Economic Potential of Africa
As early as the 1990s, the wounds of civil war, ethnic tensions over raw materials, poverty, and overpopulation began to heal on the African continent. In consolidated countries such as Kenya and South Africa, the first oases of development sprouted in the form of markets, construction projects, and mobile telephony, which was still a new technology at the time (Miguel, 2009). This growth eventually spread to large parts of the continent from the turn of the millennium, making it the world’s most dynamic economic region today, just behind China and South Asia (Figure 1). African nations regularly feature among the top ten fastest-growing countries globally, with rates that exceeded five percent, at least until the COVID-19 crisis kicked in. In some cases, such as Rwanda or Ethiopia, growth even scratched at the threshold of ten percent. For a list and comparison, see Table 1 and Appendix Table A1. It is also impossible to generalize about the characteristics of the growth countries. Whether it is a former French or English colony or the Arab cultural area, whether a country is densely populated or a sparsely populated desert region or has many or few raw materials is practically irrelevant.
Growth is spread across the continent and geographical regions. However, while it used to be East Africa and the Arab North, West Africa is now also occupying an increasingly large space, while South Africa is stagnating at a high level. Central Africa, with its great backward giant Congo at the heart of the continent, is stagnating at a low level (see appendix figure A1 for classification of countries). The question that arises from this picture is, how sustainable and long-term is this growth compared to other developing regions of the world? Can African countries establish themselves similarly to the East Asian tiger economies such as Singapore, South Korea, or Taiwan, or will they remain in stagnation after a boom triggered by a commodity cycle, similar to many countries in Latin America?
This question can only be answered after several decades; after all, hardly anyone in the 1980s would have predicted China’s meteoric rise to global power status some thirty years later – while at that time, almost every country in Africa was generating a higher GDP per capita than the Middle Kingdom (merchantmachine.co.uk, 2018). Overall, while Africa’s economic growth is not currently as strong as Asia’s tiger economies during the initial phase of their catch-up growth, it is still very high and comparatively unprecedented.
Drivers of growth in Sub Sahran Africa
A strong indication of the sustainability of development is that the structure of economic growth has changed in most countries. While for a long time it was the export of raw materials in the form of unrefined minerals and oil or primary agricultural goods, such as unprocessed cocoa, coffee, tea, or cotton, economic growth is increasingly driven by a growing middle class with an annual income of US$2,000 or more (von Carlowitz, 2018; von Carlowitz, 2019), shown in Figure 2. This middle class is estimated to already be larger than that of India, with 167 million people (Matthews, 2014).
Yet, due to the poor statistical capacity of governments, outdated calculation, and survey methods to measure economic progress and productivity, the purchasing power of this middle class is arguably underestimated (Mo Ibrahim Foundation, 2020; Devarajan, 2013). Updates to these statistics increased average incomes virtually overnight by 62 percent to $1,000 in Ghana (Ghana Statistical Service, 2010), by 25-30 percent in Malawi, Kenya, and Zambia, and Nigeria’s redefinition of wholesalers and retailers increased the number of registered stores from 16,583 to 500,000 (Jerven, Kale, Duncan, & Nyoni, 2015; Pinkovskiy & Sala-i-Martin, 2014; Devarajan, 2013). Representative household studies of consumption of consumer goods, housing quality, health, education, and women’s rights even arrive at annual growth rates on the continent of 3.4 to 3.7 percent, which is about four times higher than the 0.9 to 1.1 percent achieved in conventional GDP estimates to date. While this discrepancy is found in every developing region of the world, nowhere else is it more pronounced than in sub-Saharan Africa (Young, 2012).
However, this middle class is still very unevenly distributed across the continent and fragmented into many individual small and, above all, heterogeneous markets. This is also why it is so difficult to assess Africa’s economic potential as a whole: 55 countries, more than 3,000 languages, hundreds of peoples, which are also developed in very different ways. In the industrialized country of South Africa, for example, there are places that are in no way inferior to Western Europe and others that we are familiar with from development aid appeals. Nevertheless, it can be said that development is taking place more and more in urban centers through a young urban population that has a particular affinity for digital and modern information and communication technologies.
In contrast to the Asian tiger economies, African economies appear to be skipping the conventional development path from an agricultural economy via industrial production and the manufacture of goods to a service-oriented economy and moving straight to services using new information and communications technologies (ICT). Figure 2 also shows that governments such as those in Ethiopia and Rwanda have recognized the potential of their countries and are firing on this potential through their own state investments, especially in infrastructure, but also by launching social programs in the areas of health, education, and human development, which subsequently also attracts private investment from both domestic and foreign sources. The composition of this consumption is like that of other developing regions of the world. Africans spend a large part of their income on health services, insurance, education, and financial and credit services.
