Time to rethink our view of Africa’s economy?

Seven years have passed since the implosion of the global financial system and the largest bankruptcy filing in history – Lehman Brothers. Since the onset of the global financial crisis, the world economy seems to be stuck in a subdued, volatile recovery. Restrained consumer demand, which is a consequence of stagnant or falling wages, appears to be at the epicentre of today’s tepid global growth. With consumer spending arguably the most influential contributor to the global economy, prolonged weakness in the world’s labour market has the potential to disrupt the global community’s quality of life, regardless of whether people are rich or poor.

It is against this uninspiring growth backdrop that buoyant equity markets are uniformly recording record highs. There should be little doubt that central bankers’ expansion of the frontiers of stimulus through monetary policy has given rise to this peculiar situation.

Dislocation between MSCI World Index and global GDP growth 

Source: International Monetary Fund, I-Net Bridge

As the aftershocks which rippled through the global economy following the 2008 financial earthquake begin to fade, it appears that the experimental monetary policies employed to avert a cataclysmic depression have resulted in distorted economic fundamentals, compromised long-term global growth potential and artificially bolstered asset prices. In an environment where sustainable growth is likely to remain elusive for a prolonged period, there is an evident dislocation between buoyant asset prices and global economic realities. Policymakers and academics today are faced with a most pressing challenge, namely the undertaking to restore global growth before market participants sober to the reality of the current equity market mismatch.

It would be negligent however, to describe all geographical regions as vulnerable to the onset of economic stagnation. At present, the African continent is growing admirably. According to the African Development Bank, in 2014 the average growth rate for the region was recorded at 3.9%. Foreign Direct Investment (FDI), which is projected to reach $55 billion this year, appears to be creating an invaluable foundation upon which regional growth is mounting.

On the rise – Foreign direct investment in Africa 

Source: AfDB, UNDP, OECD and The Economist. ¹Estimate  ²Forecast

Curiously, for the first time on record, investment in the continent is increasingly moving away from resource-rich countries in favour of the ever expanding African middle class. According to a recent article featured in the Economist, investment in technology, retail and business services increased by 17 percentage points between 2007 and 2013.

However, whilst this trend is indeed encouraging, it would be premature to suggest that investment in less resource-rich countries equates to much needed inclusive economic growth. Foreign direct investment essentially can be designed with the ambition for profit extraction or alternatively the intention to stimulate inclusive economic growth. Desirable foreign direct investment should aspire to satisfy both outcomes responsibly and concurrently. Aggregated numbers, such as those provided in the illustration above, fail to expose the exact nature of foreign direct investment to date.

A fitting example of historic investment failure can be found in the African continent’s largest economy’s ongoing petroleum challenges. According to OPEC, Nigeria boasts crude oil exports of approximately 2.2 million barrels a day. However, surprisingly Nigeria at present is grappling with widespread domestic fuel shortages. Despite the region’s significant oil reserves, suboptimal investment has resulted in the underdevelopment of oil refineries within the countries’ borders. Shockingly, Nigeria today imports in excess of 80% of their refined petroleum.

African policymakers need to establish a practical framework which lends itself to focusing on value add industries and services within which inclusive economic growth can be nurtured.

Pro-business reforms, the relaxation of rigid labour laws and a sincere effort to eradicate corruption will all contribute to the continent’s appeal as a compelling investment destination. By this measure, African policymakers should consider the various models which have historically been employed by their emerging market counterparts to cultivate foreign companies’ desire to share and impart their much needed skills and expertise with Africa’s swelling labour force. The manufacturing industry for example provides the invaluable opportunity for world-class technology and practices to be explored and mastered, not dissimilar to the opportunity which empirically was embraced by South Korea in the late 1980s. With the unprecedented rise in Chinese labour costs, African lawmakers are presented with the opportune motivation to revisit their policies and attract further FDI to address the prevailing investment gaps.

China average annual wages (Chinese yuan)

Source: Trading Economics

Whatever industries our emerging market peers will be shedding over the coming years, Africa should be positioning itself to capture. It is in this context that policymakers need to reassess the importance of advancing the African growth agenda in the context of the once thriving global economy. If policymakers’ longstanding desire to compress the economic cycle is to have any hope of success, governments and the private sector need to impartially re-evaluate misconceptions about the African continent and the tools which may be employed to participate in a newfound African prosperity.

The World Economic Forum on Africa 2015 takes place in Cape Town, South Africa from 3-5 June.

Author: Steven Schultz, Head of International Fund Solutions, MMI Holdings Limited

Image: A construction worker walks on a scaffolding on a tunnel along the Nairobi-Thika highway project, under construction near Kenya’s capital Nairobi, September 23, 2011. REUTERS/Thomas Mukoya