31 August 2023
In a recent blog, I outlined the risk of near-term liquidity problems in certain African nations. And, while I suggested a region-wide debt crisis can be averted, it’s important to put the issue in a broader context. In particular, as a result of the rise in regional debt levels (both domestic and external) and higher global interest rates, the share of tax revenues now allocated to servicing debt has ballooned in many African nations (next Chart). Meanwhile, international capital flows into the region — both official and market-based — have diminished considerably after the pandemic (second Chart).
As a result, an unsustainable share of the region’s more limited resources are being diverted from its long-standing development priorities: boosting long-term economic growth, reducing poverty, and creating jobs for the rapidly expanding population. Moreover, the region is especially vulnerable to possible future global developments, e.g. climate change and the escalating geo-political tensions between China and the USA. In order to reverse Africa’s multi-decade economic underperformance, as well as to respond to upcoming new challenges, it’s critical that domestic and international resources be mobilised urgently.
Top of the Agenda: Boosting Growth and Reducing Poverty
In my earlier blog, I indicated that African per capita real GDP has expanded a paltry 0.7% annually during the past three decades. And, while the region’s performance improved during the 2000-2010 period (when commodity prices were elevated), growth has slowed again during the most recent 10-year interval. In addition, as African growth has lagged both other emerging market countries and more advanced economies, the gap between rich and poor nations has widened during the past 30 years.
As a consequence, Africa’s track record on reducing poverty deviates from other EM regions as well. Since 2000, East Asia has virtually eliminated “extreme” poverty, and the number of people in South Asia earning less than $2.15/day has declined by nearly 500 million. Likewise, the poorest in Latin America have declined by 60%. To be sure, Africa’s poverty rate has declined from 55% to 35% of the population in this millenium. However, Africa’s weak economic growth and burgeoning population actually has led to an increase in the absolute number of people living in extreme destitution since 2000 (Chart above).
Certainly, a thorough assessment of the causes of Africa’s economic subpar growth is beyond the scope of this blog. But, what are some of key ingredients to boosting growth and reducing poverty? Economists believe that low incomes typically reflect subpar productivity levels. The Chart above (supplied by McKinsey Global Institute) illustrates that African efficiency lags behind all other EM regions in every sector. Boosting long-term growth potential starts with lifting productivity. Easy to say, to be sure. But, we know that improved health and education/training are vital contributors. It’s not hard to imagine, therefore, African policymakers shifting spending priorities to these outlays at the expense of debt servicing at some stage.
High levels of capital spending is another way to boost worker efficiency. Unfortunately, Africa’s investment ratio is well below Asia’s, and is considerably lower than in most EM areas (Chart above). To be sure, Africa has immense infrastructure needs, and greater public investment is vital to boosting long-term growth. However, sustainably raising the investment rate will require higher levels of savings. Undoubtedly, African policymakers need to encourage greater domestic thrift (I’ll discuss later). In addition, foreign capital inflows can make a decisive contribution to lifting Africa’s savings rate. That’s why the current evaporation of international flows is so disturbing. Again, at some point prioritising public investment over interest payments could prove to be tempting.
On the other hand, Africa’s rapidly expanding labour force is a huge advantage in boosting the region’s long-term growth rate compared to all other areas of the world (Chart above from MGI). Not surprisingly, African policymakers will need to prioritise job creation; requiring spending on education, infrastructure, etc. Without massive employment growth, Africa would squander this “growth dividend”, and risk a “brain drain” to labour-scarce Europe (if Europe ever sorts out its immigration system).
Macro-Stability and Improved Biz Climate: Key to FDI Inflows
As traditional sources of capital inflows have diminished, perhaps foreign direct investment (FDI) can play a greater role. In recent years, however, Africa has only attracted $40-45bn of FDI annually — a mere 1.5% of GDP. In contrast, Brazil and India received $80bn and $50bn respectively in 2022. Moreover, the destinations of African FDI are highly concentrated: the top 10 countries account for 70% of the inflows. Historically, South Africa, Nigeria, and North Africa (Egypt, Morocco, Algeria, and Tunisia) have been top recipients. In the past decade, fortunately, the FDI destinations have become more diversified, with Mozambique, Ghana, Congo, DRC, Sudan, and Tanzania attracting inflows (Chart above).
Of course, attracting FDI will require greater political stability. However, of the 193 countries included in the World Bank’s Political Stability Index, two-thirds of the 50 least stable countries are in Africa. Similarly, of the 141 nations rated in the World Econonomic Forum’s Global Competitiveness Report, 27 of the 30 lowest ranked are African. South Africa ranked highest at 60th.
Likewise, macro-economic stability will be key to attracting global capital inflows. Establishing a monetary policy regime capable of producing a stable inflation environment is important. In Angola, Sierra Leone, Zimbabwe — and more recently in Ghana, Zambia, and Nigeria — high and unstable inflation has contributed to economic underperformance. Very low inflation, however, does not ensure superior GDP growth outcomes, as Chad, Congo, CAR, Namibia, and North Africa illustrate. The region’s most consistent economic performers — Rwanda, Tanzania, Uganda, CIV, Kenya, Cameroon, and Senegal — have maintained stable price growth around 6%, an acceptable performance at this stage of development.
