Media around the world have been reporting on a recent African Development Bank study claiming that Africa has a new middle class of 313 million, a size on par with middle classes in India and China.1 This news was trumpeted in the West. The Wall Street Journal published an article entitled “A New Class of Consumers Grows in Africa;”2 a similar story appeared in the Financial Times entitled “Africa: Ripe for reappraisal.”3
Meanwhile, the World Bank is also excited about African growth, reporting “Sub-Saharan Africa in 2011 has an unprecedented opportunity for transformation and sustained growth.”4 Further jumping on the pro-growth bandwagon, the Harvard Business Review published its own positive outlook on African investment entitled “The Globe: Cracking the Next Growth Market: Africa.”5
However, some African newspapers are not convinced that the continent is experiencing a rebirth. South Africa’s Globe and Mail writes “Africa’s stunning growth can’t hide pervasive poverty.”6 A story on AllAfrica.com debunks the African Development Bank and World Bank reports, writing “the global financial agencies’ desperation for an African success story should be taken with not a grain, but a calabash full of salt.” 7
Recognizing, the multitude of challenges facing Africa including fragile governments and conflicts, poor infrastructure, corruption, environmental degradation, HIV/AIDs, etc, the media and, certainly investors, are still looking to Africa as the next frontier. This analysis will examine the state of African development, including its challenges, and will try to answer the question is Africa rising.
Current State of Economic Development
Statistics highlighting African development reveal a mixed picture. According to the African Development Bank study, 61 percent of Africans live on less than $2/day. Africa’s middle class of 313 million have $2-$20 to spend daily. However 180 million of them are vulnerable to economic shocks, as they only have $2-$4 to spend daily. There are also massive disparities on the continent: 100,000 of the richest Africans own 60 percent of the Africa’s GDP.8
Africa’s GDP growth is promising. Sub-Saharan Africa has been growing an average five percent annually for the decade;9 growth dipped in the last two years due to the financial crisis, but is expected to rise 5.5 percent in 2011 and 5.8 percent in 2012.10 Natural resources accounted for 24 percent of Africa’s GDP growth from 2000 to 2008; the rest is attributed to other industries.11
A Harvard Business Review article cites three factors contributing to Africa’s GDP growth: 1) decline in serious conflicts, 2) healthier governments due to decreased budget deficits and decreased inflation, and 3) adoption of market friendly policies, such as the privatization of state-owned enterprises, reduced trade barriers and corporate taxes.12
Yet, that growth might not be sustainable. The Africa Progress Panel states that the GDP growth is of low quality because there has been little structural transformation and diversification.13 In 2009, 16 of 47 African economies earned 50 percent of their earnings from a single export and for a few African countries one commodity (oil) accounts for 90 percent of the country’s GDP. There are exceptions: Kenya, South Africa, and Tanzania, have all diversified their exports.14
Much of Africa’s GDP growth is due the increased price of commodities. Africa has 10 percent of the world’s oil reserves, 40 percent of its gold ore, and 80-90 percent of chromium and platinum deposits.15 The increased price for commodities, such as gold and oil, as well as food products, has been a boon and a liability for the continent. Africa’s commodities have attracted a lot of foreign investment, particularly by the BRIC countries. China is mainly interested in commodities, especially oil, while India has also invested in the telecommunications sector.16
Unfortunately much of the gains have not trickled down to the citizens, and remains in the hands of the multinationals and the corrupt officials. Nigeria, the largest African oil exporter, has earned an estimated $6 trillion from oil, yet 70 percent of its citizens live in poverty. Kidnapping and violence in the Niger delta is widespread.17
The high price for food products and oil has been problematic for the urban poor, leading to protests and violent demonstrations in numerous countries, such as Uganda and Burkina Faso.18 African countries that are dependent on food imports are the most vulnerable to the high food prices. In general because of the recent economic crisis and the last food crisis in 2008, most governments have few funds to help the most vulnerable in the present food crisis.19
Challenges Facing the Continent
There are many problems plaguing Africa. A 2011 World Bank report identified the challenges as: undiversified production structure, low human capital, weak governance, state fragility, women’s empowerment, youth employment, and climate changethe worldwide rise in temperatures that has been blamed for severe weather in many parts of the world..20 A finding by Global Financial Integrity notes that $358bn flowed out of Africa between 2000 and 2008, due to corruption, trade mispricing, and other illicit activity.21
Political violence is another challenge. In May 2011, following the elections Nigeria, a wave of violence left hundreds dead.22 Similar post-election violence occurred in the Ivory Coast and Kenya.
