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Tomorrow never comes: Why Africa’s Economic ‘rise’ may yet fall flat

Tomorrow never comes: Why Africa’s Economic ‘rise’ may yet fall flat

June 21, 2016
Richard Woodward
Richard Woodward Non-Resident Fellow - International Economics

Since it (in)famously dubbed Africa the ‘hopeless continent’ the Economist has undergone something of an epiphany. In the intervening period the magazine has regularly eulogised about Africa’s performance and potential culminating in its rechristening in a 2013 special report as the ‘hopeful continent’. This volte-face epitomizes the seemingly unquenchable stream of upbeat commentaries on Africa by academics, business gurus, economists, management consultants, media outlets and international organisations.  Although they acknowledge the its deep and entrenched afflictions, Africa’s boosters maintain these problems are being banished by a virtuous circle of economic growth, favourable demographics, stronger institutions and enlightened policy making. Importantly these changes are held to be structural rather than cyclical meaning that, unlike past episodes, economic growth will not come to an abrupt halt as a consequence of unsustainable domestic economic booms or fluctuating external circumstances. Narratives of Africa’s rise are nonetheless exaggerated. Not only do they rest on a selective and optimistic interpretation of the data, they conveniently neglect any discussion of power and, in particular, the hugely disadvantageous terms upon which Africa is integrated into the global economy.

Africa has long been a major economic and trade partner for the GCC region.  Most attention, due to a shared language and religion, has been in North Africa, but we are seeing ever expanding links with the rest of the Continent.  From 2005 to 2014 trade between the UAE and Africa tripled showing positive trends in growth.  However, more recently these positive trends have been hit by a number of factors in global economic system impacting growth.   This has led to the International Monetary Fund to call for a “policy reset” so that the positive aspects of Africa’s rise can be harnessed.

Superficially the case for a rising Africa looks compelling. Since the 1990s, following three decades in which African living standards deteriorated, startling advances have been made. During the 2000s, Africa was home to 6 out of the 10 fastest growing economies in the world whilst sub-Saharan Africa’s annual 5.7% growth rate made it the second fastest expanding region behind Asia. According to the World Bank, the proportion of African people living in poverty fell from 56% in 1990 to 43% in 2012, while between 1995 and 2012 life expectancy grew by six years, school enrolments surged with literacy rates rising 4%, the prevalence of chronic malnutrition amongst the under 5s dropped by 6%, and the number of deaths attributable to political violence subsided by three-quarters. Moreover, prevailing conditions suggests these trends may endure. Africa is on the cusp of reaping a substantial demographic dividend. The UN forecasts that by 2050 Africa’s population will double to almost 2.5 billion while its median age remains beneath 25. By 2035, sub-Saharan Africa’s working age population will eclipse that of the rest of the world combined. As well as providing a pool of cheap labour, young African consumers will fuel exciting frontier markets. Despite the persistence of inequality, the fruits of economic growth appear to be trickling down to an emergent middle class. The Boston Consulting Group for example estimates that Africa’s middle class will more than treble from 108 million in 2004 to 341 million in 2024 whereas McKinsey believe that by 2025 almost two-thirds of the continent’s 303 million households will possess discretionary income adding over $400 billion to the size of the consumer market.

The mushrooming middle classes are important consumers but in the Africa rising story arguably their impact as citizens may be more salient. As Nancy Birdsall has recently written, a sizeable middle class is ‘the best guarantee of good governance’.  Looking to protect their newfound affluence, the middle classes lobby for improvements in economic and political institutions while their taxes fund essential public services. In other words, the middle classes sponsor the ‘public goods that create a level social and economic playing field on which all can prosper’.  Stronger macroeconomic frameworks and governance structures improve the local business environment. In 2013, the African Development Bank found that since 2006 the costs of starting a business in Africa had plunged by two-thirds and the time taken to start a business had halved. Keen to exploit the fortune at the bottom of the pyramid, foreign direct investment (FDI) has climbed fivefold since the turn of the century to $54 billion and over 400 companies now generate revenues in excess of $1 billion in Africa.

In short, Africa appears to be locked into a positive, self-reinforcing cycle of economic and political improvement. Behind this façade, however, lurks an uncomfortable reality. The outlook for living standards may be brighter but Africa, its economy and its people confront chronic problems that will inhibit its development and potential. Poverty, disease and illiteracy are just some of the many maladies that still stalk the continent. Between 1990 and 2012, the number of African’s living in poverty rose by 104 million to 388 million. Africa is the world’s only region where the majority (61%) of deaths are attributable to communicable, maternal, neonatal and nutritional conditions. Two-thirds of Africans are illiterate. Those who covet Africa’s large labour force should ponder the effects of these problems on its productivity.

Likewise, the size of the much-vaunted middle class that purportedly drives Africa’s vibrant consumer markets and quest for institutional improvements is vastly overstated. Estimates of an African middle class numbering in the hundreds of millions rest on ludicrously generous criteria. In 2011, for instance, the African Development Bank claimed that Africa’s middle class numbered 326 million or approximately 34% of the African population. However, these figures included those existing on as little as $2 per day, fractionally above the internationally recognised poverty line.  In the same year, using $10 per day as a threshold, the Pew Research Centre calculated that only 6% of African’s qualified as middle class. Last year Credit Suisse shrank these figures further finding that just 3.3% (or 19.9 million) African’s were middle class, and confirmed Pew’s verdict that the absolute numbers of middle class African’s had hardly budged since the millennium. Furthermore, the middle class and related consumer markets are concentrated in a handful of states. Over 70% of those identified by Credit Suisse resided in just six states while in 2011 ten countries accounted for 81% of Africa’s private consumption. Even proponents of the Africa rising hypothesis now acknowledge this ‘missing middle’ and its negative impact on these budding consumer markets.

