Investor’s dreamland

Several factors make Africa an investor’s dreamland. McKinsey Global Institute, a think tank, writes, “The rate of return on foreign investment is higher in Africa than in any other developing region.”

Africa’s economic growth is driven by a number of factors, including an end to many armed conflicts, abundant natural resources and economic reforms that have promoted a better business climate.

More political stability is lubricating the continent’s economic engine. The UN Economic Commission for Africa (ECA) in 2005 linked democracy to economic growth. “Good governance is central to improving economic performance and promoting economic progress in Africa,” argued Abdoulie Janneh, the ECA executive secretary at the time.

Another important factor is accelerating urbanisation. While it may strain social services in the cities, it has also led to an increase in urban consumers. More than 40% of Africa’s population now lives in cities, and by 2030 “Africa’s top 18 cities will have a combined spending power of $1.3 trillion,” McKinsey projects. The Wall Street Journal reports that Africa’s middle class, currently numbering 60 million, will reach 100 million by 2015.

Still a long way to go

Africa’s current economic indicators may appear upbeat, but analysts say it is not yet time to celebrate. “I’ll be cautioning against excessive exuberance,” says Donald Kaberuka, president of the Africa Development Bank (AfDB). “A sustained slowdown in advanced countries will dampen demand for Africa’s exports,” adds Christine Lagarde, managing director of the IMF. Europe accounts for more than half of Africa’s external trade, and tourism could also suffer as fewer Europeans come to Africa, denting economies – like those in Kenya, Tanzania and Egypt – that rely heavily on tourism.

The South African central bank also warned in May that the crisis in Europe, which consumes 25% of South Africa’s exports, poses huge risks. And adverse effects on Africa’s largest economy will have devastating consequences for neighbouring economies.

Another flashpoint is the resurgence of political crises. Due to the Arab Spring, economic growth in North Africa nose-dived to just 0.5% in 2011. Recent coups in Mali and Guinea-Bissau could have wider economic repercussions. “Mali was scoring very well, now we are back to square one,” says Mthuli Ncube, the AfDB’s chief economist. Ethiopia, Kenya, Uganda and other countries are militarily engaged in Somalia, which may slow their economies. And Nigeria is grappling with Boko Haram, a terrorist sect in the north of that country.

Africa also faces other headwinds. The 2011 Africa Economic Report of the ECA and African Union warned of Africa’s “jobless recovery,” noting that investors are concentrating on the extractive sector, particularly oil, gold and diamonds, which produces few jobs.

Another report, the African Economic Outlook 2012 (produced by the AfDB, ECA, Organisation for Economic Cooperation and Development and UN Development Programme) reinforces concern about unemployment, adding that about 60% of Africa’s unemployed are aged 15 to 24 and about half are women. In May, UNDP raised an alarm over food insecurity in sub-Saharan Africa, a quarter of whose 856 million people are undernourished.

Talk of a rising African middle class is hasty, the AfDB argues. Defined loosely as those who live on $2 or more a day, most “middle-class” Africans have daily expenditures of no more than $4, notes the bank. Potential economic shocks could easily throw many families into poverty, below the $2 threshold. High income inequality also clouds the picture. In 2008, for example, just 100,000 of Africa’s 1 billion people had a total net worth of $800 billion, equivalent to 60% of the continent’s gross domestic product.

Despite such hurdles, Africa’s economies do not seem set to slow down. Ernst & Young insists that this “story has to be told more confidently and consistently.” But equally important is the need to ensure that the continent’s economic growth also creates jobs and helps rescue millions from poverty.

This article was first published in Africa Renewal