Economic growth in Africa has been strong for years and the standard of living is rising. Does Africa’s future look rosy or will weak leadership and ebola cloud its prospects? Léon Cornelissen, Chief Economist at Robeco, explains in this interview why he sees both opportunities and risks.
What are the most important factors influencing Africa’s strong economic development?
The continent is characterized by immense diversity, yet there are a number of identifiable features that African countries have in common. These are mainly their rich commodity resources and their young and rapidly growing population. As a result, many countries are showing strong economic growth.
The situation in South Africa and Nigeria is particularly significant for investors. These countries are developing into major economies. But they are not the only ones to show growth. Among the smaller economies, Botswana is doing very well. Commodities play a role here, but also the country’s good governance. This last feature is important, as badly functioning governments are one of Africa’s core problems.
How important is the commodities sector for economic growth?
Extremely important. China invests heavily in Africa because it wishes to safeguard commodity supplies for its own economy. Economic growth in China will diminish gradually as a result of the country’s transition from an export-led to a more consumer- driven economy. Yet if we consider production per capita, China is still poor. A high catch-up demand can therefore be expected from domestic consumers. This will lead to a sustained hunger for commodities.
Then there is India. Since the Modi government came to power there, the likelihood of an upturn in economic growth has increased considerably. Commodity-producing countries in Africa are reaping major benefits from Asia’s strong growth.
Besides commodity production, what other opportunities does the continent offer?
Further privatization can make a major contribution in Africa, not only in commodity extraction. Provided governments give businesses more latitude, large amounts of foreign capital can still be attracted. Another positive factor is Africa’s population structure. While money is clearly required to educate its young population, the continent is free of the burden of an aging society. And of course Africa is huge, and therefore still has substantial development potential.
Due to global population growth, agriculture offers further opportunities. Examples are coffee and flowers from Ethiopia, fruit and vegetables from Morocco, and wine from Algeria. These countries can gain a substantial amount of ground if they manage to upgrade their production methods and succeed in making infrastructure improvements. And this is happening. Ethiopia, one of the poorest countries in the world, is investing in its infrastructure.
As economies prosper, they become more diversified. Nigeria has a major film industry, for instance. After Hollywood, and India’s Bollywood, ‘Nollywood’ is the biggest film production center in the world. It is the country’s second-largest source of employment.
What are the primary risk factors?
In many countries, the primary risks are political in nature. Individual situations vary considerably, and many countries - I mentioned Botswana earlier - have effective leadership, but in other countries, conditions are in danger of deteriorating. Nigeria developed a type of pacification model that appears to have succeeded in reconciling the Islamic North and the Christian South with the distribution of power. However, since the rules of the game are not always observed, the elections in February threaten to become fairly fraught. This is not a good sign. Egypt has similar problems. The economy is taking a positive turn there, but religious tensions could ruin everything.
Then there is Ebola, of course. This dreadful disease - and more particularly the fear it generates - is putting a damper on growth. All areas can come under pressure as a result: economic activity, tourism and foreign investments. And this is not the only disease on the continent: while AIDS and Malaria cause many more deaths than Ebola, they are not a risk factor, though they do have a damping effect on economic growth.
What are South Africa’s economic prospects?
South Africa is one of the BRICS countries, a loose association of emerging economies with large populations. However, this country, with its more modest population numbers, remains something of an outsider. Its commodities were the reason China and India wished to include South Africa. Meanwhile, it is a convincing member of the ‘Fragile Five’, the group of emerging countries that rely heavily on foreign capital to finance their growth ambitions. Its large current-account deficit has become obscured by lengthy strike action in the mining sector, but the underlying figures are still high. This also applies to the country’s budget deficit and inflation.
Medium-term growth prospects are moderate and will not bring down the country’s high unemployment rate. Structural problems affect education, infrastructure and energy distribution, and the country’s political situation is unstable. The ANC did not manage to win a two-thirds majority in the May elections and has now formed a government team that can hardly be described as small and decisive.
Is the low oil price a problem for countries such as Nigeria, Algeria and Angola?
Only in the short term. I expect the relative price of oil to rise again. Oil is a fantastic product, and it is not easy to find substitutes. The shale-gas revolution in America is likely to be short-lived. At some point the reserves will be exhausted. Oil exports remain a positive factor for these countries, as does exporting other commodities to different countries.
All things considered, Africa is a continent of opportunities in economic terms. Nevertheless, a downturn scenario is also possible. The main thing now is to improve governance. If the continent succeeds in this respect, it will be able to maintain its present high growth rate for a long time to come.