COMPASS MAGAZINE #12
COMPASS MAGAZINE #12

AFRICA ON THE UPSWING Despite persistent challenges, economic growth is spreading

With a booming mining sector, growing clothing and tech businesses and a burgeoning middle class, Africa continues to attract economic investment from abroad. But challenges – from poor electrical generating capacity to extreme income and educational disparity – suggest an uphill climb for the continent’s economic development.

In the southeastern Nigerian city of Enugu, the sprawling Polo shopping center’s boutiques are packed with Puma sports clothes, Levi’s jeans and Swatch watches, attracting thousands of weekend shoppers. The recently opened megamall is part of a burgeoning services industry that in April 2014 helped Nigeria reach a major milestone: a revised annual gross domestic product (GDP) estimated at US$503 billion, making it the largest economy in Africa and bigger than those of Argentina, Austria or Iran.

Thanks to the growth of its services industry – everything from telecoms to the booming film productions of “Nollywood” – Nigeria created 1.1 million jobs last year, according to the Nigerian National Bureau of Statistics. Yemi Kale, the bureau’s director, told a news conference that the job growth reflected the country’s thriving business environment. But Kale also warned that despite these recent gains, “unemployment and underemployment remain relatively high.”

Call it the paradox of modern Africa: While the continent’s economic growth has been on a tear in recent years, averaging more than 4% in 2013, the boom has so far failed to produce enough jobs to lift most Africans out of poverty. Nigeria’s GDP per head, for example, is still only US$2,700, less than half of South Africa’s, and many Nigerians still live on less than US$1.50 a day.

“In spite of impressive growth, the structure of most sub-Saharan African economies has evolved little in the past 40 years, with a poorly diversified export base, limited industrialization and technological progress and a large informal economy whose economic potential remains mostly overlooked,” a recent World Bank analysis observed. “In many African economies, manufacturing – the sector that has led rapid development in East Asia – is declining as a share of GDP.”

JOBLESS GROWTH

Amadou Sy, a Senegalese economist with the Brookings Institution in Washington, DC, said that much of Africa’s growth has been fueled by exports of commodities including oil, iron ore and gold.

“The growth has been a jobless growth,” Sy said. “In spite of economic development, unemployment rates are still very high.”

Sy noted that Africa actually has less manufacturing industry today than it did when colonialism ended in the 1960s, primarily because state-owned firms closed. Lack of infrastructure development is another major challenge, Sy said. In some countries, for instance, as much as half of all agricultural output is lost because they lack roads, railroads and refrigerated transport to reach markets.

Mthuli Ncube, Tunis-based chief economist for the African Development Bank (AfDB), said the main reason the manufacturing sector remains undeveloped is a lack of electricity-generating capacity. “Our research shows that in some countries, there’s a 30% loss of productivity due to power cuts,” Ncube said.

The lack of capacity prompted General Electric (GE) CEO Jeffrey Immelt to announce that GE, a top producer of power-generating equipment, aims to double its US$3 billion annual sales in sub-Saharan Africa. The continent “is now essential to GE’s future,” Immelt said. Meanwhile, US President Barack Obama in June 2014 announced investment guarantees and grants to six African countries aimed at providing 10,000 megawatts of new generating capacity.

Ncube cited another challenge for Africa’s woeful manufacturing base: low productivity. Although many Africans subsist on US$1 a day, Ncube said wages in many African countries are higher than what is justified by the workers’ output. For example, on the basis of productivity, African workers earn more for their output than factory workers in Vietnam or Bangladesh. “It all pushes up the cost of doing business and making it not so viable for investors to turn Africa into their factory,” Ncube said.

INCOME INEQUALITY

While the AfDB expects foreign investment in Africa to reach US$84.3 billion this year – the highest ever recorded – most is likely to be for low-employment extractive industries.

“The growth has been a jobless growth.”

Amadou Sy ECONOMIST, BROOKINGS Institution

That paradox has helped produce growing income inequality on the continent. More than 60% of Nigerians still live in severe poverty, while the number of Nigerian billionaires has ballooned. Christine Lagarde, director of the International Monetary Fund, suggested recently that while Africa is home to more than 30% of the world’s mineral reserves, the profits are “captured by just a few.”

