The Political Economy of the Ecosystem
Who benefits from the status quo
The six-loop model establishes that the African scaling ecosystem is trapped in a dysfunctional equilibrium. The natural question - one the original publication did not ask directly - is: why? Not in the sense of what causes these dynamics, which the loop model addresses. But in the deeper sense of who benefits from the current state, and therefore who has a structural interest in its continuation.
This is a political economy question. It asks not just what the incentives are, but who controls the conditions that set them, and what they gain from setting them the way they do. It explains why the most powerful actors in the ecosystem are rarely the most enthusiastic advocates for structural change,
The multilateral and bilateral donor system - UN agencies, DFIs, bilateral aid agencies, and the large international NGOs that implement their programmes - is the most powerful set of actors in the African scaling ecosystem. Its power derives not primarily from its capital, though the capital is substantial, but from its bundled position: simultaneously providing funding, convening influence, technical assistance, data, and legitimacy in ways that no other actor can match. This bundled position generates significant institutional benefit. UN agencies with ecosystem mandates justify their budgets and maintain political influence by virtue of their ecosystem presence. DFIs justify their concessional capital mandates by pointing to market development activities. Bilateral donors demonstrate development impact to their domestic constituencies through programme delivery metrics. None of this is conspiratorial - each of these benefits is a legitimate institutional interest. But the aggregate effect is that the multilateral and bilateral donor system has a structural interest in maintaining the conditions that make its presence necessary.
A capability-dense ecosystem with strong indigenous institutions, deep private capital markets, and well-designed government policy does not need the same scale of multilateral programme delivery. The multilateral system becomes less relevant - less needed for capital, less needed for convening, less needed for credibility - precisely as the ecosystem becomes more capable. Individual programme designers are frequently motivated by genuine commitment to ecosystem improvement. But the institutional incentive structures within which they operate reward programme delivery, not capability development. This is the political economy explanation for Loops 1 and 2.
The ODA contraction materially changes this picture. The system's bundled advantage was predicated on abundant external capital. As that capital contracts, the bundled position weakens. Multilateral actors whose convening influence derived from their funding role find themselves convening from a weaker position. DFIs whose market development mandates were justified by capital availability face harder questions about what those mandates mean when the capital is declining. This creates an opening - not guaranteed, but real -for the rebalancing of ecosystem roles. When Multilaterals Compete documents this dynamic in granular detail across East African markets. The loop is self-reinforcing precisely because it serves multiple institutional interests simultaneously
Foreign venture capital has been a transformative force in the ecosystem. The capital it brought enabled ventures that could not have been built without it. But its structural interests are not identical with the ecosystem's structural interests. The offshore incorporation requirement - which most international VCs enforce as a condition of investment - routes governance and IP ownership through foreign jurisdictions where international investors have greater legal certainty. This benefits the investor: it reduces legal risk, simplifies portfolio management, and standardises deal terms. Its cost - the regulatory hostility trap, the leak in the founder experience flywheel, the reduced embeddedness of successful founders in local ecosystems - is paid by the ecosystem, not by the investor. Offshoring African Startups: Beyond Founder Choice documents this in detail, tracing how offshore incorporation is structurally produced by investor incentive rather than founder preference, and how it compounds over time into a structural drain on local ecosystem development.
Large technology multinationals - Google, Microsoft, Meta, Amazon - have established significant presence in African markets. Their primary benefit is talent access. The African technology talent pool represents a significant global labour arbitrage opportunity. Developer centres in Nairobi and Lagos enable these companies to access high-quality technical talent at costs substantially below what equivalent talent commands in their home markets. The talent drain that African scaling ventures consistently identify as one of their most acute constraints is, from the technology multinational perspective, a feature rather than a bug.
Local political and business elites benefit from complex regulatory environments that function as gatekeeping mechanisms. Multi-step business registration, opaque licensing processes, and discretionary foreign exchange access create rents - economic value that flows to those who control the regulatory machinery. A transparent, efficient regulatory environment would eliminate these rents. Established corporates face competitive disruption from scaling ventures and have an interest in regulatory complexity that imposes high compliance costs on new entrants. The interest is in moderate, managed disruption - innovation at the margins, not at the core. Transparency International's Corruption Perceptions Index 2024 shows that the markets with the highest regulatory complexity correlate with both the lowest CPI scores and the highest rates of offshore incorporation - the two dynamics reinforce each other through exactly this mechanism.
The academic and think-tank community that studies African entrepreneurship has a structural interest in the continuation of the research agenda. The incentive structures of academic publishing reward novel contributions to an ongoing literature, not definitive solutions that close it. The result is a continued emphasis on description and diagnosis over prescription and implementation. Initiatives like the AGCAE and the Utrecht/i4Policy collaboration on the AEEI are explicitly designed to break this pattern - publishing findings that practitioners can use, in forms they can access. But they remain the exception within an academic system whose incentives point in the other direction.
