• 17:36
  • Tuesday ,05 August 2014

Misunderstanding Africa

By Robert Tashima, Daily News Egypt



Tuesday ,05 August 2014

Misunderstanding Africa
Gold, oil, timber, cocoa: these four words could sum up the essence of African economic development over the 20th century. Investors dug mines, brought in derricks, and chopped down trees, but with few exceptions that was largely it.
The impact of this was significant. Per capita GDP declined in the 1980s, and while agricultural productivity tripled in Asia, it barely budged in Africa. Things became so bad that The Economist in 2000 labelled Africa the “Hopeless Continent.”
It goes without saying that much has changed.
Since 2000, GDP across the continent has risen roughly twice as fast as in the 1990s and is expected to average 5.5% this year. Throughout Africa, higher urbanisation and a young population are boosting productivity, demand and investment.
As in previous booms, commodities play a large role, but as a whole they have made up only around one-third of Africa’s growth over the past decade, with services – whether filmmaking in Nigeria or mortgage lending in Morocco – contributing an increasing amount.
All of this opens up significant opportunities for foreign capital. But actually realising those opportunities has proven tricky, in part due to three key misconceptions about Africa’s markets.
1) Africa is a single market: Africa is a continent of 55(ish) countries, one billion people and 2000 languages. In terms of area, it is larger than the US, China, India and Western Europe combined and takes up to nine hours to fly end-to-end. To think of the continent as a single market – let alone a big, booming market – is a useless generalisation.
Each economy varies in structure and composition. Algeria and Morocco share a border and cultural, demographic and historical ties, but their investment profiles could not be more different: the former heavily state-planned, with a dominant hydrocarbons industry; the latter largely liberalised, with a strong services sector.
The fact is, what works in one market will not necessarily work in another. Mobile banking has been a trending topic in Africa following the success of Safaricom’s M-Pesa in Kenya: the programme now handles a volume of transactions equivalent to roughly 40% of Kenya’s GDP. However, neighbouring Tanzania, which has a similar population size, saw only one-tenth the subscription growth that Kenya saw for M-Pesa over the first year.
2) Africa is unusually risky: The challenges African countries face – which include high poverty, fragile states, poor transparency, and ethnic conflict – are serious.
But the assumption that Africa’s risks are exceptional is erroneous and obscures the strength of the continent’s markets. Average inflation across Africa shrank by nearly two-thirds from the 1990s to the 2000s. Public spending rose even as debt dropped.
Furthermore, more reliable avenues for foreign investment are opening up. Home-grown African firms have cultivated footholds in some of the continent’s more frontier markets, allowing investors to piggyback on their networks and supply chains – as with Walmart’s acquisition of South Africa’s Massmart chain. Morocco, for example, is positioning itself as a conduit to West and Central Africa. With a new financial centre and strong regional investment ties, it offers an accessible gateway to more challenging opportunities elsewhere.
3) Africa requires big investments: Africa does require big investments, and there have been a number of mind-bogglingly large capital projects recently. But while large-scale projects help create jobs and stimulate growth, smaller investments are equally important and can sometimes have a comparable impact.
In West Africa, for example, more than one-third of agricultural products bound for local markets spoil before reaching the point of sale, thanks to poor supply chain networks. Small investments in refrigerated transport would help bring that down, increasing farmer revenues and consumer transactions.
Morocco’s sprawling Tanger-Med port – the result of several billion dollars worth of capital spending – has had a dramatic impact on manufacturing activity, but smaller projects such as the Institute of Aeronautic Trades, a new vocational training school, have been equally crucial in attracting industry investment, helping provide a skilled labour force.
For a region of the world that is attracting so much attention these days for its economic performance – whether in terms of growth rates or bond yields, infrastructure spending or disposable incomes – Africa is still surprisingly poorly-understood.
Of course, this is not surprising. Reliable data in Africa is difficult to come by, and markets across the continent require investors to spend time on the ground to gain a sense of potential returns.
But ultimately, while investing in Africa is not an easy proposition, it is a rewarding one provided it is done so with a clear understanding of the market.