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SpirE-Journal 2010 Q2

Africa: the emerging world’s final frontier?

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Africa: the emerging world’s final frontier?

With key economies in Africa averaging 5% to 6% economic growth, the continent is starting to grab the attention of international firms seeking new markets to compensate for lack-luster growth in the OECD. While the global recession affected the continent badly, the outlook for 2010 seems positive. A notable trend has been the increase in trade between Sub Saharan Africa and Asia, particularly India and China. Will Africa be able to sustain this growth and emerge as the emerging world’s Next Big Thing?

Africa Comes of Age

While the Asian powerhouses of India and China grab all the headlines these days, there is one global growth story that tends to be overlooked: Africa. In 2007 and 2008, the Great Lakes region of Kenya, Tanzania and Uganda and even the drought stricken Horn of Africa experienced GDP growth rates on par with the Asian giants. According to the newly revised International Monetary Fund (IMF) estimates, this year and in 2011 Africa is expected to grow by 4.8 percent.

1960 was known as the ―Year of Africa.‖ In 2010, 17 African nations will celebrate their 50th anniversary of independence. June 11th 2010 will see the first ever FIFA World Cup to be held on African soil, in South Africa. All eyes will be on Africa to see how many goals it scores off the football field this year.

Comparing Economic Performance of Asia and Africa

During the period of decolonization in the 1950‘s and 1960‘s, the growth of Asia was comparable to that of Africa. Africa possessed large endowments of natural resources and was expected to achieve rapid economic growth. Four decades ago, the per capita income of Sudan in Africa was comparable to that of South Korea in Asia. Today South Korea is on the list of world‘s richest countries while Sudan is still one of the least developed countries in Sub Saharan Africa (SSA). Unfortunately, this comparison holds true for most countries in these two regions.

One of the most obvious differences between these two regions was in terms of their participation in the world economy. As Asia increased its participation in the world economy, Africa moved in the reverse direction.

For example, trade as a percentage of GDP for Malaysia in 1986 was 33.6% and this grew to as high as 70.2% in 1996. However, for South Africa one of the largest SSA economies, trade as a percentage of GDP was 17.2% in 1986 and this grew to only 21.5% in 1996.

In the 1970‘s and 1980‘s, when non-communist Asia was booming, much of Africa eschewed integration in the world economy, becoming marginalized and stagnant instead.

The key factors that led to the divergence in growth paths Africa and Asia were differences in economic policies, resource endowments, geo-political ties to the industrial economies and domestic governance arrangements. It is generally accepted that a combination of policy, institutional and structural conditions have led to the crucial developmental differences between the two continents.

The turnaround for most of the African economies finally began during 1995, with modest increases in per capita incomes. Since 2001, the African economic growth has been sustainable with growth rates of over 6% per annum partly due to the boom of resources price but also due to the improved economic policies. Factors that enabled economic growth were the adoption of less-distorted macroeconomic frameworks, increased reliance on private sector as a driving force for economic growth, and the improvement in governance in many countries.

Where Africa stands today

Between the years 2002 and 2007, GDP in SSA rose at an average annual rate of over 6%, consistently higher than the world average.

After the global financial crisis of 2008-09 slowed growth in Africa significantly, the countries of SSA are poised for a speedy recovery in 2010. Initially the countries that were most affected by the global recession were the ones that were highly integrated into world markets, such as South Africa. As global trade collapsed, the impact spread to oil exporters (including Angola and Nigeria), manufacturing exporters (Morocco and Tunisia) and commodity exporters (Botswana).

However, most of the SSA economies have since recovered well. Part of the reason was the application of superior macroeconomic policies during the upswing period, which gave the SSA countries some leverage during the downturn. Industrial production picked up in South Africa towards the last quarter of 2009 and throughout the region exports have been rising since the second quarter of 2009. In 2009, many African countries decided to allow their government deficits to rise and to reduce policy interest rates, thus helping their economies to absorb the impact of the external shocks.

African Countries to Watch

The IMF ranks eight African countries among its top 20 fastest growing economies in 2010.

According to these numbers, the Republic of Congo and Angola are both growing faster than China and India which are ranked 5th and 11th in the world respectively.

1. Republic of Congo

Republic of Congo is endowed with vast natural resources. While economists often speak of the ―natural resource curse‖ (where resource endowments foster economic instability, institutional corruption and commodity-dependence), countries like Russia and Malaysia have shown that natural resources, if properly managed, can help drive growth in non-commodity economic sectors. Congo‘s economy is a mixture of agriculture and oil-based industries. Slumping oil prices since late 2008 slowed economic progress, but the recovery of oil prices in late 2009 reversed that effect.

