Africa's century?

It has been a tough few years for Africa. The fall in commodity prices over the past 15 years, as well as the Covid shock, caused growth rates to slow in most African countries. But the future for the continent looks brighter. African GDP is still growing faster than the rest of the world, and African countries are starting to emerge on the world stage. South Africa is a member of the G20, and taken increasingly seriously.

The main reason for being bullish on Africa is demographics. One of the big causes of the strong global growth seen in the decades after 1950 was the demographic explosion that took place after World War II. But right now, most of the world is on a downwards slope with birth rates at, or well below, replacement rates. In Africa, by contrast, while birth rates have slowed a bit, they are still high enough to ensure that the population grows by roughly 1.5% a year.

As well as expanding, Africa’s population is also much younger than that of other parts of the world. This will be an important tailwind for the continent’s economies. It will be a long time before Africa has to start worrying about ageing populations and discussing the cost of care and pensions systems, as policymakers in Europe and Asia are doing. And unlike Latin America, where disastrous falls in birth rates point to a crisis in a few decades’ time, Africa’s demographics could actually end up improving. Longer life expectancies and moderating birth rates could end up reducing the number of very young people relative to the working-age population, decades before the number of elderly people starts to increase significantly.

Africa’s share of the world’s working-age population is set to nearly triple, from about 15% at present to more than 40% by the end of this century. At the same time, the fact that Africa as a region is starting from a lower level in terms of income per capita gives it an advantage when it comes to labour costs. Such a large pool of cheap labour will help Africa take over from Asia as the factory of the world.

African countries have long struggled with poor governance and lack of stability. And that matters, because without political stability it’s hard to attract investment. If African countries could improve the quality of their institutions, companies from developed countries would be much more likely to invest. The good news here is that Africa's demographic dividends are also starting to help address the problem. Generation Z - those born between the mid to late 1990s and the early 2010s - account for a large share of the voting age population in many African countries, making them key players in the political process. This is starting to drive change across the continent as younger voters challenge parties and rulers that have been in power for a very long time.

South Africa and Nigeria have seen significant policy shifts that are yielding tangible improvements in the growth outlook. With COVID now firmly in the rear-view mirror, debt levels are stabilising, and budgetary consolidation is leading to a reduced risk of economic crisis caused by sovereign defaults.

Some critics are more sceptical about the pace of reform, however. Research suggests that many African countries still face major challenges in improving their governance. One major positive sign of meaningful economic reform is the creation of the African Continental Free Trade Area (AfCFTA), which was set up in 2018 and now encompasses most countries in Africa and covers more than 1.3 billion people. The aim is to stimulate trade within Africa by eliminating all tariff and regulatory barriers. By boosting the economies of smaller countries, the free-trade deal should also help resolve a situation where currently just seven economies account for 70% of Africa’s GDP.

?Africa is also showing promise when it comes to technology. The continent is a late developer, which has been bad for its population in terms of living standards. On the other hand, that has made it easier in recent years for African countries to adopt new techniques and industries. It is not stuck with old technologies and hence does not have to bear the costs and hassle of switching – it has even leapfrogged richer countries in certain areas.

All this has led to a huge increase in the amount of investment flowing into Africa over the past decade. Part of this is accounted for by China and its “belt-and-road initiative”, but the sources of foreign capital are broadening, reducing the continent’s dependence on Beijing – a good thing for those concerned about China’s geopolitical ambitions. Many Europeans are now investing in Africa as well, and a lot of investment has come from the United Arab Emirates, which sees a lot of potential in Africa.

There has also been a push from investors in the Gulf, who see African agriculture as a solution to their problems over the long-term security of food supplies. At the same time, with valuations in many asset classes in developed markets becoming stretched, investors are turning to African bonds and shares – the low valuations, high yields and lowered levels of perceived risk appear favourable.

Indeed, foreign investment could make Africa the world’s breadbasket in addition to the world’s factory, and also help to get the continent’s economy moving more generally. Higher levels of foreign direct investment, especially from the private sector, could in turn accelerate improvements in governance. The more outside involvement that you get, the more that will drive the setting up of the necessary institutions and regulations and laws, as well as a greater uniformity of those rules and regulations across the continent.

Africa has had a troubled history, and recent years have been difficult. But conditions are ripe for a turnaround in its fortunes. Investors should be a part of it.

6th March 2025