The background story to Africa rising.

Despite strong headwinds, the economy of Sub-Saharan Africa (SSA) is set to register yet another year of solid economic performance expanding at 5 percent in 2016 (IMF, 2015). In fact, between 2001 and 2015, the average growth rate for the region has been 5 percent. This is more than twice its pace in the 1980s (1.8 percent) and 90s (2.6 percent). Moreover, for the same period (2001 – 2015), the fastest growing economies in the world are found in SSA. As a result, the story of Africa rising has developed.

 

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There is a wide discussion about the factors underlying Africa rising with the role of high commodity prices driving growth dominating the discourse. Between 2000 and 2010, 30 percent of the continent’s growth was linked to the use/exploitation of natural resources (AFDB, 2014). Export of agricultural products, oil, metals and minerals accounted for some 70 percent of the export revenue in SSA. Consequently,  high economic growth observed in oil exporting countries such as Angola and Chad can be directly linked to the increase in commodity oil price which experienced highs of US$112 per barrel in 2012. Consequently, in Angola, fiscal revenues from oil account for two-thirds of goods and services sold.

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Since 2001, the price of commodities especially metals has boomed generating revenues for many African countries.

More than a resource boom

However, for non-oil commodity exporters, fiscal revenue has become more diversified as the chart below shows.

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In fact, natural resources, and the related government spending they financed generated only 24 percent of Africa’s GDP growth from 2000 through 2008.  The remaining two-thirds came from other sectors, including wholesale and retail, transportation, telecommunications, and manufacturing.

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For example, telecommunications have been a real game changer in SSA. In 2015, the total number of mobile phone subscriptions in Africa is over 900 million. Mobile phones have reduced the cost of communication on a continent where networks of both fixed line and physical transportation infrastructure are often inadequate, unreliable and depleted. More impactful is the innovation born out of telecommunications especially mobile technology. In East Africa, mobile technology produced mobile money. Mobile money (M-PESA) has made it easier for people to pay for, and to receive payments for goods and services, facilitating trade as a result. Electricity bills can be paid with a push of a few buttons instead of traveling to an often distant office. Furthermore, M-PESA has provided a safe storage mechanism which could increase net household savings and provides banking facilities to the adult population in a region where only 15 percent of the population own a bank account.

Fundamental changes

Africa rising is also fueled by fundamental changes such as better leadership to stronger institutions. Africa’s troubles have been, in large part, a failure of leadership where too many leaders have ruled by intimidation, violence and brute force. In the 1980’s, many authoritarian governments lost their legitimacy and the economic and financial resources to maintain control. As a result, the number of democracies in SSA jumped from just three in 1989 to twenty-three in 2008.  Furthermore, Africa has also benefited from more sensible economic policies. Twenty years ago, nearly all African economies were effectively bankrupt with large budget deficits, double digit inflation, and growing debt burdens. Poor economic management and the heavy hand of the state also scared off investors, provoked capital flight and led to stagnation and rising poverty. Today, budgets and trade deficits are somewhat manageable, the role of the state is smaller and the business environment is friendlier.

HDI improvements

In addition to GDP growth and structural changes, SSA has also experienced modest improvements in living standards. These standards are tracked by the human development index (HDI) which quantifies development through improvements in healthcare, education and poverty reduction. Human development is improving across SSA but greater effort is needed to sustain and accelerate development gains. Poverty levels are falling, incomes are rising and education and health outcomes are improving.   Africa has experienced a 1.5 percent annual growth in human development, fifteen countries are now considered to have medium to very high human development.

 

An increase in income has led to a fall in poverty rates.

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But, is Africa really rising?