The latter is urgently needed to achieve higher productivity through capital goods such as more modern machinery, IT infrastructure, marketing, and efficient company management. Thanks to new technologies that are gaining ground, private individuals can also access functioning business models where there is no state to lend a helping hand. This form of consumption is also reflected in Morgan Stanley’s MSCI Africa Top 50 fund (justetf.com, 2020), a fund that tracks the continent’s largest listed companies.
The largest weighting falls on telecommunications companies such as Safaricom and Maroc Telecom on the one hand, and on banking service providers such as Commercial International Bank in Egypt or the media group Naspers on the other – alongside South African commodity companies such as Anglogold or Gold Fields. Nevertheless, it should not be forgotten that Africa is still the region of the world with by far the most horrendous poverty rates. Economic Growth below the middle class is far from bringing everyone along and generating inclusive growth accordingly.
Physical and human capital must be reconciled
Education, in particular, is still an Achilles’ heel, making it difficult for Africans to realize their potential. While developmental aid has contributed a great deal to this, it is questionable to what extent the education provided in this regard is economically exploitable. Interestingly, according to the African Development Bank (2020a), education was a negligible driver of economic growth on the continent between 1987 to 2017, while physical capital has emerged as the main driver since the 1990s (Figure 3). As a result, there is a massive mismatch between the available machinery, equipment, and computers on the one hand and the education of local people on the other. This means that one of the biggest challenges for African economies is to invest in education to operate, repair and service this physical capital, and eventually to produce it themselves in the far future. In addition to technical skills, this also requires marketing, controlling and other administrative competencies to mesh the individual cogs of the still simple economies more efficiently and ultimately enable more complex production and supply chains.
But Africans have long since realized that targeted investment in education is worthwhile. The returns to higher education are greater here than in any other region of the world: 12.4 percent more income compared with a global average of 9.7 percent, and 21 percent for a university degree compared with a global average of 14.6 percent, and even higher for women than for men (African Development Bank, 2020a). This is also clearly reflected in the increase of students in private institutions, which has more than quintupled since 2007 to 16 percent, especially at the tertiary level (Figure 4), with public programs also continuing to be expanded by governments and years of schooling per child steadily increasing.
Institutional stumbling blocks on the path to sustainable growth
In addition to the shortcoming of education, Figure 3 shows another essential problem of African economies in the form of negative total factor productivity (TFP). This is disturbing because China’s first development steps in 1978 were driven almost exclusively by increases in TFP. TFP is a vague concept that describes the output of an individual worker, which cannot be explained by his formal education and the available physical capital, i.e., equipment. Therefore, poor TFP summarizes a smorgasbord of reasons why an African with the same computer program or machine produces less output than a European with comparable education: these include poor health, poorly functioning credit and financial markets, or non-transparent enforcement of contracts and property rights, as well as non-functioning supply chains, power failures, etc.
In China, for example, this negative TFP was partly explained by the lack of market incentives, which forced farmers to sell their entire harvest to the government for a lump sum to be distributed across the country – surplus revenues were not compensated. No farmer had an incentive to be more industrious – they were rather incentivized to be less — nor to invest in higher productivity. It was only through a transition to a system in which farmers had to sell only a portion of their harvest to the government and were allowed to sell surpluses at higher prices on the market that it became worthwhile for farmers to develop more of their own initiative. This gave a massive boost to TFP in the agricultural sector. Step by step, this system was eventually applied outside agricultural production to industrial production, leading to the China we know today (Zhu, 2012).
In contrast, the negative trend in TFP in Africa became even more entrenched between 2012 and 2017. The negative TFP can also be explained by other factors: Figure 5 illustrates the very difficult access African companies have to financing from outside (right) despite high profitability (left). For example, although Ghanaian companies have a profit rate of over 3.5 percent, well above that of European companies, nearly 70 percent of Ghanaian manufacturing companies must finance new investments almost exclusively from their own resources. Credit and investment from outside is virtually non-existent for many of them. This picture is similar for numerous other countries in Africa – while in the much less profitable United Kingdom, hardly ten percent of companies are affected. The question is therefore why – despite interesting profit prospects – these companies do not get a loan, even though high profits are tempting (credit constraint). This is mainly due to existing legal uncertainty, lack of enforcement of contracts and property rights. Who would want to borrow money from someone else if they do not know whether they are really spending it for productive purposes and whether the rule of law is capable of enforcing claims in case of doubt (moral hazard)? Other gaps in the institutional structure are reliable regulatory institutions to enable fair competition, operate networks, and enforce free markets (von Carlowitz, 2019). All of this is reflected in this negative TFP, and on the fact that a worker with the same skill set equipped with the same machine is less productive in Africa than elsewhere in the world.
