Adam Robert-Green: Is Africa Over-Hyped?

20 Min Read

Afro-optimism has reached fever pitch, but are perceptions unhinged from reality? This is Africa canvasses expert opinion on the distance travelled by the continent, and the miles left to run


In November 2011, investors flocked to a Guinea Bissau investment summit. Hosted in London, the gathering showcased the bounteous mining, infrastructure and agriculture opportunities in Africa’s westernmost state. In an interview with This is Africa at the time, Raimundo Pereira, interim president, declared the country ‘open for business’. A few months later, he fled the country at gunpoint after a military coup toppled his government.


The debacle proved symbolic of the two competing narratives of Africa. One is a story of modernisation, growth and global integration. It is the story of street traders with smartphones; new cities and skylines; factories supplying the likes of Cadburys, Unilever and Walmart; and multinational Western companies – from Google to General Electric – tripping over each other to build regional offices. The second story is one of poor governance, conflict, poverty and marginalisation – rebels piled high on armoured vehicles in Goma, jihadists rolling across the ungoverned spaces of the Sahel, and smallholders trying to eke out a living in drought-stricken east Africa.


Those images conjure the ‘old’ Africa. In the 1990s, this was the ‘hopeless’ continent, on the reckoning of The Economist; the world’s most war-torn region, with conflicts raging in the likes of Somalia, Rwanda, Angola and Sierra Leone. Then, the Kalashnikov-wielding child soldier was the continent’s defining image.


In 2013, the pendulum has swung to the other extreme. Three years ago, McKinsey published its influential Lions on the Move report which drew attention to surprising, continent-wide growth. Africa took 17 of the top 40 global GDP growth spots in the first decade of the new century. Improved health and education outcomes, enormous natural resource discoveries, democratic deepening and improved macroeconomic governance have all, the optimists say, brought about an African renaissance.


Arend van Wamelen, a principal in McKinsey’s Johannesburg office, explains the rationale behind the firm’s 2010 report: “We have been serving clients on the continent for many years and were struck by many of their successes on the continent, and the mismatch between the dialogue and the reality we observed on the ground. It was clear something was changing, but we did not have an integrated picture,” he says.


2010, the year of South Africa’s successful hosting of the World Cup, was a good time to offer up a fresh look at Africa’s potential. “I think [the report] helped others, like it did us, to put a story we saw only in fragments into a surprising and positive new perspective,” Mr van Wamelen argues.


By late 2011, The Economist was eating humble pie, proclaiming Africa a ‘hopeful’ continent. A year later, Time Magazine copied with a lead story: ‘Africa Rising’. Conference halls from New York, Davos and London to Arusha, Accra and Johannesburg are now packed with investors, rubbing their hands at the opportunities offered by a continent about to take off. But no sooner had the music started than sceptics turned the volume down, warning of over-exuberance and a speculative bubble. A recent article in Foreign Policy dismissed talk of Africa’s rise as “a myth”.


Others question the rosy statistics. The African Development Bank, for example, announced recently that there were ‘300 million’ middle class consumers in Africa. “Unfortunately the 300 million, as defined by the African Development Bank, earn between $2-$20 per day, making the term ‘middle class’ somewhat distracting,” says Salman Siddiqui, head of Middle East and Africa equities at Nomura Asset Management U.K. Ltd. “In fact 60 percent of this group earn between $2-$4 per day – barely out of poverty.”


Neither the ‘Africa rising’ narrative, or its opposite, can quite describe the continent’s many trajectories across its 54 states. Both sides of the debate can muster plenty of evidence for their case.


Optimists say a combination of good luck, good choices and helping hands has enabled many countries to ascend – and fast. By the post-millenium decade, major conflicts ceased in the likes of Rwanda, Mozambique, Angola, Sierra Leone and Liberia. While other countries’ stability was short-lived – Mali, Guinea Bissau and the DRC have all returned to conflict – the first decade of the new millenium was markedly more peaceful than its predecessor.


Economic governance has improved. “One of the main reasons for Africa’s growth over the last decade and a half is that macroeconomic policies have improved,” says Shanta Devarajan, chief economist for Africa at the World Bank. Median inflation rates in the mid-2000s were half their level from the mid-1990s. And debts have fallen, partly thanks to the Heavily Indebted Poor Countries Initiative (HIPC), and partly due to good management.


