With the global economy in search of new growth champions, Africa stands out. Growth forecasts in the rest of the world are subject to the uncertainty posed by the global environment. Inter-linkages between economies have deepened. Decelerating growth in any of the major economies will have implications for developing countries. Yet, in Sub-Saharan Africa (SSA), the fundamental impetus behind growth remains domestic. Trade shares of GDP are low. Ex-South Africa, which contributes about a third of SSA GDP, the growth picture is still encouraging.
African economies have outperformed for more than a decade, spurred by an improved policy environment, greater savings, a more open embrace of the private sector, and gains in financial intermediation. Economic reform in a post-cold war environment brought a gradual rolling back for Africa’s overextended states. Fiscal policy improved, inflation stabilized and activity took off. In the decade prior to the global economic crisis, real private-sector credit to GDP doubled in the SSA region.
Externally, there has been a tendency to see Africa’s growth as being fundamentally correlated with higher commodity prices. However, it was the rise of the African consumer that truly characterized the most recent period of African outperformance, from 2001. True, Africa’s exports remain dominated by primary commodities. But Africa has seen resource booms come and go in the past, and none has been fundamentally transformative of its economic prospects.
In the most recent period, rising levels of private consumption were far more important than net exports in driving overall growth. Although oil-rich economies experienced the strongest rates of growth, on balance, in the last decade, most African economies, whether resource-rich or resource-poor, saw accelerated GDP growth. Evidence has also emerged of a sustained decline in poverty rates for the region as a whole. This is difficult to square with the idea that resources were a key driver of growth. Resource-driven growth tends to be capital-intensive, with no obvious means of alleviating poverty. Something else, something more intrinsic to Africa, has been responsible for the region’s recent outperformance.
At Standard Chartered, with the benefit of over a hundred years’ experience in different African markets, we believe that the growth outperformance experienced recently is different. Moreover, a number of key trends suggest that it should be sustained in the future.
First, consider demographics. Africa is young, and Africa’s population is growing rapidly. Over the coming years, the working age share of Africa’s population is set to rise. This is in contrast to many mature economies and China, where populations will be ageing more rapidly. Although formal-sector job creation remains a challenge, other things being equal, this demographic profile should boost Africa’s growth, driving up consumption and asset prices, as well as creating a greater pool of pension savings that can be invested in the region.
The scale of Africa’s population growth is also important. Nigeria, the region’s most populous economy, is currently ranked 7th in the world by population size. According to United Nations statistics, by 2035, it could be the 4th most populous country globally. By 2055, it could be 3rd, overtaking the US. Only China and India are likely to have bigger populations.
But it isn’t solely a Nigeria story. Much of Africa is showing similar signs of rapid demographic growth. African economies have not yet exhibited the same fertility transition seen elsewhere. According to the same UN statistics, by 2100, roughly half of the world’s Top 20 most populous economies will be African. The growth potential this represents is immense.
Second, agriculture also represents a significant opportunity. While agricultural productivity in Africa has not yet shown the same leap forward as in other regions, things are starting to change. Governments are starting to take agriculture more seriously. More Africans are currently employed in agriculture than in any other sector, and this is where Africa’s transformation will likely be seen. In per capita terms, contrary to common stereotypes, Africa is richer in water resources than either Asia or the Middle East. Africa also boasts most of the world’s untapped arable land. Only an estimated 14 percent of potentially available farmland is put to use in Africa. Of all the available, untapped, arable land globally, a massive 60 percent is to be found in Sub-Saharan Africa. With increased investment, and greater policy prioritization, African agriculture could realize its potential, transforming growth opportunities in the region.
Third, Africa’s infrastructure deficit is well-documented, with the continent’s hinterland poorly served by major transport infrastructure. In part, this explains the weak level of intraregional trade in the region. But investment in African infrastructure is gaining ground. A higher rate of urbanization has driven down the cost of infrastructure provision in per capita terms, enabling scale economies. As domestic markets develop and yield curves are extended (allowing for more long-term borrowing), greater investment in infrastructure will likely be facilitated. More African sovereigns are issuing eurobonds, tapping into international capital, in order to finance infrastructure spending. Standard Chartered has pledged over US$2 billion of financing for African energy projects in the next five years, under US President Barack Obama’s Power Africa initiative. The catalysts for a sustained productivity boost, and a structural transformation of African economies, are starting to fall in place.
While some challenges remain — Africa must do even more to boost its saving rate and the region’s exports would still benefit from diversification, we nonetheless remain optimistic about Africa’s growth. An increasing number of markets in which Standard Chartered operates will see real GDP trend growth of 7 percent or more in the coming decade, effectively doubling in size. These countries, including Nigeria, Ghana, Angola, Mozambique, Côte d’Ivoire, Zambia, Uganda, Tanzania and perhaps even Kenya, represent a mix of opportunities as well as risks. But with growth outperformance expected in each of them, Africa’s time has arrived. It is time to take Africa’s growth seriously.