An African dawn

23 May 12
Many parts of Africa are enjoying strong economic growth levels. Joe Cosma explains the factors behind Africa’s rise and explores where the continent’s economy may go next

By Joe Cosma | 23 May 2012

Many parts of Africa are enjoying strong economic growth levels. Joe Cosma explains the factors behind Africa’s rise and explores where the continent’s economy may go next

Africa is on the move. In the past decade, the continent’s economic output more than doubled, and 6 of the 10 fastest-growing economies in the world were African. South Africa’s recent membership of the G20 has also marked the region out as one to watch.

Africa’s growth has been underpinned by a longer-term process of economic and regulatory reform that slowly began to spread across much of the continent since the end of the Cold War. During this period, inflation has been brought under control; foreign debt and budget deficits reduced; state-owned enterprises privatized; regulatory and legal systems strengthened; and many African economies opened up to international trade and investment.

Although it has not been as buoyant as the Asia Pacific region in recent years, sub-Saharan Africa grew by an average of 5.7% a year in the period 2003—10, according to the International Monetary Fund. Even in 2009, a time of global economic turmoil, the region managed to post growth of 2.8%. Since then, the pace picked up again to 5.4% in 2010 and is expected to have remained close to this in 2011, once again making Africa the second-fastest growing region in the world.

This period of growth is almost unprecedented for a continent that has, in the past, been beset by political instability, commodity price volatility and low levels of investment. But at the same time, parts of the region have continued to suffer from long-standing problems, such as food shortages resulting from adverse weather conditions, and high inflation, driven by higher food and fuel prices.

 

What is driving growth?

Strong growth within sub-Saharan Africa has been driven by oil-producing countries, as well as low-income non-oil commodity producers. Meanwhile, the middle-income economies, such as South Africa, have experienced much more modest growth in the last decade. This can be attributed to the fact that oil and other commodity prices have been particularly high, with the exception of the initial slide during the onset of the global downturn in late 2008.

This period of oil and commodity price strength followed the lengthy period in the 1990s and early 2000s when low prices discouraged investment in new production capacity, especially in the oil industry. Since 2000, rapid growth in China and many other emerging economies whose production is more oil-intensive, has led to a rise in world oil demand, driving oil prices much higher.

In addition to relatively strong real commodity prices, growth in Africa has been fueled by a steady flow of economic and regulatory reform, something that was notably lacking in the three preceding decades. This has been reflected in recent World Bank Doing Business surveys, in which African countries have featured increasingly prominently among the best reforming countries — Rwanda, Mauritius, Sierra Leone, Burundi, Uganda and Liberia are notable for their efforts to make doing business easier after particularly trying periods in their histories. Other countries such as Nigeria, Ghana and Kenya have also been making progress, their results have been slower to show through in terms of growth, given the larger size of their economies.

Inward investment flows to Africa from other emerging markets have also been rising rapidly. Much of it has been directed to other emerging economies, reflecting the ongoing power shift in the global economy. According to Ernst & Young’s 2011 Africa attractiveness survey, capital investment in Africa from emerging market investors grew strongly at 13% a year between 2003 and 2010, with a high concentration in the extractive and manufacturing sectors.

Growing economic and trade links with countries such as China, India, Brazil and Malaysia will continue to bring large amounts of investment flowing into Africa, as domestic demand for minerals and food in these major rapid growth markets (RGMs) grows rapidly. In addition, most African countries have seen rapid growth in hi-tech sectors such as telecoms and IT in recent years, and are set to continue to attract more foreign investor interest.

 

Looking to the future

The medium-term outlook for investment in-flows to Africa remains positive. However, near-term prospects are clouded by political uncertainty in a number of countries, especially given the tensions in the Middle East and North Africa, and by the impact of the economic downturn on financial market flows. An escalation of the European sovereign debt crisis would also have a significant impact on the African RGMs, as around a third of South Africa, Egypt and Ghana’s exports are to the Eurozone. Weaker demand in the Eurozone will have a significant impact on exports and growth in the African RGMs.

But faced with increasingly scarce world resources, Africa’s huge endowment in natural resources remains a major magnet for investment. Its large, expanding labor force and low labor costs are also attractive. With a business environment so rich with opportunities, a vibrant and positive future surely awaits.

 

Joe Cosma is Ernst & Young’s Africa International Development Leader.

This article first appeared in the May edition of Dynamics

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