The Bennett Newsletter
Africa: The new Asia?
I meet a lot of directors and read many company reports, but rarely does NZ business give Africa a mention. This year Africa’s economy will grow by at least 4.8% and soon revert to the 6% it was averaging before the Crisis. It has not been in recession, but growth slipped to 2.8% in 2009. Its growth is the fastest outside of Asia. Moreover, according to the IMF, Africans have a higher per capita income than Indians and in a dozen states per capita income is higher than in China. Some part are really booming, especially Lagos. The Nigerian capital city is a megapolis with a population of 18 million.
So is Africa the new Asia? Not yet; it is catching up from a low base, and has many problems including a weak infrastructure. But it is developing amazingly, and is very resource rich. Yet its growth is not coming from resource exports, but from entrepreneurship, industry and services connected with a burgeoning domestic economy. Even the infrastructure story is positive: it has good ports and is developing pan-African highways and expensive fibre-optic connections with the developed world. Miraculous changes have followed the mobile phone.
The latest IMF report on Africa is very positive about trade, export earnings, economic activity and bank credit. Africa weathered the crisis because it had robust policies: with strong fiscal positions, reduced debt burdens, low inflation and strong foreign exchange reserves. States were able to stimulate the economy and protect social spending during the crisis, especially in education and health. It also opened its economy to foreign investment. The Chinese and Australians, for example, are investing massively in African minerals. Africa has been helped by debt forgiveness, IMF support and cheap loans.
Sub-Saharan Africa grew by 6.5% p.a. between 2000 and 2007 (its highest rate for 30 years). This growth was broad-based and not confined to a few countries. But the region was hit by 2 shocks, neither of its own making. First there were spikes in fuel and food prices in late 2007-2008, and then there was a deep financial recession in late 2008. Africa hurt. The countries exposed to the global economy suffered the most damage: South Africa, Ghana, Uganda etc experienced stalled growth. But many countries had built “policy space” which permitted a relaxed fiscal and monetary posture, even explicit stimulus
Previous downturns in the global economy delivered great shocks to Africa because of budget deficits and high debt. Africans could not cushion shocks (readers will be aware that previous columns have indicated that Japan, the UK and US are now in a debt trap and lack the resources to respond to future shocks NBR 26/2/10) In the past, counties had to resort to restrictive policies, including expenditure rationing, import quotas, and forex controls.
This time, Africa rode out the recession because of increasing fiscal maturity: budgets were balanced, some were in surplus. Debts had been run down and savings, especially of foreign exchange, accumulated. Reserves have been used. Three-quarters of budgets are in deficit to preserve public spending despite lower revenue. Nevertheless urban unemployment and rural poverty remain in the poorer countries.
Africa was vulnerable in the Crisis to drastic falls in financial flows, such as direct foreign investment, trade credit, and remittances. Its export earnings also decreased, but it mitigated these effects with good fiscal discipline, massively increased trade links with China, India and Emerging markets. 60% of the population is rural and it was less affected.
Africa’s resilience owes much to a booming private sector. Government has withdrawn from some parts of the economy. The result was that Africa was “open for business” in the Crisis and welcomed foreign investment. Massive inflows have occurred. I am particularly attuned to gold and oil.
Africa is the new Eldorado for gold. Global gold production has fallen every year since 2000, and established miners like South Africa are now minor players. In the US, Canada and Australia much of the production is from “brown fields” (old diggings are being reworked). West and East Africa are “green fields” with very rich lodes but production has been held up by poor infrastructure and political instability. Such is the current price of gold, and more favourable conditions, that massive investment is occurring, and many new companies are being floated on the Australian, British and Canadian exchanges.
Similarly oil exploration and production is increasing massively. British and Australian companies have rushed to Egypt, for example. There are already established OPEC producers in Angola, Algeria, Libya and Nigeria. Other net oil exporters include Chad, Burundi, Cameroon, Guinea, Liberia, Mali and Swaziland. Economic growth has been very strong in these net oil exporters.
Opportunity
New Zealanders might retain an image of African backwardness needing adjustment to new reality. Of course the poor are always with us, but recent research indicates that 32% of the population is in poverty compared to 42% in 1995. Poverty reduction is occurring faster than in most societies, despite some population, health and environmental problems. The research is exciting also as it shows that income is better distributed than had formerly been believed. It appears that it is not just getting into the hands of a corrupt elite, be it political, military or big business. The Gini coefficient is 0.66, which is high but remarkably better than in 1995.
Africa needs more trade because its population is moving rapidly into cities. The continent is highly urbanized and urbanization tends to be beneficial for broadening the bases of the economy and creating higher incomes. At present just over one third of the population lives in cities but that group accounts for 80% of GDP according to a Newsweek article citing UN studies.
Newsweek cites a study by Oxford economist Paul Collier which examined 954 publically traded companies between 2000 and 2007. Collier found that their annual return on capital was on average 65% higher than those of similar firms in China, India, Vietnam or Indonesia because labour costs are rocketing in Asia. Their median profit margin was 11%; higher than Asia or South America.
Africa may seem remote to New Zealand, but Nestle and Unilever report some of their highest growth in Africa. While capital flows slowed to most economies in the Crisis, foreign direct investment to Africa jumped by 16%. Africa is an exciting frontier which may offer opportunities to NZ business.
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