Africa’s growing four engines

It is time for the companies that are already operating in Africa to act and expand their horizon of work for further strengthening the economy of Africa. For other companies that have still not reached Africa need to note down their points of benefit and also need to understand that early entry into emerging economies provides opportunities to create markets, establish brands, shape industry structures, influence customer preferences, and establish long-term relationships. Business can help build the Africa of the future. And working together, business, governments, and civil society can confront the continent’s many challenges and lift the living standards of its people.

The continent’s four most advanced economies – Egypt, Morocco, South Africa, and Tunisia – are already broadly diversified. Manufacturing and services together total 83 percent of their combined Gross Domestic Product (GDP). Domestic services, such as construction, banking, telecom, and retailing have accounted for more than 70 percent of their growth since 2000. They are among the continent’s richest economies and have the least volatile GDP growth. With all the necessary ingredients for further expansion, they stand to benefit greatly from the increasing ties to the global economy.

Domestic consumption is the largest contributor to growth in these countries. Their cities added more than ten million people in the last decade, real consumer spending has grown by 3 to 5 percent annually since 2000, and 90 percent of all households have some discretionary income. As a result, consumer-facing sectors such as retailing, banking, and telecom have grown rapidly. Urbanization has also prompted a construction boom that created 20 to 40 percent of all jobs over the past decade.

The continent’s four most advanced economies – Egypt, Morocco, South Africa, and Tunisia – are already broadly diversified. Manufacturing and services together total 83 percent of their combined GDP.

Looking ahead, these diversified economies face the challenge of continuing to expand exports while building a dynamic domestic economy. Apart from Egypt, their exports have grown much more slowly than those of other emerging markets, in part because they have unit labor costs (wages divided by output per worker) two to four times higher than those in China and India. Like other middle-income countries, such as Brazil, Malaysia, and Mexico, these African states must move toward producing higher-value goods. They have started to do so – witness South Africa’s and Morocco’s automotive exports – and should continue to build on their comparative advantages, which include proximity to Europe and facility with European languages. Along with other countries seeking to make this jump, Africa’s diversified economies need to improve their education systems. Broadly speaking, they already have the continent’s highest rates of literacy and school enrollment; the next step will be to increase secondary and tertiary enrollments and improve the overall quality of their education systems. Another priority for the diversified economies is to continue building their internal service sectors, which will be important sources of future employment. As per MGI research, internal services account for virtually all net job creation in high-income countries and for 85 percent of net new jobs in middle-income ones. The diversified economies can also expand manufacturing, particularly in food processing and construction materials, for local and regional markets. This move could increase exports and reduce the need for imports, easing these countries’ current-account deficits.

Oil exporters: Enhancing growth through diversification

Africa’s oil and gas exporters have the continent’s highest GDP per capita but also the least diversified economies. This group – Algeria, Angola, Chad, Congo, Equatorial Guinea, Gabon, Libya, and Nigeria – comprises both countries that have exported oil for many years and some relative newcomers. Rising oil prices have lifted their export revenues significantly; the three largest producers (Algeria, Angola, and Nigeria) earned $1 trillion from petroleum exports from 2000 through 2008, compared with just $300 billion in the 1990s. For the most part, Africa’s oil and gas exporters used this revenue well, to reduce budget deficits, fund investments, and build foreignexchange reserves.

Economic growth in these countries remains closely linked to oil and gas prices. Manufacturing and services account for just one-third of GDP – less than half their share in the diversified economies. The experience of emergingmarket oil exporters outside Africa illustrates the potential for greater diversification. In Indonesia, manufacturing and services account for 70 percent of GDP, compared with less than 45 percent in Algeria and Nigeria – even though all the three countries have produced similar quantities of oil since 1970. Nigeria provides an example of an African oil exporter that has begun the transition to a more diversified economy. Natural resources accounted for just 35 percent of Nigeria’s growth since 2000, and manufacturing and services are growing rapidly. Banking and telecom, in particular, are expanding thanks to a series of economic reforms. Since 2000, the number of Nigeria’s telecom subscribers increased from almost zero to 63 million, while banking assets grew fivefold.

