Africa’s Economic Upturn – A Boom Of Resources Or An Option For Long Term Investments?
by Rainer Thiele and Manfred Wiebelt, Kiel Institute for the World Economy
Since the early 2000s, Africa has been one of the fastest‐growing regions in the world. Existing evidence suggests that Africa’s boom was not only driven by high commodity prices, but was also associated with significant structural change towards productive activities outside the primary sector. Africa therefore provides many opportunities for international firms, but the conditions for an engagement in the continent remain challenging: First, Africa’s development in the foreseeable future will be shaped by small enterprises mainly operating in the informal sector, for which the regulatory framework to be applied is insecure. Second, despite some reform efforts, the quality of institutions in most African countries still lags behind other regions. Finally, a lack of trained workers and inadequate infrastructure will render it difficult for Africa to live up to its economic potential. Against this background, development cooperation should focus its support for partner countries on creating development‐friendly public institutions, augmenting workers‘ qualifications and improving infrastructure.
Significant Growth With Structural Change
Africa has been a booming continent since 2001. With a growth of more than 5 per cent between 2001 and 2014, Africa’s growth numbers doubled compared to the 1980s and 1990s. The average per-capita-income also rose above the world’s average to more than 4 per cent. This trend seems to continue. As it is projected by the African Economic Outlooks, per-capita-income in 2015 should be at 4.5% and 2016 at 5%. If we look at the sub-Saharan countries without South Africa, the growth is even larger with an expected average of 5.2% in 2015 and 6.2% in 2016.
Regarding the different sectors within these individual economies, it turns out that the agricultural sector had a decline in the workforce while the mining sector remained at the same level, the manufacturing sector and the service sector rose significantly – all this pointing to a structural change within the economies.
Different Development Compared To Asia
It is very striking that this structural change in Africa’s economies is different from the experience of the ones of Asian countries in earlier years. While in Asia the industry sector rose strongly, creating new jobs in large and export oriented companies, the African shift is focused on smaller and medium-sized companies in the manufacturing and construction sectors, transport and related services. Yet, most of it is part of the informal sector of the economy and they produce mainly for the domestic market, thus it is not possible to access reliable data. Surveys, however, show that, for example in Tanzania, about 60 per cent of the small companies intend to expand their businesses – the common notion of small African businesses with low quality products and stagnating developments doesn’t match the reality in the majority of the cases.
Investments Closely Related To Institutional Improvements
Investments, national and internationally, have climbed up in most African countries since 2001. Still, the countries with large resources gain the most investments, but sectors like finance, information and communication, retail and food are attracting investors increasingly.
All this goes hand in hand with the institutional framework. Looking at the Ease of Doing Business Index (EDBI) and the Corruption Perceptions Index (CPI), it is obvious that African countries still have long way to go. On the one hand, there are examples of a positive development like in Rwanda. It rose from position 108 of the CPI to 55 in 2014. On the other hand, governments in Uganda and Madagascar impaired the chances of investments with their policies. All in all, there is yet no clear direction to be identified towards an improved institutional framework to improve businesses and investments.
Lack Of Qualified Workers And Jobs
Another major problem hindering investments from international countries is the lack of qualified workers. Schools don’t prepare the children properly for their later work life. Education is too far away from the job market, skills can’t be taught because the teachers are not trained adequately and the businesses are not involved enough in training their potential new workers. Yet, at the same time, only few jobs are available for those who had a secondary education or went to a university. In Ghana, for example, there are about 250,000 university graduates each year. Only 2 per cent find a job in the formal market. The rest works in the informal sector. A similar situation was in Ethiopia. Between 2007 and 2010, a website listed only 3,000 open jobs for engineering, manufacturing and construction. So jobs were available only for 27 per cent of graduates of these fields.
(The above is a shorter version of the Kiel Policy Brief no.99 from May 2016 (in German).