The country has taken many steps to liberalize its economy by reforming the tax code and adjusting investment, labor, timber and hydrocarbon regulations. Key sectors such as banking, telecommunications and transportation were privatized in 2002-2003.

Some of the country‘s main export commodities are cut diamonds, petroleum products, lead products, timber and saw mill products, cocoa, coffee and sugar, while the main import commodities include chemical products, machinery, food products, iron steel and other metals cum metal products.

2. Angola
In 2006 and 2007, oil-rich Angola was one of the world‘s fastest growing economies. Real GDP surged by around 20% and these growth rates were predicted to last for the next 5 years. However, the oil price crash along

with the global recession affected Angola, lowering growth to 1.5%. However, the post-recession environment appears positively rosy.

In 2008, foreign direct investment was $15.5 billion compared to $600 million in the 1990s.

Today, the pace of development in Angola is staggering. Roads, ports, railways, hotels, shopping centers, hospitals, universities — even whole new towns — are rising up out of the bush. None of this would be possible without Angola‘s vast oil reserves, estimated at 13 billion barrels. Discovered in the 1950s, oil was one of the few factors that drew investment throughout the civil war. Production rose from 172,000 barrels a day in 1975 to 800,000 in 2002. Today, it stands at 1.9 million, making Angola SSA‘s biggest oil producer after Nigeria. Oil accounts for more than half of the country‘s GDP, 80 percent of the government‘s revenues and 90 percent of export earnings.

Another promising sector is Angola‘s steel industry which is in the process of being privatized. Two of the biggest steel producers in Angola have been revived by a private firm and are seeking to diversify into the construction and tourism sectors as well. Other growing industries include mining and agriculture.

Key exports products include diamonds, gas, coffee, as well as sisal and fish products. Angola‘s imports include machinery and electrical equipment, vehicles and spare parts as well as medicines, food and textiles.

3. South Africa

Traditionally, South Africa has been known as the powerhouse of Africa. The country has led the continent in industrial output, mineral production and generation of a large proportion of Africa‘s electricity. The country has well developed financial, legal, energy and transport sectors as well as modern infrastructure to support efficient distribution of goods throughout the region.

Preparations for the World Cup have already boosted the economy in terms of infrastructure spending. It is estimated that the World Cup will pump in around $29 billion in direct spending and create 159,000 new jobs.

South Africa is presently exploring Free Trade Agreements with Brazil and also India and China in order to further the government‘s export oriented trade agenda.
Mining is South Africa‘s largest industry sector followed by manufacturing, oil and gas, chemicals, agriculture and tourism.

4. Botswana

Botswana prides itself as a model of a successful African democracy. The country produces 22% of the world‘s diamonds making it the world‘s top producer and accounting for half of the government‘s revenue.

However the global recession hit the country‘s mines and halved output. Tourism, which was Botswana‘s other economic mainstay, has also taken a hit during the recession.

Unlike much of Africa, Botswana has a decent infrastructure with good roads, communications and dependable utilities.

The country‘s main exports include diamonds, vehicles, nickel, copper and meat. Botswana imports products such as foodstuffs, machinery and transport equipment as well as textiles and petroleum products.

5. Nigeria

Nigeria is the most populous nation in Africa and has traditionally been one of the continent‘s leading economies as political powers. The country‘s economy revolves around oil. Unfortunately, decades of mismanagement and poor governance have made it one of the poorest countries in the world. Agriculture is another important industry which involves a large percentage of the population.

Since 2008, the government has started implementing market reforms to modernize its banking system, curb inflation and resolve disputes over the distribution of earnings in the oil industry.

Following the enactment of the Free Zone Act in 1992, the Calabar Zone became the first industrial zone to be fully operational in 2001. Today the country has around 10 operational Free Zones in addition to many that are under construction.

Four industrial sectors are considered as priority areas of development by Nigeria‘s government – engineering industries, agriculture, chemicals/petrochemicals and construction.

Key exports include petroleum and related products as well as cocoa and rubber. Nigeria‘s main imports include machinery, chemicals, transport equipment, manufactured goods, food and live animals.

Asia’s Foray into Africa

Today China and India are at the centre of Afro-Asian trade and investment relations. The acceleration of trade between the two regions is one of the most significant global economic trends in recent years. In 2000, Asia received only 14% of exports from Africa. Today the figure stands at 27%.

 

The above graph shows that exports from Africa to Asia grew at 15% during 1990-1995. Growth accelerated to 20% in the last five years.

