The Next Investment Frontier: Why Business Majors Should Have Their Eyes on Africa
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It wasn’t too long ago that The Economist labeled Africa “the hopeless continent.” Stagnant economic growth, widespread poverty, government corruption, multiple civil wars, an HIV epidemic, and famine all plagued the continent. A decade later, however, it’s a label the publication now regrets. That’s because today, Africa is, in a word, booming. A more appropriate label for the continent is “the last investment frontier.”
Multiple figures can be used to tell the story of Africa’s turnaround from hopeless continent to investment darling. For one, economic growth in Sub-Saharan Africa is expected to accelerate more than 5% over the next three years – outpacing the global average – according to the World Bank’s latest Africa’s Pulse report. That’s in line with the International Monetary Fund’s outlook for Africa, which forecasts a growth rate of 5.4% in 2012-13 for Sub-Saharan Africa. Additionally, in 2011, Africa received its largest share ever of the global foreign direct investment (FDI), according to Ernst and Young’s 2012 Africa Attractiveness Survey.
With more than 1 billion people calling the continent home, Africa also has a growing crop of consumers. Since 2000, 31 million households have joined the world’s consuming class, according to a report from global management consulting firm McKinsey & Company. Nowhere is this more telling than in Libya, which welcomed a Cinnabon last year – only a year after its civil war. The mall staple notably became the first American franchise to set up shop in the country.
All eyes are on Africa, and for today’s business majors, there’s never been a better time to study this emerging market and understand where the growth opportunities are, what’s hindering that growth, and what’s in store for the future.
“Africa is the China of our generation,” says Babak Hafezi, CEO of HafeziCapital, a consultancy firm that has helped companies move to new markets within the African continent. “It has the ability to grow dramatically.”
Accounting for about one-seventh of the world’s population and 20% of the planet’s total land area, it’s hard to make any generalizations about Africa. By most estimates, there are more than 1,000 languages spoken throughout the continent’s more than 50 independent countries. In addition to cultural differences, economic growth varies widely from one region to the next.
“You have to think of it as a dramatic mosaic,” says Hafezi. “It’s completely different from north to south and east to west.”
To speak in general terms for a second, though: as a whole, Africa is among the fastest-growing economies in the world, with Sierra Leone, Niger, Cote d’Ivoire, Liberia, Ethiopia, Burkina Faso, and Rwanda in particular leading that growth. The region is out-performing other developing countries, too, with FDI inflows to Sub-Saharan Africa increasing 5.5% last year compared to an average decrease of 6.6% for developing countries. That growth is expected to continue, with FDI inflows projected to increase to record levels over the next three years — from $37.7 billion last year to $54 billion by 2015.
This growth is owed in large part to high commodity prices worldwide and strong consumer spending on the continent, among other factors. Here’s a look at some of the most significant changes to happen to Africa in recent years and some more predictions:
Growing Labor Market
Africa’s population is growing at twice the rate of other regions and is expected to double by 2036, according to the World Bank. Its workforce is growing, too. Currently, there are more than 500 million people of working age on the continent. That number is expected to exceed 1.1 billion by 2040, according to McKinsey – making it the largest in the world.
After a decade of strong growth, poverty has been on the decline in Africa. Between 1996 and 2010, the share of Africans living on less than $1.25 a day fell from 58% to 48.5%, reports McKinsey. More and more people have also joined the consumer class. Around 90 million of its households have joined the world’s consuming classes — an increase of 31 million in just over a decade — according to figures from McKinsey. That figure is projected to reach 128 million by 2020. The firm also predicts that Africa’s combined consumer spending will increase from $860 billion in 2008 to $1.4 trillion in 2020.
More Africans are educated, which can mean a better-trained workforce. According to McKinsey, around 40% of African workers now have at least some secondary education, a number expected to increase to 48% by 2020.
Wealth of Commodities
Africa is home to 10% of the world’s reserves of oil, 40% of its gold, a third of its diamonds, and 80%- 90% of the metals chromium and platinum. Soaring prices for oil, minerals, grain, and other commodities have helped lift Africa’s GDP since 2000, notes McKinsey, generating a third of its GDP growth from 2000 to 2008. For example, oil rose from less than $20 a barrel in 1999 to more than $145 just nine years later. African agriculture is also a big generator of jobs. In Sub-Saharan Africa, growth in agricultural employment accounted for half of all employment growth between 1999 and 2009, according to the United Nations’ Food and Agricultural Organization. The sector is expected to create 8 million more wage-paying jobs between now and 2020.
