Africa’s Must-Do Decade
In recent decades, some developing countries – mainly in Asia – have managed to industrialize. For African countries to achieve sustainable development, they, too, will have to increase substantially the share of industry – especially manufacturing – in their national investment, output, and trade.
VIENNA – Since 2000, Africa has recorded impressive rates of economic growth, owing largely to development assistance and a prolonged commodity boom. While the continent shows great diversity in the socioeconomic trajectories, growth rates have generally masked an underlying lack of structural transformation.
Many African countries have yet to undergo the kind of transformation that is necessary for socially inclusive and environmentally sustainable development over the long term: namely, industrialization. Wherever industrialization has occurred, it has reliably improved economic diversification and helped to nurture, strengthen, and uphold the conditions for competitive growth and development.
In recent decades, some developing countries – mainly in Asia – have managed to industrialize. But, despite repeated attempts, African countries have not. In 2014, the Asia and Pacific region’s share of value added in global manufacturing was 44.6%, whereas Africa’s was just 1.6%. With South Africa as its only industrialized country, Sub-Saharan Africa is the least industrialized region in the world.
For African countries to achieve sustainable development, they will have to increase substantially the share of industry – especially manufacturing – in their national investment, output, and trade. And, to their credit, most African countries already recognize that such a transformation is necessary to address a wide range of interconnected challenges that they are now confronting.
One such challenge is population growth. More than half of the continent’s 1.2 billion people are under the age of 19, and almost one in five are between the ages of 15 and 24. Each year, 12 million new workers join the labor force, and they will need the tools and skills to ensure their future livelihoods. Industrialization is the key to helping Africa’s fast-growing population realize a demographic dividend.
A related challenge is migration. Many of Africa’s most ambitious and entrepreneurially minded young people are joining others in migrating north. But no country, especially in Africa, can afford to lose so much talent and potential. Industrialization alone cannot resolve the migration crisis, but it can address one root cause, by creating jobs in the countries of origin.
A third challenge is climate change, which weighs heavily on countries where agriculture is still the primary sector for employment. To confront the threat, Africa will need to develop and adopt green technologies, while channeling more investment into resource efficiency and clean energy. With the right investments, African countries can reduce the cost of delivering power to rural areas, and contribute to global efforts to reduce emissions and mitigate the effects of climate change.
In short, Africa must industrialize, and it must do so in a socially inclusive and environmentally sustainable manner. Given that most previous efforts at sustainable development in Africa have failed, there is a clear need for a new approach: a broad-based, country-owned process that taps financial and non-financial resources, promotes regional integration, and fosters cooperation among Africa’s development partners.
As it happens, the United Nations General Assembly has declared 2016-2025 to be the Third Industrial Development Decade for Africa. During IDDA III, the United Nations Industrial Development Organization, which I lead, will spearhead the new approach to sustainable development sketched above. UNIDO has put its full support behind partnerships for mobilizing resources, and is offering a tested model for African countries to follow: the Programme for Country Partnership (PCP).
UNIDO’s PCP provides countries with technical assistance, policy advice, and investments to help them design and implement industrialization strategies. The program was launched in 2014, and is already being successfully implemented in two African countries – Ethiopia and Senegal – and in Peru.
The PCP provides a multi-stakeholder partnership model that can be adapted to each country’s national development agenda. It is designed to work in synergy with governments and their partners’ ongoing development efforts, while funneling additional funds and investments toward sectors that have high growth potential and are important to a particular government’s industrial-development agenda. Priority sectors are typically chosen for their job-creation, investment, and export potential, and for their access to necessary raw materials.
The PCP approach is designed to maximize the impact of all partner programs and projects that are relevant to industrial development. To that end, strategic partnerships with financial institutions and the business sector are particularly important. With these in place, African countries can marshal additional resources for infrastructure, innovation, expertise, and new technologies.
UNIDO’s goal is to make the PCP model the mainstream approach for all African countries. We stand ready to support Africa on its path to inclusive and sustainable industrial development – during IDDA III and beyond.
According to a new report by the African Development Bank, the continent's 54 countries grew by 2.2%, on average, in 2016, and 3.6% in 2017; in 2018, the AfDB report predicts, growth will accelerate to 4.1%, supported by some of the world's fastest-growing economies. Has Africa's moment finally arrived?
NEW YORK – The African Development Bank (AfDB) has just published its African Economic Outlook for 2018. This year’s revamped publication – shorter than usual, analytically well-structured, and written in lucid prose, without hyperbole – in some ways mirrors Africa’s own transformation, as it raises hopes that we may at last be witnessing the continent’s long-promised economic arrival.
