When you hear the word "Africa," what do you think of? Poverty? Squalor? Civil war?
Consider this: Africa has numerous cities with populations of a million or more, which is as many as all of Europe. In fact, the African continent is almost as urban as China.
The combined gross domestic product of African nations grew by almost five percent per year between 2000 and 2008, according to a new report in the McKinsey Quarterly.1 Thats double the growth that Africa experienced in the two decades before that period.
Money is flowing into Africa for new construction, banking, telecommunications, and retail. Despite various African nations that are failing, the combined GDP of the continent is still $1.6 trillion, on par with Brazil and Russia. In terms of economic growth, Africa is near the top of the list.
Some of this is due to rising prices for resources such as oil, minerals, and other commodities. But about two-thirds of the growth is coming from real structural changes that have allowed growth in transportation, telecom, manufacturing, retail, and wholesale. This means that even nations that do not boast rich resources are achieving excellent growth.
For example, many African governments have taken action to stop warring groups from killing one another. This has created the necessary political climate to encourage investment.
African countries have also taken steps to curb inflation, which had run up to 22 percent in the 1990s. After 2000, it was down to around eight percent. Governments have reduced debt and deficits, and put state-owned operations into private hands. Reducing corporate taxes, improving regulations, establishing proper legal systems, and building out infrastructure have all contributed to their efforts and subsequent growth.
In addition to all of these structural changes, Africa continues to benefit from its rich natural resources as global demand rises. Africa has plenty of oil, natural gas, arable land, and minerals. Fully 10 percent of all the known oil reserves in the world are in Africa. It also has between 80 and 90 percent of the chromium and platinum, and 40 percent of the gold ? and there is untold wealth that remains undiscovered as well.
An example of how this benefits African economies can be seen in a deal made between China and the Democratic Republic of Congo. China will get access to 10 million tons of copper and two million tons of cobalt, in exchange for building roads, rail lines, hospitals, schools, and mine improvements worth $6 billion. This has helped to increase the total flow of investment capital from just $9 billion in 2000 to $62 billion in 2008. As a result, Africa now equals China for investment relative to GDP. Among the targets for investment are tourism, textiles, construction, banking, and telecommunications.
The result is increasing urbanization and a rising middle class. Of the one billion people on the continent, some 40 percent are now in cities, up from 28 percent in 1980. This makes Africa more urbanized than India. It is estimated that by 2030, half the African population will live in cities, with those people spending some $1.3 trillion.
Adding to the growth of the middle class, according to a report from the London Telegraph,2 are young people who manage to get to the United States for higher education and then return to Africa to start their own enterprises. This marks a radical change from previous years, when any African who could get to the U.S. stayed here.
As urbanization leads to expanding infrastructure ? such as buildings, roads, and water systems ? it sets the stage for these new entrepreneurs to build long-term growth. With a solid base of half a billion people of working age, Africa is poised to become a major economic engine. In fact, Africa as a whole now has a larger middle class than India and the number is rising fast. That means new consumers, and more consumers mean a vibrant economy.
While the news is certainly looking a lot better from the standpoint of the entire African economy, the averages mask what an enormous and highly diversified continent Africa is. One reason for that diversity is its size.
China and the United states are roughly the same size, covering around three-and-a-half million square miles each. Africa, on the other hand, is more than three times that size, covering more than 20 percent of the land mass on earth. And, its people account for almost 15 percent of the entire worlds population.
So some distinctions need to be made among the various countries. The McKinsey & Company researchers classify African nations into four categories for economic purposes:3
The analysis excludes 22 countries, such as Rwanda and Chad, which accounted for less than 3 percent of Africas GDP in 2008.
This classification helps to clarify the types of opportunities and challenges each nation offers to potential investors. Lets take a closer look at each category.
Most of the growth in the African economy has come so far from the diversified economies, which are the most advanced. They include Egypt, Morocco, South Africa, and Tunisia. Manufacturing and services account for 83 percent of the GDP for these nations. This includes construction, banking, telecom, and retail.
More than 10 million people have moved to cities in those countries in the last 10 years, and consumers are driving growth. Consumer spending in the diversified economies is growing by between three and five percent a year. About 9 out of 10 households now have disposable income ? and a construction boom is creating 20 to 40 percent of all jobs.
The oil-exporting nations include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, and Nigeria. These countries boast the highest GDP per capita. But they lack the diversified economy that gives rise to a stable middle-class society. Their fates are linked to the price of oil.
