Earlier, positive sentiment in global markets and strong demand for resources helped write the narrative of “Africa rising.” However, the continent is so diverse that it has always been simplistic to have a single view of it, making a more nuanced view of a multispeed Africa more appropriate.
During the apparently good years of the commodity super-cycle, the majority of Africa’s economies grew rapidly, fueling the popular “Africa rising” narrative. Even the countries with little-diversified, structurally weak economies grew rapidly during the apparently good years of the commodity super-cycle. African economies were buoyed by the positive sentiment in global markets and strong demand for their resources, from China in particular.
However, in the different regions of Africa, fundamentally different factors were driving the continent’s seemingly synchronized growth, and so the “Africa rising” narrative was always flawed. Africa is so diverse that it has always been simplistic to have a single view of the continent. The vast geography, nascent markets, lack of connectivity, very low regional integration, and lack of trained people and knowledge networks make a more nuanced view of a multispeed Africa more appropriate.
Africa is so diverse that it has always been simplistic to have a single view of the continent.
A closer look at Africa’s economic growth shows that growth rates across the different regions vary widely. East Africa, the region least dependent on hard commodity exports, remains the best regional performer on the continent.1 Economies such as Ethiopia, Kenya, Rwanda, and Tanzania—all in East Africa—are the frontier growth stories of the continent.
Meanwhile, regions dependent on hard commodities, such as Southern Africa2 and West Africa,3 are showing signs of recovery and are projected to grow at a moderate rate. For the regions and the continent as a whole, growth is expected to recover from the lows recorded in 2016.
During the heyday of the “Africa rising” narrative, the three dominant Sub-Saharan Africa (SSA) economies—South Africa in the south, Kenya in the east, and Nigeria in the west—were all achieving strong growth.
The picture is different now. At present, Kenya’s growth remains strong, South Africa is struggling to get its growth into gear, and Nigeria’s economy is contracting. This means that only one of SSA’s three traditional anchor economies is performing robustly. This has an important influence on each region’s real GDP growth. The economic prospects of each regional economic power (REP) can sharply affect its respective region’s real GDP growth.
Looking ahead, the economic performances of the regions are set to reflect closely those of their REPs (figure 1). Investors traditionally look to enter each region by first gaining a foothold in the REP. However, this trend may start to change if REPs continue to show less ability to reform structurally than other countries in their respective regions.
The downturn suffered by many African economies following the drop in global commodity prices in 2014 has resulted in a repricing of their economies, with currencies falling against a resurgent US dollar and asset markets, too, tumbling. There is a positive side to this. It could well position them to attract more foreign direct investment (FDI) over the medium term as investors seek cheap assets.
The most evident sign of the painful repricing process was that the currencies of many African countries fell heavily (figure 2). In some cases, their value has suffered further as a result of errant monetary policies and political squabbles that have undermined investor confidence and heightened uncertainty.
Although some currencies recovered to some extent in 2016, this has not been enough to offset the losses from the earlier falls. These falls create opportunities for longer-term foreign investors. Assets whose prices were, arguably, highly inflated prior to mid-2014 have become much less expensive.
However, foreign investors will also continue to keep a wary eye on the actions of central banks and government agencies. Foreign exchange shortages have already resulted in governments tightening foreign exchange rules to protect dwindling reserves. Restrictions have been placed on those who can access foreign exchange, creating so-called “captured capital” that foreign companies cannot repatriate. In the near term, central banks are likely to put in place further forex restrictions until foreign exchange reserves start to stabilize again.
In order to shore up the balance sheets of governments under increasing fiscal pressure from reduced export earnings and currency depreciation, many countries are being forced to embark on long-overdue sales of state-owned assets. These programs typically follow intervention by the International Monetary Fund (IMF) (table 1). They may herald the beginning of a process not too dissimilar from ones that have either taken place or are now currently occurring in economies such as China and India, which, in the past, opposed private ownership.
Looking ahead, governments that are not yet under severe fiscal strain are likely to take a closer look at their debt sustainability. This, in turn, may provoke further privatization.
Will headline GDP growth translate into qualitative development across the continent? Economic history has shown that without diversification into manufacturing and services, and away from simple resource extraction, the long-term development prospects of countries are always bleak. The need for economic diversification in the continent is high, all the more so given that the growth cycle is at a low point.
For the most part, African governments have not taken advantage of the last decade’s growth spurt to move toward diversification—neither in their economic structures, nor in their export baskets. Resource-endowed countries, in particular, are anything but examples of sustainable or inclusive growth. Wealth is unable to trickle down into broader society from narrow extractive industries, especially in the face of rent-seeking governments.
Due to a lack of export diversification, most of Africa’s economies remain dependent on the vagaries of commodity prices in the international market and often on the price of a single resource (figure 3).
For the most part, African governments have not taken advantage of the last decade’s growth spurt to move toward diversification—neither in their economic structures, nor in their export baskets.
However, there are a handful of countries that have avoided the pitfall of overdependence on revenues generated by a single merchandise export, either through good fortune or as a result of strategic policy implementation. Their relatively more diversified export baskets have cushioned them from external shocks, giving rise to a more stable growth track record.
Even within oil-exporting countries, those with less dependence on the commodity still have a reasonably healthy growth outlook. To a lesser extent, countries that have a high dependence on a single non-oil export commodity are also projected to expand at lower rates. There are several countries in the East Africa region that have actively promoted export diversification. The strong growth outlook for East Africa is testament to this. The region’s growth prospect is supported by political stability and a pragmatic pro-business policy.
In order to move from what has been a resource-driven business model for most African economies toward a more diversified and sustainable one, a number of policies need to be put in place. Although there is no simple recipe for success, some of the ingredients for economic diversification include:
However, it is ultimately governance that will determine how resource rents are reinvested into the human capital that is needed to make African economies grow sustainably, with equitable development models, rather than remaining dependent on cyclical commodity prices.
The shifting value chain of production in Asia presents an enormous opportunity for economic transformation into manufacturing and higher-value-added exports.4 Rising cost pressures in China’s light industrial manufacturing sector will cause manufacturing capacity to be relocated to lower-cost foreign economies. As this shift in production out of China’s southeastern provinces takes place, forward-looking African countries could emerge as the “new Vietnams,” offering low-cost destinations for manufacturing investment from China.
The tens of millions of jobs expected to move offshore in the coming decade due to rising Chinese production costs is a big opportunity for Africa. Reform-minded and progressive African states could seize this opportunity and generate a 19th-century style industrial revolution, creating large amounts of employment and new industries in their own economies. Coupling this with the disruptors of the fourth industrial revolution, also called Industry 4.0,5 Africa could achieve the manufacturing competitiveness of early adopters of smart technologies, machines, factories, products, and services. African countries require suitably qualified workforces in order to take advantage of this potentially seismic economic shift.
Countries that recognize the need for economic transformation and successfully implement diversification drives into manufacturing and service-based activities will be primed to move toward a more sustainable, and ultimately more inclusive, growth trajectory.
The year 2016 arguably marked the bottoming of Africa’s growth downturn. Stabilization of global oil prices and the uptick in most commodity prices suggest that the growth outlook of the continent is improving.
With a new set of dynamics shaping African economies and their business environments, the pressures for structural reform have never been greater. Key considerations for businesses operating in or entering the continent include: