Can Africa Hit And Hold A 7% GDP Growth Rate Year-On-Year?

by: QFinance

By Anthony Harrington

At the recent economic forum to thrash out a new partnership model between Africa and France, Donald Kaberuka, President of the African Development Bank (ADB), said that if Africa could find ways of financing and developing improved infrastructure, the continent could push growth beyond the current year on year average of 5% to 7% and beyond. He said:

"We are all pleased and satisfied with the five percent GDP growth for the continent recorded in the past few years. But this rate is insufficient for our needs in Africa. Given strong demographic growth, the required growth rate should stand at 7%. The gap between 5% and 7% is due to poor infrastructure hindering the continent's development."

Europe, of course, would love to have five percent growth, never mind seven percent. So what is fueling growth in Africa? According to the McKinsey Global Institute, while Western companies and analysts recognize Africa's increased economic momentum, they continually misunderstand the sources of that momentum and Africa's probable staying power:

"Soaring prices for oil, minerals and other commodities have helped lift GDP since 2000. (... However, research shows) that resources accounted for only about a third of the new found growth. The rest resulted from internal structural changes that have spurred the broader domestic economy."

Nothing is certain, however. Wars, natural disasters, including the devastating drought that sometimes plagues the African continent, poor government policies and the corruption that seems endemic to much of Africa could halt or even reverse growth trends in any individual country. But the long-term internal and external trends are very favorable, McKinsey argues. Africa is changing and modernizing, often in the teeth of government mismanagement and corruption, but the lessons of how to drive change are becoming increasingly well understood by both the private and public sectors across the continent. Two thirds of the continent's growth has come from sectors such as wholesale and retail, transportation, telecommunications and manufacturing, enabling even countries without significant commodity resources to achieve growth rates comparable to those with substantial oil and mineral wealth.

Action to end wars in several African states has been key, of course, though ongoing conflicts and sporadic eruptions, including terrorist attacks, continue to plague several countries. The street protests and use of live ammunition by police to disperse crowds after the elections in Guinea in September 2012 are but one instance of the political and ethnic strife that can break out to disrupt economies. Failed states like Somalia with its piracy plaguing the shipping lanes and the long running conflict in the Democratic Republic of Congo (which, in March 2013 prompted the Security Council of the United Nations to create an "intervention brigade" of three infantry battalions to neutralize armed groups) are examples of more intractable conflicts that Africa is still seeking to resolve. Conflict in the DRC goes back to the 1990s and by the end of 2013, according to the site, there were still some 40 armed groups operating in the east of the country. For anyone interested, has a timeline briefing on the various conflicts and rebel groups in the DRC from the point in 1996 when the war and genocide in Rwanda spilled over into the DRC, up to the present. It does not make for pleasant reading.

Exceptions like Somalia and the DRC aside, economic progress across Africa has been encouraging on a number of fronts. McKinsey points to the fact that the average inflation rate has fallen from 22 percent through the 1990s to 8% since 2000. Foreign debt has, on average, come down by a quarter and budget deficits have been trimmed by around two thirds. The privatization of state enterprises continues. McKinsey points to the fact that Nigeria privatized more than 116 enterprises between 1999 and 2006 and privatization did not stop there. As Reuters reported in September 2013, after enduring year after year of power cuts from its failing state power company the Nigerian government finally decided to sell one of the state power companies to the private sector for $2.5 billion.

The power sector is a telling instance of the scale of government mismanagement in Nigeria. Despite having the world's ninth largest reserves of natural gas, Nigeria only manages to produce a tenth as much electricity as South Africa, despite having a population that is three times its size. As the Reuters article notes:

"The Power Holding Company of Nigeria (PHCN) keeps the lights on for only a few hours a day, forcing those who can afford it to rely on expensive diesel generators that burn up billions of dollars from Africa's second largest economy."

Clearly, the fact that the continent has managed to achieve and sustain 5% growth in the teeth of so much mismanagement and war suggests that what could be achieved once these issues are resolved, or even further along the path towards resolution, could be exciting indeed.