The Africa Question.

The birthplace of humanity, a continent with over a billion people, a land that has been subject to some of Man’s worst excesses in recent centuries and a source of hope for the rest of the world in coming centuries?

Following recent visits to this exceedingly beautiful continent, I’ve been reflecting on some of the challenges and opportunities Africa holds and the conditions that will allow for the further flourishing of people and the economies in Africa.

I’ve attempted to distil here some of the key matters to be addressed. Some may be common to all of the African nations, others may be a bit more specific for individual nations but my hope is that they provide a useful context for us to frame our understanding of Africa better.

Below are some of my own thoughts and observations on the areas that perhaps need the most urgent resolutions:

Ensure everyone pays their rightful dues

The narrative we often hear when Africa is discussed is about how much money the developed world is giving by way of aid (and increasingly loans) to poor and helpless African nations.

The reality though is significantly different. A United Nations Economic Commission for Africa report from 2015 highlights how Africa loses US$50 billion through tax avoidance, illicit outflows and fraud.

A staggering US$850 billion has been stolen from the continent by both companies and criminals between 1970 and 2008.

A number of large multinationals undertake complex tax avoidance through transfer pricing and trade mispricing. Profit and revenue shifting mechanisms have helped global multinationals achieve this effectively. The growth of transnational criminal undertakings also has led to this outflow of capital from Africa.

A more recent report by Global Justice Now highlights how Africa receives around US$19 billion in aid but that over US$68 billion is extracted from Africa. The report further adds how, “the rest of the world is profiting from the continent’s wealth – more so than most African citizens.” The report further provides evidence of how African governments received US$32.8 billion in loans but had to pay US$8 billion in debt interest and principal payments, with the overall debt rising rapidly.

African states need to revisit their tax approach and their approach to transfer pricing to retain a greater portion of income and earnings. Doing so will also allow them to reduce their dependency on foreign aid and debt.

Tap on the energy and passion of the youth through education.

Whilst much has been said about the need for the investment and enhancement of infrastructure of the countries in Africa, the most important investment Africa can make is in her youth.

The ingenuity, creative and the energy of the youth of Africa has been shaped by the conditions, opportunities and challenges they have been exposed to. There needs to be an urgent investment in education to help channel the irrepressible creativity and entrepreneurial energy one feels when speaking to the youth across Africa. (For one fascinating example, please view this link and listen to a young boy explain his solution to keep lions away from his family’s livestock)

One of the biggest challenges facing Africa is high youth unemployment, hovering around 50% across parts of Africa. Africa has a youthful and growing population (it is estimated by McKinsey that by 2034, Africa will have a larger workforce than China or India.)

To address this, urgent reforms in education must be made and there must be a commitment to investment. Free or affordable access to schooling is still patchy at best across Africa. Furthermore even in countries where it exists, it tends to be only at the primary school level. There must be urgent investment to support free or affordable education, supported by a well remunerated teaching and education team, for at least a minimum of 10 schooling years.

There also needs to be an emphasis on both academic and vocational educational pathways beyond the primary and junior high school age ages – with equal emphasis accorded to both pathways. There needs to be further support provided to the university sector and again more efforts should be given to ensuring that university education remains a right and not a privilege for the youth. Efforts to provide universal education should be supported by ample investment – and this is investment that will provide far greater benefits than any roads, highways or railways can bring to any nation.

There is also an urgent need to address the brain drain we witness across Africa – and more should be done to encourage and attract the youthful talent to return home to their countries so as to allow nations to tap on the deep insights and experiences gained by young Africans who have trained abroad.

Establishing the conditions for an equal and fairer society

One of the biggest challenges facing the emerging economies across Africa is that of income inequality. There is strong evidence of a rising gini co-efficient (a measure of income distribution – where a rising figure suggests growing inequality) across a large proportion of African nations. It is not uncommon to see expensive tinted Mercedes Benzes or Bentleys racing through dilapidated communities (where the car in all fairness probably costs more than what the community or township can earn in a decade).

This income inequality and wealth gap is unsustainable (and this applies to nations globally – not just African ones) and over time will become a source of tension and conflict.

The resolution of income inequality is a fairly complex issue (you can read more of my thoughts here) but a few things that can be done include a focus on building domestic demand and creating local jobs (through investment towards local enterprise). There have been a number of commentators who have suggested that Africa should follow China’s export-led model, but for reasons explained further below in this article, this will not be ideal.

An unerring focus on creating greater social mobility, through education and employment opportunities, will help stem the growing disparity of wealth and income. Ultimately, a society that is more socially mobile, with greater domestic demand (supporting more domestic consumption and job creation), will create greater prosperity for all.

Finally, African nations should work towards women’s economy empowerment and greater gender diversity in the workplace. Better diversity will lead to greater employment and growth. Providing opportunities for more women to participate in business and trade can only be a source of benefit.

As Geraldine J Fraser-Moleketi, former special envoy on gender for the African Development Bank puts it, “Equality for women really is ‘progress for all’.”

