Africa and Asia could become the epicentre of the global economy

Developed economies had for long been regarded as immune to major breakdown. We now know differently. Decades of structural challenges, coupled with poor financial controls and sheer human greed, have left Europe and America with, as Harvard economist Dani Rodrik rightly puts it, “debilitating challenges”.

Maria Ramos

Maria Ramos

That’s bad news for the citizens of developed countries. And, yes, the crisis poses challenges for Africa, too. However, the challenges now faced by developed economies also present a unique opportunity to close the gap between developing and developed economies. Rodrik says of Europe and America’s fragile recovery: “In such an environment, rapid growth in the developing world is the only thing that could propel the world economy forward and generate increasing demand for rich-country goods and services – the only silver lining in an otherwise dreary future.”

I agree with Rodrik. Africa and Asia have the potential to become the epicentre of the global economy. That moment in economic history is now. Our immediate aim must be to fully unlock that potential and turn it into historic outcomes.

The questions we must now pose ourselves are the following: what are the drivers of unprecedented growth in Africa and Asia? And, perhaps more importantly, what must Africa and Asia do, immediately, to capitalise on this historic opportunity to converge on developed economies?

The central thought I want to build a case for is that global economic power is shifting, albeit slowly, from Europe and North America to Africa and Asia.

Africa and Asia have already learnt the important lessons of the debt and financial crises of the 1970s, 80s and 90s. African and Asian economies learnt, through bitter experience, the importance of sound macroeconomic management. They also came to appreciate that the state and the market needed to work in partnership, and that the liberalisation of capital accounts and markets was not a panacea for growth.

But, more is required of Africa and Asia in order to sustain growth levels in the future, and it is worth exploring what else, beyond the conventional wisdom, might ensure that Africa and Asia become the dominant players in the world economy, soon.

So what are the big, little-known truths, about Africa and Asia?

Fifty years ago most of Asia was at least as poor as Africa. South Korea had the same income level per capita as Sudan and Ghana’s citizens were richer than virtually all the Asians. As recently as 1982, average per capita income (PPP basis) in developing Asia was less than half that of Africa, but by 2008 Asia’s per capita income was double that of Africa. Put another way, in the last 20 years per capita incomes in Africa have slightly more than doubled, while incomes in developing Asia have jumped by nearly 11-fold.

China in particular has achieved what no country in history has done, doubling per capita incomes every 10 years over a period of 30 years. Through concerted leadership, China is transforming from a rural to a manufacturing economy which has meant that over a period of approximately 25 years, roughly 600 million people were lifted out of poverty. This meant a decline in poverty rates from 85% to 15%.

Whereas, currently, Africa accounts for just 2% of global GDP and Asia a further 25%, by 2050 Africa’s contribution will have risen to around 5% and Asia’s to an astonishing 50% so together they will account for well over half of global GDP. Over the next five years Africa is likely to take the lead with the highest average growth rates and will become the fastest growing continent.

This trajectory stays the same even if we take a slightly longer term view. Over the next decade, for example, many economists are forecasting that Africa will grow at an average of 7% per year, thereby maintaining its position as the most rapidly growing continent.

It is natural, of course, to wonder what the sources of these growth forecasts are. OECD countries, for example, have never achieved these average levels of growth for even a five-year period, let alone sustained over a number of decades. This fact alone points to deep differences in the sources of growth. It is critical, for precisely this reason, that we be wary of cutting and pasting solutions from one region of the world to other regions without taking full cognisance of structural differences. Indeed, even talk about “Africa” and “Asia” belies the reality that different economies within these regions themselves differ in salient respects.

Part of the growth spurt is, nonetheless, linked to significant general differences between Africa and Asia, on the one hand, and Europe and North America, on the other.

Some of the differences include Africa’s demographic transformation – the doubling of the population in the coming decades, rapid urbanisation and a youth bulge; the extent of arable land on the continent; and the extensive and accessible commodities which, in turn, create significant manufacturing, trade and investment opportunities.

Of course, even the demographic transformation is a double-edged sword. On the positive side, a growing population implies greater demand for goods and services which, in turn, translate into increased economic opportunity and activity.

Beyond the economic benefits of increased consumption, there are also benefits for various industries that flow naturally from this demographic transformation. In countries such as Angola, for example, the construction industry is in boom because the reality of rapid urbanisation is, precisely, that new infrastructure must be built.

Africa’s demographic trends count powerfully in favour of sustained growth. Africa’s workforce will become the world’s largest by 2040. Already, there are over 500 million people of working age, and there will be over 1.1 billion by 2040. Africa is in the position to reap the demographic dividend of a bulging youth population, at a time when all other regions, and not least Europe, are entering a period of dramatically increasing dependency ratios.

There are, fortunately, already positive signs of human potential in many developing countries being successfully harnessed to achieve demonstrable economic output. The number of engineers that are produced in India, for example, leave Europe and North America with little hope of successfully competing with India for scarce engineering talent.

What we need, however, is for the human potential of all the citizens of Africa and Asia to be similarly developed. Pockets of excellence are worthy of praise. But they must be replicated across the regions.

The point to be taken to heart is a strategic one: an educated, healthy, highly skilled and self-sufficient workforce must be the foundation of an emerging markets success story.

Education is critical. Health is critical. Partnership between governments, civil society and the private sector, glued together by a mutually beneficial vision of an alternative reality for Africa and Asia, is crucial.

So, Africa’s and Asia’s demographic transformations, if exploited with appropriate policy interventions, can indeed be the catalyst for bringing about the growth forecasts I started this article with. Africa’s GDP is approaching $2 trillion, larger than Brazil’s, with its consumers spending around $900 billion per year. Within 10 years, around 2020, its GDP will have grown by a further trillion, consumer spending will be close to $1.5 trillion and the population will be well over 1.5 billion.