US$84.3 billion

The African Development Bank expects foreign investment in Africa to reach US$84.3 billion in 2014.

Such disparity has contributed to dramatic differences between countries and even between different regions within countries. In Nigeria, for example, fewer than 20% of children in the northeast of the country receive a secondary education; in the south of the country, where oil money supports education, the number is closer to 75%, according to Charles Robertson, global chief economist for London-based brokerage Renaissance Capital.

“The south is the most educated part of the country and it’s going to get richer and richer and pull away further and further from the north,” Robertson said.

As a whole, Robertson said, education is improving dramatically in sub-Saharan Africa, and the young population is growing. “If your working-age population is growing at 3% a year and it’s decently educated, it’s pretty hard for the economy not to grow at 3% or 4% a year,” Robertson said. “If you’ve got productivity gains and investments coming, you can expect growth at 6% or 7%, and that’s what we’re seeing.”

TWO BRIGHT SPOTS

Even without natural resources, some African countries are managing to prosper. Ethiopia, for example, which has 90 million people and thousands of hectares planted with cotton, has become Africa’s clothing producer, with 60 garment factories and 15 textile mills. Swedish fashion house H&M and Britain’s Tesco are both ramping up garment production in the country.

Africa is also capitalizing on homegrown engineers to build a competitive computer software industry. A Ghanaian firm called Dropifi, which helps companies collate online customer feedback, received a major boost when it was invited to move to Silicon Valley in California as part of an investment seed accelerator fund called 500 Startups. Software companies are also flourishing in Kenya’s iHub, Jozi Hub in South Africa, and Co-creation Hub in Lagos, Nigeria.

Africa’s recent growth, with a middle class expected to reach 1 billion people by 2060, has led many Western companies to ramp up their sales efforts on the continent.

Coca-Cola, for example, is now Africa’s largest employer. Nestlé has invested US$850 million and hopes to double its annual African sales of US$3.6 billion of chocolates and other foodstuffs. In July, PSA Peugeot Citroën announced that it will gradually restart its car assembly plant in Nigeria, Africa’s most populous country, and may expand the models it offers there to as many as three.

Total vehicle sales across the Middle East and Africa region are expected to grow 40% by the end of the decade, according to projections from Ford Motor Company, which in July announced 17 new models aimed at sub-Saharan Africa. But, as Reuters reported, industrial unrest closed one of Ford’s two South African plants in mid-July “as a wave of strikes that had crippled the mining sector and broader economy spread to auto suppliers, with workers seeking pay increases of 12% to 15%.” General Motors, Toyota and Mercedes-Benz also have experienced work stoppages at their plants in Africa.

“If you’ve got productivity gains and investments coming, you can expect growth at 6% or 7%, and that’s what we’re seeing.”

CHARLES ROBERTSON Global Chief Economist, Renaissance Capital, commenting on growth in sub-Saharan AFRICA

EXPATS BRING SKILLS HOME

Western businesses wanting to participate in Africa’s economic boom are entering the continent in a cross-shaped pattern: tapping the developed consumer markets of Egypt in the north and South Africa in the south, Nigeria in the west and Kenya, Tanzania and Uganda in the east. When those markets are established, they expand to neighboring countries.

While Africa’s famed corruption hasn’t been entirely eliminated, it has been waning in Rwanda and Liberia, according to Transparency International, which monitors governance around the globe. For example, notoriously corrupt customs officials have been replaced by computerized systems that speed imports into many countries.

One difficulty foreign firms seeking to invest in Africa may encounter is finding qualified people locally to run their businesses. Many European firms have scoured their own countries in search of talented African expatriates with business skills and persuaded them to return to Africa as part of their executive teams.

“Multinationals are now hiring more Africans from the diaspora,” Brookings’ Sy said. “Before it was old school; you’d have a team of foreign experts and they’d go back to the UK or France after a few years. Now, things have changed and Africans are doing a lot.” ◆

by Charles Wallace Back to top
by Charles Wallace

Charles Wallace, who was an Africa correspondent for almost five years, writes about global finance from his base in New York.