The oil exporters generally have strong growth prospects if they can use petroleum wealth to finance the broader development of their economies. The experience of other developing countries shows that it will be essential to make continued investments in infrastructure and education and to undertake further economic reforms that would spur a dynamic business sector. But like petroleum-rich countries in general, those in Africa face acute challenges in maintaining political momentum for reforms, resisting the temptation to overinvest (particularly in the resource sector), and maintaining political stability – in short, avoiding the “oil curse” that has afflicted the other oil exporters around the world.

Transition economies: Building on current gains

Africa’s transition economies – Cameroon, Ghana, Kenya, Mozambique, Senegal, Tanzania, Uganda, and Zambia – have lower GDP per capita than the countries in the first two groups but have begun the process of diversifying their sources of growth. These countries are diverse: some depend heavily on one commodity, such as copper in Zambia or aluminium in Mozambique. Others, like Kenya and Uganda, are already more diversified. The agriculture and resource sectors together accounts for as much as 35 percent of GDP in the transition countries and for two-thirds of exports. But they increasingly export manufactured goods, particularly to other African countries. Successful products include processed fuels, processed food, chemicals, apparel, and cosmetics. As these countries diversified, their annual real GDP growth accelerated from 3.6 percent a year in the 1990s to 5.5 percent after 2000.

Expanding intra-African trade will be one key to the future growth of the transition economies, because they are small individually, but their prospects improve as regional integration creates larger markets. If these countries improved their infrastructure and regulatory systems, they could also compete globally with other low-cost emerging economies. One study found that factories in the transition countries are as productive as those in China and India but that the Africans’ overall costs are higher because of poor infrastructure and regulation – problems that the right policy reforms could fix. The local service sectors (such as telecommunications, banking, and retailing) in the transition economies also have potential. While they are expanding rapidly, their penetration rates remain far lower than those in the diversified countries, creating an opportunity for businesses to satisfy the unmet demand.

Strengthening the basics

The economies in the pre-transition segment – the Democratic Republic of the Congo, Ethiopia, Mali, and Sierra Leone – are still very poor, with GDP per capita of just $353 – one-tenth that of the diversified countries. Some, such as Ethiopia and Mali, have meager commodity endowments and large rural populations. Others, devastated by wars in the 1990s, started growing again after the conflicts ended. But many pre-transition economies are now growing very fast. The three largest (the Democratic Republic of the Congo, Ethiopia, and Mali) grew, on average, by 7 percent a year since 2000, after not expanding at all in the 1990s. Even so, their growth has been erratic at times and could falter again. Although the individual circumstances of the pre-transition economies differ greatly, their common problem is a lack of the basics, such as strong, stable governments and other public institutions, good macroeconomic conditions, and sustainable agricultural development. The key challenges for this group will include maintaining peace, upholding the rule of law, getting economic fundamentals right, and creating a more predictable business environment. These countries can also hasten their progress with support from international agencies and new private philanthropic organizations that are developing novel ways to tackle poverty and other social issues.

In a more stable political and economic environment, some of these countries could tap their natural resources to finance economic growth. The Democratic Republic of Congo, for example, controls half of the world’s cobalt reserves and a quarter of the world’s diamond reserves. Sierra Leone has about 5 percent of the world’s diamond reserves. Ethiopia and Mali have 22 million and 19 million hectares of arable land, respectively. If these countries could attract businesses to help develop their resources, they could push their economies upward on the path of steadier growth. If recent trends continue, Africa will play an increasingly important role in the global economy. By 2040, it will be home to one in five of the planet’s young people, and the size of its labor force will top China’s. Africa has almost 60 percent of the world’s uncultivated arable land and a large share of the natural resources. Its consumer-facing sectors are growing two to three times faster than those in the Organization for Economic Co-operation and Development (OECD) countries. And the rate of return on foreign investment is higher in Africa than in any other developing region. Global executives and investors cannot afford to ignore this. A strategy for Africa must be part of their long-term planning.