Africa’s boom is here to stay,Good but when and where?

18 January Print

Africa’s boom is here to stay,Good but when and where?
The 21st century has seen sustained improvements in the economies of most sub-Saharan African countries. Jean-Michel Severino and Emilie Debled explain why it’s more than just a growth spurt, but warn that Africa’s national governments still face major policy challenges
The new millennium marked the beginning of a period of unprecedented economic growth in Africa. In 2011, The Economist was able to report that “over recent years, African countries account for six out of the ten countries experiencing the fastest growth”.It is likely to be a long-lasting trend, given that it is based on such structural geographic and demographic factors as rising exports, improved conditions of trade and steadily increasing domestic consumption. These are all reflected in some very positive economic indicators: External debt for the African continent has fallen from 63% of GDP in 2000 to 22.2% this year, while inflation in Africa now averages 8%, down from 15% in 2000.These overall figures should not mask, however, the diversity of African countries. To speak of African growth risks being simplistic when the real challenge is to discern the different drivers and barriers to growth. The wide variety of factors at play in each country calls for caution, and much more analysis is needed to tailor policies to each country individually. Their economic characteristics differ widely, depending on the foreign exchange regime in place (fixed or floating) and each country’s natural resources, particularly oil. Although the forecast average 2012 growth rate for the entire continent is around 6%, it is only 3.6% for South Africa and 8.5% for Côte d’Ivoire.

Growth in Africa can perhaps be described as both intriguing and seductive. There is a widespread perception that the continent is engaged in a process of development, and that in the context of the current global economic crisis investors are turning towards the “African miracle” in increasing numbers as they look for fresh opportunities and economic partnerships.

Direct foreign investment has been on the rise since the early 2000s, and has multiplied fivefold during the decade 2000-2010. This investment flow is altering the foreign exchange position of many African economies, injecting growth into national budgets and encouraging technology transfers. The banking and infrastructure sectors are in the lead in terms of capital investment, but more than half of all the transactions carried out in 2010 involved food products, healthcare, the media or telecommunications.

Foreign investors have demonstrated a real desire to participate actively in African growth, which helps to explain the rapid progress of the capital investment sector. From 2008 to 2011, sub-Saharan Africa received on average 4.4% of all the funds received by developing countries around the world, and 3.1% of investment spending. But it’s also worth stressing that foreign investors remain well aware of the challenges faced by certain countries; political risk in the Horn of Africa, Mali or Guinea Bissau, for instance, remains relatively high.

For all that, many of the indicators strongly suggest that this bullish trend is sustainable and that at last the necessary conditions are now in place to change Africa’s image and its international trade position. In 2011, 67% of potential investors interviewed said they now considered Africa attractive, and half of them had plans in place to invest in sub-Saharan Africa before 2013. And a growing number of very large corporations now consider the African continent to be among their primary strategic targets for business development.

The development of small and medium-sized enterprises (SMEs) is going to be key to dealing with the risks involved in African growth. Small and medium-sized African enterprises already play a major role in the economic landscape, and are involved in all sectors of the rural and urban economies. They also offer a guide to the growth conditions that will be dynamic, sustainable and fairly distributed.

Small and medium-sized African enterprises have shown a very real capacity to resist the impacts of crisis, thanks to the flexibility of their capital base and their low levels of involvement in the international financial system. They are also the most open to innovation, technology transfer and industrialisation. They are best positioned in terms of local impact because of their openness to the adoption of positive environmental and governance practices. Most important of all, African SMEs play an essential social role through their improvement of people’s living conditions and creating permanent jobs.

But we also shouldn’t minimise the many internal and external pressures on Africa’s SMEs; these include poor infrastructure, high labour costs, governance that is at times deficient and human technical capacity that can be weak. Above all, these SMEs lack access to long-term finance. Medium-sized companies are often the missing link in an African country’s economy, and make up what has come to be known as “the missing middle”. Very small enterprises are able to receive financing through microfinance institutions, but these circuits are less appropriate to the needs of growing medium-sized enterprises. As to larger enterprises, they are better able to secure financing from banks and other institutional lenders, thanks to their greater maturity and structuring.

Long-term investment has therefore tended to ignore Africa’s small or medium-sized enterprises. Investors have concluded that they involve high information and transaction costs, so that investing limited amounts into SMEs was both expensive and complicated. The perception has been to investors that investments in SMEs needed the same amount of time, if not more, than investments with a much greater scope that were also less risky. Often young and under-capitalised, these smaller enterprises appear riskier still because they are usually to be found in markets that are not very highly structured and whose political or economic environment is uncertain. In short, the conditions that make banks very hesitant.

On a much more positive note, the creation in many African countries of small and medium-sized enterprises has been greatly encouraged in recent years by determined efforts to reduce administrative and legal obstacles. The time needed to register property rights has on average been halved during the decade 2000-2010, reducing from almost 120 days to 65. The time needed to obtain an export licence has fallen from an average of 230 days in 2005 to 212 days in 2010, the time it takes to enforce a contract has fallen by nearly a month over the same period.

African SMEs are increasingly the best vehicles for growth and development, and their proliferation now encourages the emergence of regional markets that are still far from perfect. Their activities are contributing to the creation of new production channels for African countries’ domestic markets, thereby creating much added value. The emergence of Africa’s domestic market will also encourage the diversification of national economies that will become less vulnerable to global shocks because they will be less dependent on exporting primary raw materials and so less exposed to world price fluctuations.

Interestingly, after a long period of time when their economic development was dominated by relations with Europe and North America, sub-Saharan African countries are turning more and more towards partnerships with other countries in their region. Intra-regional trade now represents around 15% of sub-Saharan African trade, compared to only 7% in 1990. In 2010, South Africa as the regional powerhouse was alone responsible for 4% of sub-Saharan imports and 6% of exports. This is all the more remarkable because it essentially results from the emergence of new trade flows and not the re-directing of existing ones.

Africa’s accelerating regional integration is now encouraging competitiveness through a much more effective distribution of production factors, notably trade in inputs and equipment and through greater labour force mobility. But there remains a great deal to be done to improve this process of regional integration. African governments need to push ahead with their efforts to liberalise intra-regional trade, and must also pursue institutional integration and infrastructure development as determinedly as ever. Only by doing so will Africa’s commercial enterprises be able to develop further and generate higher living standards for all.

Jean-Michel Severino formerly headed the Agence française du développement (AFD) and is now CEO of I&P Conseil, where Emilie Debled handles communications,

Business Economy

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