Africa’s rise has been a long time coming. In the 1960s, hopes were high. The remarkable leaders of the independence generation – such as Ghana’s Kwame Nkrumah and Kenya’s Jomo Kenyatta – received advice from the world’s top economists. The Caribbean-born Nobel laureate Arthur Lewis became Nkrumah’s Chief Economic Adviser.
In India, we read about these leaders’ friendship with our own post-independence prime minister, Jawaharlal Nehru, and the hope for a new dawn for all emerging economies. And many emerging economies did indeed take off. In the late 1960s, some East Asian economies surged ahead. Beginning in the early 1980s, China began its decades-long rise. And, from the early 1990s, India’s economy also began to grow robustly, with annual rates reaching the 9% range by 2005.
But Africa remained stagnant, mired in poverty. Ironically, it was the continent’s resource wealth that hampered economic progress, as it fueled conflicts among governments and insurgents eager to control it. The resulting political instability attracted outsiders keen to exploit governments’ weakness. As the Indian poet and Nobel laureate Rabindranath Tagore put it in his 1936 poem “Ode to Africa,” which played on perceptions about who is “civilized,” the continent fell prey to “civilization’s barbaric greed,” as the colonists “arrived, manacles in hand/Claws sharper by far than any of your wolves.”
Finally, at the turn of the twenty-first century, things began to change for Africa. A few dynamic leaders, democratic stirrings, and emerging regional cooperation led to a decline in poverty and a pickup in growth. Commodity exporters faced a setback around 2014, when prices plummeted. But this turned out to be a blessing in disguise, because it forced countries to diversify their economies and increase production – factors that supported renewed growth.
According to the AfDB report, Africa’s 54 economies grew by 2.2% in 2016, on average, and 3.6% in 2017. In 2018, the AfDB predicts, average growth will accelerate to 4.1%, while the World Bank expects Ghana to grow by 8.3%, Ethiopia by 8.2%, and Senegal by 6.9%, placing these countries among the world’s fastest-growing economies. And these figures are not wishful thinking: in 2016, Ethiopia’s GDP grew by 7.6%.
Of course, serious challenges remain. South Africa, the continent’s strongest economy, is now facing the difficult task of tackling its deep-rooted corruption. Yet, with the African National Congress now apparently determined to replace President Jacob Zuma’s scandal-ridden administration with one led by the party’s new leader, Cyril Ramaphosa, there is reason for hope.
More broadly, many African countries need to find ways to create more employment – and fast. The share of the working-age population is rising faster in Africa than in any other region. This “demographic dividend” has immense potential. But if job creation stalls, the unemployed or under-employed are likely to become frustrated – a recipe for conflict.
Consider the case of Tanzania. Thanks to President John Magufuli’s effort to mobilize more domestic revenue to support increased development spending, the economy is doing well. But, with roughly 800,000 individuals entering the labor force each year, Tanzania needs much more working capital, better infrastructure, and educational reform aimed at ensuring that workers have the skills, resources, and opportunities to secure decent jobs.
The same is true of Ethiopia. In the last couple of decades, the country has made great strides in export-led growth, supported by a growing industrial sector and large investments from China. Now, it is poised to take over as the economic powerhouse of East Africa. Yet the urban youth unemployment rate stands at 23.3%. Left unchecked, this situation could easily end up fueling ethnic conflict and political turmoil.
Another, related challenge concerns resource mobilization: countries need funds to invest in infrastructure, human capital, and the creation of trade and digital links within and beyond Africa. The AfDB report estimates that, for infrastructure investment alone, the continent needs some $170 billion per year, which is $100 billion more than is currently available. As it stands, Africa receives a total of about $60 billion in foreign direct investment each year.
To close the gap, African governments must attract more money. That will require establishing effective regulatory structures that facilitate long-term borrowing and repayment, while ensuring that lenders do not exploit borrowers, as has occurred everywhere from rural India to the United States mortgage market.
The challenges are daunting, to say the least. But there are lessons that African countries can learn from one another. For example, Ghana’s smooth transfer of power after the December 2016 election set a positive democratic example. Nigeria’s Lagos State and Tanzania have done a good job of mobilizing internal resources for development. Add to that the emergence of an indigenous intelligentsia in the region, exemplified by organizations like the AfDB, and it seems that Africa’s moment may have arrived at last.