Africa’s brain drain is both a challenge and source of income for the continent. The loss of skilled workers impedes development, decreases productivity spill-over, and reduces the potential for home-grown creative businesses, amongst other problems. On the other hand, remittances to Africa quadrupled from 1990 to 2010, providing $40 billion in income in 2010 alone.23
One source of problematic funding for the continent has been foreign aid. The national budgets of most sub-Saharan countries are now dependent on this aid and, for some countries, it accounts for more than 80 percent of the national budget. The World Bank estimates that about 30 percent of aid funding goes to corrupt officials. Furthermore, aid is often tied to the agenda of the giving country, therefore Africans are not setting the pace and direction of their own development.24
Public and Private Sector Initiatives
Governments, corporations, non-profits, and international organizations seem to be partnering together to tackle different challenges. The prevailing wisdom focuses on integrated solutions, while recognizing that each country has its own strengths and weaknesses.
The World Bank unveiled a new Africa strategy addressing: 1) competitiveness and employment, covering all traded goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item., and 2) vulnerability and resilience, covering macroeconomic shocks. Underlying these priorities is an emphasis on governance and public sector capacity. The World Bank seeks to strengthen citizens’ voices using communications technologies and is building capacity of African leaders through training and peer networks. The strategy will be implemented in partnerships among governments, businesses, NGOs, and other aid bodies.25
The United Nations recommends regional integration as a means to achieve economic development, such as integrating infrastructure, harmonizing standards and regulations, developing common approaches to macroeconomic policy, and sharing management of natural resources. Integrating would lead to a regional industrial policy because of the presence of market scale, large labor pools, diversified resources and a production base, which taps into the trend of growing urbanization in Africa. Integration will be achieved through policy decisions and initiatives made by African leaders and by African regional bodies.26
A number of investment firms are investing heavily in Africa. Helios Investment Partners, a UK investment firm founded by Nigerians, is nearly fully subscribed to its $900 million fund, the largest private equity fund for Africa. The US-based Carlyle Group is setting up offices in South Africa and Nigeria.27
The continent has seen a major expansion of the banking, telecommunications, and other services sectors, fueling growth across the continent. In Angola, retail banking is expected to grow 6.8 percent a year and telecommunications 5.5 percent until 2020. Nigerian telecommunications subscribers grew from 0 in 2000 to 63 million in 2008. Since 2000, Africa has added 316 million new telecommunication subscribers. Penetration of banking, telecommunications and other services has been less substantial in transition economies, such as Ghana and Senegal, and lower income countries, such as Ethiopia, and Mali.28
A new $650 West Africa Cable System (WACS), funded by consortium of foreign and African telecommunications operators will be connecting the continent. With 15 stations in West African countries, the system is expected to go commercial in early 2012, providing for Africa’s present and future telecommunications needs, including broadband. A 17,000-km Africa Coast to Europe (ACE) cable is also expected to be launched in 2012, connecting even more of West Africa. Countries that do not have cable access rely on expensive satellite connections and have limited Internet bandwidth.29
At the end of the day, only five percent of global foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. flows go to Africa. FDIThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment. in Africa is increasing though. It is expected to reach $40.8 billion in 2011, up from $32 billion in 2010.30
After an examination of Africa’s multitude of challenges and opportunities, the answer to the question “Is Africa Rising?” is “Yes, but…” The “but” reflects that work needed to be done by Africa’s governments, private sectors leaders, NGOs, and all the international partners to make the growth sustainable. Growth will only be maintained across the continent when peaceful conditions exist. Investors need to know that a change in government will not results in the nationalization of their companies or in sustained violence, precluding the business from operating. More of the wealth from the commodities market also needs to reach the people living in the regions where the commodities are produced because corruption and lack of opportunity will lead to violence.
