The conventional wisdom about undertaking serious business investments in Africa is finally beginning to catch up with reality.
The dirty little secret is out — a substantial number of countries in the region — especially those south of the Sahara and, perhaps counterintuitively, relatively few of the commodity-dependent states — have had sustained and appreciable economic growth for more than a decade and a half.
Indeed, the economic performance of the bulk of the continent — the 48 countries comprising sub-Saharan Africa — has been far stronger than popularly believed. From 2000 through 2015 the average annual growth rate of ‘real’ GDP (that is, GDP adjusted for inflation) was 5.5 per cent for these countries as a whole.
Over the same period, average annual real GDP for all emerging markets taken together (including the globe’s fastest growing countries, such as China and India, among others) rose only a bit more, at 5.9 per cent. By comparison, the corresponding average growth rate among the world’s advanced countries was just 1.8 per cent — about one-third as fast as sub-Saharan Africa.
By no means are annual growth rates on the order of 5 per cent sufficiently high for most African countries to bring about job creation and a reduction in poverty at rates that meet Africans’ and the global community’s aspirations. But the data do make clear that the African long-run growth story is not an illusion.
This is a secular, structural transformation, not a one-time cyclical change.
To be candid, this is not news to those of us who have been immersed as practitioners in business transactions, investment negotiations and trade finance throughout the globe’s emerging markets for many years. But, surprisingly, to many senior executives within some of the most sophisticated companies, banks, and asset management houses around the world, that there are increasingly numerous economic success stories in Africa is truly a startling realisation.
Indeed, there’s a bit of angst in boardrooms these days — especially those in advanced countries — over the fact that the managers of the institutions they oversee are not moving quickly enough nor being open-minded enough to capitalise on ‘first-mover advantages’ in Africa, which seem to be arising almost daily.
They worry that their ‘new’ rivals, particularly the multinationals from Asia’s emerging markets — and especially from China and India — have recognised for some time what has been underway in Africa precisely because markets of these types are familiar to them. Little did I know when my book, “Africa’s Silk Road”, was published in 2007 that commerce between these Asian giants and the continent of Africa would take on such proportions!
But business matters aside — and frankly even more important — is that the bona fide integration of an increasing number of African countries into the world marketplace is potentially a game-changing — maybe even a once-in-a-lifetime — economic opportunity for the second-largest and second most populous continent on earth, home to 54 recognised sovereign states and populated by 1.1 billion people, many of whom are still impoverished. Regrettably, their continent is generally seen by the rest of the world — again, largely by advanced country players — as not only a monolith, but having markets that are utterly fraught with excessive risk while exhibiting comparatively few commercial opportunities.
Of course there are significant risks of doing business in many African countries: in fact, this is the case for all emerging markets, whether in Latin America, the Middle East, the former Soviet Union, Central and Eastern Europe and the Balkans, South Asia and East Asia.
But the sad fact is there is a tendency toward making highly distorted judgements about the opportunity-risk trade-offs of doing business in most of Africa’s states. The risks are commonly greatly overestimated, while the investment returns are generally exceptionally underestimated.
Innovative approaches are increasingly being developed and undertaken by businesses and investors to both mitigate these risks and capitalise on such opportunities — in Africa as elsewhere. But the prerequisite to benefit from those approaches is to come to grips in achieving a genuine assessment of the real conditions in these markets.
Anecdotal perceptions, rather than data-driven assessments, are a sure way to lose one’s shirt in such situations.
So who have been the long-haul economic stars of sub-Saharan Africa since 2000? While there have been some changes from year to year, illustrative representatives of this group include Botswana, Chad, Cote d’Ivoire, Democratic Republic of Congo, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Senegal, Tanzania, Uganda, and Zambia. (Angola and Nigeria also registered strong economic performance over this time.
But of course, with the current depression in oil prices, their growth as well as that of other major oil producers on the continent, is seriously stalled. So much so that they are confronting significant fiscal shortfalls and widening budget deficits. This is the cyclical curse of commodity-driven economies worldwide.
One telltale sign of Africa’s secular economic transformation is that foreign businesses from outside the continent are less frequently using South Africa as the economic gateway to penetrate sub-Saharan markets. Instead, initial commercial forays are being taken in the countries of choice directly.
One very visible reflection of this is the growth of new investment taken place to the North of South Africa along both the Eastern and Western coastlines of the continent, either to establish wholly new, or refurbish existing, ports, coupled with new freight-forwarding, logistics and rail and road networks into interior markets.
Another barometer of the significant changes afoot on the continent is the increasing participation of African businesses in global ‘network trade’ — the exporting and importing of constituent portions of final products or services. Indeed, it has been exploding.
Critically, however, this is only to a limited degree the result of activities by US and EU multinationals — the parties who by far still account for the bulk of cumulative investment in Africa. (It is a myth that the Chinese have assumed that position.)
Rather it is largely due to the growth of Africans’ participation in “South-South” trade and investment — that is, international transactions among emerging markets (as distinct from traditional “North-South” commerce — trade and investment between the advanced countries and emerging markets).
This is where Chinese and Indian firms’ investments in African markets come into play, posing potential competitive threats to flat-footed multinationals from the North.
Finally, and perhaps most important, is the enhanced efficacy of economic policy management on the part of a number of Africa’s governments. Here we actually have results from a real experiment from which insights can be drawn.
During the global financial crisis that began in 2008, despite the worry that it would be countries in Africa more than any other region of the world that would put in place price controls and protectionist policies in the hopes of sheltering the population from economic shocks, many African policymakers were actually part of the few exceptions around the world to refrain from such self-defeating policy actions.
Other emerging markets — Brazil, India, Turkey and Russia, for example — as well as a number of advanced country markets actually pursued such initiatives to their detriment.
What was the result? Taking into account each region’s ‘initial conditions’ as the crisis unfolded compared to their economic standing as the crisis began to wind down, Africa was the most resilient region of the entire world.
Looking forward, there are still many significant challenges to achieving robust growth among Africa’s economies. It’s by no means all countries on the continent, nor inevitable that it will be so.
Moreover, even for the countries in the midst of this transition, the pattern has not been, nor will it be, linear. There will be business setbacks, just as there will be positive surprises.
But one thing is for sure: sitting on the sidelines is not a wise strategy.
The writer is currently a faculty member at Johns Hopkins University and CEO and Managing Partner of Proa Global Partners LLC.
