Africa: Keep it on Your Radar

(Margaret McMillan is an associate professor of economics at Tufts University and a faculty research associate at the National Bureau of Economic Research. She has been published widely in the areas of international trade investment and was recently a panelist at Bloomberg's Emerging Markets Boot Camp conference in New York. Much of her work focuses on Africa.)

Investors are waking up to Africa -- finally. Not just Egypt and South Africa, but such countries as Ethiopia, Ghana, Malawi, Nigeria, Tanzania, and Uganda. The reason: As the continent moves more of its resources into industry and services, it stands to become an economic powerhouse, making its citizens wealthier and its influence more global.

China is steadily ramping up its investments in the continent. In 2000, according to the International Monetary Fund, China invested about $60 million into Africa. In 2008, though, China poured $5 billion into the continent, with funds targeted at a wide range of sectors -- including manufacturing of textiles and garments as well as electrical machinery and steel for construction.

The Chinese are trying to replicate a model that has worked for them: creating specialized economic zones. In cooperation with African governments, the Chinese are building industrial parks where business can flourish with economic policies, such as tax breaks, that are designed to foster industrialization.

Not all the breaks are ones to envy. A recent report published by the World Bank says that as the Chinese government tackles its pollution problems by closing a number of its worst polluting factories -- those industries could move offshore to regions, such as Africa, where environmental regulations are not so rigorous or adequately enforced.

For now, the economic zones are more about good news. One such area is the Chinese Eastern Industry Zone in Ethiopia, where a cement factory now operates. In Zambia, construction of the Multi-Facility Economic Zone has been completed, and a $22 million copper smelter is now expected to boost Zambian exports by $450 million and create about 6,000 jobs. This month, China expressed interest in funding special economic zones in the Congo Republic.

If the zone strategy works, as it did in China, it has the potential to jump-start the manufacturing sector, which would spawn ancillary services. That will lead to more jobs, especially for workers with moderate skills. Justin Lin, chief economist of the World Bank, says that some 85 million jobs will actually be transferred from China to low wage countries -- including those in Africa.

All this will boost Africa’s productivity. According to the World Bank, about half of the continent’s laborers work in agriculture. But the output per worker is about half the output in manufacturing and services. So moving labor out of agriculture and into manufacturing could potentially double Africa’s productivity. Investors Tiptoe into Africa

Investment managers are dipping their toes into Africa’s potential, cautiously testing the waters. Novare Investments, a private equity fund manager in Cape Town, South Africa, recently surveyed 39 fund managers specializing in Africa and found that they had invested only about $3 billion in African stock markets -- much of it used to buy equity stakes in telecom and mining companies. While those funds had some investments in South Africa, the top five destinations were Nigeria, Egypt, Zambia, Kenya, and Mauritius.

Private equity funds have also been sniffing around. The Carlyle Group, a global asset management firm, established a team earlier this year to look into opportunities for buyouts and capital investments in Sub-Saharan Africa. Last year, Chayton Capital, the U.K. private equity firm founded by Neil Crowder and other former Goldman Sachs executives, started Chayton Atlas Agricultural Co., which is initially investing $50 million in Zambia and has an additional $200 million earmarked for investment over the next five years.

While the amounts these firms are investing is small, Africa’s steady progress could soon attract more. Over the past decade, Africa’s GDP per capita has grown at an average annual rate of 2 percent, according to the Economic Research Service at the U.S. Agriculture Dept. While not quite as strong as Southeast Asia’s 3.46 percent growth rate, it’s on a par with emerging economies in South America.

With some luck, the next decade could be even better. Paul Collier, director of the Centre for the Study of African Economies, says that resources are plentiful, so there is still enormous potential in natural resource development. Overlay that with an expanding manufacturing economy, and Africa could soon be as popular in the West as it is in China.

To contact the editor responsible for this story: Nikhil Hutheesing at nhutheesing@bloomberg.net

• LinkedIn
• Google +1
• COMMENTS
• Print
• QUEUE