Capturing Africa’s High Returns
Over the next 12 years, Africa's expanding population and strong economic growth across globally competitive sectors could translate into especially high returns for investors. If Western firms do not step in to meet the consumer demand of Africa's growing middle class, their Chinese competitors will.
WASHINGTON, DC – Since 2000, at least half of the world’s fastest-growing economies have been in Africa. And by 2030, Africa will be home to 1.7 billion people, whose combined consumer and business spending will total $6.7 trillion.
Seven years ago, the Harvard Business Review pointed out that Africa is also home to many of the world’s biggest opportunities. And yet, despite its tremendous business potential, Africa has not risen to the top of Western business leaders’ agendas.
In fact, between 2014 and 2016, US exports to Africa fell by almost half, from $38 billion to $22 billion. And while the United Kingdom’s investments on the continent more than doubled between 2005 and 2014, reaching £42.5 billion ($57.6 billion), only 2.5% of its total exports are to Africa.
Western countries are quickly losing ground to China, which increased its exports to Africa more than sevenfold – to $103 billion – from 2005 to 2015. If Western businesses hope to keep up, they will need to tap into the African countries and sectors with the highest potential for growth.
By 2030, more than half of Africa’s population will reside in seven countries: Nigeria, Ethiopia, the Democratic Republic of Congo, Egypt, Tanzania, Kenya, and South Africa. But, more important, 43% of Africans will belong to the middle or upper classes, up from 39.6% in 2013, implying considerably higher demand for goods and services. By 2030, household consumption is expected to reach $2.5 trillion, up from $1.1 trillion in 2015.
Nearly half of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%), and South Africa (11%). But there will also be lucrative opportunities in Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia. Any one of these countries would be a good bet for companies seeking to enter new markets.
By 2030, the sectors generating the most value in Africa will be food and beverages ($740 billion), education and transportation ($397 billion), and housing ($390 billion). But there will also be strong growth in consumer goods ($370 billion), hospitality and recreation ($260 billion), health care ($175 billion), financial services ($85 billion), and telecommunications ($65 billion).
Of course, much of this growth will depend on the African Union properly implementing its new Continental Free Trade Area, which would create a single market for goods and services, offering corporations many points of entry. Moreover, the CFTA will increase the need for connectivity, so there will be new opportunities to invest in infrastructure and sectors ranging from transportation and energy to information and communications technology (ICT) and water supplies. For its part, the African Development Bank can help investors find promising projects through its Program for Infrastructure Development in Africa.
Another major growth area between now and 2030 will be in African business-to-business spending, which will reach $4.2 trillion, up from $1.6 trillion in 2015. Here, the largest sectors will be agriculture and agricultural processing ($915 billion), manufacturing ($666 billion), and construction, utilities, and transportation ($784 billion), followed by wholesale and retail ($665 billion), resources ($357 billion), banking and insurance ($249 billion), and telecommunications and ICT ($79.5 billion).
The expected growth in agriculture and agricultural processing reflects the fact that food and beverages will constitute the largest share of total household spending. Moreover, 60% of the world’s unused arable land is in Africa, which still contributes a meager share of worldwide agricultural exports. That means there is a lot of room for growth. And, because severe hunger still affects many African countries, investors can even contribute to the public good by investing in fertilizers, machinery, water and irrigation systems, and other areas of the agriculture sector.
As of 2012, the African countries with the highest agricultural value-added in terms of annual growth included Burkina Faso, Ethiopia, Nigeria, Mali, Mozambique, Rwanda, and Tanzania. In addition, Angola, Morocco, and South Africa now all have sizable markets, and have committed to expanding their agricultural sectors.
According to the Harvard Business Review, Africa also has the potential to become “the world’s next great manufacturing center.” China is expected to lose from 85-100 million low-cost, labor-intensive manufacturing jobs by 2030, and Africa stands to capture many of them.
This helps to explain why manufacturing will be the second-largest sector in terms of business-to-business spending. Another reason is that many of the manufacturing opportunities in Africa happen to be in globally competitive sectors such as automobiles and transport equipment, refined petroleum, computers, and office and industrial machinery. South Africa, Egypt, and Nigeria are already becoming promising places to invest in these areas. And investors will also be able to find high returns and favorable business environments in Ethiopia, Morocco, and Rwanda.
