Friday, November 21, 2014

Africa’s Big Boom

PARIS – Africa is undergoing a period of unprecedented economic growth. According to The Economist, six of the ten fastest-growing countries in 2011 were in Africa. Average external debt on the continent has fallen from 63% of GDP in 2000 to 22.2% this year, while average inflation now stands at 8%, down from 15% in 2000. This positive trend is likely to persist, given that it is based on structural geographic and demographic factors, such as rising exports, improved trade conditions, and steadily increasing domestic consumption.

But Africa’s national governments still face significant challenges, given the wide variety of factors at play in each country. Economic characteristics vary significantly by country, depending on, for example, whether a fixed or floating foreign exchange regime is in place, and which natural resources the country controls.

As a result, prospects also differ by country. Although the average annual GDP growth rate for the entire continent has been forecast at roughly 6% in 2012, South Africa’s economy is expected to grow by only 3.6%, while Côte d’Ivoire is expected to grow at a rate of 8.5%. In order to tailor national economic policy effectively, policymakers must identify the drivers of – and barriers to – growth in each country.

Africa’s growth potential has caught the attention of foreign investors, who have contributed to a rapid increase in capital expenditure. In 2008-2011, sub-Saharan Africa received on average 4.4% of all funds invested in developing countries worldwide, and 3.1% of investment spending. In fact, foreign direct investment in Africa has been on the rise since the early 2000’s, increasing fivefold in 2000-2010. But foreign investors remain aware of the challenges faced by certain countries. For example, much of the Horn of Africa (particularly Somalia), Mali, and Guinea Bissau carry significant political risk.

Nevertheless, many economic indicators suggest that the bullish trend is sustainable, and that the conditions needed to change Africa’s image and international trade position are finally in place. In 2011, 67% of potential investors interviewed said that they considered Africa attractive, while half of them planned to invest in sub-Saharan Africa before 2013. And a growing number of large corporations count Africa among their primary strategic targets for business development.

The growth of small and medium-size enterprises will be a key factor in coping with the risks associated with rapid economic expansion. In fact, SMEs already play a crucial role in African economies, involved as they are in all sectors of rural and urban economies.

SMEs are open to innovation, technology transfer, and industrialization. They are ideally positioned to make an impact locally, given their willingness to adopt positive environmental and governance practices and their ability to improve living conditions by creating permanent jobs.

African SMEs also point the way to dynamic, sustainable, and fair growth. They have demonstrated a genuine capacity to withstand the effects of crisis, owing to their flexible capital base and limited involvement in the international financial system.

And yet, despite their potential, African SMEs are subject to significant internal and external pressures, including poor infrastructure, high labor costs, deficient governance, and a dearth of skilled workers. Above all, they lack access to long-term finance.

Large enterprises can secure financing from banks and other institutional lenders. And microfinance institutions can help finance small enterprises. But the needs of growing medium-size enterprises cannot be met by microfinance institutions. As a result, medium-size enterprises are the missing link – known as “the missing middle” – in many African countries’ economies.

Indeed, Africa’s SMEs are often unable to secure long-term financing. High information and transaction costs contribute to the perception that investing in SMEs is complicated and expensive.

Often young and under-capitalized, these smaller enterprises appear riskier because they are usually found in poorly regulated markets characterized by an uncertain political or economic environment. This supports the view that investments in SMEs take as much – if not more – time to return a profit than less risky investments with a wider scope.

But, in recent years, many African governments have worked to reduce administrative and legal obstacles for SMEs. In 2000-2010, the average time needed to register property rights was reduced from 120 days to 65. The time needed to obtain an export license fell from an average of 230 days in 2005 to 212 days in 2010. And, over the same period, the time needed to enforce a contract was reduced by nearly a month.

African governments know that SMEs help to create new production channels for domestic markets, thereby generating significant added value. A larger domestic market encourages diversification of the national economy, reducing dependence on exports of natural resources and, in turn, exposure to global price fluctuations. This makes economies significantly less vulnerable to external shocks.

African countries’ drive toward domestic development has been accompanied by accelerating regional integration. Rather than allowing Europe and North America to continue to dominate their economic development, sub-Saharan African countries are increasingly pursuing partnerships with their neighbors.

As a result, roughly 15% of sub-Saharan African trade is intra-regional, up from only 7% in 1990. In 2010, South Africa alone accounted for 4% of sub-Saharan imports and 6% of exports. Remarkably, this reflects the emergence of new trade flows, not simply the redirection of existing ones.

