“We’re going to become the first African tiger” said Ghana’s President John Kufuor when hearing that a British –U.S. consortium had struck oil. Is that realistic, or is Africa a permanent basket case? And if it is realistic, what would such a development mean for the rest of us?

Ghana, while very poor at an average GDP per capita at purchasing power parity of $2,700, is not particularly corrupt, according to Transparency International, ranking equal 70th on its 2006 Corruption Perception Index, the same level as both China and India, coincidentally. That suggests that corruption may be something of a drag to growth, but cannot possibly be a bar to it. In the Heritage Foundation’s Index of Economic Freedom, Ghana scored relatively poorly at 91st, but is still above both China and India. Economic freedom by the Heritage Foundation definition may be a fairly poor proxy for policies that actually produce growth, but nevertheless that ranking must mean something. In terms of actual economic performance, Ghana had economic growth of 6% in 2006, with inflation around 10%; that was helped somewhat by high food and commodity prices, but prior to the current oil strike Ghana has been a substantial net importer of oil, for example.

Thus Ghana appears well placed to enjoy an economic takeoff, if such a takeoff can be achieved by any African country. Other than possible cultural barriers to a free market society, Ghana’s population growth of almost 2% per annum is the main problem. High population growth hinders economic takeoff because an educated population only becomes fully productive at an average age of 18-20 (the less educated entering the workforce first.) Meanwhile it needs feeding, housing and educating, all of which and the attendant infrastructure impose a huge burden on the economy without any corresponding benefit. Essentially children are a capital investment that does not pay off for two decades – if a society chooses too much of this form of capital, its economy will be unbalanced, its cash flow impossibly negative and economic growth will be stunted if not eliminated altogether. Add to that the need to net population growth out of any economic growth rate to get the rate of increase of individual welfare, and you can see that reduction of a high population growth rate should be the first priority of any development program. It is not a coincidence that China only emerged into rapid economic growth after the “one child policy” had been instituted in 1979.

As China showed in the 1980s, India has demonstrated since 1991 and Vietnam has further made apparent since 2000, a “takeoff into rapid economic growth” does not happen at once, with growth rates suddenly shifting to double digits. Instead, a period of economic liberalization accompanied by a reduction in corruption is accompanied by a gradual improvement in the previous growth rate, to perhaps 5-6% per annum, which if population growth is below 2% should give close to a 4% annual improvement in living standards. That appears to be sufficient for the electorate to wish to keep liberalizing policies in place, but it also provides a temptation to the political class, which may react to increased wealth by deciding that the “crisis” is over and so corruption and rent-seeking policies can be restored. Thus the initial period of moderate growth is not necessarily followed by acceleration into rapid growth.

In Bangladesh and Pakistan, for example, no transition into rapid growth has ever occurred and in Brazil the rapid growth of the late 1960s to mid 1970s proved temporary as the transition from military rule to democracy proved a transition to renewed statism, corruption and rent seeking. In India a period of reform after 1991 was succeeded by stasis in the mid 1990s as the corrupt socialists of the Congress party decided that reform had gone far enough. Fortunately in this case reform had been carried out by a center-left government, so an opposition was available that was more committed to reform, which came to power in 1998. Further reform followed rapidly, and after a couple of years delay the economy followed suit, rising to levels of growth not seen before. Unexpectedly, the losers from the initial phase of reform were able to vote out the reformist government in 2004, but the new Congress government appears sufficiently committed to the free market to prevent more than modest backsliding. That should be sufficient to keep growth on track, provided a more whole-heartedly reformist government is elected in 2009; a re-elected Congress, shorn of the reformist Manmohan Singh is likely to revert to its old ways.

In Ghana, the current government appears pretty committed to the free market, and has been stably and democratically elected; the problem will arise when the electorate desires a change, and may not have a reliably reformist alternative. The key to economic takeoff will not be oil discoveries, but the preservation and extension of property rights and above all the nurturing and protection of middle class savings (the seed capital for new businesses) from the triple scourges of inflation, bank collapses and government expropriation. Thus economic takeoff is certainly possible, and the indicators are that current policies and resources are sufficient to achieve such a takeoff, but dedication to free market policies and against corruption over a decade or more from now is still needed before enough wealth has been created for the process to become self-sustaining.

