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Becoming a global economic power: Africa’s people hold the key to success

25th August 2010

By: In On Africa IOA

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To date, the African economy has largely been overshadowed by Asia in the East and to a lesser extent, Latin America in the West. However, hidden in plain sight, Africa has begun to emerge as one of the world's fastest growing economic regions.


Many global investors still shy away from Africa, retaining the continent's outdated image of war, corruption, political instability, financial chaos and poverty and suffering.(2) However, leading financial consulting firms McKinsey Global Institute (MGI) and Boston Consulting Group (BCG) agree that Africa is now the most profitable place to invest. Not only does Africa provide the best growth rates, but analyses also show that investments in Africa between 2000 to 2009 have yielded the highest profits world-wide.

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This discussion paper provides an overview of the MGI and BCG reports detailing Africa's economic growth over the last decade. The rationale behind Africa's economic success and suggestions for sustaining its impressive performance are also included.


Africa's economic growth in the last decade

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In the past, it was believed that since Africa comprises 20% of the world's land and 15% of its population but only represents 4% of global gross domestic product (GDP), the continent has been under-performing for so long that it would be difficult for it ever to rebound.(3) Indeed, Africa's collective economies scarcely grew in the last two decades of the twentieth century. However, sometime in the late 1990s, Africa's GDP growth began to gather momentum, expanding increasingly rapidly through 2008.(4)


According to Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), the past decade has been remarkable for Africa even if much remains to be done.(5) Telecoms, banking and retail are flourishing, construction is booming and foreign investment is surging.(6) From 2000 to 2008, global GDP grew 4%, while growth in sub-Saharan Africa has averaged over 5% annually, the best performance in 40 years. During the eight-year period, only five African countries lived up to the reputation of chaos and stagnation, with the Central African Republic (CAR), Côte d'Ivoire, Guinea-Bissau, Liberia and Zimbabwe experiencing no or negative growth rates.(7)


Despite these few poor performances, Africa's collective GDP in 2008 - US$ 1.6 trillion - was roughly equal to that of Brazil or Russia. Poverty has reduced and significant progress has been made towards other important Millennium Development Goals (MDGs).(8)


African economies also showed remarkable resilience during the recent global economic downturn, due in part to the considerable progress made by African countries from the late 1990s and in the first decade of this century, in addressing their fiscal problems and reducing their fiscal deficits. Hence, when the crisis hit, despite many economies suffering lower revenues as a result of the reduced demand for African exports, most countries were able to sustain spending on key priorities.(9)


Foreign investors are now benefitting from the economic and social development progress made on the continent in recent years. The BCG report shows that investors that started putting their trust in Africa in 2003, made far larger profits than those investing in more conventional markets. Between 2003 and 2008, investments in Africa's leading companies yielded more than twice the profits of those made in United States, East Asian or European companies.


Since 1998 the revenues of Africa's 500 top companies, outside of the banking sector, have grown 8.3% annually. Exports have primarily been responsible for the increase, surging from 3% annual growth in the 1990s to 18% in 2000. In turn, increased revenue has allowed Africa's top companies to start investing abroad. Direct foreign investment by African companies has grown 81% annually since 2002; more than double the growth rates of Latin America and Asia.


Economic growth has also created substantial new business opportunities, though these are often overlooked by potential investors. McKinsey analysts project that at least four groups of industries in Africa - consumer-facing industries, agriculture, resources, and infrastructure - could generate as much as US$ 2.6 trillion in revenue annually by 2020, or US$ 1 trillion more than today.


There can be little doubt then that, in the words of Strauss-Kahn, "Africa is back." However, in light of rampant poverty, disease and conflict, Africa's recent economic success has been hard won. The McKinsey report shows that Africa's economic success is primarily due to the efforts of its people and the good governance of its leaders.


The secret of success


The rise in commodity prices during this decade partly explains Africa's improved economic performance.(10) Oil prices rose from less than US$ 20 a barrel in 1999 to more than US$ 145 in 2008. Prices for minerals, grain and other natural resources also soared due to increasing global demand. Strong exports and local demand also played significant roles.


However, Africa's economic success has arisen out of more than the resources boom, as resources only accounted for 24% of GDP growth from 2000 to 2008. Further growth came from additional sectors including financial services, technology, media, telecommunications logistics services, transportation, retail, trade and manufacturing.

Africa has of course received vast amounts of financial aid from a variety of sources, but the greatest credit for Africa's economic success must be given to improved political and macroeconomic stability and microeconomic reforms.(11) In the past decade, many Governments brought an end to their hostilities, thus creating the political stability and investor confidence required for significant economic growth.(12) Average annual growth in Sierra Leone reached an impressive 11% from 2000 to 2008, second only to post-war Angola's oil economy. Following the end of the 1994 genocide, Rwanda's economy grew by 7% each year and Mozambique and Uganda's economies grew by 8%.


Strengthened governance has been crucial to economic growth.(13) Many African countries have grown stronger as Governments lowered inflation, trimmed their foreign debt and shrunk their budget deficits. Governments have also increasingly adopted policies that served to energise markets. State-owned enterprises have been privatised, trade barriers have been reduced, cooperate tax has been cut and regulatory and legal systems have been strengthened.


