INSIGHT: Africa’s underpinnings of sustainable growth

Cape Town. In May 2000, the Economist magazine labelled Africa the “Hopeless Continent,” claiming that natural disasters, mass murders, a string of wars, institutional constraints and a lack of commitment to democratic practices meant that the new millennium had brought disaster rather than hope to Africa.

In March 2013, the Economist had a complete change of mind declaring that Africa is “a Hopeful Continent” since “African lives have greatly improved over the past decade-and the next 10 years will be even better”. It is heartening to note that negative perceptions about African economic prospects, which were the norm at the turn of the millennium, are less of an issue today. While many challenges persist, Africa has shown that there is a high level of commitment and potential to achieving economic success.

I would like to highlight some of the underpinnings of sustainable growth outcomes and prospects in Africa, and then look at some of the challenges facing monetary authorities.

Africa’s average growth rates have exceeded five per cent since 2000, double the pace of the 1980s and 1990s. Over the past decade, six of the world’s ten fastest-growing countries were from the African continent. Equatorial Guinea recorded an average growth rate of 17 per cent while the Angolan economy expanded by 11 per cent per annum between 2000 and 2009. In addition, seven other countries (Chad, Mozambique, Ethiopia, Nigeria, Rwanda, Sierra Leone and Tanzania) on the continent recorded in excess of 7 per cent per annum growth during this period.

With the outbreak of the financial crisis in 2008, there was justifiable concern that African economies were under threat. For example, the International Monetary Fund (IMF) kept revising downwards the growth forecasts for Sub-Saharan Africa (SSA) for 2009, from five per cent in October 2008, to 3.5 per cent in January 2009, to 1.7 per cent in April 2009 and 1.3 per cent by October. However, SSA recorded a growth rate of 2.6 per cent in 2009 which was twice the pace predicted by the IMF.

In addition, the pickup in economic activity in the post crisis period also exceeded forecasts with growth averaging 5. 3 per cent between 2010 and 2012. Part of the explanation for Africa’s resilience to the financial crisis was related to the rise in commodity prices. In fact, the boom in commodity prices during the 2000s provided a significant boost to export revenues given that mineral exports account for over half of the continent’s total exports. Statistics from the United Nations Conference on Trade and Development (UNCTAD) show that there was almost a fourfold increase in Africa’s exports from $149 billion in 2000 to $595 billion in 2011.

The slowdown in the traditional export markets in the advanced countries as a result of the global financial crisis was countered by the rise of emerging countries in the world economy. This facilitated the diversification of export markets which served to sustain the demand for Africa’s commodity exports. For example, the share of exports destined to the European Union (EU) and United States (US) declined from 47 per cent in 2000 to 33 per cent in 2011 while the share to the BRIC (Brazil, Russia, India and China) nations increased from around 8 per cent to approximately 23 per cent during the same period.

However, there was more to it than just commodity prices. Africa has been increasingly better managed, with the improvements in governance helping to promote an overall conducive environment to growth and development. There has been a steady rise in the contribution of domestic demand to gross domestic product (GDP). Part of the explanation here is the fast-growing middle class in many African countries.

Estimates by the African Development Bank (ADB) show that consumer spending by the middle class reached $680 billion and accounted for 25 per cent of Africa’s GDP in 2008. This figure is projected to reach $2.2 trillion by 2030. On the supply side, the rise of the services sector has been one of the defining characteristics of the structural change in African economies. Telecommunications, banking, and the retail sector have been flourishing in many countries. This has contributed to the improvement in Africa’s growth prospects, which in turn, has attracted the attention of foreign investors.

The concerted efforts of policy makers to address some of the major binding growth constraints, which were previously neglected, have also played a significant role in Africa’s enhanced growth performance over the last decade. Research from the McKinsey Global Institute (MGI) show that natural resources and activities directly related to the primary sector accounted for only about a third of Africa’s growth.

The World Economic Forum (The Africa Competitiveness Report 2013) estimates that more than half of Africa’s enhanced growth performance can be attributed to improvements in infrastructure. The Africa Competitiveness Report 2013.  Policy makers have devoted significant attention to addressing the growth constraints on the continent, the dividends of which have been reflected in the growth outcomes of the past decade. However, having said that, infrastructure bottlenecks still persist and further attention is needed in this area to enhance Africa’s growth prospects.

The 2013 “Doing Business Report” published by the World Bank earlier this year highlights that 66 per cent of countries in Africa enacted at least one business- enhancing reform in 2012 - this is double the number of countries in 2005. The report acknowledges that nine African countries rank among the top 20 most improved in terms of business regulations since 2009.

These include Benin, Burundi, Cote d’Ivoire, Ghana, Guinea-Bissau, Liberia, Rwanda, Sierra Leone, and Togo. These countries are bound to reap the benefits of these business-friendly reform measures. Foreign investors have taken note of these changes. Over the past decade Africa has increasingly been earmarked as a profitable investment destination by international investors. Foreign Direct Investment (FDI) to Africa increased from approximately $10 billion per year in 2000 to more than $50 billion in 2012.

According to the African Development Bank: Annual Development Effectiveness Review 2013, while the commodity price boom has played some part, the institutional and political changes coupled with the continent’s enhanced growth potential have been the main factors underpinning investor confidence in Africa. According to UNCTAD, greenfield investment into Africa constituted approximately 10 per cent of global greenfield investment between 2006 and 2012, compared to two per cent of global mergers and acquisitions that was directed to Africa. 

The author is deputy governor of the South African Reserve. His article first appeared in The African Executive Issue 449 | November 27 - December 4, 2013