Middle class helps Africa to avoid past pitfalls

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Created on Tuesday, 03 April 2012 00:00

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Middle class helps Africa to avoid past pitfalls

In part 2 of our series, David Smith finds that domestic demand and diversification are underpinning the continent's economic boom.

David Smith, Africa correspondent

It has been described as the new scramble for Africa. The continent has awoken from the nightmare of its mid-90s civil wars. Coups and dictators appear to be going out of fashion. Now, with six of the world's 10 fastest-growing economies, there is a growing consensus that Africa's time has come.

Africa's GDP growth will average 5% in the coming decade, according to Ernst & Young, with Ghana, Ethiopia and Uganda set to top 7% a year. Foreign direct investment, which has risen six-fold in the past decade, is forecast to reach $150bn (£95bn) by 2015.

There is growing confidence in Africa as an investment destination, with the highest returns in the world. In the World Bank's most recent Ease of Doing Business rankings, 14 African countries ranked ahead of Russia, 16 ahead of Brazil and 17 ahead of India.

But with expectation comes the potential for disappointment. The question now is can Africa build on the opportunity and avoid the pitfalls of the past?

Some are in no doubt that the continent is better shape this time. This month, Tony Blair, who once described Africa as a "scar on the conscience of the world", told businessmen in London: "There is no doubt: Africa is changing for the better, the perceptions of Africa are also changing for the better. There is a new sense of hope and confidence, an optimism and an expectation that is based on evidence not dreams.

"Above all, I am noticing in my frequent visits there that there is a new generation of leaders in politics, business and civic society who don't simply have a new competence about how they approach their tasks but a new attitude, a new frame of thinking, a new way of looking at their own situation."

Whereas in the past these opportunities may have been squandered, or cancelled out by a global financial crisis, it now appears that Africa is better positioned to withstand shocks. During the meltdown of 2009, while developed western economies were shrinking at average of 2%, sub-Saharan Africa was still growing at about 3.5%.

Mthuli Ncube, chief economist at the African Development Bank, gave three reasons: "First, the growing domestic demand in Africa itself, the rise of a middle class, acted as a shock absorber. Second, there was improved macroeconomic management from a generation of managers who trained during the restructuring programmes of the early 90s.

"Third, African economies have diversified: Nigeria is now not only oil but also tourism and agriculture. Diversification is very helpful when there is a decline in commodity prices."

The bank estimates the middle class at 313 million people in 2010, 34% of the continent's population, and predicts it will grow to 1.1 billion (42%) by 2060. There are now more than 100,000 Africans with at least $1m to invest, according to the consultants Merrill Lynch and Capgemini. A mobile phone revolution is sweeping the continent.

Blair said the growing influence of China was another reason for optimism. Three years ago it overtook the United States as Africa's biggest trading partner. China, which has a thirst for Africa's natural resources, says bilateral trade grew from $10.6bn in 2000 to $160bn in 2011 and investment totalled $13bn.

Sceptics accuse China of a morally blind "resource colonialism". But in his speech in London, Blair said: "The fact is that China has both the capital and the capacity to get things done. This is especially true in infrastructure.

"How many times do you see in Africa a road promised for years, that finally is being built; and we, in the west, at the same time as we make legitimate points about the methods of investment sometimes used, have to face up to the uncomfortable fact that this didn't happen with us."

However, as the good times roll, there is a danger of Africa becoming too dependent on exporting mineral resources and not investing in manufacturing, Ncube added. "Most trade is between Africa and the rest of the world. It will take a while to fix."

Intra-Africa trade, punished by lack of regional integration and poor infrastructure, makes up a woeful 10% of total exports, compared with 60% for south-east Asian countries.

Such weakness led to a warning from the Africa Progress Panel, whose members include Blair, Kofi Annan and Bob Geldof. "The lack of economic diversification, in terms of both export products and destinations, explains the high volatility of African trade in recent years, and the strongly adverse impact of the global economic crisis through trade," said the panel in its 2011 report[pdf].{unavailable here}

"It also explains why so little of the continent's high GDP growth translates into social development and tangible improvements to people's lives ... It is thus hardly surprising that, despite a decade of strong economic growth, poverty remains pervasive throughout the continent."

Africa remains the poorest continent, with only one in four people having access to electricity. The experience of Angola and others suggests that economic growth may deepen, rather than reduce, the gap between rich and poor.

There appears to be no causal relationship between growth and democracy and human rights. Corruption is still rife and agricultural productivity frustrating low. These issues could undermine the growth narrative.

The oil and gas finds have the potential to translate into riches. But Philip Walker, senior editor/economist for Africa at the Economist Intelligence Unit, warned that the projects were still at a very early stage.

"The common bottlenecks to doing business on the continent – excessive bureaucracy and government inefficiency – coupled with a lack of regulation in many countries mean that it will be a number of years before the potential is fully realised."

But despite the persistent caveats, Africa, where 70% of population is under the age of 30, is thinking big. Talks began last year on a planned Cape-to-Cairo free trade zone encompassing 26 countries, 525 million people and $1tn in output which, it is hoped, could be in place in three years.

As one Reuters commentary put it: "The penny has also dropped in most capitals that Africa needs to start making more goods and selling them internally rather than just digging up minerals, putting them on a ship to China and importing washing machines or shoes on the return run."

Source: The Guardian UK, 28 March 2012