Africa’s bountiful commodities aren’t the only drivers of economic growth. As more and more Africans turn to mobile technology, telecommunications is one significant area. Since 2000, there have been 316 million new mobile phone subscribers signed up in Africa, according to McKinsey. Mobile technology is also a major contributor to Africa’s economy, with mobile operators generating 3.1% of the GDP last year, according to a report from GSMA, a global association of mobile operators. The group predicts that annual mobile operator revenue will increase by 25% from 2012 to 2017. Retail banking presents another major opportunity, expected to account for nearly 40% of African banking revenue by 2020, according to Reuters.
Africa is a different place than it was a generation ago, when civil war was rampant, capital was scarce, and dictators ruled many countries. The Africa of today is not a 100% peaceful, democratic continent, but dictators like the Congo’s Mobutu Sese Seko are gone, civil wars have mostly ended, and two out of three African countries hold elections. This political stability was necessary to restart economic growth, notes McKinsey.
All of this change bodes well for the future of Africa.
“If properly harnessed to unleash their full potential, these trends hold the promise of more growth, much less poverty, and accelerating shared prosperity for African countries in the foreseeable future,” says Punam Chuhan-Pole, a co-author of the World Bank’s Africa’s Pulse report.
Challenges to Growth
At the same time, Africa is not without its challenges. Ironically, some of its greatest areas of success are also in need of improvement for the continent to continue its rise.
Despite a rising consumer base and a decrease in poverty, Africa is also home to high inequality. Although the number of people in Sub-Saharan Africa living below the poverty line did decline from 58% to 48.5% between 1996 and 2010, it’s still leagues behind other nations in the global region. South Asia’s ahead of Africa at 31%.
Malaria has been on the decline in Africa but still accounts for the vast majority of cases in the world. According to the World Health Organization, 90% of the 660,000 malaria deaths across the globe occur in Africa. Nigeria, Democratic Republic of the Congo, United Republic of Tanzania, Uganda, Mozambique, and Cote d’Ivoire account for an estimated 103 million malaria cases. The disease is inextricably linked with poverty and largely affects those under the age of 5.
A combination of poverty, conflict, population growth, poor infrastructure, and environmental factors such as drought have resulted in significant undernourishment in Africa. According to the United Nations’ Food and Agriculture Organization, 239 million people in Sub-Saharan Africa were undernourished in 2010 — the highest proportion of undernourished people in the world.
Education is on the rise in Africa, but the quality of that education is in need of improvement. According to the Brookings Center for Universal Education, about half of Sub-Saharan Africa’s 128 million school children are likely to acquire the basic skills needed to live healthy and productive lives. In other words, 1 out of every 2 kids will reach their adolescent years unable to read, write, or perform basic numeracy tasks. This will make it increasingly difficult for African companies looking for skilled workers to hire other Africans.
Slow Job Growth
According to a McKinsey report, over the past decade, Africa created 37 million stable, wage-paying jobs — but 91 million people were added to the workforce. As a result, two million are unemployed, and a majority — 52 million — turned to subsistence activities to earn income. If this trend continues, the number of people in vulnerable employment will continue to rise. That is, unless the continent creates wage-paying jobs more quickly.
“The political situation in many Africa countries is becoming more stable, but it is hardly stable,” says Kathleen Brush, a global business, leadership, and strategy consultant. According to the Foreign Policy’s 2012 Failed States Index, which looks at such factors as uneven development, human rights, refugees, and economic decline, every country in Africa is listed with a status of critical, in danger, or on the borderline of becoming a failed state. Brush notes that in total, 36 out of 54 countries have experienced at least one episode of devastating conflict since independence, while several others, such as Mali, Democratic Republic of the Congo, Burundi, Rwanda, and Somalia, are still experiencing armed conflict.
Even though Africa has changed dramatically over the past two decades, many still view the region as “the hopeless continent” it was more than a decade ago. A survey by Ernst & Young found that, despite high growth, returns, and optimism for Africa, a perception gap exists wherein businesses still view the continent as an unattractive investment destination, with major obstacles including political instability, corruption, and security. The firm recommends that Africans, and those with a passion for Africa, need to better articulate and “sell” the story of growth and investment opportunity.
The World Bank also has some advice for the changing continent to ensure continued prosperity, including bringing more electricity, nutritious food, jobs, and opportunity to help end extreme poverty and promote shared prosperity.
“Without more electricity and higher agricultural productivity, Africa’s development future cannot prosper,” says World Bank’s Africa Vice President Makhtar Diop. “The good news is that governments in Africa are intent on changing this.”
