Friday, July 02, 2010

Long-term Economic Growth Opportunities Abound in Africa

McKinsey Global Institute: Lions on the Move: The progress and potential of African Economies (executive summary here)
IMF: All About Goals as Africa Shows Signs of Recovery
IMF: Africa Needs New Engines to Drive Post-Crisis Growth
Financial Times: Africa’s Frontier Market Ready to Score
Financial Times: Attitudes Change to Business in Region
NY Times: Report Optimistic on African Economies
Resource Investor: Outlook is Good for Africa to Survive a U.S. Recession

Do not be mistaken, there is still hardship in Africa, but a recent report has carefully examined and explained why the African economy has the potential to thrive. Africa has an abundance of natural resources as well as human capital. Furthermore, African economies were more resilient through the worldwide recession of 2009 than many more developed economies . This resilience may have proven to investors that the African economy is not as risky as was once thought, resulting in an increased willingness to invest.

Africa’s abundance of natural resources is one of many reasons why Africa’s economy has an opportunity to thrive. Africa has at least 10 percent of the world’s global oil reserves, more than one third of the world’s cobalt reserves, and 60 percent of the world’s total amount of uncultivated, arable land. South Africa alone has 40 percent of the world’s gold. In a time when long-term consumption and commodity prices are increasing, exploitation of these resources gives Africa great opportunities for economic growth. Of course, Africa must have capital — both human and monetary — to exploit the potential of these natural resources. Luckily for Africa it has plenty of both.

Africa has the youngest, most rapidly urbanizing population on the planet. Shortly, Africa’s billionth person will be born and its population growth is not forecasted to slow any time soon. Urbanization means that farmers are switching to urban jobs–where incomes rise. Experts believe that with rising incomes comes an increase in the middle class. A larger middles class contributes to consumerism, which in turn spurs economic growth.

Africa’s monetary capital–through foreign direct investment (FDI)–is increasing as well. In the mid-2000’s, many African governments implemented policies to improve their business climate and open their markets. During that time, approximately 10 sub-Saharan African countries–called “frontier markets”–experienced an increase in foreign capital. During the financial crisis, many countries' FDI decreased from their mid-2000 levels; however, experts have observed that Africa's FDI tended to be more stable than other parts of the world. Furthermore, African countries tended to be affected less during the global financial crisis, and are showing signs of an economic recovery before more developed countries. This has demonstrated that African countries are not as risky as once thought. Therefore, with better policies, improved business climate, and relatively stable markets, investors have been increasingly willing to invest in Africa.

While there are still hardships in Africa and questions surrounding the African economy, there is definitely long-term potential for Africa to become a significant player in the world economy.

1) What are the issues that could affect the economic growth prospects of Africa?
2) Should Africa be included in the BRICs (Brazil, Russia, India, China)?