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Africa needs to diversify its economy

Published Sep 3, 2014


Investor enthusiasm for Africa is gaining traction. As the home to two economic powerhouses, the continent offers growth and the opportunity of lucrative return on investment.

In the past, Africa’s economic growth was primarily driven through extractive enterprises. But in the past decade success from manufacturing, agriculture and natural resources has shown that with the right partnerships in place, Africa is poised to outgrow its reputation as a market driven only by consumption and commodities.

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To take this next step and to reach Africa’s consumers we need a common market and economies of scale. It is evident that there is a need for further regional integration and intra-African trade for the diversification of the continent’s economy. This in turn will spur on wealth creation across all existing sectors, in all countries.

This point was reinforced by former public enterprises minister Malusi Gigaba (the current home affairs minister) in his keynote address at this year’s American Chamber of Commerce South Africa annual general meeting, held in Johannesburg in March. Gigaba expanded on the importance of regional integration for Africa – especially in an environment where developed markets are experiencing an extended downturn.

A highlight in his speech was that Africa’s growth prospects remained positive and that there was significant optimism about the development of the continent. He pointed out that Africa needed to incorporate partnerships with other leading emerging markets around the globe in order to strengthen inter-regional ties in trade, investment and business, and also achieve success through increased economies of scale.

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Early last month the US government hosted its US-Africa Summit in Washington, DC. The event was widely hailed as a success. The summit was geared towards strengthening ties between Africa and the world’s most powerful nation. In attendance were 40 out 47 African heads of state (including President Jacob Zuma and Nigerian President Goodluck Jonathan) as well as senior representatives from major US companies.

Along with US President Barack Obama’s support of the renewal of the African Growth and Opportunities Act (Agoa) $33 billion (R352bn) worth of deals was made through the “Doing Business in Africa” programme.

Agoa was signed into law by former US president Bill Clinton in 2000 and expires in 2015 (it was originally set to expire in 2008 but was extended). The trade agreement allows duty-free export access of thousands of products from eligible sub-Saharan African countries into the US. A renewal of another 15 years is anticipated.

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This conference has been regarded as an important platform to strengthen trade and investment ties between the US and Africa, to enhance co-operation on peace, safety and security, and to discuss ways to foster progress towards inclusive and sustainable development in Africa.

One of the biggest priorities on the African agenda remains achieving peace and stability on the continent, and South Africa has proved that there is an abundance of economic benefits that come with a strengthened democracy that is complemented by strong institutional and regulatory frameworks.

The 2013/14 Global Competitiveness Report of the World Economic Forum (WEF) found that countries that were highly innovative and had strong institutions topped international competitiveness rankings. The report also showed that of the Brics (Brazil, Russia, India, China and South Africa) nations, South Africa was second in its competitiveness after China.

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Another finding in the report was that in sub-Saharan Africa, Mauritius was the region’s most competitive economy, with South Africa in second place. Among low-income economies, the report showed that Kenya had made the biggest improvement – moving up 10 places to 96th position.

Imagine if these economies collaborated for partnered growth and development.

The WEF report shows us that there is a need for more insightful efforts to improve Africa’s competitiveness. A good starting point is through the diversification and opening up of its markets.

The fact is the numbers don’t lie. They point to an optimistic future ahead. A key enabler will be regional integration, and in particular the role of trade agreements as the key building blocks of that integration. There are a number of trade agreements or trade arrangements in Africa – the Common Market for Eastern and Southern Africa (Comesa), the Southern African Development Community (SADC), the Southern Africa Customs Union, the Economic Community of West African States, the East African Community (EAC) – but most remain on paper and in so doing are unable to unleash the true potential of Africa’s vast human capital and resources.

African leaders should now embrace the opportunity and renewed political will to build on these trade agreements and demonstrate their benefits by implementing them in practice.

The challenges faced by businesses operating in Africa are well documented: limited energy security, irregular banking frameworks, protecting intellectual property, and achieving a balance between aid and trade. However, these challenges are not unique to emerging markets and they are not without solutions.

Similar to other emerging markets, such as south-east Asia and Latin America, Africa can present boundless prospects for its investors. Business needs to approach Africa differently because the continent is a study in diversity. Yes, there is common opportunity like growing consumerism, rapidly developing technology, globalisation and access to information. But different countries present different opportunities and the most sustainable way to tap into these is through strengthened free trade agreements and regional integration.

South Africa, for example, where democracy is 20 years old – boasts one of the world’s most sophisticated financial systems and has the capability to use its data and institutions to grow its economy.

On the other hand Kenya, the largest economy in east Africa, is classified as a low-income market but it continues to strengthen its democracy, open its market to international investors, encourages entrepreneurship and is exploring new ways to improve its socio-economic prospects.

A recent media report (Financial Mail, February 7) indicates that Kenya exports goods valued at approximately 3 billion Kenyan shillings (R355 million) to South Africa and South Africa exports goods worth about 70 billion Kenyan shillings to Kenya.

Based on this, preferential trade agreements could come by way of a proposed tripartite agreement between Comesa, the EAC and the SADC, to establish a free trade area by 2015.

In anticipation of the promise of these agreements, and due to improved relations between the countries, a number of South African entities have established business interests in Kenya. These include Tiger Brands, Old Mutual, FirstRand and Distell.

Africa has many of these one-off case studies, but global investor consensus is that Africa has the potential and opportunities that can redefine it as a market that grows organically in all its sectors, instead of primarily depending on consumption to drive development.

The 2013 African Economic Outlook shows that sustainable development in Africa rests on diversification and investment in human capital. The report also shows that African countries must provide the right conditions to allow untapped resources such as minerals and natural wealth to optimise job creation opportunities.

The perceived “deterrents” to investing in Africa can be managed only when confronted by all stakeholders on the continent. It requires the understanding of each country’s specific dynamics, its policies and frameworks, and what each country can do to implement and help achieve intra-regional trade.

Markets will be accessible, jobs created, infrastructure development accelerated and the continent’s economy will be beneficial to more people and companies – not just for multinationals like Ford but for companies of all sizes that wish to contribute towards development and diversification.

Jeff Nemeth is president and chief executive of Ford Motor Company of Southern Africa and president of the American Chamber of Commerce in South Africa.

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