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
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