All this together imposes a big risk on investors if they want to invest in African companies. Africa ranks far behind the rest of the world in the World Bank’s Doing Business (DB) Index (doingbusiness.org, o.J.) (Figure 6). Only Morocco and Kenya are able to catch up with other world regions, while most other African countries are at a similarly weak level to Latin America, but bear no relation to much of Asia, where India scores 71 and China 77.9. The positive aspect of this is that, despite this poor starting position, African countries are growing massively – while Latin America, for example, is stagnating. This gives the impression that the continent could still accelerate its development massively if the institutional framework were improved. A map with the values of all African countries (Appendix Figure A2) once again illustrates the wide range achieved by the individual countries in the DB.
Most central governments have recognized the potential of their countries in this regard, and the long-term benefits that investment and economic freedom can have in combination with business security. However, even assuming the integrity of central governments, their capacity and authority to enforce on a broad scale is still very limited. As a result, conflicts occur again and again, especially in rural regions, which are often ruled by the heads of completely different ethnic groups. Incidentally, African countries share this problem with much more advanced states, such as China, which has even introduced the death penalty for corruption in order to control the machinations in the inner provinces (dw.com, 2016), or Russia, whose Far East and Siberia were for a long time practically on the verge of ungovernability (Dininio & Orttung, 2005), and even the mafia in the Italian Mezzogiorno is such an important economic factor and employer that it is difficult for the government in Rome to cope with it.
For this reason, a closer look at the subregional level makes sense here as well. The World Bank therefore also provides various reports on DB for the subregions of individual countries, for example, to assess the individual federated states of Nigeria (World Bank, 2018) or the capital of Somaliland, Hargeysa, which is comparatively well positioned in contrast to the rest of the country (World Bank, 2012). Other countries are also much more heterogeneous within themselves. If one compares the countries of Rwanda or Kenya with the major growth cities of China, Shanghai and Beijing, they can certainly keep up with their 73 points in the DB index; Rwanda, with its near 80 points, is even in league with Austria (von Carlowitz, 2019).The integrity of individual governments are confirmed by the fact that the continent with 905 reforms has been the scene of the most activity in recent years when it comes to attracting local business climate (World Bank, 2019). The Index of African Governance (IIAG) is a good indicator of the reform momentum that exists on the African continent. This confirms the World Bank’s findings, at least in the areas of business climate in both five and ten-year trends (Figure 7). Access to financial services, in particular, has improved strongly (13 percent), while progress in the trade environment and regional integration has been more moderate. However, there have been sharp declines in competition regulation and relations with trade unions and employee representatives.
The IIAG is published by the British-Sudanese billionaire Mo Ibrahim, who is a philanthropist through his foundation, donating his wealth to monitor and advise African governments on “good governance.” This good governance is mainly defined as the provision of public goods and services in the four super-categories: political, social, economic, and environmental. These services are regarded as the citizens’ legal entitlement to their governments, and the authorities are therefore seen as obligated to provide them. African countries made particular progress in the categories of economy and business climate, with a total of 4.1 percent over the last ten years, and social development, i.e., health, education, and standard of living (plus three percent). On the other hand, the rule of law, inclusion and voice declined by between -1 and -2 percent, see figure A3 in the appendix.
Digital and transportation infrastructure
In the previous section, it was discussed that there are private business models for education and health that offer citizens with enough purchasing power access to these services. Nevertheless, there are many investments whose scale can only be shouldered by states. In addition to the aforementioned statistical capacities, which still make it impossible to estimate both the development of purchasing power or demographics, this is primarily physical infrastructure.
At the top of the to-do list must be the expansion of efficient infrastructure for information and communication technologies (ICT). This is necessary to help innovative technologies and business models achieve a disruptive breakthrough throughout society. This includes coverage, sufficient bandwidth, and free international data flow. Most African countries have a lot of catching up to do, especially in terms of bandwidth and speed; after all, two-thirds of the networks are still based on 2G technologies. In addition, the price-performance ratio still leads to a high burden especially on low incomes (von Carlowitz, 2019). Figure 8 compares the network infrastructure of selected African countries with other regions of the world, revealing gaps with all other developing regions on the globe. It is an index of the categories of technology, the user knowledge of the population, the regulatory capacity of governments and the trust of the population in them, and the economic impact of ICT within society (Dutta & Lanvin, 2019).
The importance of these investments in this area, in particular, is underscored by the importance that the ICT sector already has for the economy of Sub-Saharan Africa: the contribution amounts to about nine percent of GDP. Cell phone penetration rates increased from 32 percent of the population to 44 in 2018 and are expected to reach 50 percent of the African population by 2025 (statista.com, 2020b; Matthews, 2014). A Google report, prepared jointly with the World Bank’s International Finance Corporation (Google & IFC, member of the World Bank Group, 2020), estimates that this sector will contribute about $180 billion to GDP in 2025, up from $115 billion today. Potential is especially seen in fintech, e-commerce, health tech, media and entertainment, business to business, and local transportation. According to the report, this development will also outlast the COVID 19 crisis.