The small middle class also saps its political clout and, predictably, the benefits for African governance have not materialised. An analysis of the World Bank’s Worldwide Governance Indicators for instance reveals that between 2000 and 2014 government effectiveness declined in 33 of the 52 African countries surveyed. The Mo Ibrahim Index of African governance has ticked up from an average of 46.5 in 2000 to 50.1 in 2014. After plateauing in 2008 however, progress has stalled. Notably the business environment has been the worst performing aspect of the survey since 2011. These judgements are corroborated by Africa’s feeble showing in rankings of international competitiveness including the World Bank’s Ease of Doing Business Index and the World Economic Forum’s Global Competitiveness Index.  A scarcity of appropriate infrastructure (see below), endemic corruption, labyrinthine regulations, and a welter of formal and informal obstacle to trade threaten the commercial viability of many businesses. At 18% of GDP, Africa has the lowest level of intra-regional trade of any continent seriously impeding the development of cross-border supply chains. Improvements to Africa’s business environment have been overhyped. Indeed far from rushing headlong into Africa, almost half the respondents to one recent survey indicated they were considering relocating or reducing headcount in the region. Similarly for all the excited chatter about soaring FDI levels, it is worth noting that aid flows have exceeded FDI flows to Africa in all but three years of the 21st century.

Another dimension of the Africa rising narrative is that Africa is now casting off the resource dependency that left it in a subservient position in the global economy. Previously Africa’s economies were structured around satiating the external demand for natural commodities. The commodities exported to developed economies would then be used to produce higher value added goods that Africa, lacking sufficient indigenous industrial capacity, was forced to import. Trapped at the lower end of the value chain African economies faced deteriorating terms of trade and were vulnerable to the vicissitudes of global demand for commodities. Africa’s economic history is littered with fleeting episodes of economic growth and development that ceased when global commodities prices subsided. Africa’s champions assure us that we are witnessing the ‘twilight of the resource curse’ with a combination of foreign investment and home-grown entrepreneurs helping to deliver more diversified economies encompassing high-value added sectors. It’s an agreeable story but sadly has little foundation in empirical evidence.

In its 2015 African Economic Outlook the African Development Bank found that ‘minerals and ores account for two-thirds of Africa’s merchandise exports’. Of the 47 sub-Saharan African countries, 11 rely on one commodity for over half of their export earnings while nearly three-quarters derive more than 50% of their export earnings from just three commodities. Far from being a break from the past, Africa’s economic growth miracle in the 2000s owed to a resources supercycle spearheaded by Chinese demand. Equally Africa’s commodity exporting economies have swooned following China’s economic slowdown. In 2015, economic growth in sub-Saharan Africa was 3.4%. Forecasts for 2016 and 2017 are slightly more optimistic but fall short of the buoyant economic growth that is supposed to elevate Africans into the middle class. The lionization of commodity exports also diminishes the prospects for economic diversification. In addition to reducing the capital available for alternative ventures, an influx of foreign money linked to resource extraction can lead to overvalued exchange rates that lessen international competitiveness. The Africa rising tropes roll out some well worn examples of successful manufacturing enterprises. Nevertheless, since the 1970s the share of manufacturing in sub-Saharan African GDP has remained stubbornly at 10% of GDP while its share of global manufacturing output has fallen from 3% to 2%.

The resource curse also contributes to other facets of Africa’s sickly business environment. Decrepit infrastructure dampens African productivity by 40% and shaves 2% off its growth rate. This partly reflects a $35 billion shortfall in the spending required to remedy Africa’s infrastructural shortcomings but also that much of it is still set up to facilitate the commercial exploitation of natural resources. Africa’s rail and road network is expanding rapidly (around 7,500 km of extra roads are completed each year for instance) but too often these link mines to ports rather than cities. Instead of acting as a motor for greater internal connectivity and indigenous development additional infrastructure often serves as a conveyor belt for the exodus of raw materials. The corruption cited by many as a brake on Africa’s progress also has links to natural resource extraction. The colonial powers that plundered Africa’s resources in the past may have gone but in their place is a modern “looting machine” where international mining conglomerates machinate with local elites to fleece Africa of its resources.

Africa’s subordinate position is reinforced by its marginalisation in the principle forums in which the rules governing the global economy are formulated. To participate in the global economic game African countries are forced to play by rules reflecting the input and interests of the powerful. Ha-Joon Chang has described how economically advanced countries are ‘kicking away the ladder’ by proscribing in developing countries the kinds of policy instruments that they themselves used to succeed. This is perhaps most conspicuous in the conditions attached to loans made by the International Monetary Fund (IMF) to African states in the aftermath of economic crises, crisis which recall are an inevitable concomitant of its structural economic position. Angola, which was forced into the arms of the IMF in April, is unlikely to be the last African commodity producer forced to swallow the IMF’s unpalatable economic medicine in 2016.

During the last two decades many African’s have experienced improvements in their quality of life. Too often however these gains are overplayed. Hundreds of millions of Africans still live in abject poverty and it is difficult to justify some of the irrational exuberance that surrounds discussions of Africa’s economic prospects. Africa’s dependent relationship with the global economy will continue to debilitate its potential. Whereas the Africa rising parable interprets the current slowdown as an aberration before which the continent’s upward ascent recommences, history suggests Africa is again suffering the consequences of the resource curse. Africa’s tomorrow should be bright. The tragedy for Africa, and indeed for Africans, is that tomorrow never comes.

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