20 January 2013

Africa: Despite Challenges, Continent Presents Lucrative Opportunities

On January 1, 2013, the United Kingdom assumed the role of the G8 Presidency. Our priorities, for this year-long period, are to drive jobs, growth and prosperity, within the global economy. Against that background, it might be timely to discuss the opportunities and challenges facing Africa today when it comes to economic growth.

After a false dawn and a long period of stagnation in the 1970s and 1980s, Africa has re-emerged in the 21st century as a continent alive with opportunity, driven by such factors as; improved governance, better macroeconomic policies, management and business environments, abundant human and natural resources, urbanisation and the rise of the middle class, and good economic performance and market potential. These factors are underpinned by steadily improving socio-economic indicators and concrete efforts to bridge gender gaps and promote equality, both of which are essential prerequisites to sustainable economic growth and development.

The economic, social and political environment is improving and African countries are now expected to become sources of global economic growth. Probably, this will take longer than hoped, because of the external economic slowdown proving even more intractable than initially forecast. But that is the direction of travel.

Despite considerable challenges, the conditions for Africa's sustained growth and development are much more favourable today than ever before. There are many reasons for this.

With the increasing realisation that African governments need to be in the driver's seat, political and economic governance is improving. This is resulting in fewer conflicts and an improvement in the general economic outlook, as the business environment and investment climate have both improved substantially.

On top of high and sustained commodity demands and prices, many African countries have put in place appropriate macroeconomic, structural and social policies, which have contributed to increasing economic diversification, sustained growth rates and progress towards meeting the Millennium Development Goals (MDGs), as well as other social development targets. Improving political and socio-economic conditions and sustained growth have resulted in rapid urbanisation and a growing middle class on the continent, which will provide an additional catalyst for faster and more sustainable broad-based growth in the future.

There is now a greater consensus than ever before, among Africans, on what needs to be done to accelerate growth and reduce poverty. The African Union's (AU) 'New Partnership for Africa's Development' (NEPAD) Programme reflects this consensus and builds on it, by identifying key priority areas for action aimed at; increasing trade within Africa and the rest of the world, enhancing the provision of regional public goods, such as; cross-country transportation and electricity pooling, and increasing the productivity of agriculture by allocating up to 10pc of national budgets to the sector, with the aim of achieving six percent annual growth in productivity.

Continental initiatives under the AU are encouraging African countries to improve governance. The African Peer Review Mechanism (APRM), under which a country submits to scrutiny by its peers to help identify weaknesses and the actions required to correct them, underscores the push for accountability in political, economic and corporate governance. Moreover, there are encouraging signs that the AU and the Regional Economic Communities (RECs) are playing an important role in spurring continued improvements in the investment climate within their regions, as well as dealing with current and sometimes long-standing conflicts on the continent, especially regarding the Sudans and Somalia.

Whilst Africa itself deserves credit for much of what has been achieved since 2000, the response of international partners to Africa's development financing needs has also been positive. During the period between 2000 and 2008, aid to Africa doubled, as a number of donors took significant measures to write off the outstanding debts of 14 African countries, under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative, freeing up resources for socio-economic development activities.

According to the International Monetary Fund (IMF), aid-flows to the region increased from 15.6 billion dollars, in 2000, to 44 billion dollars in 2008; the equivalent of 35pc of total global aid-flows. However, whilst official development assistance (ODA) can and has played a useful role in promoting Africa's development, particularly in low-income African countries, it is a volatile and sometimes unpredictable form of development finance. Fortunately, foreign direct investment and remittance flows have recently become the main sources of external capital flows for most African countries, and now exceed ODA flows by a distance.

In sum, progress in governance and institutional reforms, rising commodity prices and increased international support, for many African countries, have created a much brighter future for the continent and placed it on track for an economic take-off. However, in order to unleash its potential, the continent needs to address a number of challenges and constraints effectively. There is no single silver bullet that will turn Africa into a global power overnight. I may identify seven areas on which African leaders should focus on in the next decade, and I say this not in a paternalistic way, but because the most dynamic continental leaders are tending to agree on this recipe for change.

The continent needs visionary and gender-sensitive leadership and stronger governance institutions, in order to address market failures, promote effective industrial policy and economic transformation, and achieve its social development objectives. In addition, African countries need to invest in infrastructure.

Weak physical infrastructure is a major obstacle to investment, broad-based growth and poverty reduction in Africa. Infrastructure development leads to a reduction in production and transaction costs, which, in turn, improves the competitiveness of businesses and makes a country more attractive to foreign investors. Whilst infrastructure has already played a significant role in Africa's recent economic turnaround, it will need to play an even greater role if the continent's development targets are to be met.

