10:31 pm
27 October 2016

Africa, The Continent Of Economic Misperceptions

Africa seems to be the only continent today that is regularly referred to as a “country.” It bristles me every time I hear it said. It’s reminiscent of Ronald Reagan’s chatter with the press aboard Air Force One in late 1982 on his way back to the U.S. from a presidential visit to Latin America: “I learned a lot down there… You’d be surprised, because, you know, they’re all individual countries.”

As a relatively freshly minted PhD in international business economics at the time, I thought a statement like that coming from the president of the United States was more than odd. Just as such an utterance was, of course, grossly naïve, if not insulting, to Latin Americans, so too is the expression of the same sort to Africans.

Critically, from a business perspective, Africa is not a monolith, African countries are not homogeneous, and focusing on “Africa” as a unit of analysis is, simply put, not terribly meaningful. By painting Africa with a broad brush, perceptions about the real market opportunities and risks are extraordinarily distorted. In many cases–though not all—the perceived risks are either understated or overstated, and the same goes for the perceived returns.

Based on the United Nations’ nomenclature of a “sovereign state,” the African continent is currently comprised of 54 countries, 48 of which constitute sub-Saharan Africa. Needless to say, Africa’s countries all differ from one another—many starkly so—along a variety of dimensions: location, square area, topography, coastal vs. landlocked, population size, resource endowment, ethnic composition, diversity of religious practices, languages spoken, colonial heritage, political make-up, and so on.

And, of course, each country’s economy has a unique character, making it wholly a misnomer to refer to the “African economy.”

I think it is fair to say that the commonly held view is that the vast majority, if not all, African markets are seen as utterly fraught with excessive risk, while exhibiting comparatively few substantial opportunities.

To be sure, there are appreciable risks of doing business in many African countries, including corruption, reputational, and political risks, and I am not playing them down at all.  But so is it the case in most emerging markets around the globe, whether in Latin America; in the Middle East; in Russia and the rest of the former Soviet Union; in Central and Eastern Europe, and the Balkans; in South Asia, including India, and in East Asia, including–make that, especially–China.

Indeed, when I hear sweeping references made about one emerging market in the world as being more or less risky, or being a better investment opportunity, than another, I have to chuckle—and frankly not in a good way. Regrettably that is commonplace, even among some of the most astute—and well-known—corporate leaders, investors and bankers, especially in the advanced countries.  Ultimately, to paraphrase former U.S. House Speaker Tip O’Neill’s quip about politics: “All investment risks and opportunities are local.”

Sure, global, regional and national factors influence the opportunity-risk tradeoffs of any particular commercial transaction or investment project. And, assessing such tradeoffs in an emerging market is usually a very tricky enterprise. But reliance on qualitative perceptions, especially at the aggregate level, let alone hearsay, is a very poor substitute for systematic, data-driven, field-level analysis. So much so that I cannot tell you how many colossal investment mistakes I’ve seen or heard about being made in African countries—whether on the upside or the downside.

So what are some of the most critical economic misperceptions about countries on the Africa continent? Here are three.

Growth in Africa is an illusion. From an historical perspective, the economic performance of the bulk of Africa—the 48 countries comprising sub-Saharan Africa—has been far stronger than popularly believed.  Over the past decade and a half—from 2000 through 2015—the average annual growth rate of “real” GDP (that is, GDP adjusted for inflation) was 5.5% for sub-Saharan Africa as a whole. Over the same period, average annual real GDP for all emerging markets taken together (including the globe’s fastest growing countries, such as China and India, among others) grew at only a slightly higher rate: 5.9%. By comparison, the corresponding average growth rate among the world’s advanced countries was just 1.8%–about one-third as fast as sub-Saharan Africa.

Looking forward, the International Monetary Fund (IMF)’s most recent forecast—which of course takes into account largely unanticipated “new” weaknesses in much of the global economy, especially soft energy and commodity prices as well as the serious structural downshift in China—indicates that by 2017 average GDP growth for sub-Saharan Africa actually will be in tandem with all emerging markets: 4.7%.

To be sure, these averages absolutely mask cross-country variations for any given year, as well as for swings in growth over time for any particular country, with oil- and other commodity-dependent countries or those going through fundamental political upheavals, constituting the prime examples displaying such patterns.

To this end, between 2000 and 2015 the three slowest sub-Saharan economies were Central African Republic, Zimbabwe and South Sudan, all of which registered negative average GDP growth, while Sierra Leone and Equatorial Guinea were the fastest, averaging double-digit growth.

It needs to emphasized that by no means are annual growth rates on the order of 5% sufficiently high for most African countries to bring about job creation and a reduction in poverty at a pace that meets the local as well as global communities’ aspirations. But the data do make clear that if the African growth story is an illusion, David Copperfield is in big trouble.

South Africa, the traditional point of entry for investors coming to Africa, is the continent’s growth engine. Actually, this is less and less the case—on both counts.  Hobbled by dysfunctional governance, an entrenched and often corrupt administrative bureaucracy, a long history of protectionist trade policies, and inadequate investment in and maintenance of basic infrastructure, especially electricity grids and port facilities, South Africa’s bloom has been off the rose for some time. Since 2007, the nation’s annual growth rates have been in steady decline—in 2015 real GDP grew 1.4% and is forecast to grow only 1.3% in 2016—and over the last decade and a half, its average rate of growth—3.1%–places it barely above the lowest quartile of all the continent’s countries, only slightly ahead of Burundi and Swaziland.

