Africa Awakening: A Continent on the Rise

The time for Africa is now. The continent is rising to unexpected heights as wars have ended and humanitarian crises subsided. Afro-pessimism – the deeply-rooted notion that Africa was essentially without hope – has suddenly been replaced with almost boundless optimism. Even The Economist took note: After dismissing the continent as “hopeless” ten years ago, the magazine just last year splashed Africa Rising across its cover, reporting extensively on the burgeoning economies of the continent previously deemed hopeless.

Though statistics can be misleading, the numbers coming out of Africa are nothing short of impressive. Of the fifteen countries in the world boasting the fastest-growing economies over the last five years, nine are African. According to the International Monetary Fund (IMF), sub-Saharan Africa this year may expect average growth rates of around 5.4% – almost double the global average.

The boom times have international consulting companies work overtime. Reports and studies on Africa’s exciting future and the many opportunities awaiting the industrious are published by the dozen. A new scramble for Africa is unfolding as businesses compete for a foothold on the continent. Nigeria is the top-prize: If you can make it there, Africa is yours for the taking – or so the comments go in boardrooms from London to New York to Beijing and everywhere in between.

“The boom times have international consulting companies work overtime.”

As mentioned, statistics have their own shortcomings. Fourteen percent annual economic growth in Mozambique may seem very exciting but coming from a nominal per capita GDP of barely $650 means a modest gain of about $90. Even at this accelerated pace it will take a while for people in Mozambique to become avid consumers. The trend, however, is going in the right direction and will eventually transform the country.

Boom Time

A recent study by Bain & Company Consultants expects consumer spending in Africa to double by 2020 and reach $2 trillion as more Africans move out of poverty and into the middle class. The size of Africa’s middle class already doubled between 1981 and 2010 and its growth is picking up fast. Per capita consumer spending in an increasing number of African countries is already higher than that of both India and China. As a market, Africa is already significantly larger than either Brazil or Russia.

This holds true especially in the telecom sector. Africa now has well over 600 million mobile phone users – more than either the United States or Europe. Mobile Internet is becoming widely available and with it user gain access to services previously reserved for well-off urbanites only. The continent is already leading the global revolution in mobile banking. Thanks to the ubiquitous mobile phone, millions of Africans have gained easy access to financial services.

Foreign direct investment (FDI) in Africa has quintupled between 2000 and 2010. South Africa has lost its dominance and now receives only 3% of all investments made in Africa. Over the same period, Africa’s exports tripled thanks to strong demand for its riches from China and India.

Most countries pushed through reforms aimed at strengthening legal frameworks that promote good governance, improve political stability, and offer investors an added degree of security. The political risk previously associated with setting up shop on the continent has been sharply reduced. The cost of doing business in Africa has also fallen dramatically with corruption becoming the exception rather than the rule.

Democracy – and with it improved standards of governance – is on the march. Since Benin in 1991 set a precedent by having a peaceful transfer of power between two governments as dictated by the ballot box – something no other country on the continent had been able to accomplish in about thirty years – more than thirty governments have been democratically elected.

Sceptics may remark that the good times are to be ascribed largely to the commodity boom fuelled by China and its insatiable demand for raw materials. In order to get the ores it desires to port, China has indeed invested heavily in Africa’s infrastructure. It has also boosted the continent’s manufacturing sector to supplement its own. Africa seems poised to conquer a role in both the services industry – as, for example, an alternate host to call centres – and in light manufacturing. As intra-Africa trade expands, industry will see its potential customer base increase. Long hampered by tariff barriers and excessive paperwork, cross-border commerce is set to expand as regulations are relaxed and former rivals become friendly neighbours.

Though Chinese interest in all things African certainly does not hurt, the upswing of the continent is powered mostly by indigenous developments and drivers.

Sustaining the Momentum

Most experts tend to agree with the conclusions of a 2012 study by Roland Berger Strategy Consultants that identified a set of seven industries that will help sustain the growth momentum in Africa: Energy, telecommunications, transportation, manufacturing, consumer goods and retail, public services, and – perhaps most important of all – financial services.

Over the last decade, African banks have experienced unprecedented rates of growth. Balance sheets have grown at average rates of 42% annually while net income increased by as much as 54% per year. This astonishing expansion is by no means nearing its end. About 400 million Africans have yet to gain access to financial services while only an estimated 7% of the continent’s inhabitants are covered by a pension plan. Social security systems are virtually non-existent but most countries are already now in the process of setting up social safety nets.

According to a survey by the International Labour Organisation (ILO), pension coverage is highly differentiated across the continent. In North African countries such as Libya, Egypt, Tunisia, and Morocco around 80% of the labour force enjoys full pension coverage while in most sub-Saharan countries only between three and ten percent does.

As hordes of young and better-educated professionals enter the job market, and swell the ranks of the middle class, Africa’s much-touted demographic dividend will kick in. Governments will have a unique opportunity to introduce innovative social legislation drawing on the experiences of Western nations while avoiding the pitfalls of their now over-stretched systems.

