A global bright spot: Sub-Saharan Africa
By Kathleen Brooks. The opinions expressed are her own.
For the last three years talk about the global economy has been decidedly negative. Firstly there was the sub-prime housing crisis in the U.S., then the sovereign debt crisis, now we wonder whether the euro will survive and whether China will suffer a “hard” economic landing.
But amidst all of this doom and gloom, there seems to be a bright spot: Sub-Saharan Africa. For the bulk of the last thirty years the focus has been on famine, civil war or piracy, which has left a decidedly negative impression of the continent. However, in recent weeks there has been a growing number of optimistic reports about Africa, with some even thinking it could continue to grow while the rest of the world stagnates.
So why all the positivity? The media might be behind the curve on this one since Sub-Saharan growth has outperformed the global average for most of the past decade, according to data from the International Monetary Fund (IMF). What is even more astonishing is that it has managed to sustain its growth rates even during periods of crisis. Last year growth averaged more than 5 percent even though the sovereign debt crisis ravaged Europe and exports stayed high. Now that global food and energy inflation is starting to level, the continent is in a solid position.
The IMF predicts that Sub-Saharan Africa will grow at a faster pace than Brazil – one of the BRIC economies – between 2010 and 2015. So how has the continent managed to divert the narrative from famine and war to growth and prosperity?
There are a few reasons for this: firstly, demographics, secondly, natural resources and thirdly, its lack of exposure to developed world banking sectors. Looking at demographics first, a growing middle class is starting to emerge and now makes up approximately one third of the population of Sub-Saharan Africa. This class of people want to spend money and have helped to lift domestic demand as a share of GDP across the region. Added to this, 70 percent of the middle class is under the age of 40 so have many “spending” years ahead of them.
The Middle Class has been helped by some expedient political decisions in the region, debt relief and peace returning to parts of the continent. This helped to nurture a private sector that has also benefitted from intra-regional trade. A growing middle class brings with it societal benefits: rising education standards and aspirations, which may eventually filter down to poorer parts of society. There is no denying that poverty is a reality in Africa and by 2060 one third of the population is expected to be still living on $1.25 per day, but at the same time more and more people are expected to lift themselves out of poverty.
Africa has also undoubtedly gained from a super-cycle in commodity prices. Over the last five years the price of Brent crude oil has risen more than 110 percent. This is positive news for Nigeria, the world’s 10th largest oil producer. Tight oil supply combined with on-going tensions between the U.S. and Iran makes Nigeria a major player in the global oil industry especially since the type of crude that it produces is particularly high quality. Since energy demand remains robust, especially in the emerging world, exports of commodities have held up well even during periods of global financial stress.
Although oil accounts for 95 percent of Nigeria’s foreign exchange earnings, it is also a major source of conflict in the country, which has the potential to limit growth. But elsewhere exports of “cash” crops such as coffee, cotton and sugar have exploded in the last decade as Africa “feeds” the rapid development of the emerging world.
Another factor that has contributed to Africa’s resilience in recent years has been its lack of reliance on foreign capital markets. For decades African companies were unable to get credit from multi-national banks, which limited their growth. This meant that they had to rely on local finance or grow at a much slower pace than their global counterparts. This held back efforts to develop for years, but now that global banks, especially in Europe, are suffering and reigning in their lending activities this leaves Africa in a fairly resilient position compared with their counterparts in Europe who rely on banks for 80 percent of their financing needs.
It’s not just the IMF who are optimistic about Africa’s future. HSBC, in its latest “The World in 2050” report, also commented that Africa will finally start to emerge from economic obscurity over the next 40 years as it benefits from rapid population growth. For example, by 2050 Nigeria will have almost as many people as the United States.
Of course there are many downside risks to this scenario. A history of civil war and conflict could raise its ugly head again and destroy economic reform. Likewise, political corruption can erode earnings from commodity exports. While economies can grow because of an increase in populations, to harness the extra human capital export revenues need to be diverted to raising education standards to ensure high quality growth going forward.
When it comes to predicting the future nothing is ever straightforward, especially when it comes to growth in Africa. However, hope is growing that Africa can overcome traditional problems and could hold the key to a brighter economic future. And so, more than ever, Sub Saharan Africa deserves the title “the next frontier”.