Africa boasts the youngest population in the world, and its labour force is rapidly expanding. Today, more than 60pc of Africa's population is under 25 years of age and it is projected that by 2040 the labour force could reach 1.1 billion, overtaking that of China or India.

I, therefore, believe governments should invest in human capital that contributes to ensuring that citizens are equipped to earn a livelihood, whilst being part of the productive machinery of their countries, and that investors are able to find the skills and talents they need. This also contributes to social inclusion and integration of youth in society, whilst playing a critical role in closing gender gaps and promoting the empowerment of women. Education and skills development, especially for young people, is of paramount importance to Africa because of returns to the education pool and the contribution to poverty reduction.

Agriculture is central to achieving broad-based development in Africa, given the abundance of arable land and the importance of the sector for economic growth and livelihoods across the continent. Africa boasts approximately 60pc of the world's arable land and the sector employs around 60pc of the total labour force. It also accounts for as much as 40pc of total export earnings and provides over 50pc of household income.

However, the sector is characterised by; low productivity, a deteriorating trade balance and a stagnant growth rate. African agricultural transformation should form the basis for accelerated and sustainable shared growth, as well as future economic structural transformation. To address the challenges I have mentioned, African countries need more comprehensive planning processes, appropriate and gender-sensitive policies, and better capacity to implement plans and policies in all sectors. Policies must address the overall constraints to increasing and sustaining agricultural growth and productivity, and strengthen forward and backward linkages between agriculture and other sectors at the national, regional and global levels.

With the abundance of these resources and the rising demand for raw materials, African Governments are forging new partnerships that are leading to increased infrastructure investments and the sharing of skills and technology. Africa should exploit foreign direct investment (FDI) as a channel for technology transfer and technological learning, in order to attract and develop firms that will add value to natural resource products and exports. Increased intra-regional trade and trade with emerging partners have provided opportunities for many African countries to diversify production, exports and sources of development financing, form R&D partnerships and acquire new technologies.

Climate change is one of the most challenging threats to sustainable development in Africa and has a differentiated impact on women and men. Although Africa is the continent least responsible for climate change, it is particularly vulnerable to its effects. Overall, some models suggest that an increase in temperature of about 1.5° C by 2040 could lead to an annual loss in Africa's GDP of 1.7pc. At present, Africa is far from meeting its own development investment needs from domestic resources, let alone managing the risks of climate change.

Fortunately, in addition to normal development flows, the "polluter pays" principle prevails and the developed economies have recognised their obligation to support African adaptation and mitigation. In Copenhagen, Denmark, developed countries committed to contributing 100 billion dollars per year, by 2020, to help poorer nations cope with the impacts of climate change, with 30 billion dollars in financing to be in place by 2012.

On the other hand, African countries should promote economic diversification, in order to reduce vulnerability to climate change and extend green investment strategies and a climate risk management approach to all sectors. I pay tribute to Ethiopia's far-sighted Climate Resilient Green Economy strategy, in this context.

Regional integration is one of the driving forces behind economic development and it has been recognised as one of the key development strategies for accelerating intra-African trade, growth and poverty alleviation on the continent. Economic integration, in particular, has the potential to widen markets and regional value chains, which will in turn help African countries to address supply-side constraints, diversify their productive base, reduce costs, through increased economies of scale, and promote technology and knowledge transfer, as well as enhanced competitiveness in world markets. However, despite increases over time, intra-African trade still accounts for only 13pc of total trade, owing to a multiplicity of factors, including; weak regional infrastructure and numerous other tariff and non-tariff barriers.

A major aim of the AU is to create a common market and a single trading bloc, less exposed to external shocks and capable of supplying its import needs through an expansion of intra-African trade, to be achieved by breaking down tariffs and non-tariff barriers through trade liberalisation schemes. Recent commitments, such as the Continental Free Trade Area, which African leaders agreed to establish a year ago, are part of the solution.

The CFTA should broaden and deepen the opportunities available to exporters by removing and reducing barriers to trade and investment. It should bolster intra-regional trade by creating a wider market, increasing investment flows, enhancing competitiveness and developing cross-regional infrastructure.

Africa can escape the scourge of poverty, socio-economic inequality and underdevelopment, and embark on the process of industrialisation, just as China, India and other emerging and developing countries have done in a relatively short 30-year period. Political and economic conditions, as well as the general economic outlook, business environment and investment outlook are improving in Africa. Coupled with demographic changes, urbanisation and an increasing middle class, the continent presents an attractive investment destination that cannot be ignored.

Greg Dorey, British Ambassador to Ethiopia and Permanent Representative to the African Union (AU) and the United Nations Economic Commission for Africa (uneca).

Copyright © 2013 Addis Fortune. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.