Africa’s shift toward regional integration encourages competitiveness by distributing more effectively production factors – such as inputs and equipment – and by allowing greater labor mobility. But it still has a long way to go.

African governments should pursue intra-regional trade liberalization, institutional integration, and infrastructure development with greater determination than ever. Their commercial enterprises need to progress in these areas in order to develop further and improve living standards for all.

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    1. CommentedOlanrewaju Kamil-Muhammed OSENI

      The indices measuring this growth are totally wrong-GDP,FDI and all this percentage.The macroeconomics might look good to the western world because they bring in so little and make so much without giving back to the country they are taking so much from.Africa is not growing in real terms,poverty is growing,war is rampant and the western world are fuelling this by their rush for the natural resources. Corruption is so rife.The families are not growing and aggregate demand for goods that improve qualities of life is not growing. Malaria,tuberculosis and other infectuions are killing lot of people.No roads,no water,no power and infrstructure and how can anybody call this growth.My idea of growth is redistribute income fairly and justly among your people,provide for their basic needs,provide better education and improve standard of living we can then talk about growth. GDP and other indices are just figures and percentage that translate to nothing. I am an African and i want my kids to live in a continent that can compete with the rest of the world in positive indices like infant and maternal mortality rate,competitiveness of the country,standard of living of his people and quality of life.

    2. CommentedAbdul-Wahab Raaj

      Africa's undeveloped infrastructure and increasing natural resource discoveries makes it a virgin land to till. Europe and the West is already saturated with fully developed infrastructure that would remain a dream for Africa in 50 years. Whilst it is inconceivable for Europe and the West to ever dream of economic growth rates of 10% or more, Africa can afford to sky-rocket on that because the room for grow is simply too large.

      What we need therefore is as the writer said, "accountable" governance and vigilant law enforcement authorities to ensure that the growth as it occurs, is fairly shared amongst all stakeholders. For smaller businesses like ours, seeking funding here and partnerships in Africa will certainly help us catch a share of that growth.

      Let's keep exploring for funding sources that will help us set up factories in Africa.

    3. CommentedZsolt Hermann

      The biggest problem, and the main reason we cannot find a solution for the global crisis is that we still view and look at things in isolation, we either cannot or refuse to see the full, global picture.
      Thus we focus on "emerging markets", China and India, or now on Africa, regions and continents that were either suppressed, or were dormant up till recently and now started to catch up to the more developed part of the world.
      But it does not mean that system they use, copying basically the western model is a good one, it simply means that from the level they used to be before they have a lot of growth potential.
      But looking at the global picture these regions or continents have no chance of avoiding the problem the western part of the world is already facing, since the model, the system itself is faulty an unsustainable.
      So on paper China is still growing using previous momentum, India is already slower, and the same for South America, and of course from the almost zero level Africa can produce spectacular results until they hit the same wall everybody else is hitting.
      Constant quantitative growth is simply impossible to maintain, it is unsustainable since it does not suit the system we exist in.
      The world reached a certain maturity, like a child when finishing growth, and now instead of expansion, quantitative development, a different, more mature, more qualitative development has to start.
      When a human being finishes growth, it happens gradually, some body parts, limbs still grow for a while, but the body in general stops growing and has to transform to a different kind of function.
      This is what is happening to humanity today, and until we understand this, until we stubbornly push, urge further quantitative growth, basically we are promoting cancer in this single, interconnected body endangering ourselves and the whole environment we exist in.

        CommentedLamine, Ingmar Traore

        @Zsolt Hermann:

        Interesting comment.
        I do agree to the point, that Africa has to follow its own way to growth. Detached from, especially, the european continent.
        Africa is, using a figure of speech, driving on another highway in another environment at another level of speed.
        Whether or when a growing economy in africa will face decelerated growth or even a "wall", is of no interest right now. Or at least of another interest than it is for the european countries. They sure can learn from the crisis the europeans are confronted with right now.

        Important is, that african decision makers, the politicians as well as the businessmen, absolutely have to think of longterm strategies for the continent or for their region of countries that are related to each other in an economical and cultural way.

        I really agree to your last point about that we have to leave the path of quantitative growth.
        I can´t say whether it is possible to extract this engine from the current, global system.
        But, as an example, there is a chance for the african continent to make it better.
        They should try it - at least.