The transitional economies include Cameroon, Ghana, Kenya, Mozambique, Senegal, Tanzania, Uganda, and Zambia. Their GDP per capita is lower than those already mentioned. They represent countries that may be dependent on a single commodity but are working toward diversification. They illustrate the benefits of diversification, because as each country attempted to broaden its economic offerings, GDP went up. Taken together, this group saw GDP rise from 3.6 percent annually in the 1990s to 5.5 percent a year since 2000.
Finally, the pre-transition economies are the Democratic Republic of the Congo, Ethiopia, Mali, and Sierra Leone. They are mired in poverty and prone to internal strife. Per capita GDP is $353. But despite that, the three largest economies have seen accelerating growth since 2000, averaging seven percent a year. That includes Congo, Ethiopia, and Mali.
Bear in mind that this new growth represents an increase over zero growth in the 1990s. So it is difficult to tell where it will go.
The main factors holding those nations back is the absence of government, infrastructure, and sustainable agricultural practices. Under those conditions, its easy to start a war and hard to stop it. Investors are reluctant to put their money into such an atmosphere of uncertainty.
Nevertheless, Africa remains one of the most promising areas in the world for investment and development. Within the next 30 years, it will have more workers than China, and it will be home to 20 percent of all the "young people" on Earth.
At the moment, more than half of all the farmland in the world that is not already cultivated lies in Africa waiting to be planted with crops. And, the return on investment in Africa is already the highest for any developing region.
In light of this trend, we offer the following six forecasts:
First, in the coming decade, investors and entrepreneurs at all levels will be able to find promising opportunities in Africa. No matter what your business or specialty, it can be put to use there. Companies ignore Africa at their peril, and those that already have a presence there should consider expanding it. With a rapidly growing middle class and weak domestic competitors, Africa offers an unparalleled chance to create new markets, build new brands, shape the way entire industries operate, and even change the direction of governments and societies. An opportunity like this will not come again in the near future.
Second, despite the recent uptick in growth, some African nations will inevitably fail in the years immediately ahead. Because the continent is so large and diverse, some of the growth in Africa will stall and some nations will devolve into chaos once more. If a nation depends solely on one commodity, such as oil, it exists at the mercy of global speculation. Several nations suffered because of that in the 80s and 90s, when oil was in a slump. A careful analysis of the local conditions will guide the wise investor.
Third, the most diversified economies hold the best promise, in the short term. Exports from those nations, except for Egypt, have not kept pace with their growth due to high labor costs. Anyone who can move those nations toward producing higher-value products, such as the auto parts made in Morocco, will do well there. In addition, a huge potential gap in the high-tech sector is waiting to be filled.
Fourth, opportunities abound in the internal service sectors of the diversified economies. In high-income countries, internal services represent nearly all of the jobs created, while 85 percent of new jobs in middle-income economies come from that sector. To reach that point, African nations will need to rapidly improve their educational systems. This again presents opportunities for investment and innovation, especially in the areas of remote and online learning.
Fifth, the oil-producing nations that will be the strongest are those that use oil money to finance the development of their own societies and economies. If they take those profits and plow them back into infrastructure, they will continue to grow and will attract new investment. Tracking how those nations spend their oil windfalls will guide smart investors.
Sixth, by mid-century, Africa will represent a much larger share of the global economy than it does today. The continent may well become largely unified under a framework similar to the European Union. By then, it will have developed institutions for higher learning and its own brand-name companies that are recognized worldwide. The multi-national companies that start building long-term relationships in Africa today will be reaping the benefits tomorrow.
References List : 1. McKinsey Quarterly, June 2010, "Whats Driving Africas Growth," by Acha Leke, Susan Lund, Charles Roxburgh, and Arend van Wamelen. ⓒ Copyright 2010 by McKinsey & Company. All rights reserved. http://www.mckinseyquarterly.com 2. London Telegraph, May 30, 2010, "A New Dawn in Africa," by Jonathan Dimbleby. ⓒ Copyright 2010 by Telegraph Media Group Limited. All rights reserved. http://www.telegraph.co.uk 3. McKinsey Quarterly, June 2010, "Whats Driving Africas Growth," by Acha Leke, Susan Lund, Charles Roxburgh, and Arend van Wamelen. ⓒ Copyright 2010 by McKinsey & Company. All rights reserved. http://www.mckinseyquarterly.com
