In a recent post, Alex Shkolnikov reflected on whether Africa was developing into a globally competitive economy, analogous to those of the emerging BRIC countries, concluding that improved governance was the key to making this a reality. A recent report from the McKinsey Global Institute entitled “Lions on the Move: The Progress and Potential of African Economies” lends significant support to this argument, by underscoring the vast potential of African economies. If properly harnessed, rising productivity, foreign investment, and cross-border trade could lift millions of Africans out of poverty over the next decade. Whether this will happen depends to a large extent on whether African leaders are willing to institute serious regulatory reforms, particularly in ways that encourage increased regional trade within the continent.
The report draws its optimistic assessment of Africa’s economic potential from favorable demographic trends, including a growing work force and increased urbanization. Combined with an easing of violent conflict and an expanding market for consumer goods, McKinsey forecasts that Africa’s combined GDP will increase by $1 trillion over the next 10 years. The report acknowledges, however, that African economic development is not unfolding in a homogeneous manner. It differentiates the 32 countries representing, 97 percent of the continent’s GDP, into four categories: diversified, oil exporters, transition, and pre-transition.
Of the four categories, the most intriguing is the transition group which includes Cameroon, Ghana, Kenya, Mozambique, Senegal, Uganda, Tanzania, and Zambia. These countries have low levels of per capita GDP relative to diversified and oil exporting economies, but are also poised to become key exporters of consumer goods, which, in theory, they can produce cheaply and ship inexpensively to other African nations. Why aren’t they already doing this? Poor infrastructure is part of the story, but so are tariffs, which are among the highest in the world, as well as delays caused by inefficient and corrupt bureaucracies. As the report notes, African factories are, on average, just as productive as China’s but costs remain higher due to poor regulation and lack of commitment to developing infrastructure.
While the business environment in Africa has improved in recent years, the data regarding the pace of reform are not overly optimistic. Between 2006 and 2010, the average score for sub-Saharan Africa (excluding extreme outlier Zimbabwe) on the Heritage Foundation’s Index of Economic Freedom improved less than 1 point on the 100-point scale, from 54.9 to 55.1. Only 6 countries have improved at a rate of at least 1 point a year during that period, and 22 of the 39 countries have seen their scores decrease.
As the McKinsey report demonstrates, the stakes involved in African reform efforts are high, and the continent’s economic future depends heavily on increased commitment to eliminating barriers to expanding business and encouraging cross-border trade. African governments have the power to do what is necessary, but they are only likely to act if their own constituencies, including members of the private sector, make a convincing argument for their importance and insist on their effective implementation. The potential rewards of successful reform, and the threats of economic stagnation and continued widespread poverty if things go unchanged, are simply too great to ignore.
Published Date: June 30, 2010