While one should not refer to “Africa” as a single cohesive unit, 27 of the continent’s 30 largest economies have been expanding more rapidly since 2000. That’s enough for some to call this “Africa’s New Era,” but has enough time passed to make this claim?
It’s true there are many are many positive factors currently driving growth in Africa, including better macroeconomic policy decisions, foreign direct investment from Asia, and political stability. One of the biggest drivers of economic growth, however, is people moving out of low productivity activities in rural areas in to high productivity activities in urban areas.
Certain industries and technologies, such as ICT, have provided many of the emerging high productivity activities in some economies. These industries cannot grow and maximize their potential, however, without the institutions that allow them to do so.
For example, despite the fact that an ICT firm in Ghana had adequate management capacity, investment capital, access to a quality pool of labor, and everything else necessary to grow, that firm could not scale up its activities. Why? Because a weak system of property rights prevented that firm from buying or renting a bigger office to house more employees.
A steady flow of people to urban areas has provided the human capital necessary for the growth of ICT and other industries in the cities. There is reason for concern that comes with this trend, though: these industries are not growing fast enough to keep pace with the influx of people moving to the urban areas where they are located. Without enough formalized firms to absorb all the people moving to cities, entrepreneurs emerge in urban informal economies where their productivity and potential to scale is limited. Unless existing firms grow or many new firms emerge, productivity and growth may lag once more.
Furthermore, the lack of job opportunities, particularly for youth, is one of several reasons behind unrest in Tunisia, Egypt, and elsewhere the Arab world. If economies are to continue growing, they need to expand to absorb bulging youth populations into their workforce. That, in turn, will also contribute to the political stability.
While innovation and entrepreneurship can spur economic growth, economies must have a substantial fabric of good, productive and growing firms if they are to continue experiencing positive growth rates. If current trends keep up, and decision-makers deliver sound economic policy and institutions, it is the dawn of a new era indeed.