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Lions on the Move: The Progress and Potential of African Economies

Editor’s Note: The following blog post was contributed by Susan Lund, Ph.D., Research Director of the McKinsey Global Institute, McKinsey & Company’s business and research arm. Dr. Lund will be making a presentation at the World Bank on July 20th summarizing the institute’s new report, Lions on the move: The progress and potential of African economies, which can be downloaded for free at www.mckinsey.com/mgi.

Tomorrow I will have the opportunity to present new research on Africa's economic prospects at the World Bank, home to many Africa experts and the source of so much invaluable research on the region. I have no doubt the combination of expertise from the McKinsey Global Institute and the World Bank will produce a lively discussion. As you well know, Africa continues to face many challenges, including poverty, disease and hunger. But our report shows Africa is also a land of great progress and potential. In this blog entry, I briefly summarize some of our key findings. We hope our report will provide a useful fact-base for the World Bank in its lending programs and dialogue with Africa’s policy makers and private sector.

We at McKinsey find many of our business clients are eager for insights into Africa’s recent acceleration in GDP growth. Africa’s collective economy grew at a 4.9 percent annual rate from 2000 through 2008, twice as fast as the pace of the preceding two decades. Africa is the third fastest growing economic region in the world, after emerging Asia and the Middle East. The continent’s combined economic output, valued at $1.6 trillion in 2008, is now roughly equal to Brazil’s or Russia’s. Africa offers investors the highest rate of return of any developing region.

While this growth surge has been widely recognized, global companies and investors want to know whether this marks a temporary uptick or an economic takeoff. And they want to know where the commercial possibilities appear brightest. Although obviously risks remain to growth in any individual country, we find several reasons to believe that Africa’s long-term growth prospects are strong. And Africa’s business opportunities are potentially very large, particularly for companies in consumer goods and services, agriculture, resources, and infrastructure.

These conclusions are based on several factors. To start, Africa’s growth acceleration was broadly based, with roots extending far beyond the global commodity boom. All sectors contributed, including finance, retail, agriculture, and telecommunications. Rising revenues from oil, minerals and other natural resources accounted for just 24 percent of growth during the period. Fortunes improved across the continent, with GDP rising more rapidly in 27 of its 30 largest economies, both in countries with significant resource exports and in those without.

Key to the growth surge were improved political and macroeconomic stability and microeconomic reforms. Several countries halted their deadly conflicts. Policy makers also reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, such as banking. As a result, a dynamic African business sector is emerging. The continent has more than 1,400 publicly listed companies. It boasts more than 100 companies with revenue greater than $1 billion. Telecom firms have signed up more than 316 million new mobile phone subscribers in Africa since 2000—more than the total US population. Banking and retail are flourishing as household incomes climb. Construction is booming as new cities rise.

Africa’s future economic growth is likely to be supported by several long-term trends. Among these are the rising global demand for commodities, Africa’s increased access to global capital, urbanization and rising incomes. Indeed, one major source of fuel for growth is the rise of the urban African consumer. Already, Africa’s consumer markets are growing two to three times faster than those in OECD countries. The number of African households with discretionary income is projected to rise by 50 percent over the next decade, reaching 128 million. By 2030, Africa’s top 18 cities could have combined consumer spending of $1.3 trillion. We project that at least four groups of industries–consumer-facing industries, agriculture, resources, and infrastructure–together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.

If recent trends continue, Africa will play an increasingly important role in the global economy. And working together, international development agencies, business, government, NGO’s, and civil society can confront the continent’s many challenges and lit the living standards of its people.

Comments

Submitted by Daniel Chachu on
I share in many of the comments raised in the Mckinsey Global Institute report, especially those relating to the sectors that I believe would experience buoyant growth in the next five to ten years. Besides industry, agriculture, resources and infrastructure, I would like to include the service sector. As acknowledged in the summary above, the financial and tele-communication sectors would be key drivers of growth. A caution though... It is true that many of the good performing economies are characterized by liberalized sectors, falling general price levels, reduced budget deficits etc however the focus should not just be on these. I see most of these indicators as symptoms rather than the substantive steps that Africa needs to take to sustain growth. The five sectors mentioned above hold the key. This does not mean that ensuring a stable and low inflation rate is not necessary. It is necessary only up to the point of stifling growth. The fixation of some development partners on pushing African economies to target and achieve inflation rates of 5% (and less) at all cosst is troubling. This must stop! Macro-economic stability and not macro-economic austerity is what Africa needs.

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