This year marks the tenth anniversary of the passage of The African Growth and Opportunity Act (AGOA), a U.S. scheme aimed at ending Africa's trade isolation. To put it mildly, the act didn't live up to its expectations ["US scheme fails to end Africa’s trade isolation," by Alan Beattie, Financial Times, 9 August 2010]. Beattie reports:
"The African Growth and Opportunity Act (Agoa) has extended duty-free access to the US market to about 40 countries, including in the highly contentious area of garments and textiles. ... [In August], Agoa’s 10th anniversary was marked by discussion forums in Washington and Kansas. US officials were frank about its failures. Hillary Clinton, secretary of state, told delegates: 'We all know, despite the best of intentions, Agoa has achieved only modest results and has not lived up to the highest hopes of a decade ago ... Petroleum products still account for the vast majority of exports to the United States and we have not seen the diversification or growth of exports that Agoa was supposed to spur.'"
Beattie notes that "making clothing is often the first step on the road to prosperity for developing countries." Textiles, however, have not proven to be entry products for breaking into the U.S. economy. Beattie explains:
"While African textile and garment exports to the US under Agoa rose by 52 per cent by 2009, according to a report by the US government accountability office, they were still barely more than 1 per cent of total US imports. An initial burst of exports was not sustained, and was concentrated in a small number of countries including the middle-income nations. Part of the reason is the breadth and depth of the agreement, shaped by political pressures in Washington. Economists say even a more generous programme would have struggled to overcome the real constraints to African exports, which are more to do with infrastructure and other supply-side problems on the east side of the Atlantic than trade barriers on the west."
You don't have to go very far into economic discussions about Africa before someone brings up the subject of infrastructure. For all of the billions of dollars of aid that have poured into African nations over the past half-century, little infrastructure has been built that can support a burgeoning economy. Nevertheless, despite AGOA's disappointing results and Africa's infrastructure challenges, more and more analysts are predicting a brighter future for many African nations. Extractive industries, for example, are moving back into locations that have been embroiled in civil conflict ["Mining groups target west Africa," by William MacNamara, Financial Times, 19 May 2010]. MacNamara reports that "infrastructure deals are key in the fight for the region’s mineral deposits." He writes:
"Six of the world's biggest mining and steel companies have converged on an unprecedented scale on a mineral-rich corner of west Africa beset until recently by civil war. The companies plan to spend billions of dollars in Guinea, Liberia and Sierra Leone, where some of the world’s richest deposits of iron ore, the raw ingredient of steel, are found. The groups are Vale, the Brazilian iron ore miner, Rio Tinto and BHP Billiton, the Anglo-Australian mining houses, ArcelorMittal, the UK steel company, Russia’s Severstal, and Chinalco, the state-owned Chinese mining company. ... As yet there is little infrastructure to facilitate mineral exports from any of these countries, whose governments want to use the multinational corporations to fund the ports, roads, and railways needed to lift their struggling economies."
In many frontier market countries, public/private partnerships will be required to build the infrastructure necessary to sustain economic growth. MacNamara reports that "Vale [has] agreed to spend between $5bn-$8bn on building mines, ports, and railways in Guinea and Liberia by 2020." Obviously, Vale wouldn't be making such huge investments if the potential profits from its mining efforts weren't also enormous. Although increased mining (and associated employment and infrastructure), will benefit the region, African states understand that sustainable economic growth requires a diverse economy. As South Africa prepared to host the World Cup, the Financial Times wondered "whether Africa is finally turning the corner ["Outlook brightens for frontier market," by William Wallis, 2 June 2010]. They began a series of reports beginning with Africa's changing economic landscape. Wallis wrote:
"In the half century since colonial administrators began packing their pith helmets and heading home, sub-Saharan Africa has experienced a string of false dawns. Autocracies waxed and waned, accompanied by varying degrees of socialism, nationalism and capitalism. When they were not catastrophic the outcomes were often disappointing. By the late 1990s, neither state intervention, nor the World Bank medicine of austerity and market reforms that ensued, had delivered to more than a handful of sub-Saharan Africa's 48 states self-sustaining economic growth, independent of foreign aid. To this day, only a handful of genuine democracies have taken root."
Wallis believes, however, that both the strategic importance and the business climate of many Africa states are improving. He continues:
"A steady flow of multibillion-dollar investments, reviving terms of trade and growing interest in regional markets suggest ... opportunity is knocking at the continent's door. 'Africa is rich and its stock is rising. The value of its land and minerals is going up,' Kofi Annan, former United Nations secretary general, said last week as he launched a review of Africa’s progress in meeting development goals. 'There is no lack of resources, no deficiency of knowledge and no shortage of plans. Africa's progress rests above all else on the mobilisation of political will.' ... The region could be on the verge of joining the Bric nations – Brazil, Russia, India and China – as a destination for investment, Ngozi Okonjo-Iweala, the World Bank vice-president, argues. 'An eminent businessman once commented that profit lies where the gap between perception and reality is greatest. That surely applies to sub-Saharan Africa,' she said."
Like most analysts, Wallis begins his assessment by noting the richness of Africa's resources. He reports:
"Africa has about 10 per cent of global oil reserves, possibly more. South Africa has 40 per cent of the world’s gold. The continent has more than a third of cobalt reserves, and base metals abound. Agricultural potential is barely touched."
