Development is SA's weak spot
South Africa remains the dominant economic powerhouse in Africa, but other countries, most notably Nigeria, are fast catching up and could overtake us.
The fierce competition between South Africa and Nigeria is well documented. But other countries without the economic heft of the West African giant are outperforming South Africa in most indicators, such as measures of human development, reducing inequality gaps and producing better-educated and better-skilled citizens.
Razia Khan, regional head of research for Africa at Standard Chartered Bank, said they could prove a greater setback for South Africa’s long-term competitiveness and economic dominance than the competition posed by Nigeria.
She was speaking to the Mail & Guardian at the annual meeting of the African Development Bank in Arusha, Tanzania, this week.
Finance Minister Pravin Gordhan, who was also at the meeting, acknowledged the many challenges facing South Africa, but said the growth experienced in other African economies was off a very low base.
South Africa was hurt by the recession, he said, and as a result the private sector was more risk-averse. The crisis in Europe serves to “extend this paralysis” and, as a result, the government has to play a major role in investment.
Gordhan welcomed the competition that the Nigerian growth presented. “It’s good to have competition and Nigeria and South Africa see themselves as important partners in the global forums that we operate in.”
South Africa’s support for Nigerian Finance Minister Ngozi Okonjo-Iweala’s recent bid for the position of president of the World Bank was one such example, he said.
In recent years, many African countries have enjoyed dramatically increased economic growth rates. Policy reforms, better financial governance and improved political stability have all fuelled the growing interest of international investors in the continent.
Niger, Ghana, Liberia and Ethiopia are among the top performers. Their projected growth rates for 2012-2013 are 8.6%, 8%, 8% and 7.6%, respectively, according to the bank. Libya leads the pack with 14.8%, but this is on the back of the sharp downturn because of the civil war. Nigeria and Kenya are projected to grow at 6.9% and 5.3% in 2012, respectively.
Khan said it was important to note that this rapid growth was coming off a very low base.
The Nigerian power plan
Nigeria would overtake South Africa in terms of sheer economic size, thanks to its 160-milllion strong population and gross domestic product (GDP) figures that, like South Africa’s, were dominated by domestic consumption, Khan said. In the next five years it will add another 23-million people to its economy, although it has a lower per capita income than South Africa.
Based on current growth rate forecasts of 7% a year and inflation of 10%, compared with South Africa’s growth rate of 3% a year and an average inflation of 6%, Standard Chartered estimated that Nigeria could overtake South Africa by 2018. But, if South Africa could grow at the rates seen before the financial crisis, it would not happen until 2038, Khan said.
The one “big game-changer”, according to Khan, was Nigeria’s plan to rebase its GDP numbers. Media reports earlier this month said that the rebasing, to 2008, could increase the economy’s size by 40%.
But Khan challenged the accuracy of these figures. Given the role that consumption played in both the Nigerian and South African GDP, she said, an analysis of consumption figures in both countries did not support the idea that Nigeria was nipping at South Africa’s heels.
But other countries without the demographic clout of Nigeria were outperforming South Africa in what might be more important ways, she said. “Kenya has done things that South Africa can learn from.”
Despite positives such as large and liquid financial markets, South Africa has not made the same developmental progress that countries such as Kenya have.
For example, Kenya has increased its levels of financial inclusion dramatically, bringing many more people into the formal financial system. Kenya’s civil unrest in 2007 and 2008 did set the country back, but prior to this its economy had seen an “absolute transformation” said Khan.
There are signs that the economy is improving and credit extension has returned to rates of between 20% and 30% in a short time. The middle class in the country is growing, backed by a robust private sector that is not as hampered by the governance issues in other regions.
African Development Bank president Donald Kaberuka echoed Khan’s views at the launch of the “African Economic Outlook for 2012” report. East Africa, including Ethiopia, Kenya, Tanzania and Uganda, had been a star performer for the past 10 years, he said.
Kenya, in particular, without oil reserves or vast mineral wealth, remained the fourth-largest economy in sub-Saharan Africa at $2-billion, he said.
Future growth prospects
Recent oil finds in Kenya and neighbouring Uganda, and gas discoveries off the coast of Tanzania, can substantially improve these nations’ future growth prospects.
Khan said that the improved education and skills development seen elsewhere on the continent was not as apparent in South Africa.
“If you don’t have the skills, you won’t get the employment growth and this should be a wake-up call for South Africa.”