Reform in Progress
Indeed, it’s easier than ever to start a business thanks to government reform, cooperation, and policies that energize markets. In 2004, it took 153 days, 14 procedures, and a minimum capital equivalent to 14.5% of the country’s per capita income to start a business in Mozambique. Today, it takes 13 days, nine procedures, and no minimum capital, according to a recent report from the IFC and World Bank. Across the continent, 15 countries have lowered barriers to entry for new businesses, 23 have facilitated access to credit, and seven have made it easier to pay taxes. Additionally, in 2011, more than three-quarters of Sub-Saharan African countries made improvements to the regulatory climate for domestic firms, compared to only a third six years prior.
Here’s a look at some of the reforms that have helped make Africa a better place to do business and prosper:
Cutting Unnecessary Regulations
Getting rid of red tape can allow businesses to flourish. As McKinsey notes, Rwanda was able to increase the number of new companies from only 700 a year to 3,000 a year after streamlining the procedures to open a business.
Improving Access to Finance
According to McKinsey, improving access to finance in target sectors can also help economies flourish. To encourage foreign direct investment, Cape Verde offered investors a five-year tax holiday, unrestricted expatriation of profits, and exemption from import duties. As a result, revenues from foreign tourism increased from $23 million in 1999 to $542 million in 2008.
In Rwanda, maize and cereal output increased between 2006 and 2011. This was in part thanks to the Rwanda Crop Intensification Program, in which subsistence farmers pooled their land, specialized in one crop, and were provided low-cost fertilizer. This program has been the “workhorse of the new agricultural strategy of the government of Rwanda,” says the World Bank. Crop insurance is also helping farmers in places like Kenya, where the Kilimo Salama program assists farmers in managing natural hazards such as drought.
After landlocked Mali built integrated road, rail, and sea links to transport refrigerated goods, it increased its mango exports 1,042% percent between 1993 and 2008. The lesson learned? “Mali’s experience underlines the importance of bringing together a combination of ingredients—public-private investment, technical expertise, national capacities, and innovation—that are likely to drive positive economic change,” notes the World Bank.
Land and Natural Resource Rights
In rural Africa, access to land and natural resources are necessary for food, income, and a good livelihood, but land rights are not always secure thanks to weak, contradictory laws and customs. According to Focus on Land in Africa, however, most African countries have started to introduce land policy reforms, and the African Union has adopted a policy framework to strengthen land rights.
In North Africa and the Middle East, the most water-scarce region in the world, per capita water availability is forecasted to fall by half by 2050. But steps are underway to improve accountability of water management, according to the World Bank, such as replacing irrigation systems with drip networks that can reduce water usage and privatizing irrigation.
What Business Students Need to Know
With Africa emerging as a global player in the international market, today’s business students have a unique opportunity for investment and growth, as long as they know where to start. Some of the most promising areas include consumer-facing industries, agriculture, resources, and infrastructure, which are projected to generate as much as $2.6 trillion in revenue by 2020. Telecommunications in particular is a main driver behind the continent’s economic growth, with mobile phone users in Sub-Saharan Africa growing from 16.5 million in 2000 to 650 million in 2012 by World Bank estimates — greater than the United States and European Union combined. Internet bandwidth has also grown 20-fold.
“With the ever-growing population in Africa, there will always be a need for more access,” says Anne J. Bresnahan, principal of Boston-based consulting business Lasanne Strategies, who founded a telecommunications company in West Africa in the late 1990s.
In line with its widespread mobile use, Africa is also rapidly becoming a leader in information and communication technologies (ICTs), with innovations like dual-SIM-card mobile phones and using mobile phones for remittance payments. Countries like Kenya and Senegal are also implementing ICT-enabled trade initiatives that will help boost economic growth.
The tech field overall is thriving and driving entrepreneurship, with Nairobi , the capital city of Kenya, the undisputed tech hub of Africa. It’s home to innovative communities like iHub, NaiLab, and soon, Konza Techno City, a multibillion-dollar infrastructure located just outside the city that will focus on telecommunications, life sciences, education, and ITO-BPO. Kenya’s not alone, either. Other technology hubs include Hive CoLab and AppLab in Uganda, Activspaces in Cameroon, BantaLabs in Senegal, Kinu in Tanzania, and infoDev’s mLabs in Kenya and South Africa.
There are a lot of exciting developments, but beyond the latest FDI numbers and figures on mobile users, one of the most important things to understand about Africa is the culture. Bresnahan was quick to learn how things were done in Nigeria as opposed to the U.S., and that helped her communicate with her friends and colleagues better. Hafezi also stresses understanding cultural differences, and the best way to do that is to visit.
“Actually go and understand the market and culture from the inside,” says Hafezi, who recommends doing work abroad, such as with a non-profit, to gain that experience.
Africa is a complex, diverse continent, one where neighboring countries can have completely different languages, customs, and economies. But overall, the outlook is promising, and growth is in its future.