Lions Go Global

By Susan Lund And James Manyika

Imagine a room containing the US President and Vice President and former President Bill Clinton, nearly 40 African heads of state, and a brace of CEOs of the largest US companies. This gives you a flavour of the extraordinary gathering of the US-Africa Leaders Summit at the White House in August, which focused on economic development. Thirty three billion dollars of deals were done that day.

United States business leaders have begun to take Africa seriously – and not before time.

Private-capital flows to Africa totaled $545 billion from 2003 to 2012, surpassing remittances and official aid. Yet the United States lags well behind Europe, Brazil, Russia, India, China, and the Middle East in terms of the amount of foreign-direct investment (FDI) it sends to Africa (see Exhibit 1). Yet Africa offers a higher rate of return on FDI than most emerging economies.

 

Exhibit-1

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Moreover, the US share of African trade stands at only 9 percent and is growing more slowly than that of most other regions of the world (see Exhibit 2). US–African trade is just one-fifth the volume of Africa’s trade with Europe, and 60 percent smaller than Africa’s trade with China.

 

Exhibit-2

 

Increasingly Dynamic Economies

Yet Africa merits new focus from businesses, from the United States and other regions too. The continent’s economic growth is second only to East Asia, which includes China. Between 2000 and 2013, Africa was home to eight of the world’s 15 fastest-growing economies. The continent’s GDP of more than $2 trillion is now larger than India’s. And growth is accelerating from a compound annual rate of 4.9 percent between 2000 and 2013 to an expected 5.8 percent a year between 2014 and 2019, according to a consensus of mainstream forecasts.

The sources of Africa’s growth are diversifying. Yes, surging commodity prices have helped spur growth in some countries, but natural resources and the related government spending they financed generated only one-third of Africa’s GDP growth from 2000 to 2008. Since the global recession dampened commodity prices, they have contributed even less. The majority of Africa’s growth is being driven by other sectors of the economy, including wholesale and retail trade, transportation, telecommunications, and manufacturing. Although commodities continue to be a large share of Africa’s exports, they account for less than half of goods exports.

Africa’s accelerated growth over the past 14 years owes a great deal to government efforts to end armed conflicts, lower inflation, and reduce public sector debt, all of which has created a more stable environment for businesses and a revolution in productivity. After declining through the 1980s and 1990s, the continent’s productivity started growing again in 2000, averaging 2.4 percent per annum between then and 2013. A range of microeconomic reforms has energised markets. Governments have privatised state-owned enterprises, increased the openness of trade, lowered corporate taxes, strengthened regulatory and legal systems, and provided critical physical and social infrastructure. Nigeria, for example, privatised more than 116 enterprises between 1999 and 2006, and by 2013 had privatised its entire electric power sector. Morocco and Egypt struck free trade agreements with major export partners. Although governments across Africa can do a great deal more to create a business-friendly environment, these important first steps have enabled a private business sector to emerge.

Africa’s accelerated growth over the past 14 years owes a great deal to government efforts to end armed conflicts, lower inflation, and reduce public sector debt
Perhaps most importantly, Africa has a rapidly growing consumer market. Consumer spending is projected to reach $1.4 trillion per year by 2020 from $1.15 trillion in 2012. Already, more than 100 million households have sufficient income to spend on discretionary goods and services, as well as the basics, and the continent has more middle-class households (defined as those with annual incomes of $20,000 or more) than India – and this figure is set to grow to nearly 130 million by 2020. Rising domestic demand from these households is now an important engine of growth on the continent.

In a world where many countries are ageing, Africa stands out for the relative youthfulness of its population – a potential demographic dividend. By 2035, the continent is set to have the largest working-age population of anywhere in the world – larger than in China or India.

 

Africa’s Global Opportunity

As Africa progresses on all these fronts, its trade ties with the world are expanding. In 2012, the continent’s flows of goods, services, and finance were worth $1.6 trillion, or 82 percent of GDP, up from just $400 billion, or 60 percent of GDP, in 2000.

In a world where many countries are ageing, Africa stands out for the relative youthfulness of its population
Today may present a historic opportunity to boost Africa’s goods flows even further. As wages rise in China, production is shifting to lower-wage Asian economies – and to some African countries. Manufacturing already receives most of the FDI in some countries, including Morocco, Algeria, South Africa, Mozambique, and Egypt. On current trends, manufacturing is set to create eight million jobs by 2020, a testament to wages and productivity levels that are competitive with other global low-cost manufacturing hubs. The evidence shows that the productivity of African workers in well-managed factories is comparable with that in other countries, although overall costs are higher because of poor logistics and infrastructure, as well as cumbersome bureaucratic procedures. Africa can build on this progress and develop industrial clusters in agro-processing industries, such as food and beverage manufacturing, textiles, leather goods, and wood products.