The coalition for change
Understanding who benefits from the status quo is only half of the political economy analysis. The other half is identifying who benefits from a different equilibrium.
Scaling ventures themselves have the clearest interest in structural change. They face the daily costs of the capability trap, the misaligned incentive engine, and the capital architecture mismatch. But they are individually too small, too time-constrained, and too dependent on the ecosystem actors who benefit from the status quo to mount effective collective advocacy - a structural vulnerability that the SA Startup Act Movement's decade of coalition-building is the most instructive attempt yet to overcome.
Experienced African founders who have successfully scaled ventures have both the interest and, increasingly, the structural position to drive change. They understand the ecosystem's problems from the inside. They have the networks and credibility to convene actors across the ecosystem. The founder experience flywheel is not just an economic mechanism - it is a political economy mechanism. The correction period has created more of these people than the ecosystem has previously had. Past founder cohorts are now structurally better positioned to drive ecosystem development.
Local institutional investors - pension funds, sovereign wealth funds, insurance companies - have long-run interests in ecosystem health that international capital does not share. Their beneficiaries are African citizens whose retirement security depends on the long-run performance of the African economy. The scale of misallocated institutional capital is striking: the AfDB's 2025 Annual Meetings documented that African pension funds, insurance companies, and sovereign wealth funds hold $2.1 trillion in assets under management, but over 80 percent is locked into government treasuries. Less than 10 percent of pension funds outside South Africa and Nigeria is invested in domestic capital markets, and just 1.5 percent in infrastructure or alternatives. Ghana in 2025 mandated a five percent pension allocation to private equity and venture capital - the first such move on the continent - signalling that the political arithmetic for mobilising institutional capital is beginning to shift.
The nuance matters, however. The domestic surge is led by African DFIs, corporates, and state-backed bodies - not by commercial pension funds or family offices. DFIs do not behave like commercial LPs: their mandates come from ministries, their risk tolerances are shaped by donor frameworks. A self-sustaining ecosystem forms through exits that generate local returns that local investors then redeploy commercially - a cycle that has not yet completed at scale.
African governments with genuine reform mandates have demonstrated that the political economy is constraining, not determining. Rwanda has shown that a government with the political will to reform can achieve regulatory improvement at a pace that the political economy analysis suggests should be impossible. The African Union's Startup Model Law Framework, launched in July 2024, represents a significant continental policy architecture initiative providing a template for all 55 member states. Political leadership willing to absorb the short-term costs of displacing entrenched interests - in regulatory reform, in procurement, in how public capital is allocated - can change the environment materially. The question is whether the political will exists at sufficient scale and consistency to compound into structural change.
What the political economy analysis means for reform strategy
Three direct implications follow.
The most important reforms are those that reduce the structural advantages of the status quo's beneficiaries - without directly confronting them. Independent evaluation of donor programmes, commissioned by governments or foundations rather than by implementing agencies, reduces the information advantage that multilaterals hold. Standardised data infrastructure the African Scaleup Lab as the independent evidence institution, the AEEI as ecosystem diagnostic, the EADC's operational methodology as a replicable template reduces the information asymmetry that advantages international capital. Domestic incorporation support and locally-denominated financing reduce the structural advantage of offshore incorporation. None of these interventions directly confront any beneficiary actor. All of them change the structural conditions that generate those actors' advantages.
The coalition for change must be built around actors with structural interests in a different equilibrium. The ecosystem reform agenda has historically been driven primarily by multilateral actors who have structural interests in the status quo. The result is reform that is real at the margin but does not disturb the core dynamics. Building a reform coalition around experienced founders, local institutional investors, and governments with genuine reform mandates is more likely to produce durable transformation. The SA Startup Act Movement, i4Policy, and Endeavor embody three distinct dimensions of what a durable reform coalition could look like. None individually is sufficient.
The framing of the reform agenda matters. Political economy analyses that name beneficiaries of the status quo risk generating defensive reactions that make reform harder. The most effective framing is not one that assigns blame - most actors benefit from the status quo without consciously choosing to - but one that makes the structural case for reform visible: showing that a different equilibrium is available, that it would benefit a broader coalition of actors than the current one, and that the transition costs are manageable. The ODA contraction has, ironically, made this framing easier: when the argument for maintaining the multilateral-led programme ecosystem was that it was the only capital available, reform required displacing a functioning system. When that system is contracting under external pressure regardless, the argument for reform shifts from displacement to replacement - building the endogenous capability that fills the gap the contraction leaves.