A note of caution on African economies

Africa may be big and some of its countries growing rapidly, but sustaining that growth will be difficult in the absence of structural reform and investment in infrastructure

By  Claire Bisse

The recent resurgence of growth in many African economies, including SA and Nigeria, has revived some of the optimism that surrounded the continent in the early 2000s, when it was hoped that it might become a driver of global economic growth.

However, while Africa will likely outperform consensus expectations in the short term, the continent’s long-term outlook is less rosy. Talk of the region as the “next China” is wide of the mark, says a new research report by Capital Economics’ Africa economist, John Ashbourne.

The report is particularly bearish on SA, noting that it may be a significant underperformer once the initial confidence spurt related to Cyril Ramaphosa’s presidency subsides and the country’s deep-seated structural flaws resurface.

One of the arguments Afro-optimists advance in support of the view that the continent could become a key driver of global growth is its scale. Africa is the only emerging market region nearly as populous as China or India, and it’s the last place where populations are still rising rapidly.

By 2050, there will be almost as many people in Africa as there are in China and the developed world combined, according to the report.

But in reality, the notion of an “African” labour force is a mirage, the report points out, as trade barriers mean that most African economies have few links to one another. Individually, most African countries have fewer than 15m people.

Martyn Davies, MD for emerging markets & Africa at Deloitte, agrees that the geographical construct of Africa as one big continent is less than useful. In reality, East and West Africa have nothing in common and it makes more sense that East Africa is integrating with East Asian and Middle Eastern economies, with Dubai as the hub, than it does for the region to look west.

“We need to rethink this totally flawed notion of an ‘Africa report’,” he says. “These countries don’t have the same interests and shouldn’t be lumped together superficially.”

It is also “absolute nonsense” to think that Africa is ever going to be another China, he adds. “What China achieved in terms of private sector creation is unprecedented in any period in history. Africa, India and Latin America together probably couldn’t achieve what China did.”

China’s 20th-century miracle was powered by moving farmers into factories, but the report cautions that the growth stories of the 21st century might rely more on automation. This suggests that in a world in which low-skilled work can be more easily automated, rapid population growth may not be the economic boon it once was.

This is not to say that Capital Economics has any doubt as to whether African economies can achieve rapid growth. The real question, it argues, is whether rapid growth can be sustained.

While China sustained rapid growth for many decades, rapid growth in Africa has almost always been the result of strong commodity prices — and has lasted only as long as the upturn in the commodity cycle.

So why has Africa been so bad at consolidating rapid growth? One reason advanced by the report is that structural change tends to happen more slowly in this part of the world.

Asia’s growth was underpinned by the fact that it managed to shift hundreds of millions of workers out of agriculture into higher-productivity sectors, including export-orientated manufacturing, the report explains. As a result, productivity growth has averaged 3.2% in Southeast Asia, 5.1% in India and an impressive 8.4% in China over the past 15 years. In Africa, by contrast, the share of workers in agriculture has fallen by just 10 percentage points a year and the share of manufacturing exports has remained low or declined. Productivity growth has averaged a paltry 2.6%/year.

It turns out that Africa’s growth has been much more dependent on an increase in the size of the labour force than an increase in its productivity.

Poor governance, a difficult business environment, the resource curse and skills shortages have all been blamed for this.

But the report suggests the lack of quality infrastructure in Africa is one of the most important factors.

It notes that while labour costs have consistently been 5%-30% lower in Africa than in China, transport, utility and material costs are all so much higher in Africa that this completely erases Africa’s advantage in many labour-intensive sectors (see graph).

Africa’s infrastructure problems have persisted for decades, mostly due to its low investment rate. A few African countries, such as Ethiopia, invest as much as their Asian peers, but most do not. Bangladesh and Vietnam, which are not much richer than most African economies, manage to invest about 10 percentage points more of their GDP than most African countries do, according to the report.

Ashbourne blames this on a low level of financialisation and the weakness of many African governments. Whatever the cause, African economies’ low saving and investment rates are constraining their growth prospects.

“Among the emerging markets that sustained rapid growth over the past few decades, almost all sustained high levels of investment, which allowed them to build up physical and human capital,” says Ashbourne. “The economies where investment exceeded 30% of GDP grew on average almost twice as fast as those where investment was less than 10% of GDP.”

Capital Economics forecasts that the African continent should be able to grow at about 4% over the long term, assuming that rapid population growth adds to the workforce but low rates of investment continue to suppress productivity growth.

This would be a reasonable result by emerging-market standards, but it is much weaker than China achieved over the past decade. It would also be far below the growth that could be achieved if Africa were to reach Asian levels of productivity growth.

At 4% average annual growth, Africa will continue to make a limited contribution to global GDP growth.

“To contribute as much to growth as China did, Africa would have to sustain growth that was twice as fast as China’s recent success, which is a highly unlikely outcome,” Ashbourne concludes.

Of course, there will be significant variation between African economies, with average growth rates likely to range between 1.5% in SA and 7% in Ethiopia over the coming decade.

Ethiopia is destined to be a key outperformer, according to Capital Economics, though it concedes that a case could also be made for Rwanda or even Kenya.

Ethiopia — large, populous and resource poor — is closely following China’s model of developmental authoritarianism and is the only major African economy taking an investment-heavy approach, explains Ashbourne.

He thinks there is a good chance that Ethiopia could follow Vietnam and Bangladesh, two low-income economies that are hoovering up labour-intensive manufacturing investment.

Ethiopia has a nascent manufacturing sector, and the capital Addis Ababa is becoming a key regional transport hub. Moreover, work on a series of hydroelectric dams will soon reduce energy costs and turn the country into a net exporter of power.

Capital Economics is less optimistic about oil-rich Nigeria and Angola, fearing they will remain hobbled by resource dependency, as corruption, poor infrastructure and dysfunctional politics are likely to continue to limit investment in other sectors.

It also warns that SA is likely to remain a significant underperformer, with growth averaging 1.5%-2% over the coming years. It singles out SA’s persistently high structural unemployment, coupled with a “disastrously ineffective” education system.

“Fixing the broken education system will require significant and often painful reforms, many of which would probably be opposed to powerful public sector unions,” says Ashbourne. “This is also true in other areas of the economy … If this cannot be fixed, then the country will continue to inflict the same inequalities on the next generation.”

He doesn’t believe that Ramaphosa has the appetite for a radical change of policy. But even if he did, divides within the ANC and society at large would likely prevent him from making a radical policy shift.

First Published by Financial Mail

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