In social sectors, performance is markedly different. A Burundian child under the age of seven in 1980 could expect just 1.7 years of schooling. Today, they will receive 11. Uganda, Mali, Guinea-Bissau, Ethiopia, Guinea, and Burkina Faso have all made jumps of at least five years in expected schooling in the past three decades. Health outcomes, especially for children, are worlds away from the old Africa. Life expectancy at birth has risen by at least 15 years since 1980 in Ethiopia, Guinea and Niger.


On the commercial side, investment flows just rise and rise. The latest foreign investment report from UNCTAD shows that while FDI inflows declined by 18 percent globally in 2012, in Africa they still grew, in contrast to all other regions apart from Latin America and a handful of southeast Asian countries. “The fact that FDI flows to Africa are bigger than aid is a great sign of international confidence in the region’s growth potential,” says Charles Kenny, senior fellow at the Center for Global Development. China’s arrival has been especially transformative – a mere $56m invested in Africa in 1996 jumped to $1.5bn in 2005 and $15bn in 2011. Even as FDI fell after the 2008 crisis, China’s investment into Africa tripled.


For all its challenges, Africa is good place to do business, according to Rajat Kohli, head of mining and metals at Standard Bank. “If you come in at a ground level, dollar for dollar it is still cheaper in Africa than other parts of the world. You can argue there are reasons for that – the perceived political discount, the perceived infrastructure discount – but even when you balance that out, it’s relatively cheap.”


Indian multinationals are bullish too. “For a person like me, who has been in Africa for almost as long as Tata has existed here [3 decades], I have seen a big change in the business environment,” says Raman Dhawan, managing director of Tata Africa Holdings. “Africa is now on a growth path which was certainly missing before….if I had my own personal money I would be investing only in Africa. I just wish I was 20 years younger!” he jokes.


All told, natural resources directly accounted for just 24 percent of GDP growth from 2000 through 2008, according to McKinsey. Private equity interest, meanwhile, is diversifying. Business services, and food and agriculture, were the top two sectors of PE activity in 2012, with healthcare and industrials at number three and telecoms and media at joint fourth, according to Private Equity Africa, the consultancy.


But of course, natural resources remain key drivers. The continent can thank buoyant resource prices for its sustained 5 to 6 percent growth rates, which are withstanding the global slowdown. “A medium-term, low growth norm in rich countries would have a relatively mild effect on Africa’s growth prospects. This is based on the notion that low global growth – as opposed to a growth collapse – will have only a limited effect on global commodity prices,” says Mr Devarajan at the World Bank.


Certain commodities are booming. Gold is on a long-run increase; a favoured commodity in uncertain times. Africa has more to offer, with promising exploration in Burkina Faso, Côte d’Ivoire, Senegal and Liberia, as well as Ghana, a mature territory. In East Africa geologists have identified a gold belt running from northern DRC to Eritrea, passing through Ethiopia and South Sudan. Mali is attractive too, with Pearl Gold AG receiving its first gold delivery from its Wassoul’Or project last year, although political insecurity might well put paid to that.


The average price of crude oil, meanwhile, is at an all time high; driven up by geopolitical shocks in Libya, Iran, Syria, Yemen, Sudan and South Sudan, and now Algeria. Under land and sea, drills are humming. Africa’s oil resource estimates have increased 30 percent over the last five years, and its gas resource estimates have doubled. High prices are not necessarily a welcome trend, of course. Many African countries are net fuel importers, and energy prices drive inflation. Producers, meanwhile, must grapple with the structural consequences of currency appreciation.


Finally, in agriculture, African land is attracting unprecedented commercial interest from governments, sovereign funds, private companies and asset managers, from Qatar to South Korea.


Yet despite this investor excitement, Africa is still the world’s most aid-intensive region. The UN’s annual ‘Least Developed Countries’ report is, by and large, a report on Africa, whose members dominate the bottom spots in league tables covering everything from nutrition and climate change resilience, to state fragility.


To convert natural resources and high commodity prices into structural change, two things appear essential: prudent management of natural resource revenues, and smart policy measures to boost job creation. On the first, progress has been patchy and slow, but not trivial. Ten countries now report revenues in compliance with the Extractive Industries Transparency Initiative, and DRC and Liberia publish all or most of their contracts in full, while Ghana publishes some negotiated mining terms and most of its oil contracts. Ghana, Liberia and Zambia have all launched initiatives to increase their financial returns from the sector.