Figure 9 once again shows that huge progress has been made in the expansion of mobile communications and digitization in the last decade, with network expansion increasing by nine percent in a five-year trend and by 22.3 percent in ten years (Mo Ibrahim Foundation, 2020). Google and the World Bank (2020) estimate mobile Internet growth in absolute terms from 456 million users in 2018 to 623 million users in 2025.
New decentralized technologies and bottom-up approaches
This ICT infrastructure is the basis for many novel business models that are currently being developed in some start-up regions, such as Kenya’s Silicon Savannah (Stoisser, 2018) or Yabacon Valley (Bright, 2020) in Nigeria, and are waiting to be scaled up to country level. It is these new-economy solutions with numerous new technology solutions that could benefit young Africans who, due to their age, are more open to these innovations than older societies such as those in Europe. As a result, African countries could leapfrog development steps, as they have already done with telecommunications, and immediately enter other technologies that have strong growth potential but are unprofitable in view of the existing infrastructure in the industrialized countries (leapfrogging).
Especially under the impression of cumbersome and inefficient governments, these technologies could lead to bypassing them and not having to wait until institutions and infrastructure are available to drive economic development. The crux of it, almost all of them rely on transferring large amounts of data quickly in order to scale it up. Once again, solutions that provide healthcare services, education and access to financial markets stand out in particular.
In addition to existing mobile money solutions, especially M-Pesa, which is based on traditional prepaid cards for cell phones, blockchain solutions could be interesting for companies to refinance themselves by means of many small investors and thus overcome the credit rationing of companies shown in Figure 5. In addition, it could enable transparency where today’s markets do not materialize due to information asymmetries between buyers and sellers. There are many decentralized finance (DeFi) solutions based on this, which open up new lucrative forms of investment at favorable fees that were previously only available to large investors. An African diaspora in the Western world that regularly sends monetary remittances at horrendous fees to their home countries could drive this development even further.
Widespread penetration of even the most rural areas with mobile telephony and low-cost smartphones makes remote diagnosis possible by doctors who no longer need to travel to the remote hinterland and can delegate simpler treatment steps to nurses on the ground. To this end, more complex machines, such as MRI scanners, are no longer simply stationed in large hospitals in metropolitan areas but are also made available to smaller hospitals in more rural areas through mobility (Jackson, 2020).
In addition to – as became apparent during the COVID-19 crisis – a disastrous distance learning program, new online offerings also provide relief, at least at the tertiary level. For example, top universities from the Anglo-Saxon world offer entire (mini-) master’s programs online, sometimes for free or at affordable prices (edx.org, 2021). In addition, there are “travel agencies” that connect young people to suitable educational programs in Europe (galaxygroup4.com, 2019).
Price slides in photovoltaics, especially from Chinese production, enable the electrification of remote areas by means of off-grid solutions, which until now have been almost completely excluded from this and whose productivity thus remains low, for example among small farmers for whom cooling systems are still too expensive (freshbox.co.ke, n.d.). This could be further supported by advances in 3D printers, which enable the production of smaller quantities from regional raw materials (htxt.co.za, 2014), and therefore serve regional markets that are too small for large companies, which are only profitable above certain economies of scale (von Carlowitz, 2019). Drones could take over distribution of many products, as they are already doing in Ghana and Rwanda, and could even become tractable for COVID-19 control where road infrastructure is deficient (flyzipline.com, 2021). Similarly, biofuels from local feedstocks could help overcome latent local energy shortages.
All together, these technologies could lay the foundation for a decentralized production industry that initially has low investment requirements and fixed costs, unlike Western-style heavy industries, and that also lifts Asian countries out of poverty, supplying local populations whose purchasing power is still insufficient. The advantage is that these technologies can be scaled up very quickly with greater demand. As Europe itself is struggling to implement such technologies and production methods, this could be the beginning of a leapfrogging process, as it is already taking place in the telecommunication sector and could lead to strongly growing revenues further down the line, loosely based on Brezis, Krugman and Tsiddon (1993). All this still sounds like science fiction, but if one considers how the industrial revolution began in Europe and the development path of many catching-up countries, many of today’s still small garage companies could grow over the decades into medium-sized and even large providers. In addition to the young population, another factor is that these markets are far from saturated and new technologies face relatively little opposition from other existing industries and their lobbies, as these simply do not exist (“growth without trade-offs”).
Pan-African markets and supranational institutions
As already shown in the Doing Business Index, some African regions and countries are even on par with Chinese subregions. So why is it nevertheless more attractive for many companies to open production sites in China, even though these are also often accompanied by very strict economic conditions, something like even higher cultural barriers at place, local content requirements (LCR) or forced joint ventures, and political interventions are also not foreign? The answer is a huge domestic market whose access, despite all the political squabbles, is still attractive because of its purchasing power. The African Union (AU), modeled on the European Union, is also seeking a process of integration here. Thus, it sees its primary goal as advancing integration on the continent within the framework of Agenda 2063, which includes various projects ranging from transport infrastructure to the end of all armed conflicts to the free movement of persons (au.int, 2021b; au.int, 2013).