These changes will be effected across multiple parts of the economy. The four groups of industries which together will be worth over $2.5 trillion in annual revenues in Africa are:

  • consumer facing industries (retail, telecommunications, banking),
  • infrastructure-related industries,
  • agriculture, and
  • mining and minerals.

Growth versus Equity

We were recently reminded by development economist, Esther Duflo, that economic growth does not guarantee equity. Markets are blind to considerations of justice and fairness. If our aim is not only to grow the economies of Africa and Asia, but also to ensure that the poorest citizens in those regions share in the proceeds of economic boom, then we need to think through policy mechanisms that can ensure that the bigger economic pie we are building is not unfairly distributed.

But here is the challenge: government policies must be conducive to economic growth, while ensuring that there is an improvement in the welfare of the poorest.

Duflo rightly points out, furthermore, that we should be less concerned about what the sources of economic growth are in a society; and rather be more concerned with ensuring that once growth happens (whatever the source), a larger number of economically disenfranchised citizens are brought into the economic fold.

Yet, even this interesting hypothesis, however, is subject to debate. What, for example, are the policy tools that will ensure that kind of outcome? Access to micro-finance, for example, is often uncritically assumed to be key to unlocking “pro-poor” business ventures but Duflo discusses studies that suggest that there might at best be an inconclusive relationship between access to finance, and increases in productivity and economic growth, let alone reductions in inequality. In rural Morocco, for example, a micro-financing initiative led to more investment in existing activity among farmers but the increased revenue resulted in greater savings, and a reduction in the amount of time they spent working. More research is needed to understand the relationship between access to credit, and reductions in inequality.

The least uncertain policy intervention that can aid both growth, and equity goals, is to invest in education. In our country, South Africa, the amount of money spent on education is already a large part of the GDP, by international comparative standards, and the next question for education experts to resolve is how to spend this money more effectively to ensure that the education system plays a demonstrably positive role in reducing structural unemployment, and that it contributes to a reduction in inequality.

Duflo’s main insight, about the importance of investing in human capital, ultimately, is beautifully echoed by Rodrik, although he delivers the insight from a different direction, in a recent piece of analysis worth recalling.

Rodrik argues that we cannot assume that all developing economies will automatically converge on their developed counterparts. Many, sadly, will waste the historic opportunity. The ones that will succeed will have to transfer “ideas and knowledge from the technology frontier”.

Most importantly, we need to go beyond conventional wisdom, he rightly says, in finding the drivers of growth success. It is not obvious that a) macroeconomic stability; b) good governance and c) liberalisation will be sufficient; beyond this ‘conventional wisdom’ it is also important for there to be “investment in physical and human capital [which] need not be constrained by domestic savings; [developing countries] can borrow from global financial markets to finance their accumulation”.

These policy discussions are politically and economically difficult to negotiate. But they are unavoidable: growth without equity leads to a wealthier, but less just, society; equity at the expense of growth leads to a more just, but less wealthy, society. We must aim to get the balance right.

Concluding thought: reflections on the gap between perception and reality

I would like to step back from the data, and the economic case for Africa and Asia, and pose a set of questions that is important for us to grapple with as citizens and friends of these regions.

If, depending on how well we exploit our economic potential, we are on the brink of being at the epicentre of the global economy, then why is there a negative perception about our fate that has become gospel the world over? Why do many of us, in fact, join sceptical outsiders-looking-in in their pessimistic outlook on Africa’s future in particular? Why are so many of us negative about Africa’s future when we have every reason to be optimistic.

Perhaps these questions are best answered by a shrink and not a banker!

But as someone who spent a large part of my adult years in government and in the private sector, I have had the opportunity to observe, closely, how we project ourselves internationally, as a developing world, and I have seen how our leaders, in government and the private sector, behave on the international stage. I have also, as the head of a state-owned enterprise before my current job and now as a leader of one of the biggest banking groups, had an opportunity to work closely with countless ordinary citizens from our region.

I am convinced that we can activate Africa and Asia’s economic potential.

First, we need to believe in our own human potential. Markets around the world prey on confidence. Markets care as much, if not more, about perception as they do about reality.

To be sure, this negative perception about our region is changing, but it nevertheless still lingers in various guises. I am optimistic about Africa and Asia, not as a matter of blind citizenship loyalty, but precisely because the empirical facts about the economic directional changes we have undergone, are real. It is now up to us to tap into that potential by ensuring that the right policy decisions are made to ensure that the convergence on the growth levels of the developed economies, continue well into the 21st century.

Second, it is critical that we focus on long-term sustainability. Doing so is not incompatible with short-term goals such as financial stability. These policies are mutually reinforcing, rather than being genuine dichotomies we must choose between. Our policy choices must lean towards long-term sustainability in order for us to unlock the potential in Africa and Asia that I have focused on in today’s talk. To this end, it is worth ending with a clear enumeration of five ‘points of commonality’ from the Growth Report that gives us an understanding of what successful economies have in common.

Successful countries:

1) Fully exploited the world economy (openness, imported knowledge, exploited global demand)
2) Maintained macroeconomic stability (modest inflation rates and sustainable public finances)
3) Mustered high rates of savings and investment
4) Let markets allocate resources (prices guide resources; resources follow prices); and
5) Had committed, credible and capable governments.

Countries like Singapore can tick all of these boxes. Countries like China and South Africa can probably tick two or three. It is, however, when most of the countries in Africa and Asia can tick the majority of these boxes that the economic tide will have turned.

Maria Ramos is group chief executive of Absa. This article is an edited version of her speech at the Discovery Invest Leadership Summit 2011