At a recent Atlantic Council conference in Abu Dhabi, the audience was asked to form a word cloud by typing the word they associate with investment in Africa. I submitted “opportunity” but was in a clear minority. The word that dominated the screen was “corruption”.
There is clearly a lot of suspicion but I think the demographic story is powerful enough to render this Africa’s century.
According to United Nations, Africa’s population is currently around 1.3bn, versus 4.6bn in Asia. By the end of the century, the UN expects Africa’s population to be 4.3bn (and still growing), versus 4.7bn in Asia (having peaked at 5.3bn in 2055).
Further, Africa today accounts for 14 per cent of the world’s working-age population (ie 20- to 64-year-olds) and Asia accounts for 62 per cent. UN projections suggest that both regions will account for 42 per cent by 2100.
All my historical analyses suggest a clear correlation between population growth and economic growth, so I believe Africa has a bright future. It may not have to wait that long: sub-Saharan Africa’s gross domestic product growth averaged 4.9 per cent per year from 2000 to 2019 versus 2.8 per cent for the world, according to IMF data, using the fund’s forecast for 2019.
However, a recent Financial Times article, “Africa reduces industrial activity as Asia grabs market share”, suggested there has been a decline in the industrial share of GDP in Africa (and a rise in the share accounted for by agriculture).
This runs counter to the supposed development model whereby an economy transitions first from agriculture to manufacturing and then to services and could suggest Africa is going backwards. But, as shown in Figure 2, the agriculture share of GDP was never as high in Africa as it was in China and India and therefore had less scope to decline (though it has fallen and is now roughly in line with that of India).
True, there has been a similar decline in the share of the industrial sector in Africa over that same period (from a peak of 31 per cent in the mid-1990s to 25 per cent in 2018, using World Bank data) but much of the balance has gone into services (from a mid-1990s low of 43 per cent to 52 per cent in 2018).
This is not too dissimilar to the experience of east Asia (excluding the high-income countries) and bears some resemblance to what has happened in India. Indeed, this “de-industrialisation” would appear to be a global phenomenon with industry’s share of world GDP falling from 32 per cent in the mid-1990s to 25 per cent in 2017.
Another FT article “Debt crisis in poor countries driving public spending cuts” made the link between corruption and rising debt service costs in some countries (both factors that could act as a brake on development).
The 2018 edition of the Corruption Perceptions Index, published by Transparency International, shows the problem. The highest ranking (ie least corrupt) African country was Botswana at 34 (out of 180), while the bottom ranked country was Somalia, with a range of other African countries such as Burundi, Libya, Sudan and South Sudan in the bottom 10.
However, Africa may suffer some stereotyping in these surveys and, if we are honest, corruption is everywhere: the global financial crisis did not start in Africa (the US rank is 22). My presumption is that investment from countries such as China, and the gradual rise in incomes and education levels, will ease this problem.
On the topic of debt servicing costs (interest plus repayment of principal in a given period), they have risen for sub-Saharan Africa (for both total and public sector debt) but the same can be said for China, India and Indonesia.
Sub-Saharan Africa has a similar GDP per capita to India but does have a higher public debt servicing ratio (2.2 per cent of gross national income, versus 0.9 per cent, using World Bank data).
Figure 3 shows that Africa is alone among regions in having a dependency ratio (the rest of population divided by the number of 20- to 64-year-olds) above 1.0, which naturally creates public sector financing problems. I believe that the high dependency ratio in Africa is due to the high birth rate and I expect that comparison to reverse as other economies age and Africa’s children become workers.
By the end of the century, UN projections suggest Africa will have the lowest dependency ratio and I believe that will put it in a better position than most other regions to reduce its debt servicing burden.
Africa has its problems but it also has a lot going for it. In a world of shrinking working-age populations, Africa’s abundant workforce will be an advantage (as will its natural resources such as fertile land, mineral resources and sunshine).
The rest of the world must decide if it wants Africa’s workers to come to where the capital is or whether the capital should go to where the workers are. I suspect it will choose the latter. China may be leading the way to Africa for now but I believe the rest of us will eventually play a role in the continent’s success.
Paul Jackson is global head of asset allocation research at Invesco.
beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.
Source: Economy - ft.com