A centerpiece, and one of the most ambitious projects in this strategy, is the establishment of the African Continental Free Trade Area (AfCFTA), signed in 2019 by 54 of the 55 member states of the African Union. This aims to liberalize trade in goods and services between countries and will thus encompass 1.3 billion people with a GDP of $3.4 trillion (Kuwonu, 2021). By comparison, the world’s largest single economy, the EU, estimates a GDP of $18.3 trillion.
The theoretical potential of this free trade area is considerable, with projected income increases of up to five percent in the longer term and an 80 percent increase in trade between countries on the continent. The latter is sorely needed, as only two percent of the trade volume is currently traded between African countries, while the large remainder, consisting mainly of unprocessed agricultural goods and mineral raw materials, is exported outside the continent. By comparison, the contribution traded within the region is 67 percent in Europe, 61 percent in Asia, or 47 percent in the United States. Except for Oceania, this makes Africa the most export-dependent region in the world (UNCTAD.org, 2019). Such a merger into a large bloc allows African countries to negotiate more advantageous trade deals with other large economic blocs such as China, the EU, or the U. S. (Abrego et. al., 2020), and also to dictate stricter terms to multinational corporations, which are not currently seen eye-to-eye, regarding local production due to market access to a large African middle class, which is now dispersed over various countries. However, the AfCFTA also raises the risk of becoming entangled in disputes due to differences of interest and of it being just another free trade agreement added on top of numerous already existing regional agreements, which only increases the bureaucratic burden. The implementation of the agreement could lead to losses and dislocations on three levels: Loss of revenue for governments in the form of tariffs and revenue taxes, higher income inequality, and finally unemployment in sectors where individual states have developed less competitive industries.
Overall, trade should be promoted mainly through the reciprocal reduction of tariffs, with non-tariff barriers being the much bigger hurdle here for companies to operate across African national borders (Abrego et. al., 2020; Chinyamakobvu, 2017). These are, first, legally mandated product standards and other technical regulations (TBT) or protective regulations that should reduce threats to animal health, human health, and biodiversity (SPS) (wto.org, o.J.; agriculture.gov.au, 2020). In addition, there is a lack of transportation infrastructure, not only in rural areas, but also across national borders. The lack of roads across the continent, whose main arteries from north to south and east to west are not yet developed with asphalt roads, is shown in Figure 10. The IIAG (Figure 9) even shows that these have regressed in the form of postal services and aviation (minus three percent in the 10-year trend). One way for private investors to become active here is the African Domestic Bond Fund (bondfund.africanbondmarkets.org, 2021), issued by the African Development Bank in cooperation with the Mauritius Commercial Bank (mcb.mu, 2021), which issues government bonds of the individual countries in a single bond.
China is particularly ambitious in strategically expanding infrastructure, acting not only as a financier but also as a service provider and builder. As early as 2006, China took over the role of the World Bank as the largest sponsor of infrastructure (Figure 11). In addition to roads and railroad lines, the Middle Kingdom is also active in supporting supranational organizations on the continent, for example by financing the headquarters of the African Union and the East African Community (Marsh, 2018; bbc.com, 2012). On the one hand, this speaks to the desire for stability under the One Belt One Road initiative, which includes the resource-rich continent, and on the other hand, it also speaks to the claim to power that is exuded and leveraged in the form of loans to African governments when it comes to voting in international organizations, such as the UN, for example. Other challenges to building pan-African supply chains that enable the manufacture of more complex products include the lack of a cross-country financial infrastructure in the form of a harmonized credit and payment system, SWAP agreements between central banks, and multi-currency clearing centers that minimize currency risks for companies operating across currency areas. In addition, there is no superior institution, such as arbitration courts, which would be neutral and independent of the influence of governments and able to enforce trade rules efficiently in case of non-compliance. However, this would be precisely the instrument that could establish trust and credibility to help trade achieve a breakthrough (Abrego et. al., 2020).
External hurdles to Africa’s development
Of course, Africa’s well-being and advancement does not depend solely on its own efforts, but is also influenced by the world’s geopolitical developments, to which it is in many cases passively exposed and over which African governments can exert relatively little influence. First of all, there is automation and digitalization. Both developments enable companies to produce in a more capital-intensive way, which means that they have less demand for cheap labor; simple work steps in particular can be taken over more and more by robots. Therefore, a process of repatriation (“reshoring”) of these work steps back to the industrialized countries can be expected, which can score with an attractive taxation of capital and already existing infrastructure. In addition, they are closer to the major markets and can adapt their supply chains more flexibly to new circumstances (Carbonero et. al., 2018).