But transparency measures need to go further. “The majority of Africa’s resource-rich countries keep agreements secret. From Ghana to Equatorial Guinea, resource finds to mineral windfalls are generally opaque, preventing these massive sums of money from being invested in creating jobs and alleviating poverty,” says Antoine Heuty, deputy director of the Revenue Watch Institute.


Sovereign wealth funds could help major producers save resource revenues and diversify their economies, and Angola and Nigeria both announced their own SWFs in recent months with seed capital of $5bn and $1bn respectively. But neither has an impressive revenue management record to date. Nigeria has ‘lost’ $35bn over the last 10 years through corruption and mismanagement of its oil industry, while Angola’s developmental progress over the last decade has been painfully slow given the country’s enormous oil earnings. Two thirds of the population live on less than $2 a day.


But resource-rich governments are under increasing pressure to ensure developmental gains. “If you are a corporate investing in Africa, especially the likes of Zambia, Tanzania, Nigeria and Mozambique, in most cases there is a call within government to try to increase the rent that can be extracted and the rent can be in the form of direct taxation, through royalty payments, through taking equity ownership, minority equity positions,” says Mr Kohli at Standard Bank.


Governments have to tread carefully, balancing investment incentives with development benefits, but those challenges are not unique to Africa. “Regulation and government influence is an issue globally in natural resources, and that has only been exacerbated because of the amount of leverage in the system. There is so much debt, governments try to find ways to reduce their debt to make their books balanced,” he says.


Government activism does not, in itself, present a major problem for companies, Mr Kohli argues: “What matters is clarity of legislation. Even if there is a doubling in a government’s ownership of an asset, say from 10 to 20 percent overnight, that obviously cuts into the economics of the project, but as long as companies know that, they know which rules they are operating in. It’s when the rules become a little fuzzy – when there are guidelines or statements that are not rules – that is when corporates start to get nervous because, for them, they want to model their cash flows and therefore the profitability of the project.”


The prime challenge going forward, across Africa, is now structural. “There is nothing new in rapid African growth,” says Christopher Cramer, director of the development studies department at the School of Oriental and African Studies. “The question is whether it will translate into structural change that sustains it for decades, with lasting impact on welfare. And the answer is that, when we look at manufacturing and industrialisation, there is very little structural change and Africa still depends on high primary commodity demand and prices globally, on inflows of FDI, and on cheap credit – all of which are volatile.”


Assembly-based production is indeed nascent, but growing at a fair clip. Industrial zones are popping up from Ghana to Ethiopia, providing garments, foodstuffs and light manufactures for Western and Asian firms. In January, GE announced plans to invest $1bn in manufacturing plants in Nigeria. According to new research at Johns Hopkins University, the Chinese private sector is gathering momentum in several larger African markets, with a heavy concentration in labour-intensive manufacturing activities, followed by service industries. “Feedback on the job-creation impact is universally positive among all six countries” in the survey, says Xiaofang Shen, the author of the study.


Preferential trade is also supporting value-added exports. The US Africa Growth and Opportunity Act has resulted in a three-fold increase in US non-oil imports from Africa including textiles, processed agricultural products and footwear. The African Coalition for Trade says around 1.3m jobs have been created on the continent, and 10m jobs indirectly supported, by AGOA. Looking forward, more manufacturing jobs could come Africa’s way as wage increases in China push millions of jobs to cheaper locations.


While the ‘Africa rising’ narrative may occasionally fall victim to irrational exuberance, with talk of ‘soaring incomes’ and a 300 million-strong middle class, there are still firm grounds for optimism. What is needed now is a more sophisticated picture of a region undergoing profound change, in highly uneven – and not always linear – directions.


Job creation is the buzzword in policy circles. Millions are entering the labour markets every year, and Africa has a young population, which could bring a demographic dividend or a source of social unrest. In the long run, the continent’s success will depend on its ability to generate stable, waged employment.


Shanta Devarajan at the World Bank is optimistic. “One of the main reasons why Africa has not achieved structural transformation is that microeconomic policies – infrastructure pricing and regulation, ease of doing business, education and health services, credit policies – have yet to be reformed,” he says. “Since African policymakers were able to reform macroeconomic policies, and garner political support for them, I am confident that they will be able to reform the microeconomic policies and regulations that stand in the way of structural transformation, and thereby enjoy sustained growth and poverty reduction.”

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