Global Downturn and African Development

Posted by on Oct 24, 2013

Global Downturn and African Development

By now it is clear that the global economy is on the downturn cycle. Projections of global GDP have been downscaled substantially. Recent reports from the IMF, World Bank and The UN have all concurred that the rate of growth of the world output is going to hover around 4% at best and possibly as low as 3.3% during 2012. The ILO report in the meantime is cautioning against a “job deficit’ of approximately 400 million worldwide. This means an average of 40 million per year, predominantly youths, are going to be out of the job market. This is a serious risk to the global socio-economic stability. Almost no region of the world, and no country per se, is immune to the potential adverse impact of this situation.

What does this mean for Africa’s expected growth and development over the next decade? Overall, this is clearly not favourable for Africa. In a world of integrated trade and investment networks, what affects one region is bound to spill over to the others. So, the expected and looming economic recession in Europe is bound to have some negative consequences for Africa and its rate of growth. As it is said, ’a receding tide lowers all boats’!

At the same time, it is not all doom and gloom either. Technically, Africa’s relative position globally is in fact expected to improve over the next few years. This is because the growth rate of the continent, especially in the Sub-Saharan region, is affected less adversely than most other regions. Two factors contribute to this: one is that Africa’s exports are by and large raw materials. The growing regions of the world, such as China, India, South East Asia, and parts of Europe do need such raw materials for their growth. These regions are expected to grow between 5 to 8% per annum over the next five years. Their growth is underpinned by rapid and sustained urbanization. This process, in turn, is bound to secure a high level of demand for Africa’s resources such as iron ore, coal, manganese and chrome- among others. So, the fact that the global GDP growth is slowing down is driven mostly by the rapid contraction in the OECD member countries. These countries, however, have not been the main source of demand for raw material in the recent past.


The second driver of Africa’s growth, and increasingly the more significant one, is an internal one. In the jargon of economics, the absorption capacity of Africa has increased markedly in the recent years. The main contributors in this regard have been the growing focus on national and regional infrastructure development, the promotion of local industries and the channelling of national savings towards continental projects.  Of course, the commodity boom, and the relentless exploration for oil and gas have been a major force in this process. The upshot of these interrelated dynamics has been the rising inward investment in Africa.

Whereas up to the 1990s, as much as 60% of the continent’s annual savings was invested in Europe and North America, nowadays this figure is as low as 30%. At the same time, due to the dramatic changes to the investment climate in the OECD countries, a great deal of direct investments from these countries in flowing out, and Africa is receiving its share of such capital market flows. The considerable growth of private equity funds in Africa is a case in point.


The mushrooming of private equity funds in Africa is also a reflection of the fact that capital markets are not well developed in most countries on the continent. This is a glaring gap in the overall macro-financial architecture of most African countries. Potentially, this is a critical inhibiting factor for drawing large scale private capital into the developmental dynamics of the continent. Strategically, this needs urgent attention.

At the time when tectonic changes are taking place within the global capital markets, it is the relative position of each region, and by extension each country, that matters. The relative position in turn is determined largely by two factors: one is the resource endowment of the country/region, and the other is the regulatory framework for investments. Africa has all the relatively advantages when it comes to the initial resource endowment (not just minerals, but also land, water, energy, etc). However, there is much to be done as regards improving the regulatory framework so as to accelerate the current pace of investment and growth. Arguably, time has never been so favourable for Africa to consolidate its global positioning- and do so in a relatively short time.