A combination of GDP growth, fundamental changes, and HDI improvements have culminated into Africa rising. However, one of the key metrics that would back the Africa rising narrative tells a different story. Statics show that Africa in the past two decades has actually experienced de-industrialization. Manufacturing in total value added fell from 13 percent in 1990 to 12 percent in 2000 and 10 percent in 2011 (UNCTAD,2014). The most important factor of production for many manufacturers is their employees. As such, the cost and skills of the local workforce are key drivers to the development of the manufacturing sector. African labor is relatively cheap; however, this is more than offset by the lack of relevant skills, implying that the marginal revenue product of labor in many African is low compared to the average wage. This is illustrated by the graph below.

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Manufacturing’s impact on development has been widely studied. Very few countries have been able to grow and accumulate wealth without investing in their manufacturing industries. It is also labor intensive and promotes exports which have a direct correlation to the success of a country. Furthermore, the manufacturing sector is also more sustainable and less venerable to external shocks than commodities for instance. Many African economies today are based on raw commodity exports which make them highly susceptible to global price movements and in most cases, the general population does not directly benefit from the country’s natural resources. In contrast, a strong manufacturing industry contributes to development in the private sector which increases resilience to external shocks. However, as things stand today, Africa commands a meager 1.5 percent share of the world’s total manufacturing output. To put this in context, the combined national output of SSA is equivalent to the total gross domestic product (GDP) of Spain. As a result, many perceive Africa rising as a storm in a teacup.

The future- Strength in numbers

According to the IMF, Africa will account for 80 percent (3.2 billion) of the projected 4 billion increase in the global population by 2100. The accompanying increase in Africa’s working age population creates a window of opportunity, which if properly harnessed, can translate into higher growth and yield a demographic dividend which would extend the Africa rising narrative. A demographic dividend describes the interplay between changes in a population’s age structure due to the demographic transition and rapid economic growth. With almost 200 million people aged between 15 and 24, Africa has the youngest population in the world. And it keeps growing rapidly. Declines in child mortality, followed by declines in fertility, produce a “bulge” generation and a period when a country has a large number of working-age people and a smaller number of dependents. Having a large number of workers per capita gives a boost to the economy provided there are labor opportunities for the workers. More important, are the changes in worker productivity. Smaller family sizes mean that both families and governments have more resources to invest in health and education per child. It also means that women can enter the labor force. The graph below shows, the total number of dependents in SSA getting smaller over the coming years.

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By 2020, Africa will have 122 million workers more than any region in the world and 48 percent of them will have a secondary or tertiary education contributing towards a skilled labor force. World bank economist Amer Ahmed suggests that this demographic dividend could account for 11 to 15 percent of GDP growth in the region between 2011 and 2030—varying by region. However, the dividend can only be achieved if the burgeoning working population can be gainfully employed. Yet, statistics show that SSA is experiencing de-industrialization affecting the chances of decreasing unemployment. Furthermore, although foreign direct investment (FDI) has been rising over the past year’s, a big chunk of it has been directed towards extractive industries that do not absorb the increase in labor supply. As such, some are predicting a demographic disaster.

Africa’s looming demographic disaster

A large portion of people aged between 15 and 24 in Sub-Saharan Africa are involved in self-employment in the informal and agricultural sectors (World Bank, 2011). For example, Mali has 94 percent, Ethiopia 74 percent, and South Africa 31 percent of the total population employed in the informal sector (Adams, 2008). However, employment for the 15 to 24 age bracket, compared to the total population, has remained largely stagnant despite this age group increasing in size. This means that more and more youth are not fully absorbed in the economy. Compounding this problem is the increased rural-urban migration of youth. For example, according to Mckinsey& Company, 50 percent of youth in Africa’s most populous nation (Nigeria) are unemployed.  The end result is booming city populations with idol minded youth. This is a catalyst for crime, drug abuse, political instability and illegal travel.

To avoid a demographic disaster, governments across the continent have been urged to adopt policies that encourage smaller families such as, addressing social norms on fertility and reduce child marriage. Furthermore, governments are advised to continue improving education and human capital, do more to attract foreign direct investments and reduce trade barriers. Additionally, governments need to improve policies and institutions for domestic savings and investment.  

 

 


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