While there is clearly scope for US businesses to engage more in this resurgent continent, for its part Africa can do more to engage in the world economy and thereby fulfill its potential. The new McKinsey Global Institute Connectedness Index ranks countries based on goods, services, finance, people, and data and communication flows. It adjusts for the size of countries, and it reflects both inflows as well as outflows, both of which contribute to economic growth. The index shows that Africa ranks the lowest of any region in the world on its connections to the global economy.

But Africa’s connections with the world are growing, and at a rapid pace. Some of the most diversified African economies, including South Africa, Morocco, Egypt, and Nigeria, are rapidly becoming more connected to the rest of the world. The experience of Morocco, the second most connected economy in Africa after rising 26 places since 1995, shows that large gains in connectedness are possible with a concerted effort. Morocco has been proactive in attracting FDI into its growing automotive industry, which generated $2.7 billion of exports in 2013, as well as in expanding tourism, offshore services, and agricultural exports.

Underlying the expansion of global flows of goods, services, finance, and people is the soaring exchange of data and communication across borders through cross-border Internet traffic and international phone calls. More than 720 million Africans have mobile phones, some 167 million people use the Internet, and 52 million are on Facebook. The numbers are rising rapidly but Africa risks being left behind in a growing “digital divide”. More than three-quarters of the continent’s one billion people remain unconnected to what is supposed to be a “worldwide” web. The Internet contributes just 1.1 percent of Africa’s GDP overall, compared with 1.9 percent across developing economies.

The situation may be changing. Africa’s cross-border Internet traffic grew 70-fold between 2005 and 2013, faster than in China or Latin America. The new undersea cables circling the continent should open up new opportunities, although laying the cables to bring that broadband access inland to cities and countries without easy access to the coast will be challenging. The potential in Africa’s growing cities is very large. A McKinsey survey in 2012 found that 51 percent of urbanites had accessed the Internet in the previous month and that 54 percent own Internet-capable devices.

African countries must continue to strengthen the rule of law, ensure the sanctity of contracts, and make arbitration available in the event of disagreements. Foreign investors also want a level playing field with local firms.
It will take months – perhaps years – for the full impact of the historic Washington Summit to materialise. Now that the commitment to engage has been formally made, it is to be hoped that new economic ties will develop and deepen over time. As that engagement unfolds, what should its cornerstones be? We see several priorities for US businesses to benefit from the undoubted wealth of investment opportunities in Africa, and for Africa to continue on the path of reform to ensure that it fulfills its potential.

• Raising US investment in Africa’s infrastructure from both public and private sources. Power Africa is a 2013 US initiative to double the number of people with access to power in sub-Saharan Africa. It aims to enable public and private capital to expand power generation and help electrify the continent. This initiative could be expanded given the size of the need in Africa. And energy is not the only infrastructure challenge that Africa faces. The McKinsey Global Institute estimates that Africa needs $2.6 trillion in infrastructure investment by 2030, including highway, water, and telecommunications infrastructure.

• Building the next generation of African leaders. Equally important will be measures to help the continent to develop a new generation of business and political leaders. The White House’s Young African Leaders Initiative is a step in the right direction. But more can be done. One useful step would be to dramatically expand the number of African students who can attend US universities for both undergraduate and graduate programs. Shorter-term exchanges, through the Fulbright Fellowship program and other opportunities, can also have impact.

• Improving Africa’s business climate. Greater trade with and investment in Africa from the United States will, to a large degree, depend on confidence about the macroeconomic and business environment. African countries must continue to strengthen the rule of law, ensure the sanctity of contracts, and make arbitration available in the event of disagreements. Foreign investors also want a level playing field with local firms. In practical terms, this requires limiting the preferential treatment of locally owned companies, as well as the removal of withholding tax on foreign remittances and ceilings on the repatriation of profits and capital by foreign firms. There is also more to be done in African countries on simplifying and standardising business regulations, raising the efficiency of obtaining permits and approvals, and shortening the time it takes for companies to obtain approvals needed to set up operations.

• Facilitating US investment. Several African governments already have investment and trade promotion agencies to facilitate increased global engagement. For their part, African countries can do more to reach out to US investors and companies. Too many US executives are simply unaware of the opportunity. African countries can help them navigate regulations and local customs. Many developing economies have developed explicit strategies for attracting FDI and have created investment agencies that help foreign companies identify opportunities.

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About the Authors

Dr. Susan Lund is an economist and partner at the McKinsey Global Institute (MGI), based in Washington DC. She leads research on global financial markets, labour markets, and the macroeconomic outlook.

Dr. James Manyika is a director at McKinsey & Company based in San Francisco and a leader of MGI. He focuses on the impact of technology on growth, organisations, and labour markets.

References

1. See ‘Global flows in a digital age: How trade, finance, people, and data connect the world economy’. The McKinsey Global Institute (April 2014), available at: http://www.mckinsey.com/insights/globalization/global_flows_in_a_digital_age