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Keep it Up: GDP Growth in Africa

May 16, 2013

According to McKinsey, Africa’s real GDP grew at a rate of 4.9% per year between 2000 and 2008 more than twice the pace of growth in the 1980s and 1990s. As Africa grows policymakers and business manager are asking what is driving this growth. And while many argue that what African countries are experiencing is just another commodity boom, a cursory look into the drivers of this growth shows that it isn’t just a resource boom.

It’s not just a resource boom. The surge in resource (minerals, grain, oil etc.) prices fueled only 32% of Africa’s GDP growth between 2000 and 2008. GDP growth is being consistent across the continent and countries without resources have grown as fast as those with resources. Other sectors have significantly contributed to this growth: wholesale and retail, agriculture and transportation and telecommunications. The underlying drivers of such growth are according to McKinsey the results of governments actions: the termination of conflicts and civil wars, the improvement of macroeconomic fundamentals (e.g. reduced inflation) and the creation of a business-friendly climate. In addition governments took steps such as the privatization of state-owned enterprises, increasing openness of trade and improving the physical and social infrastructure which drove the growth. The most important change these factors brought about is according to the report the growth in productivity of 2.7% per year across countries and sectors. If one then asks if the African growth can be sustained into the future one needs to look at two key dynamics, one international and the other domestic: one is that resources prices are set to continue to rise; the second is the trend in urbanization, expansion of labor force and the rise of African middle-class.

But resources are a big part of the story. As per the first factor, the global demand for fuel, arable land, natural gas, minerals and food is set to increase and Africa stands to benefit from it. It has in fact a large availability of resources such as oil, gold and uranium. The first consideration one can then make is that Africa’s growth is not just a resource boom, yet on the other hand resources matter by far the greatest deal in the African growth. When the CitiBank CEO was asked by the FT what sectors businesses should pay attention to he mentioned resources were at the top of his list. This consideration alone lends itself to the criticism of the skeptics of the African growth: development is about diversification of economic activities with a shift from agricultural and natural resources sectors to manufacturing and service sectors. If one then defines development in this fashion the picture is not as optimistic: Africa accounts for only 2% of manufacturing value added worldwide, roughly the same proportion it accounted for two decades ago. Similarly, the share of Manufacturing Value Added (the net output after adding up all outputs and subtracting intermediate inputs)  in Africa’s GDP fell from 12.8% in 2000 to 10.5% in 2008. African optimists counter this narrative pointing out that Africa’s growth does not stand to rely exclusively on international factors because there are key domestic dynamics which underpin Africa’s growth in the medium term.

Sell it to the African Consumers (source cartoonstock.com)

Sell it to the consumers. The first of such domestic factors is urbanization: according to McKinsey, it can increase productivity, demand and investment as business can create economic of scale and bring down fixed costs. The second factor is the expansion of labor force which has the potential to boost domestic consumption and production. Finally, and related to the second factor, it is the rise of African consumers who can spur domestic demand: the number of household with an income of over $5,000 can increase from 59 millions in 2000 to 106 million in 2014. There are however caveats to this potential domestic dynamic: for instance, for the productivity to increase, for the labor force to expand, be productively engaged and for it to turn into a consumer class, Africa’s growth must generate stable wage-paying jobs. And this is far from automatic. First of all, in the past ten years Africa’s labor force has increased by 92 millions but only 37 millions were employed in stable wage-paying jobs; the majority was engaged in subsistence activity. If manufacturing, agriculture and retail and hospitality continue to grow at the current pace they are likely to bring up the share of workers with wage-paying jobs in 2020 to around 32% from the 28% of today.  The bad news is that as resources continue to make up for a big share of GDP growth stable jobs creation is set to remain low: if one looks at the period 2002-2010 the resource sector did not create any significant stable job. The debate about the prospect of African growth is far from being settled.

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