Boosting inclusive growth in Africa Published on "Forum Agenda", May 2014

Published by: Forum Agenda, May 1, 2014

Sub-Saharan Africa is expected to remain the world’s second fastest growing region, despite mounting concerns over emerging market turmoil. Its robust growth since the mid-1990s is not only a commodities story. It is also a result of better governance, more efficient use of resources and rising domestic demand: two-thirds of Africa’s GDP growth is driven by rising consumption of goods and services, including retail, financial services and telecommunications.

The past two decades transformed Africa’s economies and societies. According to theAfrican Development Bank, the continent’s middle class has almost tripled to 326 million since 1980, which roughly equals the middle class population of India or China. This did not go unnoticed by global enterprises: while natural resources are still the mainstay of foreign direct investment (FDI), investment in consumer­-oriented goods and services is climbing.

However, the study also shows that just 44 million in this group make $10 to $20 a day. All others belong to the lower middle class, earning $4 to $10 a day, or to the “floating class”: those with incomes barely above the poverty line. So, much remains to be done to make growth more inclusive. And what has been achieved to date is far from secured: research by the Financial Times suggests that 1 billion people in the developing world are at risk of slipping out of the nascent middle class and back into poverty if external or internal conditions change.

And they might. Faltering growth in China is already affecting commodity prices, especially for industrial inputs such as copper and iron ore – an essential revenue source for many governments in the region. Tighter money supply in the United States poses another risk: last year 10 billion in US dollar-denominated sovereign bonds was issued, up from 1 billion 10 years earlier. Now investors pay closer attention to the region’s vulnerabilities, which is reflected in less capital pouring into local currency debt markets and depreciating currencies.

These trends matter but the biggest challenge is not cyclical – it’s structural. As the 2013 African Transformation Report points out, better macroeconomic management, governance and incentives for the private sector produced higher growth but did little to change the structures and technology levels of African economies. This sets the continent apart from East Asia in the 1960s, where economies rapidly diversified and moved up the value chain.

In Africa, despite FDI hitting all-time highs, investment in modern non-resource industries is flat. Some regions are less industrialized today than in the 1980s, andless than 10% of the workforce finds jobs in manufacturing. This is tough news, especially for Africa’s young people, who make up more than half of the population: only 25% of those under the age of 25 find regular employment as a salaried worker, and only a small fraction in the formal sector of modern enterprises.

In response to this defining challenge, the 2014 World Economic Forum on Africa, which takes place in Abuja, Nigeria, is focusing on inclusive growth and job creation. As Africa’s largest economy and most populous nation, Nigeria plays a crucial role in advancing the continent’s growth. However, with more than 60% of its population living in extreme poverty, Nigeria is also emblematic of the challenge to convert growth into broad-based prosperity.

About Sebastian Buckup