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Africa: The bottom billion becomes the fastest billion

By on July 19, 2011

Africa now has more of the world’s fastest-growing economies than any other.

Age is not often associated with speed. But Africa, the world’s oldest continent, now has more of the world’s fastest-growing economies than any other. Over 2000-2009, 11 African countries grew at an annual rate of 7% or more – a rate sufficient to double the economy in 10 years. This is a big shift from the 1980s and 1990s, when just three African countries achieved this level of growth. Of these 11 booming economies, nine were in Sub-Saharan Africa (SSA); six benefited from higher energy prices, and five were not associated with either energy or metal exports: China’s demand for global commodities cannot be the only reason for this significant improvement. After a generation of relative stagnation in the late 20th century, many in Africa have now begun the long-awaited period of catch-up with the developed world. The bottom billion is becoming the fastest billion.

Source: IMF World Economic Outlook, April 2011

Catch-up economic theory suggests all countries will eventually make the leap from subsistence farming to developed nation status, and that the later countries make this transition, the quicker the growth when it finally happens. The technologies to boost productivity get cheaper and easier to import; Africa’s booming telecoms sector is just one example. The global markets available to the poorest societies get ever larger: In the 19th century, the UK had no countries to export to that were richer on a per-capita GDP basis; today, Africa has richer export markets to pick from – not just in North America and Europe, but also across an increasing number of Asian countries. Delivering that export growth is easier too, as telecoms opens up services as a route for export growth. Meanwhile, the evidence that effective policymaking can lead to growth becomes progressively harder to ignore – in recent years, even North Korea and Cuba have made efforts to bring market forces into their economic systems, but we find far more to be inspired by in Rwanda and Mauritius.

Just how fast can growth be? The fact that 11 booming African nations have already achieved at least 7% annual growth is yesterday’s story. What’s more important is that three have grown at 10% pa, and we believe more can achieve or better this. In our view, it would not take much for Nigeria to shift its 9% growth rate into double digits by widening access to cheaper electricity. We see scope for improved governance in Côte d’Ivoire, in turn enabling it to emulate Sierra Leone’s 10% annual growth rate. The positive examples provided by countries like Rwanda highlight the success that others across Africa might copy.

Higher investment rates would go a long way towards broadening and accelerating growth across Africa. This investment might flow from external sources – as it did in South East Asia. Chinese lending to Africa is one example (see our China in Africa report, dated 21 April 2011), as is US retail giant Walmart’s investment in African retail. Foreign portfolio flows can reduce borrowing costs for companies, and provide equity financing for businesses to expand.

We think such inflows look increasingly likely, as demographics favour direct investment in Africa. Asia’s young population is now declining – with East Asia’s dropping 27% this decade – and only SSA is positioned to experience 15-20% growth in the crucial 15-24 age range over the coming decades, which will provide the plentiful labour force the world economy will rely on.

Better still, this workforce is far better educated than a generation or two ago, after SSA saw nearly a tenfold rise in the gross secondary school enrolment rate to 29% by 2005 from just 3% in 1960 (the latter was surely a contributory factor to the weakness of the 1980s). These are now around the levels of Mexico or Turkey in the 1970s which helped pave the way to their strong growth performance in subsequent decades. Africa’s workforce is now well educated enough to support the take-off.

Most positive would be a restoration of trust in the domestic economic environment from locals themselves, and a recognition that returns on investment in Africa can far outweigh those now available in the West. This can already be seen in the reinvestment of profits by African businesses. We estimate higher investment could add 2 ppts to GDP growth rates (see pages 29 to 37), and note that this would have increased the number of African countries doubling their economies within a decade to 21 over 2000-2009. The challenge for investors will be in accessing the multiple growth stories that could result from this (see page 38 for our current stock (recommendations).

Even a slight improvement in the growth rate over the next two decades will produce some remarkable results. If, instead of nominal dollar growth of 9% annually, we saw 10%, then Nigeria would become a $1trn economy by 2027. Sub-Saharan Africa – excluding South Africa – alone would rise from $700bn (similar to Indonesia) to $4.5trn by 2030, assuming 10% growth in nominal dollar terms. These may well prove to be conservative estimates.

The creation of a virtuous circle of higher growth leading to better governance – in turn attracting more investment and faster growth – is under way. Democracies are becoming safer across the continent. We would not be surprised to see Africa recording some of the highest growth rates ever achieved in the coming decades.