However, politicians and officials must meet the challenge of allowing for the creation of an adequate number of meaningful jobs for the tens of millions expected to enter the workforce in the near future. Thanks to the commodities boom, and improved standards of governance, the resources are available to make this happen. Should the job fail to materialise, frustration will set in which in turn may lead to violence and political instability. The pay-off of a successful job-creation drive is immense. As the ratio between working people and dependents rises, economies will thrive just as they did during the three decades of Asia’s demographic dividend.

The time to cash in is now: Birth rates are already falling and will continue to do so as prosperity levels increase. By 2050, the 55+ demographic will have doubled in size opening up a whole range of opportunities for the financial and healthcare sectors but signalling the end of the demographic dividend. By this time, most countries in Africa should have reached reasonable levels of prosperity.

The Need for Industry

According to Rick Rowden, a US expert on industrial development, Africa cannot possibly expect to escape poverty without resorting to industrialisation: “Apart from a few tax havens and resource-rich places, there is no country that has attained a high standard of living on the basis of services or extractive industry alone. To really prosper, a country simply must put as many workers through factory doors as it can.”

Almost everywhere on the continent, the small but resilient industrial sector is holding onto its ground. Even with the commodities boom in full swing, industrial output in sub-Saharan Africa has managed to keep up at between 10 to 14% of GDP.

Big international names are slowly moving away from Asia to open manufacturing plants in Africa. The American General Electric conglomerate is investing $250 million in a new factory for electrical components in Nigeria. Clothing giants as Swedish H&M and Primark from Ireland are increasingly sourcing products from Ethiopia. A South African telecom has recently begun manufacturing cheap mobile phones for the African market with most components sourced locally.

The World Bank predicts that as many as 80 million jobs may leave China as wages increase. Most of these jobs will migrate to the world’s last economic frontier – Africa. Already low, manufacturing costs are declining even further as improved infrastructure reduces transportation and other logistics expenses. Moreover, productivity across Africa is rising at around 3.5% annually, significantly more than in the US (2.3%). As manufacturing in China becomes more expensive, Africa becomes ever more attractive.

World Bank economist Wolfgang Fengler is convinced that “Africa is now in a good position to industrialise with the right mix of ingredients. For this to happen, the continent will need to scale up its infrastructure investments and improve the business climate. Many [African] countries have already started to tackle these challenges in recent years.”

Though few expect the next South Korea to come from Africa, most economists agree that the continent will follow a more diverse path with a huge number of smaller scale companies providing most of the manufacturing output. Agriculture and the services industry will likely remain important and extractive industries will be a mainstay of African economies for the foreseeable future. This need not be an issue. India has managed reasonably well on agriculture and services while slowly building up its industrial base.

Issues Remain

Though the future looks bright, Africa has yet a vast range of issues to tackle. To begin with, not all countries fare equally well. Oil income may be powering economic growth in Angola and Equatorial Guinea, both countries have a long way to go toward the full implementation of good governance principles. Here, business may be booming, but so is corruption.

The Democratic Republic of Congo is barely governable and not quite as democratic yet as its name would seem to imply. The country remains in the grip of warring factions fighting to loot its riches. Zimbabwe is still the private domain of a stubbornly antiquated ruler who insists on blaming others for his country’s many ills. Even South Africa is tumbling from its pedestal with the ANC (African National Congress), entrenched in power and increasingly arrogant, openly considering land reform and the nationalisation of the mining industry. As the party mulls a swing to the left, the country is tainted by countless corruption scandals.

Learning from Past Mistakes

While most countries have learned from past mistakes, others insist on giving tried-and-failed policies yet another spin. Even in places that have now found the path to sustainable development, much work remains to be done.

Starting a business in most countries is an adventure into the bureaucratic unknown to be undertaken only by the exceedingly well-financed and out of reach for the common man. The selects few who do manage to launch a fully and properly document business are often taxed out of existence. Tax reform is urgently called for as are the means to collect taxes honestly. Property registration, the most mundane of issues, is also lacking. Opening up access to title deeds and registration for small-scale farmers and the urban poor has been shown to unlock credit that, once flowing, enables people to get ahead more easily.

But most of all, politicians and officials should be made to stop appropriating other people’s money. Corruption and the abuse of power are still rife and threaten to derail progress.

These blights will not disappear anytime soon. But they can be managed and even tackled as long as there is a political will to do so. This is where the importance of good governance comes in. Countries that are able to take themselves seriously and conduct their official business accordingly will be amply rewarded with solid growth and a sharp overall reduction in poverty levels.

It is no coincidence that the African countries most successful in combatting corruption, according to the annual tabulations by Transparency International, are the same ones that, according to the numbers of both the World Bank and the IMF, have the fastest growing economies of the continent.