So who have become the economic stars of sub-Saharan Africa—those with fairly sustained high growth rates over the past decade and a half?

While there are some changes from year to year, illustrative representatives of this group include Angola, Botswana, Chad, Cote d’Ivoire, Democratic Republic of Congo, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Tanzania, Uganda, and Zambia. (Of course, with the current depression in oil prices, growth in Angola and Nigeria, among other major oil producers on the continent, is seriously stalled; so much so that they are confronting significant fiscal shortfalls and widening budget deficits.)

One sure indicator of South Africa’s diminishing economic role on the continent is that domestic businesses themselves are plowing a larger and larger amount of their resources in an increasing number of countries to the North, where they can avail themselves of stronger growth prospects than at home.

Another telltale sign is that foreign businesses from outside the continent are less frequently using South Africa as the economic gateway to penetrate sub-Saharan markets.  Instead, initial commercial forays are being taken in the countries of choice directly.

One very visible reflection of this is the explosion of new investment along both the Eastern and Western coastlines of the continent North of South Africa either to establish wholly new, or refurbish existing, ports, coupled with new freight-forwarding, logistics and rail and road networks into interior markets.

In fact, inter-port competition is becoming so intense for South Africa, especially vis-à-vis the main and highly congested port at Durban, that in bordering countries—most notably at Namibia’s Walvis Bay and Mozambique’s Maputo–modernized ports and associated terrestrial transport systems are now actually allowing shippers to bypass Durban (thus saving extra days of sailing and of sitting in the harbor waiting for berthage to open up) and bring in the cargo overland to the same targeted South African sales endpoints but at far lower cost and with the shipments exposed to de minimis pilferage.

African countries are as fragile as they ever were, always on the verge of another crisis. Are African states, particularly the ones highly dependent on commodities, highly vulnerable to shocks from external changes in demand, supply and thus world prices? Of course. This is hardly unique to Africa, nor to emerging markets in general. Indeed, it will take decades for these economies to diversify; frankly more than likely far longer than most observers expect. But it’s important to not discount the changes already afoot.

While the majority of Africa’s exports remain commodity-driven—constituting 60% of total exports—the role of manufacturing in trade has been increasing. Today, manufacturing accounts for 16% of sub-Saharan exports. No doubt, this imbalance needs to be further redressed. And even among commodity exports, there is a need for African producers to be able to climb the value chain and process such commodities prior to their exportation.  But this is starting to happen, in some cases, significantly.

Integration of African businesses into global “network trade”—the exporting and importing of constituent portions of final products or services—has also grown over the past decade or more. Indeed, it has exploded. This is only to a limited degree the result of activities by U.S. and EU multinationals—the parties who by far still account for the bulk of cumulative investment in Africa. (It is a myth that the Chinese have assumed that position.) Rather it is largely due to the growth of Africans’ participation in “South-South” trade and investment, that is, international transactions among emerging markets (as distinct from traditional “North-South” commerce—trade and investment between the advanced countries and emerging markets). It is here where the Chinese–as well as Indian and Brazilian–firms’ new flows of investment in African markets come in.

Either way, however, the result is that African firms are increasingly directly exposed to international competition—arguably for the first time in the continent’s post-colonial history. There is little question that the effect will be to strengthen the most efficient African firms, but also drive out of business the most inefficient enterprises, and that will be a painful process—one that cannot be overstated. But it is inevitable. Postponing this process only becomes increasingly costly—not only in terms of the costs of the transition itself, but also in terms of the opportunity costs of delaying the realization of the benefits of increased economic growth.

And perhaps most important is the enhanced efficacy of economic policy management on the part of a number of Africa’s governments. Here we actually have results from a real experiment from which insights can be drawn. During the global financial crisis that began in 2008, despite the worry that it would be countries in Africa, more than any other region of the world that would put in place price controls and protectionist policies in the hopes of sheltering the population from economic shocks, many African policy makers, veterans of hard-won economic reforms over the past few decades, were actually part of the few exceptions around the world to refrain from such self-defeating policy actions. Other emerging markets—Brazil, India, Turkey and Russia, for example—as well as a number of advanced country markets actually pursued such initiatives to their detriment.

What was the result? Taking into account each region’s “initial conditions” as the crisis unfolded, compared to their economic standing as the crisis began to wind down, Africa was the most resilient region of the entire world.


One doesn’t need to be pollyannaish to acknowledge that a sizeable number of African countries are in the midst of an inflection point, reflecting a secular or structural—rather than a cyclical—change to a pattern of sustained, higher rates of economic growth. It’s by no means all countries on the African continent, nor inevitable that it will be so. Moreover, even for the countries in the midst of this transition, the pattern has not been, nor will it be, linear. There will be setbacks, just as there will be positive surprises.

Nor is it the case that there aren’t currently substantial risks of investing in these countries, let alone in other parts of the continent, indeed in all emerging markets. But so too are there new as well as unfound investment opportunities in Africa.

Innovative approaches are increasingly being developed and undertaken by businesses and investors to both mitigate these risks and capitalize on such opportunities—in Africa as elsewhere. But the prerequisite to benefit from those approaches is to come to grips in achieving a genuine assessment of the real conditions in these markets. Anecdotal perceptions, rather than data-driven assessments, are a sure way to lose one’s shirt in such situations.

Harry G. Broadman is CEO of Proa Global Partners LLC, a business advisory firm; on the faculty of Johns Hopkins University; Keynote Speaker; and Non-Executive Board Director.