"Ask ABI" Question 5: What Next For The African Economy?

 

The African Economy has been steadily growing thanks largely to a few specific sectors. What about the rest?

AUTHORED BY Beatrice Somanje, Daniel Mtombosola, Moses Kuthyola and Tawonga Mkandawire

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Harvard Business Review published an article in 2011 examining the surprisingly rapid growth of African economies and consumer markets, sparking new levels of interest in Africa by the international business community. Multinational companies in a range of industries—from consumer goods to financial services to technology—have since expanded their African footprints. The biggest growing sectors have been banking and finance, followed by oil, mining, and telecommunications/ICT. However, sub-Saharan Africa also holds great growth potential apart from these sectors. So what are these areas that can further boost the growth of the continent’s economies? Richard Attias, a consultant and former producer of the World Economic Forum in Davos, suggested that, “the countries that will be successful in 2017 are the countries which are diversifying their economies”.

 

Food and Agri Processing

Africa's agricultural industry is expanding at an exponential rate,  as discussed in one of the previous articles, but it has a big missing link - food processing and adding value to its agricultural outputs. Processed products are predominant in the global food trade. This is true for both exports and imports in developing countries, with imports overwhelmingly and understandably surpassing exports in scale. This adds great downward pressure to a developing country's trade balance. But this is changing. In the case of Africa, the importing of processed foods has stalled since the mid-90s, and today stands at 10% of its consumption. In fact, according to the World Bank, agricultural exports have increased sharply in all developing countries, including those in Africa. Yes, Africa is beginning to grow its food and agri processing industry.

Hitherto, one of the main reasons behind that missing link is that large sections of the production value chain were simply not explored in Africa due to lack of infrastructure to foster commercialization and process improvements. The ongoing major challenge is to identify specific value chain opportunities and credible local partners who can co-invest or become suppliers. in Africa, hardly anything works without partnerships that can manage the challenges of supply chain management. For companies that will seize such opportunities, the benefits will be exceptional.

 

Healthcare

In a staggering display of Africa’s many contrasts and dichotomies, its healthcare sector is inclined to position itself as the catalyst of some of the largest and most important global healthcare players, and yet a disproportionately large number of people in Africa, still today, die from common preventable diseases. In fact, why do African leaders still often travel abroad to seek treatment? Edwin Ngarari, author of The Nerve Africa, mentioned in one of his articles how sub-Saharan Africa accounts for 24% of the global disease burden while only accounting for 11% of the world’s population.

According to African Business Magazine (2016), however, there have been significant advances made in access to healthcare, electronic care records, remote monitoring and personalised medicine. The digital and mobile economy in healthcare industries have the potential to significantly reduce costs and inefficiencies, improve quality, and stimulate people’s interests in monitoring their own health. As the market develops, increasingly standardized law and regulations also reflect the growing medical sector to ensure suitable quality standards, levelling but maintaining a competitive playing field, while providing an appropriate framework that attracts investors and safeguards public interests.

 

Financial services - Banking

Not all countries in Africa seem to grow at a steady pace in the financial sector. While fast-paced technological breakthroughs weave their way into the sector in some African countries, its slower advance in others show that this will not be an overnight transformation. But in all African countries, it is clear that there is huge, beneficial possibilities for future development. Investments in the financial services industry are is particularly dear to private equity firms operating in Africa. According to an article by Daniel Makina from the Department of Finance, Risk Management and Banking at the University of South Africa, the landscape of financial services in Africa is as varied as the countries comprising the continent. Common features across the continent are low levels of financial inclusion, low financial literacy, constrained access to credit, costly credit even when available, gender discrimination in account ownership, and inefficient foreign exchange markets. Nevertheless, there are promising innovations, especially in relation to the mobile money market, which has a very real potential to foster more inclusive financial systems.

 

Construction and Infrastructure

Across the entire continent, Africa has seen a surge in infrastructure investment in recent decades, most notably in the construction of roads, ports, bridges and airports. Yet the continent still has a serious infrastructure gap - a gap that the World Bank estimates will require $93 billion a year through 2020 to close. With hundreds of billions of cash in the pipeline, how can countries on the continent get the most out of this investment?

There has been a marked increase in major infrastructure development projects over the past two decades. This has brought many employment opportunities for local communities. They have also boosted the credibility and marketability of local products. More broadly, the value of mega-projects under construction in Africa soared 46% last year to $326 billion, according to Deloitte. Almost half of that was in southern Africa, and 80% involved the transport and energy sectors. Such developments have provided significant opportunities for both skilled and unskilled locals alike, as the projects are usually labour-intensive in nature. Every $1 billion invested in infrastructure has the potential to generate, on average, about 110,000 related jobs in oil-importing countries and 49,000 jobs in oil-exporting countries, according to the World Bank. In 2012, the African Development Bank raised $22 billion from a pan-African infrastructure bond to invest in its Programme for Infrastructure Development in Africa (PIDA). Another $368 billion is expected to be invested through 2040 on roads, ports, hospitals, schools and other key infrastructure projects - which, combined, is expected to create hundreds of thousands of jobs.

Resource-rich Angola in the south and Kenya in the east are two countries that have been among the biggest beneficiaries of this growing investment. They have been a worthy showcase of how these projects can facilitate strong economic growth. These examples and many others demonstrate what a boom infrastructure investment in Africa can be for its economy at large. 

All in all, despite the shortfalls, infrastructure development in Africa has been positive. Whether in developed or developing countries, the economic benefits of such projects are usually seen over the long run. These projects give a greater boost when they are linked with critical economic sectors such as agriculture, energy and farming. They also have a strong effect when officials anticipate what economic opportunities could be kickstarted by a project and ensure they translate them into serious long-term employment opportunities.

Africa has complex economic and political issues and huge infrastructure needs that can drive growth and employment for decades to come. The benefits are many. By taking a careful strategic approach, countries can make short-term projects translate into long-term economic and employment gains.

 

Companies looking to grow across sub-Saharan Africa should develop a strong position in their home market, using that as a base for expanding into markets well beyond their immediate region, and by adopting a long-term perspective while investing in talent, build the partnerships needed to sustain success. The biggest multinationals in Africa right now have been patient in building wide footprints rather than "long" ones. Most have been in Africa for longer than fifteen years, and more than half are present in over ten African countries.

The turbulence—both economic and political—in parts of Africa in recent years have doubtlessly posed challenges, but it has not derailed Africa’s growth. No doubt, there is much that governments must do to improve the fitness of Africa’s economies to sustainable growth; accelerating infrastructure development, deepening regional integration, creating tomorrow’s talent, and ensuring healthy urbanization. But the private sector’s role is just as important. Large companies, both African-owned and global, must be in the forefront of the continent’s march toward prosperity