African governments face enormous demands for greater development spending (especially health, education, and infrastructure priorities). Despite the recent increase in African government debt, public sector liabilities are still less than 60% of GDP. Therefore, there remains some “fiscal space” to pursue development objectives. But, the situation differs widely throughout the region. High debt burdens may limit policy options in Ghana, Zambia, Zimbabwe, Sierra Leone, Congo, Egypt, and Tunisia. Likewise, rapidly rising debt levels in Rwanda, Senegal, South Africa, Ivory Coast (CIV), Burundi, and Kenya may limit governments’ ability to meet demands for higher spending (Chart aove).
In addition to attracting foreign capital, Africa must mobilise domestic resources to allow governments to expand spending aimed at reducing poverty. The Chart above illustrates tax revenues are far lower than in other EM and OECD nations. Boosting tax collection would help African governments pursue development goals without producing spiraling government debt.
Secular Shifts and Challenges: What to Expect
As development progresses in coming decades, African policymakers and international investors should anticipate important secular shifts in the structure of the region’s economy. While richly endowed with natural resources, Africa is overly dependent on oil and other extractive industries; accounting for two-thirds of exports, and leaving the area vulnerable to commodity price swings (Chart above). In addition, fossil fuel producing countries are exposed, as climate considerations lowers demand for this energy source, e.g. Nigeria, Angola, Gabon, Sudan, Egypt and other North Africa. On the other hand, Africa enjoys large reserves of commodities important to combating climate change (next Chart). The region should also expand its ability to process these valuable commodities, which China now dominates. Overall, expect efforts to diversify and reduce reliance on extractive industries.
As in other regions in the early stage of development, agriculture is by far the largest segment of Africa’s economy (next Chart). Inevitably, this sector’s share of employment and output will decline as development succeeds. As we noted earlier, African agricultural productivity is very low (as in India). In order to improve farm incomes and to free rural workers to migrate to more dynamic sectors, agricultural efficiency will need to improve dramatically. However, the size of Africa’s farm sector is simply too large to expect the rest of the economy to absorb surplus agriculture workers (in addition to new extrants to the labour force). Therefore, as the share of agricultural output/employment declines, an expansion of other rural activities will be necessary, e.g. food processing, etc.
As the contribution of the agriculture and extractive industries shrinks, the rest of the economy will need to pick up the slack; providing jobs for the rapidly-growing population. To date, however, this transition has been progressing quite slowly. Nevertheless, Africa’s service sector has been a key economic driver in the past 20 years (Chart above). Indeed, employment in these businesses has more than doubled during this interval. Low-cost Africa could play a valuable role in the global outsourcing of services in the future. For example, the region has displayed a comparative advantage in e-banking and payments.
Africa’s manufacturing sector lags far behind Asia and other successful EM regions (Chart above). Equally worrisome, industry’s share of employment and output has stagnated in recent decades. An expanding industrial sector will be critical to creating the jobs needed to absorb future new extrants in the workforce. As industry and service businesses expand, urbanisation will follow; requiring a vast investment in infrastructure.
New Challenges: Climate Change and Global Fragmentation
If the task was not challenging enough, global events may produce additional formidable headwinds to the region’s development. For example, Africa is especially vulnerable to climate change. To be sure, Africa’s per capita CO2 emissions are the world’s lowest, and the region accounts for only 3% of annual global carbon emissions (and 3% of cumulative world-wide historical pollution). Nevertheless, in Notre Dame’s Global Vulnerability Index, 31 of the 40 countries most at risk are in Africa (out of 185 countries).
In the 2015 Paris Climate Accord, world leaders agreed that developing countries would require annual investments of $1.7-trillion to mitigate future risks. In 2022, as an example, only $544bn was made available. Since 2015, of the top 10 LDCs receiving climate investments, only two are African (Egypt and Morocco). Moreover, the funding to Africa is highly concentrated: over 50% goes to Nigeria, South Africa, Zambia, Kenya, Egypt, and Morocco. Unless international pledges are met, climate change could be devastating for the continent.
In addition, the Covid pandemic, the Global Financial Crisis, the Ukraine war, and especially the US-China trade war (and geopolitical tensions) have led many to believe the era of globalisation is at risk. The IMF estimates that Africa would be most harmed if this occurs (Chart above). One reason for this vulnerabilty has been the deepening trade and investment ties with China. In addition to providing loans, China has boosted its FDI in Africa by $40bn during the past 15 years. In contrast, the USA has disinvested in the past 10 years (next Chart).
Similarly, China-Africa bilateral trade ties have deepened, while those with the USA have stagnated (next Chart).
In order to mitigate against these risk, Africa should attempt to boost intra-regional trade links. Commercial ties within the continent are far less developed than in all other world regions (next Chart). Deeper intra-African trade and investment ties would help businesses achieve economies of scale, and would likely be attractive to non-African investors.
