Economic history that Africa must not repeat: the economic success of the Asian tigers is often held up as an example to Africa, but as Dr Lawrence Akwetey writes here, Africa should study the history of the near collapse of the Asian tigers in 1997 in order not to repeat their sad ordeal.

After the G8 summit in Gleneagles and the deal on debt relief, the question that comes to the fore is whether such promises (sometimes backed by no action) constitute the real panacea for Africa's problems. Is it more aid or trade that Africa really needs?

[ILLUSTRATION OMITTED]

Debt, aid and trade promises have been made to Africa many times before; in fact, some of the promises remain unfulfilled until they are topped up with yet more promises.

But whether these promises are fulfilled or not, fundamental rudiments of development economics say that until Africa is able to embark on a "staged model of economic development", nothing much will happen to the continent. There are five stages involved in this model which, incidentally, have been used by both Western and East Asian countries to reach where they are today.

The first stage is Foreign Direct Investment (FDI). Traditional African society suffers from a weak capital base and static economy. Tons of aid, debt relief or trade concessions will not provide the needed capital base or scientific approach to production in Africa. There is also insufficient domestic savings from either individuals or governments to undertake the size of infrastructure upgrade and capital formation to make the establishment of modern factories possible.

The only way is for African countries to re-double their efforts in attracting significant FDI. The process is described by development economists as a "Large Scale Internationally Managed Support System" (LSIMSS). This has been hugely successful in Malaysia and Singapore.

This also worked for Western Europe and Japan during the post-war period when $400bn, in today's money, was made available to them under the US-assisted Marshall Aid plan. Why can't the G8 countries do the same for Africa instead of the over-publicised debt relief deal? If it worked for Japan and Western Europe, transforming them into manufacturing giants, why bother using aid or debt relief, which will not help build a single modern manufacturing plant, as a panacea for Africa's economic development woes?

The second stage is "economic take-off". In traditional African society, the pre-conditions for economic take-off require technical application of the sciences (technology and skills). There must also be new political structures (political stability) and good infrastructure to attract FDI in sufficient quantities to enhance economic production.

FDI has enormous potential for helping the accelerated development of various sectors of a country. In Ghana, for example, when the Akosombo Textiles factory was established in the 1960s through FDI, the company built a hospital for both workers and residents of the Akosombo township.

It also improved the existing infrastructure or built new ones altogether--roads, water supply, communication, electricity, etc. It also established social facilities such as golf and sports centres for the community. It even built a football team from scratch, Akotex, which played in the country's premier league, and did very well for many years. Most importantly, the company provided thousands of jobs, paid corporation tax to the government and produced manufactured goods for domestic consumption and export. This is the way, in my opinion, to tackle poverty and economic stagnation in Africa. Imagine if Ghana had 100 more of such FDI projects around the country? This is what Africa needs to substantially reduce poverty--not aid or debt relief.

The third stage is growth. With "take-off", growth becomes a normal condition as the powers of growth strengthen each other. There is higher formation of capital, increasing entrepreneurs' initiatives, and the political constellation is attuned to economic objectives. It surely is better for Africa's economic development than aid or debt relief.

The fourth stage is the "drive to maturity". For this to happen in Africa, it will depend entirely on technological support. This is where the presence of significant FDI (with technology transfers and support) would be crucial.

The fifth stage is the "age of high mass consumption", whereby society achieves affluence, production of mass consumer goods becomes perfect, and the population shares not only in the material wellbeing (consumer goods, social services) but also in material progress (leisure time, cultural development, schools, hospitals, education, infrastructure).

Some observers argue that this concept assumes the existence of developed nations' attitudes and arrangements in developing countries. This is a sound argument. For example, in Australia, with its Western style economy, the fifth phase set in immediately after the beginning of the "take-off" stage, even without the "maturity" phase having been completed. This trend of abridgement constitutes a favourable sign for Africa.

The East Asia example

There was an increase in foreign debt across East Asia in the 1970s, before the region's trade, investment and economic reforms kicked in, just like Africa today.

The region experienced foreign capital flight and exchange rate deterioration--a typical economic phenomenon in most African countries today. There was also a notable decline in aggregate output, institutional financial problems and discontinuity of many corporate entities. As one observer succinctly described it, "these economies did not 'die' but were close to the graveyard". But buoyed by vigorous trade, investment and economic reforms--which contributed hugely to the attraction of significant FDI into the region (and not debt cancellation by the G8 countries), East Asia achieved sustainable rates of productivity and economic prosperity. Countries such as Singapore and Malaysia turned a deaf ear to the rhetoric of debt relief, more aid, etc, and concentrated on FDI for infrastructure upgrade and increased industrialisation, initially from "big brother" Japan; and then when the advocators of "more aid and debt relief" saw the progress and fertile grounds for investment generated by the region, they rushed in with mountains of investments, presumably in a don't-leave-me-behind attitude.

As a result, the idea of debt relief and more aid suddenly became insignificant in South East Asia. Why can't this happen in Africa? The continent has "big brothers" such as South Africa and Nigeria--who with their huge natural resources and comparatively better wealth--could lead the other African countries in this direction. The US did it for Japan; Japan did it for South East Asia; who will do it for Africa?

Africa may, after all, shake off its poverty and economic development problems one day, just as South East Asia did. When this eventually happens, whatever success is scored should be fiercely protected. I say this with the South East Asia experience in mind.

In spite of all their excellent trade and economic development performances, the East Asian countries woke up to be told that their practices were flawed, their strategies faulty, and their approaches aberrant.

Their leaders were accused of corruption, nepotism and crony capitalism. Their creditworthiness was downgraded. Their short-term lending was revoked. Their business sector was labelled shaky and fragile. Their governments were considered inept and incompetent. Their currencies were viewed with disdain. Their state-owned corporations fell out of grace. Their real estate sector was abandoned.

What could have actually gone wrong? Good performance or not, an economic crisis did evolve. A financial contagion started in Thailand and then spread; first across much of Asia and then to Russia and Latin America. A massive devaluation of national currencies against the US dollar (and other currencies) was accompanied with large-scale currency speculation, withdrawal of institutional investors and a near collapse of the domestic banking sector.

In 1998, the British weekly, The Economist, reported (under the heading, Is Contagion A Myth?): "Economies that looked healthy one moment were seriously ill the next--not apparently because of any new development within their borders but because of the shock from abroad, in the form of a withdrawal of international investment." Three countries--Thailand, Malaysia and Indonesia--bore the brunt of this economic crisis.

What went wrong? A critical examination summarised two broad explanations: one, intrinsic "home-grown" factors such as corruption, lack of transparency, lack of information, loose regulation and "crony capitalism"; and two, investor panic and "herd mentality".

But is there any truth to both interpretations? The difficulty of authentication of the above explanation derives from the fact that the traditional economic performance parameters of the East Asian countries were, as recently as 1996, healthy. No economic change occurred in 1997 to justify such a massive loss of confidence.

"Crony capitalism" had always existed in East Asia and is very likely to have stimulated economic growth rather than curtailed it during the years under consideration. "Crony capitalism" does also exist in Western economies and does not seem to have the disastrous effect claimed in the Asian context. So then, what really caused the South East Asian financial crisis of the 1990s? Africa needs to be aware of this.

Thank God, South East Asia's viable infrastructure is still there and the sound entrepreneurial zeal that has always driven the private sectors of these economies continues to prevail. This is what Africa really needs, not debt relief or aid.