1 Wonacott, Peter. “A New Class of Consumers Grows in Africa.” Wall Street Journal. May 2, 2011.
3 Wallis, William and Andrew England and Katrina Manson “Africa: Ripe for reappraisal.” Financial Times. May 18, 2011.
4 “Africa’s Future and the World Bank’s Support to It.” March 2011.
5 Chironga, Mutsa and Acha Leke, Arend van Wamelen, and Susan Lund “The Globe: Cracking the Next Growth Market: Africa.” Harvard Business Review. May 2011.
6 York, Geoffrey. “Africa’s stunning growth can’t hide pervasive poverty.” Globe and Mail. May 9, 2011.
7 Bond, Patrick. “Africa: Are ‘African Lions’ Really Roaring?” AllAfrica. May 12, 2011.
8 Wonacott, Peter. “A New Class of Consumers Grows in Africa.” Wall Street Journal. May 2, 2011.
9 “Africa’s Future and the World Bank’s Support to It.” March 2011.
10 York, Geoffrey. “Africa’s stunning growth can’t hide pervasive poverty.” Globe and Mail. May 9, 2011.
11 Chironga, Mutsa and Acha Leke, Arend van Wamelen, and Susan Lund “The Globe: Cracking the Next Growth Market: Africa.” Harvard Business Review. May 2011.
13 Wallis, William and Andrew England and Katrina Manson “Africa: Ripe for reappraisal.” Financial Times. May 18, 2011.
14 Chuhan-Pole, Punam, Vijdan Korman, Manka Angwafo, and Mapi Buitano. Africa Pulse. April 2011, Vol. 3.
15 Chironga, Mutsa and Acha Leke, Arend van Wamelen, and Susan Lund “The Globe: Cracking the Next Growth Market: Africa.” Harvard Business Review. May 2011.
16 Simpkins, Jason. “The Scramble for Africa: Profiting From World’s Largest Cache of Commodities.” MoneyMornings. March 12, 2011.
17 Greenwood, Louise. “Are Africa’s commodities an economic blessing?” BBC News. July 22, 2010.
18 England, Andrew. “Commodity prices threaten Africa’s recovery.” Financial Times. May 8, 2011.
19 Chuhan-Pole, Punam, Vijdan Korman, Manka Angwafo, and Mapi Buitano. Africa Pulse. April 2011, Vol. 3.
20 “Africa’s Future and the World Bank’s Support to It.” March 2011.
21 Wallis, William and Andrew England and Katrina Manson “Africa: Ripe for reappraisal.” Financial Times. May 18, 2011.
22 Wonacott, Peter. “A New Class of Consumers Grows in Africa.” Wall Street Journal. May 2, 2011.
23 Harding, Claude. “Africa’s brain drain – should we be worried?” April 27, 2011.
24 Jallow, Michael K. “Foreign Aid and Underdevelopment in Africa.” Senegambia News. May 13, 2011.
25 “Africa’s Future and the World Bank’s Support to It.” March 2011.
26 “Regional Integration and Human Development: A Pathway for Africa.” UNESCO. April 2011.
27 Wallis, William and Andrew England and Katrina Manson “Africa: Ripe for reappraisal.” Financial Times. May 18, 2011.
28 Chironga, Mutsa and Acha Leke, Arend van Wamelen, and Susan Lund. “The Globe: Cracking the Next Growth Market: Africa.” Harvard Business Review. May 2011.
29 Malakata, Michael. “West Africa Cable System fuels telecom competition.” Computer World. April 21, 2011.
30 Wallis, William and Andrew England and Katrina Manson “Africa: Ripe for reappraisal.” Financial Times. May 18, 2011.
* Image of kidnapping: http://www.flickr.com/photos/securitywatch/2470864584/