Africa’s climb to near the top of the global economic growth tables has attracted much attention. Some commentators have suggested that Africa could become the next China or India as the driver of global growth. Global investors are looking for new ways to participate in Africa’s growth success.
The International Monetary Fund’s (IMF’s) latest World Economic Outlook expects that sub-Saharan Africa will grow 5.6% this year and 6.1% next year. If these projections are realised, sub-Saharan Africa will surpass Asia as the world’s fastest-growing region next year.
It is not surprising that rapid growth is occurring in the poorest countries. Economist Mancur Olson noted in 1996 that the fastest-growing economies in any period are always a subset of the poorest countries. This, he argues, is because poor countries have the opportunity for rapid "catch-up" growth as they narrow the gap between their actual and potential income. This opportunity is not available to richer countries. That only some countries enjoy this rapid growth at any one time is, Olson argues, a matter of policy choices. The poorer countries that do enjoy rapid growth are those "that adopt relatively good economic policies and institutions".
What is surprising about Africa’s present rapid growth performance is that it is spread across a large number of countries. The IMF’s forecasts for 45 sub-Saharan African countries suggest 19 will grow more than 6% this year, increasing to 23 next year. Only four countries are expected to grow less than 3% this year.
The rapid rise of global commodity prices since 2002 and the consequent investment in new resources has been an important part of Africa’s economic acceleration. All bar one of Africa’s five major oil-producing countries are growing rapidly. New oil and mineral finds will further boost the performance of a number of others in coming years.
Widening and more accountable democracy, improved governance and better economic policies have also contributed to Africa’s improved fortunes. So, too, has the young, rapidly growing population. As a result, consumption spending has become the most important driver of higher growth. In this respect, Africa’s faster growth differs from that experienced in the rapidly growing Asian economies. In Asia, investment was the main driver of economic growth and often exceeded 30% of gross domestic product (GDP). In China, it is more than 45%. In sub-Saharan Africa, investment is growing, but is just 21% of GDP. It needs to increase much more than this to create the infrastructure and productive capital needed for sustained rapid economic growth.
The emphasis on consumption also means sub-Saharan African economies are expected to generate combined deficits on the current account of the balance of payments of 3.5% of GDP this year. This is because people in these countries are spending rather than saving. In contrast, the economies of Asia all had high savings and so generated current account surpluses while growing rapidly. As a result, Africa’s future growth depends on sustained inflows of capital from the rest of the world. It is therefore vulnerable should exceptionally low interest rates and huge liquidity come to an end, and render Africa a less attractive investment destination.
The exception to sub-Saharan Africa’s growth story is South Africa. The IMF projects South Africa will grow 2.8% this year and 3.3% next year. South Africa is holding back the region. If South Africa is excluded, growth in sub-Saharan Africa is expected to jump to about 7% this year and next. Our low growth is reducing our economic significance in sub-Saharan Africa. In 1994, South Africa contributed more than 50% of the GDP of sub-Saharan Africa. Last year, this fell to 30%. If the IMF’s projections are realised, our share of sub-Saharan Africa will shrink to less than 25% by 2018. While increased growth in the rest of Africa is good news, our declining importance is a negative. South Africa has long been seen by foreign businesses as the "gateway" to Africa. Many have located their African headquarters in South Africa. In some cases (such as motor vehicles) they have located their production facilities here for the whole continent.
This is changing and South Africa faces growing competition as the business centre of Africa. In 1994, our economy was 7.5 times that of Nigeria’s. Last year, it was 1.4 times larger and by 2018, the Nigerian economy may surpass South Africa’s. While South Africa’s per capita income will still be more than three times that of the more populous Nigeria, the importance of our market for global producers is diminishing.
Let’s not forget that rapid growth in sub-Saharan Africa creates a growing market for South African exporters, too. Part of our growth strategy must be to take advantage of the opportunities in Africa, where we enjoy a head start over others in location, and political and cultural ties. We should strive to gain as much from our neighbours’ growing prosperity as they do.
Written by: Gavin Keeton
• Keeton is with the economics department at Rhodes University. This article was published on Business Day.