Business

Reality check on hype is needed

Dianna Games

All the gushing about growth largely ignores the continent's political risks and challenges, says Dianna Games.

Before its civil war, Côte d'Ivoire was the biggest economy in Francophone Africa. (AFP)

It is easy, with all the optimism and hype about Africa in consultants' reports and newspaper articles and the mushrooming number of conferences on the topic, to think that all is well. But Africa is still a place of many harsh realities and it might yet dent the ambitious growth prognoses.

In 2010, gross domestic product (GDP) per capita in Africa finally reached levels last seen in the 1970s, which means there were almost 40 years of lost growth and investment. This decline had its roots in politics, and political risk is still a significant issue in many African economies.

A prime example is Zimbabwe, once a thriving economy that experienced a decade of lost growth and has yet to recover, despite some economic stabilisation and political accommodation.

Côte d'Ivoire is another example. The biggest economy in Francophone Africa buckled under a civil war that drove many investors, including the African Development Bank, to safer havens. Lingering political problems following recent uprisings in Egypt, Libya and Tunisia will dampen the future outlook for the continent.

Another danger is the lack of diversification of Africa's economies, a factor that leaves them vulnerable to exogenous shocks from trading partners. As stellar as Angola's growth was in the mid-2000s, the country was one of the worst affected by the global financial crisis and, in 2009, it experienced negative growth.

The high growth rates used to highlight opportunity in Africa are often in undiversified, resource-rich economies and, despite the significant opportunity resources they offer for sustainable and broad-based growth and development, few of Africa's governments have played this scenario well.

Dazzled by the apparent profits being made by mining companies, governments and communities expect a lot, ignoring high and rising production costs and the long-term nature of an industry that has to consider all the commodity cycles, not just the boom times.

Source of opportunity
The focus is usually on how to extract more of those profits rather than how they could best benefit future economic development.   

Mining companies are now focusing on how they can be a catalyst for growth rather than the sole source of opportunity. They are also seeking new models that will enable them to add more value to their non-mining investments and reduce dependence on the mines.

Multinational companies often come in for criticism by African governments for failing to contribute sufficiently to local economies, despite huge profits. However, this overlooks the broader benefits of foreign investment that, apart from direct revenues into the national fiscus, include employment, skills training and technology transfer.

Local content and procurement demands are not accompanied by supply-side measures to address the lack of capacity and skills that forced companies to source from outside the country in the first place.

Africa's policymakers have testing times ahead. The hype about investment opportunities tends to obscure the fact that African countries mostly have modest experience of huge capital inflows, and an inability to absorb them may create dysfunction in small local economies that have small, illiquid markets with little financial infrastructure.

The pressure to develop greener economies is another looming challenge for countries that have not yet found a way out of persistent energy crises. This may have the unintended consequence of diverting policymakers from reforming the costly and dysfunctional operating environments that exist in many states and add considerably to the costs and difficulties of investment and doing business.

Sprawling entities
African governments are not spending sufficiently or efficiently on either health or education, the key building blocks of many successful economies around the world.

 Despite the opportunities urbanisation represents, many of Africa's largest cities have become sprawling entities with large areas of squalor barely touched by municipal services and infrastructure.  

African agriculture is modestly commercialised and continues to rely on smallholder farmers, many of whom are without decent inputs, technology, storage facilities, funding or infrastructure to connect them to local, regional and international markets.

With people moving into the cities, there needs to be a concerted effort to promote smarter farming and commercial enterprise, otherwise food costs are going to push up inflation and costs for urban dwellers, which creates conditions for potential conflict.

Related to food production is the continued existence of trade barriers, which compound the infrastructural and other issues that suppress the growth of intra-African trade. The barriers to regional integration are a concern for many investors looking at pan-African strategies rather than just localised investments.

A larger regional market will be more attractive to funders of infrastructure projects and will enable greater co-operation in areas such as agricultural development and the formulation of common regional positions and strategies in multilateral and international trade forums.

There are other potential benefits, such as the development of national and even regional industrial policies, currently absent, to allow the development of comparative advantage and value addition in an environment of increased competition and reduced protection. But the deindustrialisation of most African countries has created an undue dependence on trade taxes – more than 30% of state revenue in most cases – and countries will now be pushed to search for new ways to boost revenue.

Africa's manufacturing industry has declined since the early 1990s owing to a number of factors, including power shortages, uncompetitive operating environments, a lack of policy support for exports and competition for international markets coupled with small regional markets.

Inadequate skills development
The continent's labour advantage has also been eroded by poor education levels and inadequate skills development.

Although there will be more bumps in the road, investor interest in the continent is likely to continue and companies wanting to get on the bandwagon should do so sooner rather than later. The price of assets is rising and the number of bargains available is diminishing rapidly.

Risk is still a factor in African countries, but most investors will say that the perception is not matched by the reality. Levels of risk are indeed far lower than they used to be on the back of improved governance, economic reform and increased public-private engagement. But new risks come with changes in the business and political environment and it is important to keep abreast of them.

The continent is also still vulnerable to externally driven shocks and slow growth in major trading partners in the West and in emerging markets. Although increased trade from Asia has helped to offset declines among Africa's traditional trading partners – European countries and the United States – many countries have arguably become too dependent on the growth of their non-African trading partners such as China.

But Africa as a whole seems to be going in the right direction, notwithstanding political problems in some countries. Its biggest challenge is to develop areas of specific competitiveness and sustainable economies on the back of its resources and people.

This is an edited excerpt from the new book Business in Africa: ­Corporate Insights, written and compiled by Dianna Games, chief executive of Africa @ Work. It is published by Penguin South Africa

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