Africa and the rise of Asia

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Based on a new World Bank study titled "Africa's Silk Road," I'm happy to report that recent economic developments in Africa are both real and indicative of tremendous opportunity. I know you have heard a lot about Africa's "resurgence" lately, but these developments are truly market-driven and not merely the result of outsiders' good intentions.

As economist Paul Collier likes to say, it's important to distinguish between the development "biz," or the world of official development aid, and development "buzz," or the periodic rush of celebrity interest. Both are worthy in their own ways but largely ineffectual over the long haul in that they treat symptoms more than disease. While it's crucial to respond to humanitarian crises, such resource flows tend to evaporate once the triggering events die down.

Worse, like the "oil curse," outside aid tends to displace local capacity and initiative, making governments less responsive to their own citizens. When leaders have little need to tax the people, they needn't listen to them, either. Mr. Collier estimates more than one-third of military spending inside Africa is indirectly enabled by foreign aid flows. So when military coups happen, it's basically "profit taking" by military elites who know full well that there's more where that came from.

I'm not arguing we should reduce foreign aid, only that we must never make it too large a component of any country's gross domestic product or continue it indefinitely without serious reforms.

That's why the Bush administration's Millennium Challenge Account is such a brilliant innovation. By luring near-emerging market economies in the direction of much-needed reforms by the promise of significant rewards, we encourage governments to decide for themselves whether they're serious about change.

Now let's move on to the truly good news. In a nutshell, globalization integrates trade among countries by disintegrating production chains and dispersing them across economies. As such, multinational corporations account for roughly two-thirds of global trade and half of that share is actually intra-industry or intra-corporate transactions. Such traffic is called "network trade."

As rising Asia increasingly looks to Africa for resources, there's also a natural tendency to want to shift production facilities there for three potential outcomes: producing and selling to local markets, doing the same for home markets, and doing the same for advanced third-party markets — i.e., the West.

Right now, most of what chain connectivity is brewing inside Africa is of the buyer-chain variety, with Wal-Mart as a logical template. Buyer chains feature a focus on consumer products with retailers, branded marketers and branded manufacturers playing the central role. These "buyer-driven networks" tap into Africa's cheap labor pool by concentrated purchasing of labor-intensive, low-end goods.

The bigger opportunity here is to migrate African economies into producer-driven networks, where a major manufacturer like Toyota is more the model. Producer chains feature multinational corporations with strong vertical integration in capital- and technology-intensive industries looking for cheaper inputs and further opportunity to disperse production in the most cost-efficient and resilient fashion. The fact that Indian and Chinese companies are already looking at Africa along these lines is hugely positive. Yes, in the grand scheme of things, these Asian investment flows are small, but they're rising dramatically and quickly becoming "about far more than resources," as the report notes.

China and India have become global leaders in forging "bilateral investment treaties" with other developing economies. And wherever their investments go, there follow three important and positive trends: (1) more trade with Asia; (2) more internal competition within the target economy; and (3) more trade connectivity between the targeted economy and the rest of the global economy.

The big holdup is, in many ways, the poor and complex regulation of the investment climate in Africa. Simply put, there's a "spaghetti bowl" of overlapping free-trade areas. American efforts in the region should logically pursue simplification of this investment landscape wherever possible, facilitating India's and China's deeper penetration, along with any American companies prepared to play this game.

This is a complete win-win in grand strategic terms. Instead of pretending that weak African economies can scale the development mountain on their own, we hitch their future to rising India and China, who in turn link African workers to their firms to our firms to everybody's markets.

You want to "drain the swamp"? This is how it's really done.

Thomas P.M. Barnett is a visiting scholar at the University of Tennessee's Howard Baker Center and the senior managing director of Enterra Solutions LLC.