27 September 2011

Africa and Asia could become the epicentre of the global economy

Developed economies had for long been regarded as immune to major breakdown. We now know differently. Decades of structural challenges, coupled with poor financial controls and sheer human greed, have left Europe and America with, as Harvard economist Dani Rodrik rightly puts it, “debilitating challenges”.

That’s bad news for the citizens of developed countries. And, yes, the crisis poses challenges for Africa, too. However, the challenges now faced by developed economies also present a unique opportunity to close the gap between developing and developed economies. Rodrik says of Europe and America’s fragile recovery: “In such an environment, rapid growth in the developing world is the only thing that could propel the world economy forward and generate increasing demand for rich-country goods and services – the only silver lining in an otherwise dreary future.”

I agree with Rodrik. Africa and Asia have the potential to become the epicentre of the global economy. That moment in economic history is now. Our immediate aim must be to fully unlock that potential and turn it into historic outcomes.

The questions we must now pose ourselves are the following: what are the drivers of unprecedented growth in Africa and Asia? And, perhaps more importantly, what must Africa and Asia do, immediately, to capitalise on this historic opportunity to converge on developed economies?

The central thought I want to build a case for is that global economic power is shifting, albeit slowly, from Europe and North America to Africa and Asia.

Africa and Asia have already learnt the important lessons of the debt and financial crises of the 1970s, 80s and 90s. African and Asian economies learnt, through bitter experience, the importance of sound macroeconomic management. They also came to appreciate that the state and the market needed to work in partnership, and that the liberalisation of capital accounts and markets was not a panacea for growth.

But, more is required of Africa and Asia in order to sustain growth levels in the future, and it is worth exploring what else, beyond the conventional wisdom, might ensure that Africa and Asia become the dominant players in the world economy, soon.

So what are the big, little-known truths, about Africa and Asia?

Fifty years ago most of Asia was at least as poor as Africa. South Korea had the same income level per capita as Sudan and Ghana’s citizens were richer than virtually all the Asians. As recently as 1982, average per capita income (PPP basis) in developing Asia was less than half that of Africa, but by 2008 Asia’s per capita income was double that of Africa. Put another way, in the last 20 years per capita incomes in Africa have slightly more than doubled, while incomes in developing Asia have jumped by nearly 11-fold.

China in particular has achieved what no country in history has done, doubling per capita incomes every 10 years over a period of 30 years. Through concerted leadership, China is transforming from a rural to a manufacturing economy which has meant that over a period of approximately 25 years, roughly 600 million people were lifted out of poverty. This meant a decline in poverty rates from 85% to 15%.

Whereas, currently, Africa accounts for just 2% of global GDP and Asia a further 25%, by 2050 Africa’s contribution will have risen to around 5% and Asia’s to an astonishing 50% so together they will account for well over half of global GDP. Over the next five years Africa is likely to take the lead with the highest average growth rates and will become the fastest growing continent.

This trajectory stays the same even if we take a slightly longer term view. Over the next decade, for example, many economists are forecasting that Africa will grow at an average of 7% per year, thereby maintaining its position as the most rapidly growing continent.

It is natural, of course, to wonder what the sources of these growth forecasts are. OECD countries, for example, have never achieved these average levels of growth for even a five-year period, let alone sustained over a number of decades. This fact alone points to deep differences in the sources of growth. It is critical, for precisely this reason, that we be wary of cutting and pasting solutions from one region of the world to other regions without taking full cognisance of structural differences. Indeed, even talk about “Africa” and “Asia” belies the reality that different economies within these regions themselves differ in salient respects.

Part of the growth spurt is, nonetheless, linked to significant general differences between Africa and Asia, on the one hand, and Europe and North America, on the other.

Some of the differences include Africa’s demographic transformation – the doubling of the population in the coming decades, rapid urbanisation and a youth bulge; the extent of arable land on the continent; and the extensive and accessible commodities which, in turn, create significant manufacturing, trade and investment opportunities.

Of course, even the demographic transformation is a double-edged sword. On the positive side, a growing population implies greater demand for goods and services which, in turn, translate into increased economic opportunity and activity.

Beyond the economic benefits of increased consumption, there are also benefits for various industries that flow naturally from this demographic transformation. In countries such as Angola, for example, the construction industry is in boom because the reality of rapid urbanisation is, precisely, that new infrastructure must be built.

Africa’s demographic trends count powerfully in favour of sustained growth. Africa’s workforce will become the world’s largest by 2040. Already, there are over 500 million people of working age, and there will be over 1.1 billion by 2040. Africa is in the position to reap the demographic dividend of a bulging youth population, at a time when all other regions, and not least Europe, are entering a period of dramatically increasing dependency ratios.

There are, fortunately, already positive signs of human potential in many developing countries being successfully harnessed to achieve demonstrable economic output. The number of engineers that are produced in India, for example, leave Europe and North America with little hope of successfully competing with India for scarce engineering talent.

What we need, however, is for the human potential of all the citizens of Africa and Asia to be similarly developed. Pockets of excellence are worthy of praise. But they must be replicated across the regions.

The point to be taken to heart is a strategic one: an educated, healthy, highly skilled and self-sufficient workforce must be the foundation of an emerging markets success story.

Education is critical. Health is critical. Partnership between governments, civil society and the private sector, glued together by a mutually beneficial vision of an alternative reality for Africa and Asia, is crucial.

So, Africa’s and Asia’s demographic transformations, if exploited with appropriate policy interventions, can indeed be the catalyst for bringing about the growth forecasts I started this article with. Africa’s GDP is approaching $2 trillion, larger than Brazil’s, with its consumers spending around $900 billion per year. Within 10 years, around 2020, its GDP will have grown by a further trillion, consumer spending will be close to $1.5 trillion and the population will be well over 1.5 billion.

These changes will be effected across multiple parts of the economy. The four groups of industries which together will be worth over $2.5 trillion in annual revenues in Africa are:

consumer facing industries (retail, telecommunications, banking),

infrastructure-related industries,

agriculture, and

mining and minerals.

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