Africa is the world’s last frontier market, and Western businesses need to start taking advantage of its tremendous potential, as Chinese firms already are. Doing business in Africa will also create sustainable jobs and advance the United Nations Sustainable Development Goals to eliminate poverty and hunger. And that, too, will be good for the bottom line. As the Business and Sustainable Development Commission has shown, pursuing the SDGs “could raise trillions in new market opportunities in ways that extend prosperity to all.”
Africa’s Alternative Path to Development
Stalled manufacturing growth across Sub-Saharan Africa has worried many development experts that the region has lost the opportunity to emulate East Asia's economic trajectory. But the region's burgeoning service sectors suggest that another, equally powerful development model is available.
WASHINGTON, DC – Recent projections indicate that several Sub-Saharan African countries will experience robust economic growth over the next five years. By 2023, around one-third of the region’s economies will have grown at an average annual rate of 5% or higher since 2000.
And yet, as The Economist observed last year, Africa’s development model “puzzles economists.” After all, only four of the continent’s high-growth countries are natural-resource dependent. Nor is overall performance due primarily to industrialization, as traditional development models would have predicted. What, then, explains the strong economic performance?
New research by the Brookings Institution’s Africa Growth Initiative and the United Nations University World Institute for Development Economics Research (UNU-WIDER) might hold the key to answering that question. According to the forthcoming book Industries Without Smokestacks: Industrialization in Africa Reconsidered, there is evidence to suggest that Sub-Saharan Africa is undergoing a more profound structural transformation than we think.
Africa owes this structural transformation not to traditional industries, but to new developments in tradable services and agro-industries that resemble traditional industrialization. Aside from horticulture and agro-business, these new industries include information and communication technology-based services (ICT) and tourism.
This is a departure from the historical norm. Traditionally, as Harvard University economist Dani Rodrik points out, economies that have sustained robust growth rates without relying on natural-resource booms, “typically do so through export-oriented industrialization.” But in Africa, manufacturing as a share of total economic activity has stagnated at around 10%, with economic activity moving from agriculture to services. And because the rate of productivity growth in services is only about half that of manufacturing, the aggregate productivity gains needed for sustained growth have fallen relatively short.
This process of premature deindustrialization is not unique to Africa. But it is more consequential for the continent, given the scale of its development challenges. Owing to its young, rapidly growing labor force, Africa now needs to create more than 11 million jobs in the formal economy every year. But as Nobel laureate economist Joseph E. Stiglitz has warned, Africa cannot replicate East Asia’s manufacturing-led model, so the question is whether it can leverage modern services to achieve economic development.
According to Foresight Africa: Top Priorities for 2018, a Brookings Institution report previewing the results of Industries Without Smokestacks, services exports from Africa grew more than six times faster than merchandise exports between 1998 and 2015. In Kenya, Rwanda, Senegal, and South Africa, the ICT sector is flourishing. In Rwanda, tourism is now the single largest export activity, accounting for about 30% of total exports. Ethiopia, Ghana, Kenya, and Senegal are all integrated into global horticultural value chains, and Ethiopia has become a leading player in global flower exports.
As these smokestack-less industries have grown, they have generated new patterns of structural change that are distinct from those of East Asia’s manufacturing-led transformation. But, if properly stewarded, they could play the same role in Africa’s development as manufacturing did in East Asia.
Manufacturing-led growth proved to be an effective development model in East Asia for three main reasons. First, manufacturing has higher productivity than agriculture, and it can absorb a large number of moderately skilled workers migrating out of the agriculture sector. Second, manufacturers benefit from technological transfers from abroad, so their productivity rises in line with global trends. And third, the shift to manufacturing in East Asia was oriented toward exports, which allowed production to be scaled up.
According to John Page, one of the editors of Industries Without Smokestacks, Africa’s growing service sectors share these same characteristics. In addition to being tradable, they have higher productivity and can absorb large numbers of moderately skilled workers. And like manufacturing, they also benefit from technological change and economies of scale and agglomeration.
Moreover, Africa’s smokestack-less service sectors have the added advantage of being less vulnerable to automation. Notwithstanding automation’s many benefits, it presents challenges for countries where the overriding priority is to create a sufficient number of formal-sector jobs.
While economists have been increasingly confident that Africa’s development model will be different from that of East Asia, they have been less certain about what shape it will take. An industries-without-smokestacks model offers one possible answer.
From a policy perspective, African leaders should explore more ways to support these industries’ growth, either through targeted reforms or by incorporating them into national industrialization strategies and broader development agendas. The development of industries without smokestacks can occur alongside efforts to develop those with smokestacks, thus offering a multifaceted approach for Africa to achieve structural transformation.
