Are African Lions One-Trick Ponies?

Jun 10, 2013 | Updated Aug 10, 2013

The price of oil rose from $20 a barrel in 1999 to $145 in 2008. Africa, which has plenty of the black gold, saw its economy grow by leaps and bounds during the same period. Six of the ten fastest growing countries in the world between 2000 and 2010 were African. The fastest of them all was oil and diamond rich Angola. So a reasonable question to ask would be how much of this growth is a result of a cyclical rise in global demand for primary commodities. Is talk of this being 'Africa's turn' a red herring?

McKinsey Global Institute estimates that natural resources accounted for only 24 percent of Africa's GDP growth between 2000 and 2008. Countries with significant resource exports did not grow faster than countries without. Perhaps the most persuasive statistic that indicates a secular change in Africa's fortunes is its growth in labor productivity. After declining by 0.5 and 0.2 percentage points in the 1980s and 1990s respectively, the continent's labor productivity grew by 2.7% between 2000 and 2008.

I recently had the pleasure of getting insights into the issues from some of the most thoughtful people in this field. In the words of Kwesi Botchwey, Ghana's former Minister of Finance and keynote speaker for our Africa's Turn? conference at The Fletcher School, "this time there really is reason to believe that Africa's time has come." Joseph Kitamirike, CEO of the Ugandan Securities Exchange, who also spoke at the conference listed three important drivers of this phenomenon -- the winding down of most armed conflicts in the region, democratic elections becoming the norm rather than the exception, and finally, macroeconomic stability that has created the foundation for microeconomic growth. Mr. Kitamirike made the astute observation that the Arab Spring ought to more accurately be called an African Spring as the countries in which democracy has been successfully established are all African nations. This, he opined, is a reflection of a continent-wide social transformation that has accompanied rising economic expectations.

Empirical evidence lends much credence to Mr. Kitamirike's argument. The average number of deadly conflicts which resulted in more than 1000 deaths a year declined from 4.8 in the 1990s to 2.6 in the 2000s. For the continent as a whole, inflation fell from an average of 22% in the 1990s to 8% after 2000. Budget deficits fell from 4.6 to 1.98 percent of GDP.

Steven Radelet, former Chief Economist of USAID, echoed Mr. Kitamirike's sentiments while characterizing the ongoing transformation of Africa's political landscape as a move away from 'big man' politics of patrimonialism towards rule-based institutions and democratic elections. This, combined with economic reforms that opened domestic economies to foreign investment and improved microeconomic conditions for business through the removal of stifling regulations, has been crucial to Africa's growth story.

Despite these optimistic assessments of Africa's prospects, it's worth remembering that Africa's share of the $3 trillion global trade in goods and services, for 2010, was only 3% -- a figure that has been steadily diminishing for decades. A staggering 80% percent of the continent's export earnings come from primary, mostly unprocessed commodities. Kingsley Moghalu, Deputy Governor of the Central Bank of Nigeria, minced no words when he stated, "if you think that Africa is on the cusp of some economic breakthrough, I hate to burst your bubble," going on to make the case that Africa, a continent of over a billion people, still remains a marginal player in globalization. He identified four reasons why Africa has suddenly become prominent on the radars of international investors and analysts: the global financial crisis, the Eurozone recession, slowing down of the BRICs, and political instability in North Africa. These external factors have been responsible for focusing attention on opportunities in Sub-Saharan Africa, not necessarily because there has been a rapid rise in the competitiveness of the region. For Mr. Moghalu, key to the sustenance of Africa's growth would be to convert the comparative advantages it enjoys in the production and export of natural resources into competitive advantages in manufacturing, agri-business, and services.

What does all this mean for policymakers and business leaders with an interest in Africa? Substantial opportunity exists for the growth of a thriving and diversified private sector, but investing in infrastructure and human capital is the key to unlocking this potential. Of the $72 billion currently being spent on new infrastructure in Africa every year, private financing accounts for 13 percent, up from 7 percent in 2000. McKinsey Global Institute estimates that an additional $46 billion needs to be spent on infrastructure, and an increasing part of this will have to come from the private sector. Africa's combined consumer spending is expected to expand from $860 billion in 2008 to $1.4 trillion in 2020 if real GDP continues to grow at its current rate. For investors, industries such as consumer goods, telecom, and banking present the greatest opportunities going forward.

In order for Africa to truly realize its vast potential in areas outside of extraction of natural resources, such as agribusiness, protectionism and other discriminatory measures that hurt African exporters, both by developed countries and by large, fast growing developing countries, need to be curbed. This would mean, among other things, moving forward on some of the issues that remain unresolved in the Doha Development Agenda such as reducing the level of trade distorting subsidies that cotton growers in the United States receive: something that African cotton growing countries like Benin, Burkina Faso, Chad, and Mali have been asking for years.

Robust intra-African trade can provide powerful incentives for economic diversification but this currently accounts for a mere 10 percent of the region's total exports. Compare this to the ASEAN region where intra-regional trade accounts for 60% of total exports. The reasons for this include the lack of connecting infrastructure, and insufficient resource and production complementarities between countries. UNCTAD estimates that an investment of $32 billion to improve the main intra-African road network alone could generate around $250 billion in additional trade over a 15 year period.

For the African growth story to be more than the "one-trick" resources story, its leaders have to prioritize the diversification of their economies. Natural resource extraction offers immediate benefits and poses little pressure to undertake messy structural reform, but this growth path will always be fickle, beholden to unpredictable external factors and unlikely to translate into tangible improvements in the lives of most Africans. How to make this transition requires an understanding of the many Africas within the continent and their unique situations.
For a broader discussion of these and other issues about how real Africa's rise is, you can read our conference report (from where this article is extracted) at here.

Bhaskar Chakravorti is Senior Associate Dean of International Business and Finance and founding Executive Director of the Institute for Business in the Global Context at The Fletcher School at Tufts University. He is the author of the book, The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World and organized the conference "Africa's Turn?" at The Fletcher School.