Together, these structural changes have spurred on an African productivity revolution by helping companies achieve greater economies of scale, increase investment and become more competitive. Labour productivity has risen by 2.7% annually since 2000, with productivity in some countries matching that of India and China.


History has shown that as countries develop, they move closer to creating diverse sources of economic growth and generating expert revenue to finance imported and capital goods necessary for investment.(14) The McKinsey report notes that even "pre-transition" national economies - those countries that are still largely dependent on agriculture - are growing and have started to diversify. Ethiopia's economy grew by an impressive 8% each year from 2000 to 2008 and Mali and Burkina Faso's economies expanded by 6% during that period. Meanwhile, several African economies are already seen as diversified, with the GDP share of manufacturing and services exceeding 70%. These include Cape Verde, Egypt, Lesotho, Mauritius, Morocco, Namibia, South Africa and Tunisia. These diversified economies recorded growth of 4% to 6% annually.


In addition to the three main exporters of oil - Libya, Nigeria and Angola - African transition economies such as Ghana, Kenya and Senegal that are moving toward diversified economies, have begun to export manufactured goods including processed fuels, processed food, chemicals, textiles and cosmetics.


Future prospects


Despite the glowing commendations given by MGI and BCG, it must be considered that African economies still face many challenges including poverty, disease and high infant mortality. The McKinsey and BCG reports agree that Africa still has some major challenges to overcome to secure its exit from poverty. These include the need to remove inter-African trade barriers, investing massively in infrastructure and communication, improving the education sector and improving public health throughout the continent. Nevertheless, the continent's growth prospects remain strong, propelled by both external trends in the global economy and internal transformations of the continent's societies and economies.


MGI suggests that Africa will continue to benefit from the rising prices of oil, natural gas, minerals, food, arable land and other natural resources. Demand for natural resources is growing fastest in the world's emerging markets, which account for half of Africa's trade. As such, foreign direct investment has increased from US$ 9 billion in 2000 to US$ 63 billion in 2006, an amount almost as large as the flow into China.


Parallel with the projected industrial revolution in Africa, the continent is set to emulate Asia's green revolution.(15) Over 60% of the world's unexploited agricultural lands are located in Africa, and with a growing global population and new needs in the production of biofuels, these unexploited lands are already becoming the target of massive investments.


Africa's future growth is however, mostly in the hands of its inhabitants as social and demographic trends are creating new sources of domestic growth. Chief among these are urbanisation and a growing middle-class consumer base. Urbanisation rates in Africa are now similar to China and the world's other fastest growing cities, and the middle-class is steadily growing. As more Africans move from agriculture to urban employment, their incomes are rising. The number of households with discretionary income is projected to rise by 50% in the next ten years and the combined spending power of the inhabitants of Africa's 18 top cities could reach US$ 1.3 trillion.


Despite a prevailing positive outlook for Africa's future economic growth, Strauss-Kahn warns that "This is not the time to rest on our laurels."(16) Africa remains highly vulnerable to economic dislocation from many different sources, including swings in commodity prices, natural disasters and instability in neighbouring countries. In order to endure unforeseen economic shocks in the future, strong macroeconomic policies must remain in place. Policy buffers must be rebuilt to allow for future countercyclical responses, with fiscal policy and with reserves. In addition, social safety nets must be strengthened as these are the first line of defence against adverse shocks.


Poor Government policies, wars and other unforeseen factors may disrupt the impressive economic growth Africa has experienced in the last decade. However, it would be ill-advised for global businesses to ignore the continent's potential. A strategy for Africa must be part of their long-term planning.


While the continent's future prospects for growth remain strong, Africa cannot afford to move away from its path of democracy, stability and economic liberalisation that will keep investors interested and allow African people to prosper and make significant contributions toward positioning Africa as the global economic power it has the potential to be.


Written by: Claire Furphy (1)

NOTES:

(1) Contact Claire Furphy through Consultancy Africa Intelligence's Eyes on Africa Unit (eyesonafrica@consultancyafrica.com).
(2) Aré, L. et al., 'The African Challengers: global competitors emerge from the overlooked continent', Boston Consulting Group, 2010, http://www.bcg.com.
(3) Ibid.
(4) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(5) International Monetary Fund (IMF) website: http://www.imf.org
(6) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(7) Aré, L. et al., 'The African Challengers: global competitors emerge from the overlooked continent', Boston Consulting Group, 2010, http://www.bcg.com
(8) International Monetary Fund (IMF) website: http://www.imf.org.
(9) Simon Willson, ‘Private sector gains ground in Africa', IMF Survey Magazine, 4 March 2010, http://www.imf.org.
(10) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(11) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(12) International Monetary Fund (IMF) website: http://www.imf.org.
(13) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(14) Ibid.
(15) Roxburgh, C. et al., 'Lions on the move: the progress and potential of African economies', McKinsey Global Institute, 2010, http://www.mckinsey.com.
(16) International Monetary Fund (IMF) website: http://www.imf.org.

 

 

 

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