This development is particularly problematic for countries that model their development very much on that of China, which in the 1990s acted as the world’s extended workbench to attract know-how and technology to the country (Carbonero et. al., 2018). This is especially true of Ethiopia, China’s most erudite student. Yet Africa remains heavily dependent on foreign investment in factories, machinery, and other direct investment to drive its own development. Unlike infrastructure, Europeans continue to lead the way here. The largest sources of direct investment are still France and the United Kingdom, while the Netherlands and Italy are highly dynamic (Figure 12).
Africa is still one of the largest deposits of mineral resources, which will not change as a result of the shift to electromobility and renewable energies, although the focus is shifting from oil-producing countries such as Algeria, Nigeria or Angola to states such as the Democratic Republic of Congo. Table 2 shows both Africa’s share in the production of certain metals and their estimated reserves in the global stock. However, countries with weak institutions and mechanisms for distribution find it particularly difficult to derive sustainable benefits from these commodities, especially when high exchange rates make domestic production more expensive, making local industries less competitive internationally. The Economic Commission for Africa (2016) even noted a trend of deindustrialization on the continent. Accordingly, Africa’s countries are vulnerable to fluctuations in commodities on world markets. This puts a strain on those countries that derive a large part of their government budgets from foreign exchange earnings from these commodities.
However, the African Union has also been active in this area, helping governments optimize their mineral revenues and build local value chains, while harmonizing mining conditions across national borders. To this end, all countries have signed a declaration of intent to use their mineral wealth to advance their socioeconomic development. To give substance to this, the African Minerals Development Center (aflsf.org, 2019) was established to support AU member states in implementing their policies through strategic, technical and operational support. This will lead to a more level playing field in negotiations with large international groups, whose budgets and negotiating experience often far dwarf those of states. In addition, pooling mineral resource revenues across countries could lead to a mutual hedging mechanism for fluctuating commodity prices with countervailing trends (Economic Commission for Africa, 2016). Other solutions to resulting problems from high mineral resource revenues could be pension funds, similar to Norway’s, which are thus removed from the economic cycle and have no impact on exchange rates and industry.
In addition to mineral resources, Africa is also the continent with the most fallow agricultural land, with about 60 percent of the world’s land said to be on the continent (growafrica.com, 2018). These are extremely attractive to a world whose population is still growing, on the one hand, and also increasingly battered by climate change, on the other. Yet, according to the World Bank, Africa itself will be one of the biggest victims of climate change: between 80 and 50 percent of GDP will have to be contributed by African countries for adaptation to global warming, that is, half to four-fifths of every dollar generated. These funds will need to go primarily to water supply and rainwater storage to ensure less dependence on dry and rainy seasons, flood protection, and agricultural production itself in the form of more heat-resistant varieties that must also be less susceptible to diseases of a more tropical climate (World Bank, 2010). Although the problems in this regard seem immense, in absolute amounts it is by no means a fortune for the global community. To that end, climate change exacerbates problems that have existed in the past anyway and would require investments of a similar magnitude to address them. Hence, adaptation to climate change and economic development are not trade-offs in this case. But foreign investment can play an important role here as well. Land grabbing is a term that often has a negative connotation, but its definition has never been particularly selective and often ignores its larger economic significance (Deininger & Byerlee, 2012; Cotula et. al., 2009; Holmen, 2015).
With the help of investments, productivity gains of up to 155 percent could be achieved with only a small expansion of agricultural land by 20 million hectares (from 480 to 840 million hectares of total available land) (Goedde, Ooko-Ombaka, & Pais, 2019). Key actions include improving agricultural varieties, higher-yielding hybrids that are also more heat tolerant, less demanding of water, and have better defenses against pests. In addition, there is a significant loss from harvest to consumption due to poor storage capacity. These losses account for between 20.5 and 37 percent for some commodities, according to FAO, although micro surveys cannot corroborate this (worldbank.org, 2021). Figure 13 shows investment needs, broken down into input factors, infrastructure, and marketing, which could more than double yields.
Impact of the COVID-19 crisis on the African Economy
Despite all the inconsistencies in their statistics and lack of testing capacity, African countries by and large came through the first wave of the COVID-19 pandemic with very low numbers, and the impact of the second is yet to be seen. Nevertheless, the strict lockdown measures are having a massive economic impact, especially on the black continent. Although the economic slump seems to be less massive than in the U.S. or Europe, it is still significant and the consequences for the people are even more devastating due to the insufficient reserves. Therefore, observers such as the Finance Minister of Ghana, Ken O-fori-Atta, see a lost decade looming for Africa (Economist, 2021a). The Purchasing Managers Index (PMI), shown in Figure 14, is the most meaningful indicator for assessing the short-term consequences for the economy, as it is independent of statistical information from local governments (Africabusinesspanel.com, o.J.; IHS Markit, 2019). Similar to the IFO business climate index (ifo.de, o.J.) the PMI asks African companies about their order situation and can therefore provide particularly up-to-date information about economic developments.
