Post-crisis Africa: The new belle of the ball

December 30th, 2010

post-crisis-africa1There is one missing element in the numerous reports that have been written about the allure of Africa as the “next frontier” for investors. This goes beyond the estimated 6% growth rate in 2010 – more than double that of the developed world – and an increasing consumer market that just reached a record 1 billion. Behind the statistics and reports lies the impact of the global financial crisis on the continent’s psyche.

Why is this important? Because the lessons learned from the crisis have caused a mini revolution resulting in a renewed African self-reliance – one can sense through the explosion of infrastructure projects that in the next decade, many countries will be transformed, if not to the level of their BRIC counterparts then most certainly nearing them. This “mind transformation” has had a profound impact both on intra-African trade and on traditional trading partnership with countries beyond the continent.

African traders have been hit hard by the crisis in the EU, which represents Africa’s primary trading partners. Africa’s response to the foreclosures of many of its international buyers, the drying up of investments and access to credit has been to develop domestic markets to increase intra-regional trade with an eye to also attracting investors. 

In its stride towards strengthened regional integration, Africa has embraced the axiom “bigger is better” in order to increase market size and ultimately its appeal to investors. Although it still has a long way to go to bridge the gap with other regions such as Asia – intra-regional exports in Sub-Saharan Africa as a proportion of total trade accounts for less than 10% in contrast to over 45% in developing Asia. Despite this lag, the East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) made history in 2010 by launching a common market of 130 million people, allowing the free flow of goods and people across all borders and the removal of tariffs.

The countries in Eastern and Southern Africa are also vigorously pursuing a Free Trade Area that would encompass a population of 568 million people and a GDP of $625 billion. While on the opposite coast the 15 countries of the Economic Community of West Africa are moving toward stronger implementation of a policy that will lead to a Free Trade Area of about 300 million people. Increased harmonization of  policies and regulations will help decrease the overall cost of doing business in Africa.

Coupled with regional integration initiatives, African countries have started to address one of the key contributors to the high cost of doing business – poor infrastructure. Lack of adequate roads, rail systems and ports, and unreliable access to energy and water has left many countries at a competitive disadvantage to counterparts in other regions. The Infrastructure Consortium for Africa estimates that the cost of moving a tonne of goods in Africa costs between 4 and 14 US cents versus 1 to 4 cents in other developing regions.

In order to bring infrastructure to the level of the 21st century spending needs to double to $93 billion. This gap could decrease significantly with stronger efforts to enforce existing regulations ensuring that people who use resources pay their fees regularly. Notwithstanding payment lags by users, African countries are taking a proactive stance. In East Africa, for instance, infrastructure spending is up for the period 2010/2011 on average from 15 to 20 percent.

Kenya is a prime example of the infrastructure boom currently taking place in many African countries. The Kenyan government is working toward the realization of their Vision 2030 plan that will see the country elevate to a global manufacturing and services hub. Central to this objective is improvements to their roads and power networks. For the 2010/2011 budget Kenya has allocated a 20% budget increase in infrastructure with $1 billion to be spent on roads alone.

In addition to infrastructure and intra-African trade, the continent’s transformed mindset is also impacting on its trading relationships. In short, the emergence of China in Africa, which has increased trade with the continent by 92% in the last decade, is at the forefront of the “new wave” of trading partners in addition to India. Other non-traditional trading partners such as Russia, Brazil and Argentina are also emerging to stand along side the likes of the U.S. and Western European countries as viable partners.

When likened to a dance star, Africa with its new clothes in the form of self-reliance and a full dance card of willing partners will need to be mindful of a few potential obstacles on its way to the ball. The full slate of elections scheduled to take place across Africa in the next few years will place into sharp focus the issue of political risk. A continued trend towards peaceful elections such as the one recently held in Tanzania will help recast the perception of increased risk that may be prevalent in the minds of investors. But Africa must also maintain its gains in improving its business climate – The World Bank’s recent Doing Business Report noted that the Sub-Saharan region registered the most gains in terms of reducing barriers to conducting business.

If it can maintain its footing, the next decade may well place Africa on the verge of truly sustainable growth that will mean opportunities for many.

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