The African economy: Meltdown or slowdown?
These are excerpts of a paper Professor Newman Kwadwo Kusi, Executive Director of the Institute for Fiscal Studies, Ghana presented at the Ghana Economic Forum in Accra.
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The turn of the millennium saw Africa entering a period of sustained and impressive growth, with some of its countries among the fastest growing economies in the world.
Africa’s recent growth story
• GDP growth across the continent in 1995-2010 averaged about 4.3 percent a year, some 3 percentage points higher than in the previous two decades;
• The continent’s total GDP of US$1.6 trillion in 2008 was roughly equal to that of Russia and Brazil;
• Between 2000 and 2010, six of the world’s ten fastest-growing countries were African, and in eight of the 10 years, Africa grew faster than East Asia, including Japan;
• Labor productivity rose, on average, by 2.7 percent a year since 2000;
• Trade between Africa and the rest of the world increased by 200 percent, among other things.
Africa’s growth was also associated with declining inequalities in several countries, a growing labour force and improvements in key social indicators. A genuine middle class emerged, and some 60 million African households had incomes of more than US$3,000 at market exchange rates.
The declining inequality, a rising middle class and urban growth together contributed to a vibrant consumer market, such that consumer spending in Africa in 2013 stood at US$680 billion, and it was projected to increase to US$1 trillion in 2020 and US$2.2 trillion by 2030.
The rapid growth rates experienced in Africa in the last two decades were however not uniform across the continent, with about half the countries in the region experiencing remarkable growth and others growing slowly.
Factors behind recent growth
Truly, Africa benefited greatly from the surge in commodity prices in the post-2000 period. Oil price rose from less than US$20 a barrel in 1999 to more than US$145 in 2008.
Prices of minerals, grain and other raw materials also soared on rising global demand, which helped buoy economic activity in much of the region. Yet, the commodity boom explains only a part of Africa’s growth story.
The other factors include the decline of conflicts, improved institutional and regulatory quality, and the emergence of accountable and democratic governance which led to an improved political and economic environment in the region.
A new generation of policymakers, entrepreneurs and business leaders emerged across the continent who rose through the ranks of government institutions, civil society organisations, and private businesses setting up businesses or working as local representatives of multinational corporations, leading local NGOs and activist groups, and taking an increasing role in political leadership.
In addition, the world economic conditions were also generally favourable.
Current economic outlook
The recent slowdown of growth around the world has had a serious spill-over effect on emerging markets, including sub-Saharan Africa. Growth in sub-Saharan Africa has slowed down, from 5.1 per cent in 2014 to an estimated 3.3 per cent in 2015 and growth is projected at 1.6 per cent in 2016, as commodity prices remained low.
The declines in growth are having a wide-range implications for many sub-Saharan African countries, in terms of export earnings, budget revenues, investment, employment, exchange rates, and foreign exchange reserves.
Countries with more diversified exports are experiencing moderate impact on export prices, coupled with gains on the import side. Oil exporters, such as Nigeria and Angola, are confronted with widening fiscal and trade imbalances. By contrast, oil importing African countries are benefitting from the drop in oil prices.
The business environment in the continent is also rapidly improving with many African countries ranked among the world’s best. This positive business environment in Africa did not go unnoticed by private investors across the globe. Up to 2014, African countries constituted half of the 20 top global frontier markets that America and European multinational corporations were most interested in investing in. But, for most of the region’s frontier markets, external financing conditions have tightened after 2014.
Countries across the region face several other long term challenges, including infrastructure deficits, especially power, roads and water. Infrastructure financing gap is estimated at about US$41.6 billion as of 2013. The World Bank estimates that infrastructure deficiencies in Africa reduces growth by more than two percentage points a year and productivity by 40 per cent.
Long-term growth prospects
A number of factors continue to pose serious headwinds for sub-Saharan Africa, but this does not mean that the region’s growth momentum is melting. More broadly, Africa’s long-term growth prospects are strong, and would be propelled by both developments in the global economy and internal changes in the continent.
With about 60 percent of the world’s uncultivated arable land surface and forests resources covering 23 per cent of its land area, the growth potential of Africa’s agricultural sector is enormous. But there are significant obstacles to the sector’s development, including lack of capital to invest in the sector’s modernisation and productivity increases, problems of land ownership rights, post-harvest management difficulties, and weak government support.
The continent also boasts of abundant riches, including 10 per cent of the world’s oil reserve, 75 per cent of global platinum deposits, 50 per cent of diamonds, 50 per cent of chromium, 40 per cent of gold and 20 percent of uranium (UN-ECA, 2014).
Africa’s natural resources have not brought fortunes to many resource-rich countries in the region. This is partly because the linkage between the extractive sectors with the rest of the economy has remained low and resource-rich countries have usually failed to diversify their economies, engendering the concept of ‘resource curse’ that is afflicting many of them.
Continued long-term progress in Africa requires building institutions of good governance and deepening democracy. The move during the past two decades away from authoritarian rule is remarkable, but it remains incomplete.
How to increase growth
To reap Africa’s strong growth potential, there is the need for a significant policy reset. Currently, widening budget and current account deficits are putting pressure on foreign exchange reserves and currencies.
As budget deficits are widening and borrowing options becoming limited, closing the gaps requires difficult choices. At the core will be the ability to mobilise domestic resources which will allow countries to control deficits while financing critical investments in infrastructure.
A long-term decline in commodity prices would also undoubtedly affect the continent’s growth prospects. Fortunately buyers of Africa’s commodities now are more diversified than before. A generation ago, Brazil, Russia, India and China accounted for just 1.0 per cent of African trade. Today, they make up 20 per cent, and by 2030 the rate is expected to be 50 per cent. This means that if Brazil, Russia, India and China continue to grow, Africa will probably grow too.
Weak infrastructure in sub-Saharan Africa is having limiting effect on agricultural growth, industrialisation, trade integration, and poverty reduction. The poor state of infrastructure contributes significantly to the cost of doing business in the region.
A strong policy agenda for building and maintaining infrastructure in the continent is therefore required to support high and sustainable growth.
Africa’s surge of progress can also not be sustained without strong education and health systems. Increases in school enrollment and completion rates, especially for girls, in the past decade or so are good first steps. But school quality is undermined. The future calls for dramatic improvement in the quality of education to equip students with the skills they need to be productive workers.
Similarly, health systems remain weak, underfunded, and overburdened. Robust efforts are needed to improve access to health facilities, train providers, bolster the delivery of basic health services, and strengthen health systems.
To unleash and sustain the continent’s growth potential, African governments must also intensify their move to implement the vision for a truly integrated continent. The regional integration agenda should move beyond the narrow focus on trade to include productive integration, free movement of people, regional infrastructure, and financial and macroeconomic integration.
Free cross-border movement will provide a powerful boost to economic growth and skills development, and support competitiveness. Free flow of capital will lead to investment increases and efficient allocation of finance, while better financial integration will promote knowledge and technology transfer as well as greater innovation.
Finally, improvements in the business environment and rising corporate sentiment ratings have translated into an upsurge in external capital flows. Remittances, foreign direct investment and overseas development assistance have increased significantly in recent years.
Channeling these flows into development programmes and projects would also go a long way in supporting the growth of the continent.
Rich countries can also help by reducing barriers to trade to help spur new economic opportunities in Africa.