Leading the charge for African resources is, of course, China. Wallis reports that China "has increased trade five-fold with Africa since 2003." But some economic successes, he notes, "have been home-grown." He explains:
"The expansion of mobile telephones, for example, has defied expectations, pointing to a vast consumer market of 900m people once considered too poor to be bankable. ... PwC, the professional services firm, found hundreds of African business executives surveyed felt more confident about the future than their peers on other continents. Yet much of the progress was occurring despite government, Mr Annan’s review concluded. A generous interpretation would be that the role of the state has decreased and the private sector now sets the pace. A less generous view is that despite routine elections, there is still a huge deficit in accountable leadership and a strong risk that a chance to boost social and physical infrastructure could be squandered."
Just as one cannot talk about African economics without touching on infrastructure, one cannot talk about Africa politics without mentioning corruption. Wallis reports that an estimated "$854bn (€703bn, £586bn) has been siphoned from Africa since 1970 in cumulative capital flight." Health care and education are other areas where many African nations fall woefully short. In addition, "Few countries have yet created a sense of national identity within the artificial boundaries inherited from colonial rule and many are still torn by ethnic and political strife." Wallis notes that the three Sub-Saharan countries that drive most regional economic growth -- Kenya, Nigeria, and South Africa -- "are going through tricky reforms and only one is a credible democracy." He also reiterates that most African nations lack a diversified economy. "The direction of trade may be changing," he writes, "but its character, involving raw material exports and manufactured imports, has not." He concludes:
"Yet over the long term demand for African commodities, land and manpower is unlikely to diminish. This time optimism about the outlook has less to do with visionary autocrats and more with the macro-economic climate. If Mrs Okonjo-Iweala is right and sub-Saharan Africa is the world’s next frontier market, this could be one time when the whole is greater than the sum of Africa’s parts."
In a companion article, Wallis notes that some African companies are starting to emerge as significant players on the global stage ["Emerging groups make African lions' roar," Financial Times, 1 June 2010]. He reports:
"Africa's top 40 companies are emerging as competitors on the global stage, propelled by economies whose performance now rivals the Bric nations, according to new research by the Boston Consulting Group. According to the study, ... 500 African companies have been growing at more than 8 per cent a year since 1998. The report selects the top 40 among them, ranging in size from $350m (€285m, £240m) to $80bn, and argues that these companies, already regional players in mining, consumer industries and services, are now well positioned to 'spread their wings and look beyond the continent'."
Even though AGOA produced disappointing results with regards to trade between African nations and the United States, Wallis reports that "export growth has helped power this expansion, surging from 3 per cent annually during the 1990s to 18 per cent since 2000." Unfortunately, the most prosperous companies "are drawn from eight countries which together represent 70 per cent of Africa’s GDP. Most are based in South Africa, Egypt and Morocco, with nine spread across Algeria, Angola, Nigeria, Togo and Tunisia." That leaves some 53 countries still suffering with struggling economies. Wallis notes that the collective per capita GDP of these eight countries (at $10,000), "is already higher than the average for the Brics." Wallis continues:
"Patrick Dupoux, one of the authors based in Morocco, says the research should wake up western companies and BCG clients both to the potential of Africa's market of 1bn people and the emergence of potential partners and rivals from the continent. 'We always talked about Asian tigers. There is another group we call the Africa lions. These are the countries that will drive the continent, become the locomotive,' he said. 'There is also group starting from much lower position like Ghana and Nigeria but that is starting to pick up, and of course there are others too like Ivory Coast that have stagnated.'"
Wallis concludes by noting that "a hypothetical $100 investment in the top 40 companies over the past 10 years would have been worth more than $900 by November 2009." One U.S. company that agrees with BCG's assessment concerning the African lions is IBM ["I.B.M.: Africa Is the Next Growth Frontier," by Steve Lohr, New York Times, 17 September 2010]. Lohr reports:
"I.B.M. will supply the computing technology and services for an upgraded cellphone network across 16 nations in sub-Saharan Africa. Its customer is India's largest cellphone operator, Bharti Airtel, which paid $9 billion a few months ago for most of the African assets of Kuwait's Mobile Telecommunications Company, or Zain. Under the 10-year agreement, I.B.M. will handle customer service for Bharti and provide the hardware, software and services to run everything from billing and call-traffic management to delivering new services like music and video. The deal takes the broad partnership between Bharti and I.B.M., begun in 2004, beyond India. ... The Bharti contract ... punctuates I.B.M.'s Africa strategy. The company’s presence in Africa dates back 50 years, but in the last five years I.B.M. has invested $300 million in the region to build data centers, add country offices and foster technology training programs — and it plans to expand aggressively in the region."
According to Bruno Di Leo, general manager for growth markets for IBM, the company believes that Africa is "the next major emerging growth market." Lohr continues:
"Though it looms small in the global technology market today, Africa is primed for growth, according to Frank Gens, an analyst at IDC. 'And I.B.M. is, as it's done before, getting in on the ground floor,' Mr. Gens said. The company's strategy calls for the growth markets — not only the well-known BRIC countries, Brazil, Russia, India and China, but also dozens of others — to increase as a share of I.B.M.'s revenue from 19 percent to 25 percent by 2015. That is the equivalent of $1 billion in new sales a year. In these nations, I.B.M. is targeting the linchpin industries of economies including telecommunications, banking, transportation, health care and energy."
The important thing about IBM's investment in Africa is that it involves sectors other than mining. As noted above, diversifying national economies beyond mining is necessary if resource-rich African states are going to avoid highs and lows associated with volatile commodity markets. I'm sure that residents of African nations are tired of hearing about the continent's "potential" and would love to see that potential realized. Helping the African lions succeed will play an important role in making that happen. Regional economies need to be anchored by strong economies.
