The five trends powering Africa’s enduring allure

- by India Writes Network | India Writes Network

Over the course of the past decade, Africa has fundamentally reconstituted its role in the global economy. Emerging from the periphery, African economies, today, are increasingly integral cogs in a vastly altered global economic map. Measured by the IMF, between 2001 and 2010, no fewer than six of the ten fastest growing economies in the world (excluding those with populations lower than 10 million people) were from Sub-Saharan Africa (SSA). Contrasting this performance is the fact that, in the two decades to 2000, the only African country to rank in the top ten was Uganda, surrounded by nine Asian economies. Looking ahead, several African economies are set to register record advances in national output this year and next. Across SSA, growth in 2011 averaged an estimated 5.2% in 2011, compared to a world average of 3.9%. The IMF is further predicting that between 2011 and 2015, seven of the ten fastest growing economies in the world will be from SSA.

This positive trajectory is unlikely to alter. Indeed, five major trends will continue to power Africa’s growth and reconfigure the continent’s global relevance. These are: A larger, younger and more affluent population; rapidurbanisation; increasing absorption of telecommunications; natural resource wealth (crucially including agricultural potential; and a deepening financial sector.

Africa’s large, youthful, and increasingly affluent population

According to the United Nations, Africa’s population of 1 billion today is expected to increase by an average of 2.2% a year over the next decade, meaning that, by 2050, it will have doubled from today’s size to reach 2 billion. Two core benefits may spring from this undeniably swift population growth.

First, when placed aside the robust economic growth for which many African economies are increasingly becoming known, population growth will swell the continent’s consumer base – providing markets for local firms, creating economic opportunities, and attracting much-needed foreign investment. Second, for countries able to provide the necessary infrastructure and services, a youthful and growing population has the potential to yield a demographic dividend of young, empowered and increasingly educated workers to drive Africa’s services and manufacturing sectors—fundamentally reshaping the prospects of these institutionally stronger economies on the continent.

Consider that, today, Africa’s median age is 19.7, compared to 32 for the BRIC nations and 40.1 for Europe, and, according to the IMF, Sub-Saharan Africa’s per capita income has swelled by 70% since 2000, compared to growth of 15% between 1990 and 2000. Within the next five years Africa’s spending power will increase by 25%. Meanwhile, by 2050, 1.2 billion Africans will be of working age, meaning that one in four workers in the world will be African, compared to one in eight from China, reversing today’s balance. Falling fertility rates and improved healthcare (evidenced by enhanced life expectancy) are lowering dependency ratios, providing the means for potentially profound demographic gains.

Urbanisation is bringing Africans closer to economic opportunities

Not only is Africa’s population rising, but it is also urbanizing at an unprecedented rate, deepening the structural foundations of Africa’s ongoing economic momentum. According to the UN, around 40% (or around 400 million people) of Africans currently live in the continent’s cities. Staggeringly, this ratio is expected to elevate to 60% by 2050 – implying that, within the next forty years, approximately 800 million Africans will either migrate to or be born in the continent’s swelling urban nodes. An inevitable result of this seismic shift is the mushrooming of Africa’s commercial centres – cities such as Lagos, Kinshasa and Cairo are rapidly becoming some of the most populous in the emerging world. Yet, interestingly, virtually three-quarters of all urban growth in Africa is taking place in the continent’s smaller towns and cities, those urban agglomerations with populations of less than 750,000 people.

Urbanisation matters on a number of levels, though two potential gains are perhaps most salient. First, given the significant benefits of agglomeration and economies of scale, urban-based enterprises tend to be more productive, and thus contribute a greater share of GDP than rural equivalents. And, second, urban inhabitants on average enjoy far superior access to basic infrastructure, including education and healthcare. Consider, for instance, the World Bank analysis which shows how over 70% of urban inhabitants in Africa have access to electricity, compared to just 10% of rural inhabitants.

Leapfrogging through enhanced access to telecommunications

The manner in which technological advance has changed the world has been meaningful. Importantly, and unlike in the past, Africa has not been left stranded from these alterations. Indeed, new ways to connect, communicate and transact are shaping a new reality across the continent, forging new opportunities, and providing a bridge for economic development. Several indicators display the manner in which Africa has embraced ICT. Consider that, according to the International Telecommunications Union, while in 2000 there were 15 million mobile subscriptions in Africa, by the end of 2010 there were over 500 million; by 2015 it is believed there will be almost 800 million. Even though internet usage grew by an impressive 2,527%, compared to a world average of 480%, between 2001 and 2011, still only 10% of Africans have access to the Internet, implying tremendous room for expansion. Mobile banking has also been transformative. Since launching in 2007, Safaricom’s mobile payments system M-Pesa already has over 15 million users in Kenya, last year an amount equivalent to 20% of Kenya’s GDP was transferred via M-Pesa in the country. According to some estimates, by 2015 mobile banking will be worth over $20 billion in Africa.