Africa‘s export growth to Asia has surpassed that of all other markets in the last decade. As of 2005, Asia was Africa‘s third most important export destination, lagging only the EU and US, and making up 27% of total exports. That figure would now almost certainly be much higher.

In the last few years, there has been high demand in India and China for natural resources, due to industrial growth and increasing household consumption, fuelling African exports to the region. Petroleum is the leading commodity in African exports to Asia, followed by ores and metals. However, African exports to Asia are not limited to minerals alone. Other exported products are labor intensive goods and raw or semi processed agricultural commodities which are required for either industrial or consumer usage. Due to low cost structures and abundant labor, Africa has the potential to export labor-intensive manufactures, processed commodities, food and tourism services to India and China.

During the last 8 to 10 years, Africa‘s imports from Asia have also increased steadily. These imports have been in the form of manufactured goods or even intermediate products which are then assembled in Africa and shipped out to other markets.

FDI flows between Asia and Africa have also been increasing during this period. As of mid-2006, the stock of China‘s FDI in Africa was estimated to be $1.18 billion. In the past decade, the vast majority of Chinese and Indian FDI into Africa has been concentrated in extractive industries. In the last few years, however, this has begun to diversify into other sectors such as agro-processing, apparel, power generation, telecommunications and road construction.

According to the World Bank, knowledge might be the greatest gift that India and China can give to Africa. India and China can partner with SSA countries on agricultural projects where they have considerable technical expertise to impart. For example, China has pledged $800 million to modernize Mozambique’s agricultural infrastructure. It has also financed the building of a dam and canal to bring water to arable land. Additionally, at least 100 Chinese agricultural experts are stationed in several research stations within Mozambique, working with local groups to increase crop yields and otherwise improve the performance of the agricultural sector.

Is Africa the New Asia?

Asia and Africa differ in many aspects. Moreover, each region is made up of at least 45 diverse countries, each with their own opportunities and challenges. Because of this, it would not be possible to directly apply a single successful Asian development model to Africa. Countries in Asia follow models varying from the free port and service dominated approach of Singapore to the export-led model of Thailand and South Korea.

Out of Africa‘s total population of 1 billion, the rapidly emerging middle class is estimated to be around 300 million. Though only some of them posses the disposable income found in Asia and the West, these people are driving demand for goods and services in the continent.

A good deal of the growth in Africa today is driven by not the sale of raw materials such as oil or diamonds, but by the burgeoning domestic market. According to a study by the Harvard Initiative for Global Health, between 2005 and 2015 the share of the working age population will rise in Africa. A fast growing, economically active population will help to provide the initial impetus to industrial production. If handled properly, this can enable a country to become more productive. East Asia is a model of this. According to some calculations, demography accounted for about a third of East Asia‘s phenomenal growth over the past 30 years.

Africa‘s emerging consumer market is a huge attraction to Multi-National Companies (MNC‘s) seeking to diversify their markets. Some world-famous MNCs in Africa include Shell, Diageo, Nestle and Unilever. There are also major regional players such as South Africa based Shoprite Holdings Ltd which is Africa‘s largest food retailer operating in 17 countries across the continent.

In order to grow in emerging markets like Africa, MNC‘s are adapting to local demand patterns. For example, Unilever‘s business in India took off after it started designing products for the local market, rather than selling old product lines from the West. A similar approach was taken by Unilever‘s Nigerian subsidiary and the result was a pre-tax profit of $36.4 million for the first nine months of 2009. Products such as India‘s TATA trucks are a favorite in Africa, due to the fact that they are easier to repair and cheaper than Japanese and Western brand truck. Coca – Cola and SABMiller, which bottle and distribute Coca-Cola in 10 African countries, have tapped into African markets using informal supply chain methods. In areas where standard delivery drop by truck is not possible, the company uses a manual distribution programme which involves two people – one who sits in the store and takes money and the other with a wheelbarrow serving the neighborhood.

While much of the boom in Africa can be attributed to external factors such as evolving trade patterns, there are many internal changes as well. Despite Africa‘s reputation for corruption, the continent is experiencing unprecedented political stability compared to the past. As a result of this, countries such as Kenya and Botswana now boast privately owned world-class hospitals, charter schools, and toll roads that are actually safe to drive on.

Another interesting factor is the waves of expatriates returning to Africa to start their own businesses. This is similar to the reverse brain drain that happened in India and China in 1990‘s which helped to transform these countries. For example, Ghana, Botswana and South Africa have seen an unprecedented ―brain gain‖ in recent years. According to some reports, the number of Angolans seeking jobs back home has spiked 10 fold to 1,000 in the last five years. These returning expatriates could provide a vital stimulus to kick-start self-sustaining growth in domestic markets.

