1. Wednesday September 23, 2009
Africa: The Next Global Growth Engine?
By David Haarmeyer
September 2009
Africa - the sleeping, potential economic giant - is stirring. Acceleration
in private capital flows to sub-Saharan African countries is stimulating
growth and creating opportunities not seen in that part of the continent
for many years. Although this resurgence in interest may suggest an
economic transformation in the region, risks still remain for investors.
On average, the continent's GDP grew almost 6 percent a year from
2001 to 2008. In 2007, private capital flows to Sub-Saharan Africa reached over $50
billion - overtaking official aid flows for the first time, according to the IMF's latest
economic outlook for the region . Although almost 90 percent of the money went to
South Africa, private capital infusions are also on the rise in other countries - notably
Ghana, Kenya, Tanzania, Uganda and Zambia. "Africa's future is up to Africans," as U.S.
President Obama stated during his visit to Africa in July, and this future is indeed
looking brighter.
What makes this growth so astonishing is that until recently Africa was referred as "the
worst economic tragedy of the 20th century" by the World Economic Forum in its Africa
Competitiveness Report 2004. The IMF's statistics are especially meaningful because
Africa is indeed a giant - the second largest continent geographically and the second
most populated one with a billion people. Yet, with only 2 percent of the global output,
Africa's potential for growth is tremendous.
The global financial crisis offers a good test of the staying power of the continent's
economic transformation: Is recent growth a matter of favorable trends outside the
continent's control, such as the commodity price boom, which saw oil, copper and cocoa
prices skyrocket? Or can it be traced to hard-won economic policy changes, such as
liberalization of trade and investment?
Africa's improving political and economic stability has been an important factor
contributing to the region's economic growth. From 1980 to 2006, 27 Sub-Saharan
African countries improved their ratings in the Vancouver-based Fraser Institute's
Economic Freedom Index. Although ranked last in business-friendly regulatory
environments by the World Bank, the region implemented more reforms in 2008 than in
any previous year, as Mauritus, Botswana, and Malawi were top performers in their
categories and Rwanda was the world leader in reforms.

2. Trade should play a growing role in Africa's growth. Between 1995 and 2006, tariff levels
were nearly cut in half. Although the continent must face the economic reality of global
market prices, having less-protected markets will compel entrepreneurs to quickly
address the scale, cost and product quality issues that have handicapped the region.
Another key growth enabler is foreign direct investment (FDI), which can include
valuable knowledge transfer. According to the United Nations Conference on Trade and
Development (UNCTAD), FDI inflows to Africa grew almost 35 percent from 2007 to
2008 to more than $70 billion. The vast majority of this money is focused on resource
extraction, including mining and petroleum drilling, but it also includes investments like
the Industrial Bank of China's purchase of a 20 percent share of Standard Bank Group of
South Africa for more than $5 billion.
The flow of capital from private equity funds into Africa is also starting to
accelerate. This is an important sign of confidence, as managers of these funds are
putting their own capital at risk - anywhere from 2 percent to 12 percent of total value of
funds raised. Moreover, private equity managers act as powerful conduits that bring not
only capital and management resources, but operational, financial and governance
discipline to their portfolio companies. Today global firms such as Actis, Aureos Capital
and Emerging Capital Partners are active across the African continent. Last July, Actis
paid $244 million for a 9.3 percent stake in Commercial International Bank, Egypt's
biggest commercial lender.
Foreign capital gravitating to Africa's resource-intensive industries often brings positive
spillover effects. One of these is "parallel" investment in roads, power plants and other
infrastructure. The impact of China is especially pronounced with the China Ex-Im Bank
averaging $1.7 billion a year in African investments from 2001 to 2006.
Mobile phones provide one of the more remarkable private investment stories in Africa.
Today, according to the Paris-based Organization for Economic Cooperation and
Development, about one in five Africans has a mobile phone, and revenues from mobile
services are higher than for fixed lines. The continent is the first region in the world to
offer free, mobile roaming services across several countries. African telecommunications

3. firms, such as MTN, Orascom and Celtel, were the market catalysts and pioneers.
According to International Telecommunication Union, Africa is expected to see double-
digit average annual growth rates during the next five years, with the value of its market
reaching well over $40 billion by 2013.
This is not to say that the economic path ahead for Africa will be smooth. The continent
leads the world with the highest percentage of population with AIDS. Unstable states
threaten regional stability. According to the World Bank, Africa faces an annual $23
billion financing gap to build necessary infrastructure. Corruption remains a scourge.
The continent's reliance on resource exports puts it heavily at risk of a Chinese economic
slowdown.
Still, some experienced investors are optimistic. Stephen Jennings, the chief executive of
Moscow-based investment bank Renaissance Group, which grew out of the wreckage of
Russia's emergence from communism, expects "Africa to grow faster than Asia did at the
equivalent stage of its takeoff." Although African countries may not adopt Western
institutions nor rely on traditional multinational-led models, Jennings believes they will
benefit from the powerful economic forces of global convergence.
David Haarmeyer is an economic consultant and writer who focuses on organizations,
markets and economic development. He recently completed a study on economic
growth prospects in Africa. He can be reached at dhaarmeyer@gmail.com.
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