In this context, the pandemic shows that dependence on exports to industrialized countries, especially in the raw materials sector and to China’s manufacturing industry, has taken a heavy toll on African countries. This also means that countries where international tourism plays a crucial role will have to do without their main source of income and the engine of their job growth for much longer. Mauritius’ GDP fell by 12.9 percent and Botswana’s, one of the continent’s model students and providers of high-end safaris, by ten percent. Meanwhile, poaching is rampant because food supplies are no longer guaranteed (Economist, 2021a).
On the other hand, the individual countries’ own lockdowns, some of which were very severe, led to a sharp slump in household consumption spending (Figure 15). Unless the second wave requires tougher measures, the World Bank estimates a return to old pre-crisis consumption levels only in 2022. Taking into account all factors such as government consumption, investment and net exports, the economy as a whole should not return to old growth rates until 2022 (Zeufack et. al., 2020) – putting the recovery roughly on a par with Europe, while China would return to its pre-crisis levels as early as the beginning of the year and the U.S. in the course of 2021 (Giles, 2021).
While the vaccine gives reason for hope, with the emergence of mutations and forcing vaccine logistics, distribution of the same is still a long way off and could cloud above projections even further. Overall, The Economist’s statistics department estimates that Africa is not expected to have universal vaccine coverage until 2023 (eiu.com, 2020), forcing those with the lowest reserves to sustain economically drastic measures the longest of all. The COVID-19 crisis could be just the fatal event that throws the fragile growth of the world’s poorest region off track again. The psychological toll could be devastating, but entrepreneurship and risky entry into new technologies need enthusiasm and confidence that may have been lost during the lockdowns. Because much more serious than the losses in the short term could be the long-term socio-economic consequences.
During the lockdown, many young people lost access to schooling, e-learning was only rudimentarily available, and school classes were closed for an average of 23 weeks – more than in most other regions of the world. Statistically, this lost education time already accumulates to $500 billion, or $7,000 in lifetime income per child. But it has also been experienced that after such drastic crises, many do not resume their school careers because they are now working or otherwise indisposed. This particularly affects girls and young women who have now had their first children during the crisis and will therefore no longer pursue a career. This could lead to a closing of the demographic window on the continent, in which a young population is confronted with a small number of dependent persons, such as children or pensioners. Experience shows that the lower the level of education of women, the more children they are going to have (Economist, 2021b).
To make matters worse, the countries of the global South have nowhere near the financial resources available to Western countries to provide measures such as short-time working allowances or unemployment benefits. This is fatal in an economy that is largely based on informal jobs, whose workers and employees spend their wages on the same day on their daily errands and therefore have hardly been able to build up reserves or savings. Existing savings eventually melted away during the lockdowns and are no longer available for long-term investments in children’s education or one’s own health, loans can no longer be paid off and many private households are threatened with the debt trap. Falling below the absolute poverty line of $1.90 per day has thus become a realistic scenario for many.
The job of local governments to cushion the lockdowns economically is even exacerbated by a significant flight of private investors. Whereas developing and emerging countries were attractive destinations before the crisis, with bonds still offering sufficient returns for risk-neutral investors, these investors are now tending to return to the safe havens of the industrialized countries. The latter are borrowing money on the financial markets in raucous amounts to finance their budget deficits caused by lockdown measures (African Development Bank, 2020b). Therefore, developing and emerging economies must offer higher interest rates to attract international investors. These higher interest rates, in turn, lead to an increased risk of soon being unable to service the debt, a fate that has already befallen Chad (Shalal, 2021), and previous growth champions Ethiopia, Ghana, and Zambia have already been rated as riskier by Moody’s. Overall, Sub-Saharan African countries were able to raise only three percent of their GDP for mitigation measures, compared to seven percent in rich countries (Economist, 2021a). Private investment in Rwanda also plummeted by 47.1 percent in 2020 compared to 2019 (Namata, 2021).
But in a broader scenario, vaccine distribution could also spur new, ambitious infrastructure projects that kick-start the complex logistics of the drugs. For example, vaccines required end-to-end refrigeration at varying intensities, which no country in SSA has yet been able to provide. In addition to capacity in the form of freezers, these primarily require electricity, including in remote areas that are particularly isolated in Africa. However, international efforts could now accelerate this electrification and sustainably increase productivity in rural areas long after the COVID-19 crisis. Also, in such a short lead time, roads cannot be expected to be laid to the far corners of the world, so drone transports mentioned earlier could help reach them and enable widespread delivery. Ghana, Rwanda, and Malawi already exemplified this, with drones distributing medical supplies nationwide (Unicef, 2020). Even before Corona, two-thirds of all blood transfusions outside Kigali, the capital of Rwanda, were delivered by drones.
