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Marco Annunziata and Todd Johnson: Betting on Africa’s Future

Africa is at a crossroad. Over the past decade and a half, the continent has emerged as the most promising growth region, exceeding world growth by an average of 2 percentage points per year.

 

Commodities have helped: Sub-Saharan Africa’s fortunes began turning when the commodity cycle picked up steam in the late 1990s. Established commodity exporters capitalized on higher prices, while untapped natural resource deposits across the continent attracted investors’ capital and foreign expertise. Commodity exports have also driven a fast expansion in trade with Asia, especially China.

But there is a lot more to Africa’s growth story. Economic policies have improved, political institutions have strengthened, and many countries registered improvement in four (of five) dimensions of the World Bank’s governance indicators: control of corruption, government effectiveness, political stability and absence of violence, and regulatory quality.

Improvements in governance have played an especially important role. Here, Africa’s governments have mostly followed a gradual approach, putting in place what the academic literature calls “just enough governance” — the idea that countries at the early stages of economic development should not try to do everything at once. This has helped accelerate economic performance, but requires persistence and perseverance to make the improvements deep and sustainable.

Africa’s transformation is not yet self-sustaining. Governance has improved significantly, but from a low starting point, so reforms lag other growth markets. Economic growth has become more broad-based, but remains overly dependent on commodities. Doing business in the region is still difficult, with execution risk high. The risk that progress might stall, or even backslide, is still present. The region’s future could play out in one of four different scenarios, depending on the speed of progress in economic and governance reform, as illustrated in this infographic:

Africa_Governance
To keep the continent on track for the best scenario, Africa Ascending, political and business leaders will need to remain focused on four key priorities.

Infrastructure: Lack of infrastructure is the biggest obstacle to faster economic development. More dense and efficient transportation networks would facilitate trade and communications, allowing economic development to spread into rural areas. More reliable and distributed power would greatly facilitate manufacturing activities. Better access to power, together with portable cost-effective healthcare, would ensure better living conditions and health standards — making it easier for citizens to be more engaged in the political process and supporting a further improvement in governance.

Trade: Accelerating both regional and global trade integration could generate much more significant benefits. The first meaningful steps have been taken, notably with a move towards free trade both within and across the East African Community, the South African Development Community, and the Common Market for Eastern and Southern Africa. A proposed Bilateral Investment Treaty between the U.S. and East Africa would substantially expand opportunities for countries in the region, as would deeper trade integration in West Africa. Altogether, the creation of a common African market underpinned by a joint infrastructure strategy would make it easier for African companies to achieve scale and gain competitiveness on the global scene, boosting growth, employment and productivity.

Human capital: Education and training is another essential pillar. If strong growth continues and spreads to a wider range of sectors, the limited availability of a qualified local workforce would become a serious constraint. Company-sponsored training programs could play an important role in filling the gap, creating the skills needed by fast-developing industries. Governments and companies should cooperate in the development of professional schools closely aligned to industry, to match the supply of skills with demand.

Innovation: African businesses are very attuned to the fact that the pace of innovation is accelerating, disrupting industries across the globe. African business executives polled in the 2014 GE Global Innovation Barometer rank above the global average in their conviction that the meshing of the digital world with the physical world of machines is bringing about a new Industrial Revolution. A strong majority (about 80 percent) of business executives in Kenya, Nigeria and South Africa see innovation as a positive force that has already helped raise living standards in their countries. New waves of disruptive innovations, such as the one we are experiencing today, can allow emerging markets players to leapfrog existing technologies and gain a precious competitive advantage.

African businesses are well aware of the opportunity. While the challenges are substantial, Africa’s willingness to be an enthusiastic early adopter of new technologies can be a massive advantage. The viral success of M-Pesa, the mobile-banking and micro-financing system that quickly bypassed the relative under-development of traditional banking, is a case in point.

The road ahead is long, but the progress already achieved is impressive. We are optimistic. This is the time to bet on Africa.

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Marco Annunziata is
 the Chief Economist
 and Executive Director of Global Market Insight at GE. Todd Johnson is the Security & Market Risk Leader for GE Africa.

Marco Annunziata

Johnson, Todd (GE)

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