Africa Still Poised to Become the Next Great Investment Destination

ai-home-bannerThe commodities boom may be over, but sub-Saharan Africa is still experiencing growth, a remarkable fact considering that the continent is a net exporter of primary commodities. By adopting sound macroeconomic policies over the past two decades and sector reforms, many African economies have already shown that they can sustain a trajectory of economic growth and beat the “resource curse.”

Despite considerable external challenges, African countries are now seeking to demonstrate that they can weather the end of the commodity super-cycle and achieve more sustainable and inclusive growth by diversifying their economies, boosting productivity and adopting policies that aid the poor.  Five African countries were among the top ten improvers globally in the 2015 Doing Business rankings for 2013/14. Overall, Africa accounted for the largest number of regulatory reforms—75 of the 230 worldwide.

The continent has become the second most attractive investment destination in the world – ranking just behind North America — as investors are looking beyond the more established markets of South Africa, Nigeria and Kenya. Increased investment and industrialization will help to unlock the potential for job creation and poverty reduction in African countries.

Foreign direct investment (FDI) in the region has hit a record $60 billion, five times its 2000 level. For example, Chinese FDI to Africa rose to $3.5 billion in 2013, and nearly all African countries are benefiting from China’s participation today. In Ethiopia, total FDI inflows in 2013 accounted for 2 percent of GDP. Intra-African investment is also on the rise, creating a virtuous circle that encourages greater foreign investment. Investors in Africa nearly tripled their share of FDI projects over the last decade, from 8 percent in 2003 to 22.8 percent in 2013.

The reason for this trend is simple. The world’s eyes are turned toward Africa’s market of one billion people, including a growing middle class. Investors also see significant opportunities to invest in Africa’s non-commodities sectors:  financial services, construction and manufacturing now account for 50 percent of Chinese FDI in Africa. And while to date relocation of manufacturing is relatively limited, the potential is significant.

With rising production costs in Asia, manufacturers have been looking at countries such as Ethiopia, Kenya and Rwanda. Today, China, Turkey and India are the top three job creators in Africa’s manufacturing sector. In an industrial zone outside Addis Ababa, the Chinese-owned Huajian factory — which opened in 2012 and became profitable in its first year of operation—reportedly plans to expand its workforce to 30,000 as part of a $2-billion investment, one more indication that “made in Ethiopia” could become the next “made in China.” But can Africa become a global outsourcing hub? Only if the right conditions are in place.

Africa needs a skilled labor force. The sub-Saharan region will see more people joining the labor force in the next 20 years than the rest of the world combined. How will Africa reap the benefits of this demographic transition? The burgeoning working-age population will need to be gainfully employed, and significant investments must be made to support education and provide this “youth bulge” with the necessary skills to meet market demands.

To that end, African countries and institutions are stepping up efforts to close the skills gap and capitalize on growing FDI flows to build greater technological capability, enroll more students in science and technology disciplines, and strengthen science and mathematics education at all levels. The ratio of scientists and researchers in sub-Saharan Africa stands at just 79 per million population, compared to a world average of 1,081 per million. Similarly, only 22 percent of African university graduates are emerging with degrees in the “STEM” disciplines, compared with a 40 percent ratio in China.

To equip young people with the skills needed to sustain Africa’s decade of economic growth, 19 regional Centers of Excellence have been created in Western and Central Africa with World Bank support, and more are on the way. And this month, the Governments of Senegal, Rwanda and Ethiopia have partnered with business leaders to launch a regional innovation fund that will support 10,000 scientists. Vocational education geared to the demands of the private sector, another strategic priority, could also be addressed by establishing “school-based factories” and “factory-based schools.”

Africa still needs a more conducive investment climate. This will require not only lowering transport and energy costs, but also eliminating formal and informal barriers to trade; increasing the flexibility of labor markets; and ensuring effective competition policies. By improving its regulatory structure for business, Rwanda — a country lacking natural resources — has seen its FDI increased more than threefold in the past five years. Increasingly sophisticated regional and global manufacturing supply chains demand cross-border predictability, transparency, reliability and accountability.

Sub-Saharan Africa’s activity stands at 2 percent of total world trade, even though trade flows have expanded by 10 percent per year since 2000. The African Union’s Comprehensive Free Trade Agreement and single air-transport market, both to be in effect by 2017, place regional integration and trade at the center of the continent’s progress. The good news? Africa is one of the most integrated regions in the world, ranking behind only Europe and Southeast Asia for economic integration.

Africa needs infrastructure. Although Africa is considered the next frontier for investors, future growth will depend on productivity increases and higher private investment to bridge the infrastructure gap. Sub-Saharan Africa, where infrastructure financing needs are estimated at $93 billion a year for the next decade, won’t be able to compete with other regions without roads and universal access to electricity, as well as enhanced ICT. In a region with limited participation in global trade, road freight moves no faster than a horse-drawn cart, and major ports are chronically choked due to lack of capacity. As trade volumes increase, demand for container traffic will increase by an average of 6 to 8 percent over the next 30 years according to the African Development Bank. Inadequate power supply remains the most serious infrastructure challenge. Regular power outages cost the African economy as a whole between 1 and 4 percentage points of GDP. Further, only one in three Africans has access to electricity, and those with power access typically pay up to seven times more than consumers elsewhere.

It is estimated that China’s investment in its own physical capital may account for 50 percent of China’s growth over the past few decades. Today, two-thirds of roads in China are paved, compared with one-third in Senegal and just 7 percent in Kenya.

At present, the concentration of investments in relatively short-term maturities reflects investors’ reluctance to engage in sectors such as infrastructure, where the returns are spread over a longer time frame, yet the rate of return on foreign investment is higher in Africa than in any other developing region. Right now, all the multilateral development banks together make up about 5 to 10 percent of the overall annual spending in infrastructure.

Africa needs agribusiness. It is also time to accelerate the continent’s progress in boosting agriculture productivity and promoting growth in the places and sectors where the poor live and work. Agriculture still employs 60 to 70 percent of the workforce but accounts for less than 20 percent of total value-added. Despite substantial policy commitments, productivity in the agriculture sector remains disappointing. Supporting smallholders through investments in improved technologies, rural financial services and better access to markets is vital. Agriculture and agribusiness are expected to become a $1-trillion industry by 2030. Kenya is now the third-largest exporter of cut flowers in the world, with the industry employing more than 500,000 people. According to the Kenya National Bureau of Statistics, the floriculture industry exported 136,601 tons of product in 2014 and now accounts for 1.3 percent of the country’s GDP. But Kenya is adding more than half a million people to the labor force every year, so massive job creation is required.

To boost responsible investment on the continent, the government of Ethiopia, China Development Bank (CDB), the World Bank Group (WBG), and the United Nations Industrial Development Organization (UNIDO) have joined forces to host the “Investing in Africa Forum,” in Addis Ababa on June 30 and July 1.  Policy makers, development partners, and foreign and local private investors will discuss what it will take to make Africa the next great investment destination.

The bottom line? It will take partnerships between governments and the private sector, between African countries and their neighbors, between Africa and non-neighbor countries, and between Africa and its development partners. Africa has a unique opportunity to attract strategic, job-creating investment. The time for action is now. Anacortes_Refinery_31911

Makhtar Diop, World Bank Vice President for the Africa Region | @Diop_WB

Yuan Li, Executive Vice President, China Development Bank, People’s Republic of China

Li Yong, Director General, the United Nations Industrial Development Organization (UNIDO)

H.E. Ato Ahmed Shide, State Minister of Finance and Economic Development, Federal Democratic Republic of Ethiopia