Powering Africa’s Future
Greater international investment in Africa’s struggling electricity sector could be among the best ways to empower Africa’s youth and keep talent at home. That is why Africa’s energy needs will rank high on the agenda when G20 leaders meet later this year in Germany.
CONAKRY – When G20 leaders meet later this year in Hamburg, investment in Africa’s future will be high on their agenda. German Chancellor Angela Merkel has already committed to using her presidency of the forum to promote “sustainable growth and jobs” on the continent, with a focus on “investments in infrastructure and renewable energies.”
Energy is not a new need for many Africans. While parts of Africa are energy-rich, supply remains frustratingly poor for most of the continent. Indeed, the African Development Bank calculates that some 620 million Africans live without access to reliable electricity.
But with advanced economies now expressing support for efforts to broaden the availability of this basic human need, perhaps the time has come to flip the switch on one of Africa’s biggest developmental – and societal – challenges.
According to the International Energy Agency, Africa accounts for 13% of the world’s population but only 4% of its energy demand. While residents of London or New York might complain of slow broadband or shoddy mobile phone reception, many people in African cities, towns, and villages still struggle with access to basic electricity to light their homes and power their businesses. As I have noted elsewhere, in 36 African countries, just two in five people have electricity throughout the day. In some countries, fewer than one in ten do.
Given this, it is not surprising that so many of Africa’s young people believe their best hope lies in traveling to Europe and beyond. Reliable electricity is about more than powering schools, hospitals, and homes. A reliable supply of power can allow young people to develop skills, find employment, and start a business – and can enable existing businesses to compete on a level playing field in regional and international markets. Because electricity is fundamental for economic development, providing communities and businesses with access to reliable, clean, and affordable energy will be my top priority during my stewardship of the African Union.
As the G20’s Hamburg agenda suggests, African and Western countries now have a shared incentive to work together to solve Africa’s developmental shortcomings. Africa cannot afford to lose generations of its young talent to places like Germany, France, and Italy, and European countries cannot afford to continue struggling with an influx of migrants. Among the best ways to reverse these trends is cooperation between developing and developed economics – particularly in the energy sector.
Opportunities for partnership abound. According to a February 2015 report by McKinsey & Company, Africa has an extraordinary reserve of untapped energy potential, including an estimated 10 terawatts of potential solar energy, 350 gigawatts of hydroelectric power, 110 gigawatts of wind power, and an additional 15 gigawatts of geothermal energy. Whereas it was once too expensive to exploit Africa’s vast renewable assets, technology is providing solutions that promote new enterprises and new opportunities. With sufficient international investment, Africa will have a chance to harness and use these resources.
We have already seen the impact new sources of power can have on African cities. Two years ago, residents of Conakry, Guinea’s capital, could not light their homes for more than six hours a day, and businesses went without the power they needed to operate. Now, thanks to the construction of the Kaleta hydroelectric dam by the China International Water & Electric Corporation, businesses have reliable power for up to 24 hours a day.
And it’s not just Guinea. From the huge pan-African Lekela wind and solar projects, to wind farms in Kenya and solar projects in Rwanda and Tanzania, large and small African countries alike are harnessing their natural resources to create jobs and produce clean, affordable energy.
What’s even more exciting is that these projects are not happening in isolation. They are being planned alongside a wider push to create a network of industrial-scale generating capacity across the continent.
International collaboration and investment are essential to these efforts. Working with international partners in West Africa, a groundbreaking electricity interconnector will allow power exports from Côte d’Ivoire to Liberia, Sierra Leone, and Guinea. And this will be the first of several new public-private initiatives aimed at transforming how African countries deliver power.
If we get this right, we will not only strengthen African economies’ capacity to provide jobs and a future for our young people. We will open up new trading opportunities for both Africa and the West.
Having spent the last year coordinating energy policy within the African Union, I have sensed a growing mood of impatience from Africa’s political leaders on the topic, a sentiment that is shared by many of our people. But African leaders are demonstrating a new determination to improve younger generations’ prospects, not least by electrifying our economies.
Never in my lifetime have I seen Africa’s political leaders so focused on overcoming some of the challenges that have held back our continent for so long. Working with international partners in the public and private sector, we can chart a new and prosperous path for Africa and a hopeful future for our youth. And if African leaders pair their determination with the G20’s pledge to invest in infrastructure partnerships, the future for Africa’s people will be bright in more ways than one.