Africa‘s booming population can also be used to its advantage in the same way India harnessed its population to provide low-cost services for global markets. Today the labor cost in Asia is skyrocketing. As a result of this, MNC‘s have shown higher profit margins in Africa than in Asia or South America. Many Chinese firms are exploring outsourcing basic manufacturing to Africa. The World Bank is now helping China to set up an industrial zone in Ethiopia, the first of perhaps several offshore centers akin to the sprawling free-trade zones that opened up China‘s economy in the 1980s.

Export processing zones (EPZs), which are now a global phenomenon, are yet to fully take off in Africa. The primary reason for this was the inadequate legal or regulatory framework existing in Africa. However countries such as Mauritius, Madagascar and Kenya are notable exceptions. Kenya inaugurated its EPZs program in early 1990. Kenya is planning to create Special Economic Zones (SEZs) in 2010 to replace its EPZs. These SEZs will have economic laws that are more liberal than typical national laws. This will offer greater incentives to investors such as tax waivers and tax holidays, while addressing the weaknesses found in the EPZs which were set up in the 1990s.

Free Trade Agreements – Blazing a Trail

The negotiation of Free Trade Agreements (FTAs) between Africa and Asia is a new phenomenon. While the African Growth and Opportunity Act (AGOA) and Everything But Arms (EBA) have improved trade relations between Africa and developed countries, FTAs between Africa and Asia would mainly be seeking mutually beneficial commercial arrangements for their respective domestic economies.

One of the natural FTA partners sought out by Asian countries is South Africa. However, the response to FTAs from South Africa has been mixed. While mining companies in South Africa welcome FTAs with China to boost future exports, local textile and clothing firms are wary of FTAs due to the competition.

The negotiation of Free Trade Agreements (FTAs) between Africa and Asia is a new phenomenon. While the African Growth and Opportunity Act (AGOA) and Everything But Arms (EBA) have improved trade relations between Africa and developed countries, FTAs between Africa and Asia would mainly be seeking mutually beneficial commercial arrangements for their respective domestic economies.

One of the natural FTA partners sought out by Asian countries is South Africa. However, the response to FTAs from South Africa has been mixed. While mining companies in South Africa welcome FTAs with China to boost future exports, local textile and clothing firms are wary of FTAs due to the competition.

India and its largest African trading partner, Nigeria, are expected to sign agreements on trade and investment in June, 2010. This is likely to double bilateral trade to over $20 billion in the next five years. South Africa is also exploring free trade agreements with Mercosur, the European Free Trade Association, India, China, Nigeria and possibly the USA. China is a major investor and trade partner for Africa. This has opened the door to possible China-Africa FTAs on a bigger scale in future, including those that cover investments and trade in such as financial services and tourism.

A major development in the region is the African Free Trade Zone (AFTZ), announced at the EAC-SADC-COMESA Summit in October, 2008 by the heads of Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC). It is hoped that the AFTZ agreement would ease access to markets within the AFTZ zone and help boost intra-regional trade and growth.

Africa: a future heavyweight in the world economy

There can be little doubt that Africa will raise its economic weight in the world eventually, but how long will this take? The world is ready for the insertion of the African growth engine, but is Africa ready for the world?

Despite its recent respectable record of growth, huge barriers to entrepreneurship remain.

Transparency International regards corruption to be rampant in 36 of the 53 African countries.

Another key challenge faced in Africa is the high cost of infrastructure. The continent is severely under-penetrated in terms of viable roads, railways ports and airports. Operating costs in Africa are amongst the highest in the world for this reason. Mobile telecommunications carriers sometimes have to build roads to transport their equipment. The cost of transporting goods within the continent is often more expensive than shipping the same goods to Europe.

Other features of the African business climate also deter investment: unfavorable regulatory regimes, weak governance standards, a dearth of skilled labor, limited access to local finance and the terrible impact of HIV-AIDS across the continent.

One thing is certain, though: it is not a question of if Africa will achieve economic lift-off but when. Global firms will naturally gravitate towards the last region of the world where the base is low enough to generate exponential growth in markets and low-cost production, particularly when that region has a young, one billion-strong population. When this happens hinges on the emergence of one or more countries to serve as a good example to spur others, in the same way that more open and progressive states and cities in China and India created a fervor for economic liberalization – and ultimately growth – across those countries.

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