The emergence of Nigeria and the economic potential of East Africa had to be seen as a positive development, the bank’s chief economist, Mthuli Ncube, said. Nigeria complimented South Africa’s work in championing the continent.
Despite the good news coming out of Africa, Kaberuka warned against “hubris and excessive exuberance”.
The conditions in the eurozone and other rich countries and the slowdown in large emerging markets such as India and China were reason “to be very cautious”.
Given that they are large consumers of African commodities, a slowdown in these regions could see a decline in the prices of minerals.
But, Ncube said, these countries saw Africa as a market and a region of growth.
“On the one hand, [commodity] prices could fall, but you could see even more activity between Africa and these countries as they do more in Africa as a market,” he said.
This includes everything from retail to manufacturing. The population of Africa will double in the next 50 years, rising to nearly 2.5-billion from the current figure of just more than one billion.
The middle class was growing at a rate of 3% above that of the overall population, Ncube said.
“Investors will be watching this closely. All this is an opportunity for anyone, including entrepreneurs in the emerging markets, who see Africa as a potential market for their manufactured goods.”
Africa is also likely to become a much more attractive labour market, with its labour force set to grow by one billion people in the next 30 years. It presents an ideal opportunity for companies to place factories on the continent.
Wages in China had been on the increase and some Africa countries were still competitive “wage wise” as locations for factories, Ncube said.
Although the European crisis was likely to affect Africa’s financial sector and trade financing would slow down, the risk of contagion to Africa’s banks was likely to be limited, Ncube said.
Africa’s banks are exposed to African risk and funded by internal resources, which helps to insulate them from the eurozone fallout.
Lynley Donnelly is in Arusha to attend the annual meeting of the African Development Bank. Her accommodation and flight were paid for by the bank
Curbing Africa’s illicit cash flight could aid growth
With the amount of money that has left Africa through illicit ways, the continent could have paid its decades-old debt several times over.
The $735-billion that left Africa’s shores between 1970 and 2008 dwarfs the continent’s total foreign debt of about $180-billion. Other estimates put the level at up to $1.8-trillion.
“Taking this capital flight into account, Africa is actually a net creditor to the rest of the world,” said Sebastian Levine, policy adviser at the regional bureau for Africa at the United Nations Development Programme.
He was speaking at this week’s launch of the “African Economic Outlook” report released by the African Development Bank, the Organisation for Economic Co-operation and Development, the UN Economic Commission for Africa and the UN Development Programme.
Capital flight is money that flows out of the continent through theft, the plundering of public resources, corruption and incorrect trade pricing. It has a profound effect on the ability of many African countries to invest in their own growth and development.
“When capital is not available for domestic development, it lowers potential income growth. It increases debt and obligates future generations through interest payments. This means foregone investments in social spending,” said Levine.
If flight capital was saved and invested in domestic economies, it would increase income per capita and reduce poverty. “In Nigeria and Angola, for example, this would imply additional investment of $10.7-billion and $3.6-billion a year, respectively, in the period 2000 to 2008,” the report said.
Africa’s ratio of domestic investment to gross domestic product would increase from 19% to 35% if only one-quarter of the flight capital was repatriated for investment.
Africa’s richest residents are responsible for the money leaving. The problem is particularly rife in oil-rich countries, where capital flight is eight times that of states without resources. “The people benefiting from capital flight are the elites who engage in trade mispricing of imports and exports or those who have the power to unlawfully appropriate and transfer resources abroad,” the report said.
If flight capital was reinvested domestically, it would substantially raise growth on the continent. Income per capita could increase by between three and five percentage points and poverty would be reduced by between four and six percentage points, the report said.
Work is being done to reverse the flow and former South African president Thabo Mbeki is at the helm of a high-level panel on illicit financial flows from Africa that was set up by the UN’s Economic Commission for Africa.
But domestic investment climates also need to be improved to keep money in Africa. “Improvement in governance and the rule of law, particularly government transparency in terms of financial inflows and how they are used, would undermine the secrecy surrounding capital flows to and from Africa, a situation that has allowed capital flight to flourish,” the report said.
Countries could introduce specific steps to counter capital flight, such as “generalising shipment inspections as an integral part of import and export procedures [to] reduce capital flight due to trade mispricing”. The report also advocated that multinationals negotiating investment contracts with African countries should make “publish what you pay” a core corporate governance principle.
Time-limited amnesty could also be granted to individuals willing to repatriate illegal assets held in other countries. “This has been successfully tried by a number of countries,” the report said. – Lynley Donnelly