Africa: Africa’s Big Boom

Africa is undergoing a period of unprecedented economic growth. According to The Economist, six of the ten fastest-growing countries in 2011 were in Africa. Average external debt on the continent has fallen from 63% of GDP in 2000 to 22.2% this year, while average inflation now stands at 8%, down from 15% in 2000. This positive trend is likely to persist, given that it is based on structural geographic and demographic factors, such as rising exports, improved trade conditions, and steadily increasing domestic consumption.
But Africa’s national governments still face significant challenges, given the wide variety of factors at play in each country. Economic characteristics vary significantly by country, depending on, for example, whether a fixed or floating foreign exchange regime is in place, and which natural resources the country controls.
As a result, prospects also differ by country. Although the average annual GDP growth rate for the entire continent has been forecast at roughly 6% in 2012, South Africa’s economy is expected to grow by only 3.6%, while Côte d’Ivoire is expected to grow at a rate of 8.5%. In order to tailor national economic policy effectively, policymakers must identify the drivers of – and barriers to – growth in each country.
Africa’s growth potential has caught the attention of foreign investors, who have contributed to a rapid increase in capital expenditure. In 2008-2011, sub-Saharan Africa received on average 4.4% of all funds invested in developing countries worldwide, and 3.1% of investment spending. In fact, foreign direct investment in Africa has been on the rise since the early 2000’s, increasing fivefold in 2000-2010. But foreign investors remain aware of the challenges faced by certain countries. For example, much of the Horn of Africa (particularly Somalia), Mali, and Guinea Bissau carry significant political risk.
Nevertheless, many economic indicators suggest that the bullish trend is sustainable, and that the conditions needed to change Africa’s image and international trade position are finally in place. In 2011, 67% of potential investors interviewed said that they considered Africa attractive, while half of them planned to invest in sub-Saharan Africa before 2013. And a growing number of large corporations count Africa among their primary strategic targets for business development.
The growth of small and medium-size enterprises will be a key factor in coping with the risks associated with rapid economic expansion. In fact, SMEs already play a crucial role in African economies, involved as they are in all sectors of rural and urban economies.
SMEs are open to innovation, technology transfer, and industrialization. They are ideally positioned to make an impact locally, given their willingness to adopt positive environmental and governance practices and their ability to improve living conditions by creating permanent jobs.
African SMEs also point the way to dynamic, sustainable, and fair growth. They have demonstrated a genuine capacity to withstand the effects of crisis, owing to their flexible capital base and limited involvement in the international financial system.
And yet, despite their potential, African SMEs are subject to significant internal and external pressures, including poor infrastructure, high labor costs, deficient governance, and a dearth of skilled workers. Above all, they lack access to long-term finance.
Large enterprises can secure financing from banks and other institutional lenders. And microfinance institutions can help finance small enterprises. But the needs of growing medium-size enterprises cannot be met by microfinance institutions. As a result, medium-size enterprises are the missing link – known as “the missing middle” – in many African countries’ economies.
Indeed, Africa’s SMEs are often unable to secure long-term financing. High information and transaction costs contribute to the perception that investing in SMEs is complicated and expensive.
Often young and under-capitalized, these smaller enterprises appear riskier because they are usually found in poorly regulated markets characterized by an uncertain political or economic environment. This supports the view that investments in SMEs take as much – if not more – time to return a profit than less risky investments with a wider scope.
But, in recent years, many African governments have worked to reduce administrative and legal obstacles for SMEs. In 2000-2010, the average time needed to register property rights was reduced from 120 days to 65. The time needed to obtain an export license fell from an average of 230 days in 2005 to 212 days in 2010. And, over the same period, the time needed to enforce a contract was reduced by nearly a month.
African governments know that SMEs help to create new production channels for domestic markets, thereby generating significant added value. A larger domestic market encourages diversification of the national economy, reducing dependence on exports of natural resources and, in turn, exposure to global price fluctuations. This makes economies significantly less vulnerable to external shocks.
African countries’ drive toward domestic development has been accompanied by accelerating regional integration. Rather than allowing Europe and North America to continue to dominate their economic development, sub-Saharan African countries are increasingly pursuing partnerships with their neighbors.
As a result, roughly 15% of sub-Saharan African trade is intra-regional, up from only 7% in 1990. In 2010, South Africa alone accounted for 4% of sub-Saharan imports and 6% of exports. Remarkably, this reflects the emergence of new trade flows, not simply the redirection of existing ones.
Africa’s shift toward regional integration encourages competitiveness by distributing more effectively production factors – such as inputs and equipment – and by allowing greater labor mobility. But it still has a long way to go.
African governments should pursue intra-regional trade liberalization, institutional integration, and infrastructure development with greater determination than ever. Their commercial enterprises need to progress in these areas in order to develop further and improve living standards for all.