Similarly, achievements such as mobile money (for example, M-Pesa) help disburse aid payments to needy households despite lockdowns and travel restrictions. Home offices have meant that many tasks that were previously done by hand have had to be digitized in an improvised process to be done from home. This is leading to innovations in the insurance industry. Allianz, for example, now offers insurance against data loss and cybercrime (Whitehouse, 2021). Even though the budgets of the individual countries in Africa are severely strained and much of this cannot be implemented on a self-financed basis, there is, however, a strong vested interest on the part of the Western industrialized nations and China in keeping the pandemic under control worldwide (Caparros & Finus, 2020), because as long as the virus rages unchecked in some regions of the world, there is always the danger of a flare-up and spread to other countries, even more so in a globalized world, but above all also in the form of mutations. Misconceived austerity in this sense could therefore cost industrialized countries and multilateral organizations, such as the IMF or the World Bank, much more in the longer term.
Almost every corner of the African continent experienced strong economic growth at the turn of the millennium. Official figures tend to underestimate this growth, as the statistical capacities of the countries are far from sufficient to create a reliable database. The growth of the African economies is mainly driven by a middle class with an annual income of more than 2,000 U.S. dollars, which is invested in education, health, and insurance. While the younger part of the population already has a more pronounced consumer and brand awareness. This awareness is also reflected in the MSCI Africa index and the 50 strongest companies in telecommunications, banking, insurance, but still mineral resources.
In order to generate sustainable (and inclusive) growth that benefits a broad mass of people, many courses still need to be set. The most important of these is to invest in education that relates to applied knowledge, in addition to technical know-how, this primarily concerns management skills, controlling and marketing. Up to now, education has played a subordinate role when it comes to the growth of the gross domestic product; here, simple physical capital, i.e., equipment, machines, and computers, has been the main driver for higher productivity. This is also reflected in negative total factor productivity. Nevertheless, Africans have long recognized the opportunities of higher education, and where governments are unable to provide it, private institutions catering to middle class students are flourishing.
However, much work is also needed from governments on the institutional framework to make the business climate more attractive to investors. This must be done primarily in regulatory areas by creating credible institutions that enable fair competition, operate networks, and enforce free markets. While many African governments are showing great reform zeal and dynamism in this area, they are still at very low levels in relevant rankings such as the World Bank’s “Doing Business Index” or the “Ibrahim Index of African Governance.
The physical infrastructure is still an Achilles’ heel, especially with regards to information and communication technologies, which could actually be the basis of a digital revolution and should fall on fertile ground among the world’s youngest population. Africa is still the most backward region in the world, but it is catching up, and the Internet economy could trigger a leapfrogging process of new decentralized business models in financial, credit and insurance services, health care, transport logistics, education, and production. But development steps towards pan-African markets and suprastate institutions along the lines of the European Union, including a transport infrastructure that enables the exchange of physical goods, namely pan-African highways, are also essential for development. The African Continental Free Trade Area took its first steps in this direction in 2019, but its success will have to be measured by how it is filled with substance – especially on the issue of dispute settlement – so that it does not end up as a bureaucratic paper tiger. If successful, it could lead to five percent higher incomes for the current inadequate road infrastructure and cross-border financial institutions and, in the long term, enable supply chains that also allow the production of more complex goods.
When it comes to financing infrastructure and development in general, external factors also play a key role over which the local population has little influence. The first of these is the relocation of production back to the industrialized countries themselves, since simple labor-intensive steps can be taken care of in the meantime by automated production and therefore make a Chinese development model as the world’s extended workbench very difficult, to say the least. This also fundamentally hinders technology transfer in the form of foreign direct investment to build local factories and production facilities. In addition, Africa is still a depository for numerous mineral resources, the focus of which will now shift within the continent as a result of increased e-mobility and renewable energies. As a common African Union, numerous instruments are being created to control the resource curse in the form of instability, deindustrialization, and high exchange rates in the future. To this end, the potential of the large agricultural capacities must be developed, both to be more resilient to the challenges of climate change and to promote industrial development through cheaper food.
The COVID-19 crisis has been testing Africa’s fragile growth since 2020. Like laggard Europe, Africa will not return to its pre-crisis levels until 2022. Still, more devastating outcomes could be more long-term, with fewer savings available to put toward children’s education, or one’s own health. Younger people may return to the informal economy and day labor, and young women may have more children and not pursue professional careers. Together, they may be discouraged by the economic crisis from taking risks to take advantage of the opportunities offered by new technologies. However, spirited investment in COVID-19 vaccine distribution, which must include widespread electrification and innovative transportation solutions, could spark a surge in development.
To answer the opening question about the sustainability of African growth, the COVID-19 crisis could be a baptism of fire. Those countries that managed it better definitely did so because of more resilient institutions, and these speak to stable growth in the long run. These countries, at least, can be beacons of an African growth model that will eventually be taken up by other countries.