By Stanley Subramoney
02 June 2010
Africa is known for its abundance and opportunity. Being the world’s second largest continent, it is richly endowed with a variety of resources. But it needs to set aside its intra-continental differences in order to maximise the opportunities available from growing foreign interest.
Africa is attracting increasing interest from the international financial community. The spotlight is now on our continent and Africa must rise to the occasion. We cannot afford to fail. This is our chance and we need to take it.
The world wants us
Africa has a dynamic history shaped by great migrations, wars, slavery, colonialism, and even the Cold War. But now Africa is reclaiming its place on the world stage.
Often seen by observers as a single country, Africa has a complicated history and is often misunderstood. It is extensively diverse – in geography and climate; in cultures and traditions; in economic production, distribution, and consumption; and in social and political structures and practices.
This diversity gives us colour – but its extensiveness can be daunting. It may even hinder our seamless incorporation into the global village. Even the diversity of Africa’s currencies and difficulty with their conversion can be problematic.
However, with much innovation and initiative, Africa is finally grabbing the world’s attention, with more international companies setting up offices here, increased banking interest, and strong stock market performances. All its major regions have recently experienced strong economic growth, driven in part by its wealth of natural resources. 2008 marked the decade that Africa’s energy and mining industry came to life, bringing an unprecedented oil export boom.
Already boasting one of the highest returns on investment, Africa is a tempting place to do business. But in order to support our growing international appeal we have to address our weaknesses
Although African banks did not experience the turbulence that banks in developed countries experienced the African banking system is still perceived as unstable, and governments and industry continue to rely on international and foreign banks.
It is no secret that we have infrastructural deficiencies, including poor transport networks and low electrification levels. However, investment from the world’s wealthier nations can be a solution to this. They are now scrambling for our natural resources and oil imports is becoming a strategic priority for Africa. Foreign investors are prepared to build the necessary where-with-all that goes along with tapping into Africa’s riches.
Our wealth of metals and minerals is in strong demand. The global economy needs raw materials from Africa to feed its voracious appetite, with the bourgeoning economies of China and India seemingly insatiable. The continent is blessed with vast resources, producing approximately 13% of the world’s oil; 46% of its diamonds; 21% of its gold; 57% of its cobalt; and 50% of its platinum-group metals.
Foreign investment into Africa is unique, and at times it will come at a price. But its main themes must be non-colonialist, with equal partnerships. Without compromise, foreign investment must always promote and preserve democracy. Across the continent, democracy is spreading, and the number of democratically-elected leaders is on the increase. This trend should not be jeopardized by foreign interest. We also cannot stand by and watch foreign investors remove Africa’s riches and leave very little in its place. Africa is at risk of parting with its wealth at a rapid rate. Parting with wealth should always be measurable against some intrinsic permanent heritage – but this is not yet visible and obvious in Africa. The only economic advantage to the African people so far is payment for their labour. This is insufficient and the continent and its citizens deserve a far richer and longer lasting reward.
Despite the global downturn, it is obvious that the interest of multinational companies in Africa has not waned. They are still looking to the continent for fertile opportunities and astute investment and business possibilities. They also have the resources and responsibility to contribute to Africa’s development.
A growing world population offers Africa some incredible opportunities. By 2030 the world population will rise to 8.3 billion and the demand for resources on a global scale will have soared to unprecedented levels. Such a crisis should be seen as an opportunity for Africa to uplift itself as it brings much potential for the continent. Africa can play a key role in meeting the consumer needs of billions of people in the fast-growing younger markets. Great opportunities lie ahead.
Foreign direct investment is growing – with China showing exceptional interest Recent Gross Domestic Product numbers showed Africa, measured as one, is the sixth largest economy globally, exceeded only by the U.S., China, Japan, India and Germany. In 2006/7, global foreign direct investment (FDI) flows amounted to a staggering $1.3 trillion. Africa participated in this distribution, with FDI flows into Africa reaching $39 billion. Notably, South Africa is the biggest foreign direct investor into the rest of Africa.
