Political Risk and Investment in African Land

Reading this story in the Guardian, I am reminded of the fact that Africa has enormous resources in land and yet it is the continent that most advertises its problems with feeding its people. Recently, a number of corporations have sought to enter into long-term leases with African governments to bring land into more intense farming and thereby increase food production for local consumption with the possibility of exports. In the story referred to above, a number of farms are concluding leases of up to a couple of generations with the Ethiopian government in order to plant cereals for domestic and regional markets. It is clear to me that given the fairly intense farming methods that will be introduced in those areas, the farms will be very productive and the investing firms will be able to bring a lot of produce to markets thereby making enormous profits.

An earlier blog post here addressed a similar investment in the western part of Kenya and confirms the view expressed by the author of the story that many such deals are being pursued on the continent. A number of the land leases have raised concerns especially because they were meant entirely to generate food for export to the Asian countries. To my mind, the quest to expand agricultural productivity in Africa has been longstanding and the principle of investment based on factor abundance is altogether sound and worthy of support.

The one point of concern and which betrays serious naivette on the part of the managers and owners of the overwhelmingly foreign firms is the political risks that appertain to these long term leases involving land. First, it is worthy of taking into account that most of Africa is not governed by particularly transparent and democratic governments. So the leases will be seen as concluded with foreigners entirely at the behest of government and to the disadvantage of the local people. Secondly, these long-term leases involve a critical issue of land ownership which in most of these countries is a very highly politicized matter. A long-term lease of up to 80 years is almost certain to be interpreted by opportunistic politicians as an outright sale. Finally, in the quest to attract these investments, these governments that have bad reputations for corruption have negotiated lease agreements on absurdly cheap rates. Since most of these rates are nominally fixed, it is clear that because of the inflation endemic in these countries, they will in turn be ridiculously small while the profit of these firms will be rising.

The confluence of these factors suggests that most of these firms will increasingly rely on government protection or repression to ensure that the citizens of these countries do not violate their rights to the leased property. Indeed, whether there is improved public consultation or not, the population pressure and absence of other opportunities will lead to intense and nationalistic demands for surrender of the land. One would think that these firms should tread cautiously because whereas they are entitled to negotiate the best terms for themselves, that does not mean that those leases will be perpetually respected as representing fair deals.