Africa’s new dawn?

Paul Collier

It is uncertain and hard to call, but there are real signs that profound global change is afoot.

Africa is now growing. The serious question is whether this is a sustainable take-off or a transient commodity boom. The element of transience is evident. Africa is more dependent than ever on commodity exports, but the global commodity super-cycle is over. Prices are off their peak and may soften further. There are, however, other sources of growth that are likely to take over the role played during the past decade by rising commodity prices.

The most substantial source of continued African growth will come from rising quantities of resource exports. The decade of high prices triggered substantial investment in African prospecting: as of the Millennium, Africa had been the least prospected region, so it was the prime choice for search. Much of this prospecting has been successful, but there are usually long lags between discovery and exploitation. Hence, the discoveries of the past decade will mostly come on stream only during the coming decade. These quantity effects will underpin continued growth. Whether the resource booms will be harnessed for diversified development will depend upon whether governments repeat or learn from history. African politics is not a pretty sight, but leaders are well aware of past mistakes.

A second new source of growth is consequential to the expansion of resource extraction. Mining needs infrastructure: rail, ports and power. Increasingly in Africa this is being designed to be multifunctional, opening up opportunities along development corridors, especially for commercial agriculture – prospective examples are in Mozambique and Guinea. Brazil has already demonstrated the scope for commercial tropical agriculture and Africa has vast under-cultivated land of reasonable quality.

While the primary sector of resource extraction and commercial agriculture will underpin the region’s economy, the service sector may well end up contributing more to the growth of GDP. The service sector is already typically around half of GDP, but much of it is staggeringly unproductive. The construction sector has grown even more rapidly than resource extraction, but its unit costs are high and it is ripe for a productivity revolution. Retail distribution is antique, dominated by small shops and hawkers. Supermarkets are still at an early stage, but with the rise of consumer markets they are clearly set to take over. The retail revolution which occurred in Europe in the 1970s will spread across Africa in the next decade. Alongside low productivity services, the African telecoms sector has demonstrated the potential for new technology to revolutionise some services. Mobile financial services, pioneered in Kenya, will spread across the region, in turn opening opportunities for small business.

The wild card in African development is manufacturing. Africa has yet to break in to global markets, and over the past decade manufacturing actually contracted as a share of GDP. The future of manufacturing is difficult to predict because of two counter-trends. On one hand the scope for industrialisation arises because China is at last becoming uncompetitive in labour-intensive manufacturing, due to its rapidly rising wages. For example, wages in Ghana are now only around a quarter of China’s prevailing level. China’s share in export markets for labour-intensive manufactures is already falling and, over the coming decade, much of it will shift offshore to lower wage economies. Currently the shift is to low-wage Asia, such as Bangladesh, but there is potential for coastal Africa to break in. But on the other hand, the counter-trend is that the continued expansion of resource extraction will further erode the competitiveness of other export activities: the phenomenon known as Dutch disease. Whether this kills the potential to break into manufacturing depends upon how resource extraction is managed. Governments are at least aware of the dangers.

The final new source of growth will come from the arrival of private financial capital. To date, Africa has attracted very little financial capital, but that is set to change. The creditworthiness of African governments is being reassessed. Whereas African governments have greatly reduced their indebtedness due to debt relief, debt levels in developed countries have exploded. In 2011 Zambia issued its first sovereign bond. The issue sought to raise US$750m but was oversubscribed by $11bn. More dramatically, Zambia was able to borrow more cheaply than Italy. Many African governments are likely to follow Zambia in tapping bond markets.

But perhaps a more important development than sovereign commercial borrowing is the emergence of international venture capital for medium-sized African fi rms. Again, part of the impetus is that global capital markets are awash with liquidity and returns elsewhere have been driven down. Investors are again reassessing – not only are returns likely to be higher in African markets, but risks may actually be lower. If European economies remain stagnant, then investment in medium-sized companies becomes much riskier: for every firm that grows, another will decline. In contrast, many African economies will be growing in excess of five percent: errors of selection can be bailed out by national growth.

Which countries will do best? The multi-sector nature of African opportunities suggests that many countries might do well. Angola is set to grow rapidly simply through its trajectory of oil extraction.

Ghana and Kenya may pioneer the adoption of the modern service economy: Ghana is already leading in university education and Kenya in e-finance. Lagos is at last being well-managed, with its fine location and large hinterland it could harness the productivity gains commonly generated by mega-cities. Astonishingly, Rwanda once associated with catastrophe, has been so well-managed that it is becoming a sub-regional haven for business services. It benchmarks what is possible in more favourably endowed economies.

Who, outside Africa, will participate in this growth? China is, of course, making a major play for resource extraction. In doing so it has aroused suspicions on the part of African governments and so is unlikely to be allowed to develop a dominant position. The emerging opportunities in the service economy are more naturally the domain of European and South African companies. America could take the lead on manufacturing: the companies that moved production to China might now move it to Africa.

Africa’s opportunities do not come with guarantees. Decades of dysfunction leave a legacy, and ‘this time it’s different’ is rightly viewed with scepticism. But profound global changes are afoot and this is probably one of them.

About the author:

Paul Collier is Professor of Economics and Public Policy at the Blavatnik School of Government, Oxford University and Director of the Centre for the Study of African Economies


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