Prospects in Africa continue to be positive because of high commodity prices and ever-increasing resource demand from China and India. The continent is also being perceived as less risky in terms of politics, currency, governance and trade, and it is offering rates of return far more appealing than what can be achieved in developed countries. Despite these improvements, Africa remains a marginal player in global trade in that it is responsible for less than two percent of world exports and imports. To ensure its development and sustainability, Africa must have substantial outside investment. This means long-term FDI into new productive capacity which would lead to job creation, as well as portfolio investment to finance current account deficits. Africa has indeed seen a substantial surge in foreign capital inflows in the past five years—foreign direct investment, portfolio investment, and loans.
Nevertheless, encouraging and maintaining foreign investment into Africa is not an easy task. Even Africans are reluctant to invest locally and disappointingly about forty percent of sub-Saharan African savings are invested in external markets. The IMF and World Bank will only lend the continent money after imposing stringent and sometimes controversial conditions.
Any curtailment in foreign capital inflows could seriously affect growth and poverty reduction in Africa. A reversal of or slowdown in these flows from foreign investors, including the sovereign wealth funds, is the last thing this continent needs. Most African countries use foreign inflows to finance much needed infrastructure investment and if cutback spreads to official development assistance, then the lives of hundreds of millions of Africans may be threatened.
Many of our problems need to be addressed. For example, the development of Africa’s electrical power sector is a prerequisite for growth in other industries. Regular consistent power supplies help to attract FDI and entice international companies to establish operations in Africa. However, a combination of droughts, wars and aging equipment have contributed to an irregular and sparse electricity supply in many African countries. Severe power shortages have resulted in serious consequences for these economies.
Another challenge is the continent’s vast distances serviced by few usable roads and poor rail networks. Companies are compelled to rely on very expensive and polluting air cargo transport. Despite these challenges, foreigners are not deterred. Especially so, Chinese investment into Africa is transforming the continent’s political, economic and social landscape. More than 800 Chinese companies are active in Africa and the speed and extent of China’s investment into the continent has surprised on the upside. China’s long-term strategy for Africa includes offering non-commercial loans in exchange for long-term strategic and economic interests, increasing two-way trade, generous debt concessions, and training African talent. The Chinese have wasted no time in seeing the potential of Africa, their decision-making is immediate, and their presence can now be felt all across the continent.
Whole is greater than sum-of the-parts
In an increasingly connected world, Africa needs to differentiate itself. The continent is now on the international agenda, experiencing some of its best periods of economic growth. But there is some seriously tough competition from other young upstarts. Asia’s performance is being powered by China and India, Latin America is prospering as a result of demand for commodities, and Eastern Europe is fast becoming one of the manufacturing sector’s most favoured outsourcing locations.
The world’s economic axis is shifting, and to compete in this league of focussed and ambitious players, Africa needs to scale up its efforts to be a successful global participant. We may not believe we are that different – statistics such as ‘Africa has more English-language speakers than the United Kingdom, more French-speaking people than France and more Portuguese-speaking people than Portugal’ may let us think we are not that separate.
But we are, and some of our problems can be deterring. We must therefore address the challenges that confront international investors on the continent. One such way is through regional integration. This is imperative in order to overcome the limitations of the continent’s many small and fragmented economies. For example, regional transport systems should be implemented as this would lift regional and international trade levels and addresses the current lack of transport corridors for landlocked countries. Trade needs to become more seamless and this could require revisiting regional non-tariff barriers. Africa needs reforms similar to the European Union model and all African states must develop coherent trade programs with each other. Africa does have pockets of regional integration and there are six Regional Economic Communities in Africa at present. They provide ample opportunity for integration and development on the continent, including the integration of stock exchanges - but more of these initiatives are required.
A further caution is that Africa should not become overly reliant on commodities. Strategic imperatives for Africa include export-oriented investment, primarily in non-traditional production, and a shift in focus to value-add operations. We also need to enhance the quality of human capital, empower small and micro businesses, and harness the savings of ordinary Africans.
The next decade could prove to be an extraordinary period for Africa. It should be a time in which African countries work together to produce an environment capable of supporting wealth creation and social cohesion across the continent.
Africa’s time has come – but it is up to Africa. Its leaders need to stand together with a new mindset, and rise to the challenge of creating continental peace and co-operation. Economic and social connectivity is essential. Differences need to be put aside and everyone needs to be ‘African’ for Africa’s sake.
Source: NEPAD Business Foundation [1]
