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.