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African economic growth increasingly internally generated

African economic growth increasingly internally generated

1st November 2013

By: Natalie Greve
Creamer Media Contributing Editor Online

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The increasing propensity of growth in African economies to be internally generated is expected to go some way towards partially offsetting a global deceleration in the growth prospects of emerging market economies, delegates attending the African Frontiers Forum, in Johannesburg, heard on Thursday.

African Development Bank (AfDB) Southern Africa Resource Center lead economist Dr Ernest Addison acceded that, while African markets were adversely exposed to the slowdown in the price of commodities, growth in the region was becoming more endogenous, particularly within the sub-Saharan Africa (SSA) region.

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“While we are observing a slowdown in emerging market economies to the extent that they are linked to exports, we [at the AfDB] are of the view that growth in this region will be more sustained than elsewhere as a result of the domestic, internal growth triggers,” he commented, adding that over one-third of SSA countries had recorded economic growth above 5% over the last three years.

The bulk of this growth originated from the rise of the African middle class, which financial advisory firm Deloitte said had increased from 26% of the continent’s population in 1980 to 34.3% of the population in 2010.

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“The biggest implication of this emerging middle class is increased demand for consumer goods and services, but also the subsequent spillover into other areas, such as construction, infrastructure development and agriculture. First-mover advantage in this case is everything,” the firm said in a recent report.

Further regional growth had been observed as a result of foreign direct investment growth into SSA, which was not only directed into the resources sector, but also into the nonresources sector.

Government-driven infrastructure build programmes also bolstered growth and were currently being implemented across the region in an effort to advance the development required to support export-orientated industries.

“This tells us that the sources of growth are more diverse than just that which emerges from the prices of commodities. There is more consumer spending and [there are more] consumer industries in SSA, while the stance of fiscal policy by governments mean that they are starting to direct more investment into infrastructure. All these final demand factors tend to [drive] growth,” said Addison.

Supporting this assertion, International Montery Fund senior resident representative for South Africa Dr Axel Schimmelpfennig said the IMF had observed improvements in policy frameworks and in the overall approach to economic policy by SSA governments, which was also fostering internally directed investment.

He acknowledged that, while growth prospects for the region had been recently revised downwards, SSA had started to generate its own growth momentum.

Cannon Asset Managers chief investment officer Dr Adrian Saville added that recent evidence suggested this momentum was the result of the region  “getting into the business of economic inclusion” and relaxing intraregional trade barriers.

“The SSA is yet to pull its most powerful [growth] lever, which is economic openness. This would not just involve the flow of capital, but the flow of people and information,” he held.

Saville’s comments followed a 2012 report by the World Bank, which claimed that African countries were losing out on billions of dollars in potential trade earnings yearly as a result of prohibitively high trade barriers between neighbouring States.

“On average, only between 10% and 13% of African trade is with other African nations, while 40% of North American trade is with other North American countries, and 63% of trade by countries in Western Europe is with other Western European countries.

“The African market remains highly fragmented. With a similar size to China and India, Africa consists of 54 markets, while China and India comprise only one each. Therein lies the challenge for a company wanting to access African opportunities,” Deloitte noted.

From an investor position, Addison said the AfDB would look to continue its investment in infrastructure projects related to water, energy and transport, which would improve regional connectivity and drive the integration of markets in SSA.

“This is done in an effort to improve the international competitiveness of the region,” he noted.

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