The World’s Fastest Growing Continent
Economist Moin Siddiqi says visible changes are in the air across Africa – home to a billion people and a dozen of the world’s fastest-growing economies – with forces of globalisation, connectivity and mobility offering impetus for growth and opportunities for investment and trade
The World Bank believes Africa is on the verge of an economic boom similar to China’s during early 1980s. Obiageli Ezekwesili, former Vice-President for the World Bank’s Africa Region, spoke of a ‘palpable dynamism’ in Africa thanks to economic growth and innovation taking place.
It is widely acknowledged on benchmarks – such as democratic governance, socio-political stability and market-friendly policies, as well as growing media pluralism and strong civil society – that most African countries are making tangible progress, with increased emphasis on promoting prosperity through infrastructure development, capacity building, entrepreneurship and intra-regional trade. This represents a deep shift in the perception of Africa’s future, with far-reaching policy and practical implications for private investors and foreign donors as well as national authorities.
The African growth story of the past decade is explained by increasing political-economic vibrancy, enhanced investor attraction supported by regulatory reforms and demographic changes – chiefly urbanisation, an expanding workforce and burgeoning middle-class consumers – which are creating new businesses in finance, telecoms, construction, tourism and other sectors. McKinsey Global Institute sees a huge opportunity for businesses of all types with consumer industries in Africa predicted to grow by US$410 billion by 2020.
Moreover, governments undertook measures to liberalise their markets by privatisation, opening up to external trade and foreign direct investment (FDI), strengthening their regulatory/legal systems, and providing more resources for infrastructure investments. These structural changes have underpinned increases in productivity by helping companies to become more competitive.
Several countries have pursued micro-reforms since mid-2000s to improve business environment, by setting up inter-ministerial committees, cutting red tape and expediting property registration. The 2014 Doing Business Report compiled by the World Bank revealed that two-thirds of African countries enacted at least one reform in the past year, versus one-third in 2005.
FDI flows have expanded rapidly – they totalled US$415 billion over 2001-10, five times the amount of the previous decade – exceeding official aid. Significantly, one third of new investment has gone into manufacturing, 38 per cent towards infrastructure building and only 28 per cent into extractive sectors. Returns on FDI are among the world’s highest. Africa’s external trade has also surged within a decade, with exports quadrupling in value from US$148 billion to US$582 billion between 2000-11, according to UN Conference on Trade and Development figures.
Despite the global slowdown, Africa has been growing at an unprecedented rate. In 2013, a third of African countries grew at 7 per cent or higher: a year during which inflation, public debt and fiscal deficits were reduced across the region. In contrast with Europe and the US, government debt in sub-Saharan Africa now averages 35-40 per cent of GDP. On average, foreign debt has fallen by one quarter due to the enhanced Highly Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, which released resources for poverty reduction projects. The International Monetary Fund (IMF) predicts that regional GDP growth in 2014 (excluding South Africa) would be 7 per cent – surpassing the developing country average of 5.1 per cent. On this projection, Africa is the world’s fastest-growing continent.
A recent African Development Bank (AfDB) report titled ‘Africa in 50 Years’ Time’ estimates both economic output and GDP per capita will increase steadily between 2010 and 2060. By that time, most African countries will have attained upper middle-income status. It also projects that emerging middle-class consumer spending power – behind the ongoing economic renaissance – should expand from 335 million people in 2010 (on a par with India) to 1.1 billion by 2060.
Renaissance Capital, the Russian investment bank, predicts a swelling of Africa’s GDP from US$2 trillion to US$29 trillion in today’s money by 2050.
With 15 per cent of the globe’s population, two thirds of the earth’s uncultivated arable land, plentiful mineral-energy resources, as well as rising youth population, Africa boasts the necessary ingredients to become a productive continent.
Despite the improving perceptions of the Sahara region, its wider developmental agenda is largely incomplete – hence the need for continued progress to underpin robust sustainable growth. ‘African markets must position themselves appropriately in this shifting landscape to accelerate growth and development and avoid getting left behind by other emerging markets and regions,’ the IMF noted.
Policymakers have several challenges to address:
• Outdated infrastructure is a key obstacle to doing business in Africa. Rapid urbanisation demands that cities become globally competitive. The biggest need exists in power, transportation, telecoms, irrigation and social housing. According to the World Bank, current capital-related spending is about US$45 billion – far short of the US$90-100 billion/year needed, which is a huge funding deficit. The private sector can close the gap by either investing alone or in partnership with government, using Build-Own-Operate and/or Build-Own-Transfer models.
• Over time, Africa needs to shift from being a source of raw materials and low value-added manufacturing by climbing the technology ladder – hence diversifying the economy towards higher-productivity industry and modern services to the kind of competitive dynamism that East Asia has achieved. Thus, channelling FDI towards labour-intensive secondary downstream and services will be crucial in coming years.
• African countries need to devise investment policies that ensure higher socio-economic dividends of FDI in the form of job creation, technology and knowledge transfer, and export diversification. Concrete efforts to tackle policy and human resource weaknesses, which hinder the work of National Investment Promotion Agencies are also important.
• Improving the quality of secondary and tertiary education through a focus on science/technology and investing in research and development will help nurture a workforce capable of adopting new technologies vital for competing in global markets.
• Joint public/private sector training programmes to develop the human capital and labour skills demanded if the ‘new Africa’ is to attract some of the 85-to-90 million jobs in light manufacturing that wage pressures will force firms in South East Asia to off-shore over the next decade.
• There is room to increase productivity in agriculture right across the continent. According to the AfDB, regional agricultural productivity is only half of global average and merely 5 per cent of arable land is artificially irrigated. Experts estimate that Africa requires annual investments of US$50 billion for raising farm output to optimal capacity. Foreign investors (mostly Middle Eastern) have acquired over 134 million hectares of African fertile land during the last decade.
• The region would benefit from closer cooperation on trade, energy-sharing and the efficient use of water resources. Despite the customs unions and common markets within Africa, the level of intra-regional trade comprised just 13 per cent of Africa’s 2012 total trade, compared to 40 and 60 per cent respectively in North America and Western Europe.
• Developing liquid domestic debt markets, thus increasing the depth, quality, and inclusiveness of financial intermediation. Setting up credit bureaus, credit guarantee schemes, improving the competition and efficiency of banks, as well as effective insolvency laws will help the micro- small- medium-sized enterprises sector through better access to seed capital and venture capital.
• The 5 per cent average annual GDP growth over the past decade is insufficent for improving social conditions, with most countries falling short of their Millennium Development Goals (MDG) targets. The size of the infrastructure gap that must be closed if Africa is to realise the MDGs is estimated at over US$180 billion. Further institutional reforms are needed in fledgling democracies aimed at improving states’ capacity and tackling, in some places, an entrenched culture of graft.
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