Is Sub-Saharan Africa like Medieval Europe?

A new report suggests that African economies resemble those of Medieval Europe, and so hopes of sustained growth across the continent are unrealistic.

Economists have long puzzled over why economies across much of Sub-Saharan Africa still lag behind. Two LSE researchers, Stephen Broadberry and Leigh Gardner, have come up with a new explanation.

Many economies across Sub-Saharan Africa resemble those of medieval Europe, they argue, not just because GDP per capita is comparable (adjusting to 1990 prices), but also because they lack the political institutions to sustain economic growth. And just like Medieval Europe, African economies experience sporadic spurts of growth, followed by economic reversals.

The only way the Medieval economies of Northern Europe were able to start sustaining growth was when the state became strong enough to secure property rights, and yet democratic enough that politicians couldn’t arbitrarily intervene in business. This simply hasn’t happened in much of Africa, the report maintains. As a result, despite impressive growth figures in parts of the continent – an IMF report in April predicted that Sub-Saharan Africa is set to grow three times faster than America, Japan and Western Europe in 2014 – there isn’t much cause for optimism. Africa will take a long, long time to catch up.

They even compare Sub-Saharan African economies with different periods of Medieval Europe – so for instance, the average earner in Sierra Leone, Burundi and Malawi has the same annual income as the average Englishman before the Black Death in the fourteenth century ($750), while average per capita income in South Africa and Botswana ($2,000) is comparable to an average Englishman around 1800.

So how helpful are these findings? An FT Alphaville blog says that the theory is flawed in parts because you can’t really map modern African political institutions onto medieval ones (is Kenya’s political system really Tudor?) and because countries' fortunes change in unpredictable ways. The Economist suggests that as well as focusing on the importance of political institutions it should consider social changes too – improved public health care and education will boost African growth.

Sometimes a thought-provoking historic parallel can be a good way to focus public attention on an issue. Oxfam, for instance, recently issued a report warning that the UK risked returning to ‘Victorian levels’ of inequality. The LSE report is a way to highlight the importance of addressing the problems of corruption, unaccountability and political patronage that thwart many economies in Sub-Saharan Africa. But comparing the vast and varied region to Medieval Europe is overly reductive.

It is also unfair. Medieval in often used inter-changeably with “backwards” and while the authors don’t imply this directly, they do suggest that Sub-Saharan Africa is playing a doomed game of catch-up. A more realistic, and more optimistic, picture, is that each country in Sub-Saharan Africa has its own set of challenges, and its own (perhaps halting) growth trajectory.
 

Clothes infected by the Black Death being burnt in medieval Europe. An illustration from the 'Romance of Alexander' in the Bodleian Library, Oxford. Photo by Hulton Archive/Getty Images

Sophie McBain is a freelance writer based in Cairo. She was previously an assistant editor at the New Statesman.

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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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