‘invest, guide investment and get the most out of it’.

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