If Ghana – or some other African country, but Ghana appears among the best candidates – achieves rapid economic takeoff and progresses to middle income status and increasing prosperity, this will be very good news for Africa in general. Only by the example of success can Africans and especially outside aid providers be prevented from reinforcing failure and destroying the market signals that cause success to occur. Once an African country has reached the level of say Thailand – about $10,000 per capita GDP at purchasing power parity, four times Ghana’s level – it can show the rest of Africa both how development can take place and what a wealthy African society should look like.

For the rest of the world, an emerging African country would also be a positive development; it would make it overwhelmingly probable that fifty years from now the great majority of the world’s inhabitants will have at least middle-income status. Nevertheless, however attractive that prospect may be as a moral matter (and of course for the people concerned, mostly yet unborn) it raises a serious issue. Can the world economy and the global environment cope with a population of 9 billion (on current projections) nearly all of whom are enjoying a middle-income standard of living, such as an automobile for example, and consuming resources appropriate to that standard of living. The answer may very well be no; there are two problems:

• First, as has been exhaustively promoted in the media, if global warming is indeed a real danger, it will be hugely exacerbated by the extension of the automobile culture to the entire world population, rather than just the wealthy West
• Second, it’s not clear to what extent, at a given level of technology, the world economy is a zero sum game. Automobile production of say 400 million vehicles per annum, the rate implied by a middle income population of most of 9 billion, will not require anything like six times the workforce of the current world automobile production of 67 million. What will everybody else do?

To some extent, we already know about the global warming problem. Current projections of global warming to 2100 assume continuation of current rates of economic growth, which implies the spreading of middle class comforts to an increasing percentage of the world’s population. Nevertheless, to the extent that as in China and now India economic growth beyond a certain point produces an explosion in automobile usage, as more people are propelled into an income level at which such usage is affordable, that suggests that a democratization of middle class living standards, as is implied by African emergence, could increase automobile usage much faster than income. Certainly it would increase automobile usage faster than the alternative possible route to greater average economic output: the concentration of the world’s increasing wealth among hedge fund traders living in gated communities.

The second problem is also serious. If the number of “good” jobs available increases less quickly than the number of people sufficiently educated to pursue them, then incomes and living standards for the educated will decline (Say’s Law means they will find jobs, but the economies of scale in a mechanized society means they may be low level personal service jobs.) Global wealth will increase, but it will equalize wages between Africa and the West, producing an immense underclass of Westerners who don’t have sufficient education to be worth paying more than the emerging African middle class. That will cause huge social pressures in Western societies as their middle class (by African standards, upper middle class) living standards are undermined. Rapid immigration will make the problem worse, since it will expose the Western personal service sector, haven for the modestly educated, to the full rigors of international competition.

The reality is that human labor at all but the most highly educated and skilled level is potentially in huge glut. The equilibrium world population before industrialization, given decent agricultural techniques and no major epidemics, appears to have been about 1 billion, the population in 1800. The equilibrium population at our current level of technology, at which jobs are adequately filled with people enjoying a decent fraction of current world average living standards, is probably more than 1 billion – certainly our ability to feed people has improved – but it is almost certainly much lower than the 9 billion world population expected by 2050. If we enter an era of population glut, we shall enter an era of declining living standards and increasing environmental costs. Our ability to solve such problems will increase much more slowly, because the supply of highly skilled people and scarce energy and other resources is limited, while the problems themselves and their attempted solutions will impose increasing burdens on output. Solving global warming won’t be free, and could become very expensive indeed in certain scenarios.

Thus globally as well as in Africa, population control and in the long term reduction is key to producing and maintaining decent living standards. However, given the strong inverse relationship between wealth and fertility, a few “African tigers” such as Ghana should be at least some help in addressing even this long term problem.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)