Narrow the employment gap

I mentioned earlier the need for a reform and restructure of basic educational systems for African youth. This is also critical in narrowing the skills mismatch that exists across Africa and there must be efforts to ensure that individuals acquire relevant skills to find the jobs that are available in the marketplace.

This focus on reducing unemployment is also vital in ensuring the social harmony across African nations. Continued high unemployment will lead to greater resentment and anger and will also over time create a dependent society that becomes a challenge to resolve.

In addition to meeting this employment gap, the public sector (the largest employment sector across Africa) still needs to be professionalised and this can only be supported through fair and adequate remuneration of the public sector staff. Whilst it is common to hear the shrills and berating by advanced economies to stem corruption, this can only be realistically achieved if public sector employees are paid fair wages and given the right skills and support.

Sowing the seeds of efficiency and reaping greater benefits from agriculture

Parts of the African continent are going through the worst drought and this has led to the world facing the worst humanitarian crisis since 1945. The drought has hit the farming community hard. Two-thirds of Africans are still dependent on rain-fed agriculture and the drought has wiped out the livelihoods of millions. The growing impacts of climate change will only serve to exacerbate this issue further in coming years and decades.

This has a much broader economic impact as well. In Rwanda for instance, agriculture accounts for 30% of total GDP and provides jobs for more than two-thirds of the population and accounts for 80% of all exports. Therefore, if agriculture is impacted, the consequences are felt deeply across all of Rwandan society.

The growing population of Africa will also lead to greater pressures on land. There is an urgent need to ensure greater efficiency is achieved across the agricultural sector. Agricultural efficiency across Africa is still only around a fifth of the agricultural efficiency for comparable areas in Australia and Europe. Agricultural land needs to be used much more effectively and greater automation and technology will help enhance agricultural productivity.

Improved milling, better and modern agricultural machinery and irrigation will support the efficiency drive across Africa. Technology and better crop management (and exploring alternative agricultural approaches such as hydroponics or organic pesticides) will only serve to support African nations in building greater self-sufficiency in the area of agriculture. Greater support and financing facilities and grants need to also be provided to farmers with conditions of implementing enhanced technologies and farm management as part of the grant issuance.

Africa has the potential to be the bread-basket for the world. However, for instance, we still see Nigeria being a net importer of rice when Nigeria should really be exporting rice to Africa and beyond. Food security is of crucial importance for Africa and allows for better self-sufficiency. This food security can only be really achieved if they reject global multinational seed companies that manipulate local farming and embark on practices such as selling ‘terminator seeds’ that do not allow for further reproduction of plants. Nations need to control and partner with one another to research optimal seeds and be in control of seed distribution to farmers. Countries that give this up, give up the security of food - the most fundamental security issue.

Paving a clear path towards infrastructure enhancements

An area of focus for a large proportion of African states has been around infrastructure investments, namely the building of better road and rail links alongside telecommunication infrastructure. As Africa grows economically, there is a pressing need to overcome mounting pressures on infrastructure and this can be a significant bottleneck on continued growth and efficiency.

As Africa seeks to become the global industrial powerhouse, there is a need for stable electricity and power with well-maintained transport and utilities. Africa has already moved rapidly in the space of alternative and renewable energy and there must be a sustained investment in this area.

This needs to be supported by wider social infrastructure investments. I’ve already highlighted the need to invest further in education but there is more that can be done around healthcare infrastructure which remains patchy across Africa.

Urgent effort needs to also be made in easing up regulatory red tape and bureaucracy for business and company start-up and formation.

Resolving the housing challenges should also be at the forefront of wider infrastructure investment. There is a growth of slums around urban centres. For instance, the World Bank estimates up to two million homes are needed in Kenya to stem the growth of slums around main urban centres such as Nairobi and Mombasa. Affordable and good housing should not be an afterthought and should be very much in the front and centre of urban planners and policy makers.

Africa has the opportunity to build the infrastructure they need and yet maintain a clean and pollution-free approach to infrastructure developments. As we have seen in other emerging nations, industrial growth and infrastructure investment have often come at the expense of environmental sustainability and they are struggling to redress the challenges which they have brought upon themselves. There is an opportunity for Africa to avoid these pitfalls.

Navigating the big economic and business questions

As Africa embarks on the path towards greater economic prosperity, Africa needs to create her own journey towards success. There have been a number of commentators suggesting that Africa should seek to emulate China’s economic growth model. However, I would urge caution China’s model of low wages and export-led economy is not going to be necessarily suitable for Africa. The Chinese model of growth took place in a time with a different set of circumstances, assumptions and political landscape. With rising automation, artificial intelligence in manufacturing and technology, export-led factors will not necessarily lead to the rise of jobs, employment nor prosperity.

There is increasing evidence that wider macroeconomic factors remain weak – including a rising proportion of bad loans and falling revenues of large companies. The underlying weakness in global economic trade is also a risk for Africa to consider.

Africa also needs to continue to build domestic demand and seek to lift the significant proportion of her population to the middle-income group. Driving domestic demand, through greater support for small and medium sized enterprises and creating greater and sustainable employment opportunities will have a much greater multiplier effect on the economy. Building domestic demand will create greater prosperity for all.