Absorption of these new technologies matters a great deal for economic growth. The World Bank estimates that a 10 percentage point increase in broadband penetration in an average African country could lead to an increase in economic growth of 0.73 percentage points. And for every 10 new mobile phones per 100 people a country adds, GDP could increase by 0.8 percentage points.

Africa’s untapped natural resource potential

Data compiled by the United States Geological Survey estimates that Africa is home to 95% of the world’s platinum group metals reserves, 90% of chromite ore reserves, 85% of phosphate rock reserves and more than half of the world’s cobalt.  Even more importantly, production and reserves of core commodities have been expanding rapidly. For instance, between 2006 and 2010, copper production in Africa increased by 75%. And, British Petroleum statistics show how crude oil reserves have doubled since 1990, with natural gas reserves increasing by 70% within the same period.

However, perhaps more critically, Africa’s agricultural potential is capturing newfound attention in light of the world’s population recently reaching 7 billion, raising the spectre of food shortages and the social instability that this may engender. Indeed, food is widely expected to emerge as the ‘new oil’ of the 21st century.  While pervasive and meaningful challenges confront Africa’s agricultural sector, its potential is undoubtedly immense. It is estimated that over 60% of the world’s available and unexploited cropland is in Sub-Saharan Africa. In Sudan alone, upwards of 80 million hectares of arable land remains underused.  In order to feed a global population of 9 billion in 2050 it is estimated that upwards of $80 billion needs to be invested in developing world agriculture each year for the next four decades. Increasingly, these funds, from private and governmental institutions, will find their way to Africa. Importantly, much of the demand for Africa’s commodities will originate from the world’s rapidly advancing emerging nations. China alone accounted for one-quarter of total global platinum group metals consumption, 65% of global iron ore consumption, and, together with India, 15% of total crude oil consumption in 2010.

A deepening financial sector provides support to Africa’s surge

As incomes elevate, new technologies are absorbed, and urbanisation intensifies, demand for more sophisticated financial services will inevitably result. According to Bain and Company, the financial services sector in Africa expanded at a compound annual growth rate of 15% between 2004 and 2008, and now contributes 8% of the continent’s GDP. A range of supporting factors, underpinned by a sounder regulatory environment and swifter general growth, will conspire to allow the financial services sector to account for 20% of the continent’s GDP by 2020. Much of this growth will come from the expansion of retail banking as Africa’s vast unbanked, or at least under-banked, population gain access to financial services. An indication of the weight of growth potential can be found in the fact that, according to IMF data, bank credit to the private sector in Africa represents, on average, 15% of GDP, compared to over 100% in many developing economies. Fewer than one in five adults in key economies such as Nigeria, Kenya and Malawi have a formal relationship with a financial institution. Based on recent growth rates, it is feasible that over 300 million new deposit account will be opened in Africa over the course of the next decade.

Ties with the emerging world are elevating

Inspired by the shifts and opportunities outlined above, a host of large, and swiftly advancing, emerging powers are reinvigorating commercial ties with Africa. Indeed, hastened by the ongoing global economic downturn, the rise of the BRIC economies, as well as others such as Turkey, Indonesia and Thailand, are forging a new, fundamentally multi-polar, commercial globe. Importantly, Africa has participated in these alterations. Consider, for instance, that BRIC-Africa trade has increased more than ten-fold since 2001. Last year, China-Africa trade reached almost USD150 billion, making it the continent’s largest single trade partner. Africa’s abundant natural resources and fast-growing consumer markets offer vital new opportunities. In turn, new sources of capital are providing profound support to Africa’s ongoing economic growth assertions. To be sure, the advanced economies remain critical components of Africa’s broadening commercial vista; a wider array of commercial partners, if managed well, offers the potential for significant gains across the continent. Naturally, towering challenges remain for all African economies, yet, considering the trends outlined in this article, and the manner in which growth on the continent is finding structural pillars, there is undoubtedly great cause for cheer.

(Simon Freemantle is an analyst at Standard Bank Research)

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India Writes Network
India Writes Network
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