Africa also needs to diversify from her current trend of dependence on primary commodities and extractive sectors. Whilst they generate significant economic value from their current industries (e.g. Botswana from her diamond mining sector), there is an opportunity for Africa to learn from other smaller nations such Singapore and Norway in setting up professionally managed sovereign wealth funds that channels current wealth towards an investment vehicle that provides long-term and diversified sustainability when the current resources run out.

Moving up the commodities value chain

The first area which a number of African nations are already looking at, and which must continue in earnest, is making the journey up the commodities value chain. It is not enough for African states to merely being in the primary production space and must venture further downstream where the bulk of the value-creating activities are. The era of Africa being simply an extractive resource sector and where the primary products are exported out of the continent for greater value generation needs to end.

Stronger regional economic integration

The level of intra-continent trade in Africa remains woefully behind other regions. Only 13% of all African trade is intra-African. If you compare this to the over 50% of intra-European and intra-Asian trade that takes place across Europe and Asia, it does show just how far behind Africa is in terms of regional economic integration. Whilst there are also ready some regional African groupings (such as the East African Community), this isn’t enough and there must be a greater political will and effort to create better integration and create more effective partnerships. This will also allow for a wider and broader African regional grouping to obtain favourable tradition conditions with other major countries and other regional blocks such as the EU and ASEAN (Association of South East Asian Nations).

Leaders of African states should not also allow for political differences to torpedo regional economic integration efforts. The lessons from ASEAN where radically different political systems of governance came together to create an economic and social community has helped create greater prosperity for all.

Capitalise on the Belt and Road Initiative and keep options open to other partners

Africa’s trade with China continues to rise (16% quarter on quarter to Q1 2017 rising t US$38.8 billion) and China’s Belt and Road Initiative (BRI) provides significant opportunities for African states. It is important that African nations secure long-term sustainable commitments as part of the BRI rather than be in a position where they end up making concessions without receiving any of the resultant benefits.

It will also be important for African states to also hedge their bets and also create and continue to enhance other economic partnerships with the likes of India and the EU. India for instance, whilst slightly late to the developments in Africa, has a lot more commonalities with the African development story post a colonial period.

Focus on small and medium size businesses and provide them with the right conditions for success

Across the OECD, small and medium enterprises (SMEs) contribute to about 70% of employment and up to 45% of total GDP. This highlights the critical importance SMEs play in driving the economic enhancement of economies.

Africa needs to be investment more towards supporting SMEs given their role in creating employment and national income. There needs to be further support given to SMEs from a financing perspective. Ex-Im banks (or export-import banks) that make it easier for SMEs to obtain financing and access to trade tools (such as letters of credit) will help SMEs grow, both domestically as well as internationally.

More support should also be given to SMEs across Africa in the form of productivity grants (that help SMEs embark on structural and technological improvements that drive efficiency as well and research and development and training services) to enhance SME quality.

Creating greater support to SMEs will also help tap into the entrepreneurial abilities we see across Africa and help capitalise on the social resources available. SME development will also almost certainly help drive greater domestic investment and consumption which allows for greater domestic wealth creation and better income distribution. 

Effective capital utilisation and creation

A significant number of African states have been working hard to build banking facilities for low income and the unbanked population. This ultimately creates greater formality around a hitherto informal market and supports better participation in the economy by those who’ve been unable to do so. This also needs to be considered in the context of how diaspora funds contribute to nation building and driving economic performance. Some sources estimate that the 30 million strong African diaspora remit back almost US$160 billion each year but they are mostly untracked due to the informal systems and structures and are not necessarily channelled to effective economic output.

An efficient money market with better and efficient capital markets will also allow for greater domestic inclusion in the local economic growth. There needs to be more robust efforts to enhance financial literacy and to also create the various financial frameworks (including effectively functioning stock exchanges) to support this.

Whilst there have been a slow but steady stream of public-private partnerships, more thought could be given to alternative finance and risk-sharing schemes including joint ventures and blended finance which will help underwrite large and successful investments across Africa.

Africa also needs to also watch the investment of State Owned Enterprises (SOEs) across their respective national jurisdictions. Typically in rapidly growing economies, we often see SOEs searching for ever-rising returns in other sectors and industries which are not core to their business. This often has a deleterious influence on economies as SOEs enter industries they are ill-equipped to do so and in the process destroy their own value and wealth. SOEs need to remain disciplined and remain in their respective industries and resist the urges to branch out and allow for other players who are better equipped to do so develop other sectors and industries.

Conclusion

Africa has been breaking the yokes of colonialism and oppression over the last fifty years. In the coming fifty years, Africa will be leading the world economically and socially. It is predicted that a quarter of the world’s population is likely to be living in Africa by 2050. This is also a world where most of the current developed economies will have an overwhelmingly ageing population. The coming century will belong to Africa and whilst there are complex political and economic reforms that are required, it will soon be time for Africa to provide the moral leadership for the world.