McKinsey report on Africa – and it's good news!

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Global consulting company, McKinsey, have just released a report entitled, “Lions on the move: The progress and potential of African economies” (June 2010). It was part of a larger “package” of reports on Africa (click here to view them all).

Their report is bullish on Africa, providing some interesting reading for those with little knowledge of “the dark continent” and for those who are ignoring Africa in their future strategies and growth plans for developing markets. Here are some of the highlights and facts (many from the McKinsey report, but also from other sources):

  • Africa’s collective GDP, at $1.6 trillion in 2008, is now roughly equal to Brazil’s or Russia’s. Africa’s billion people spent $860 billion in 2008, more than India’s population of 1.2 billion.
  • From 2000 to 2008, African economies grew at twice the pace that they did in the 1980s and 1990s. Moreover, Africa was one of only two regions – Asia was the other – where the collective economy rose through the global recession of 2009, by 1.4%.
  • According to The Economist, the following GDP growth rates (annual percentage increase year on year) might be interesting: China +11.8%; India +6; Egypt +4.7; Brazil +4.3; South Africa -1.4; Britain -0.3. The Economist does not list any other African countries, but here are some stats: Angola +13.2; Ethopia +11.6; Rwanda +11.2; Equatorial Guinea +10.6; Niger +9.5. There are at least 10 other countries with growth rates higher than 5% (See a full list here based on the 2009 CIA fact book.)
  • Africa’s growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24% of the continent’s GDP growth from 2000 through 2008. Key to Africa’s growth surge were improved political and macroeconomic stability and microeconomic reforms.
  • Future economic growth will be supported by Africa’s increasing ties to the global economy. Rising demand for commodities is driving buyers around the world to pay dearly for Africa’s natural riches and to forge new types of partnerships with producers. And Africa is gaining greater access to international capital; total foreign capital flows into Africa rose from $9 billion in 2000 to a peak of $87 billion in 2007. It fell slightly to $62 billion in 2008.
  • Standard Bank of South Africa is still the recipient of the single largest outgoing foreign investment by a Chinese company. That multi billion dollar deal was concluded 4 years ago, and Standard bank is now one of the fastest growing banks in the world. Most of Africa’s banks were largely untroubled by the credit crisis and sub prime mortgage disasters of the last two years.
  • China has provided more financing for roads, power, railways and other infrastructure in Africa in recent years than the World Bank.
  • Africa’s collective inflation rate fell to 8% after 2000, from 22% in the 1990s. Budget deficits declined to 1.8% of gross domestic product from 4.6% (this has increased in many countries in the last few months due to the global economic downturn).
  • McKinsey attributed Africa’s economic expansion to rising commodity prices, greater political stability aided by a reduction in violent conflicts, improved macroeconomic performance and market-friendly economic reforms.
  • Africa’s economic growth is creating substantial new business opportunities that are often overlooked by global companies RMGI projects that at least four groups of industries-consumer-facing industries, agriculture, resources, and infrastructure-together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.
  • Since 2000, 316 million people on the continent have signed up for cellphone service, more than the entire population of the United States.
  • The rise of the African urban consumer also will fuel long-term growth. Today, 40 percent of Africans live in urban areas, a portion close to China’s and continuing to expand. The number of households with discretionary income is projected to rise by 50% over the next 10 years, reaching 128 million. By 2030, the continents’ top 18 cities could have a combined spending power of $1.3 trillion.
  • Africa now has 52 cities with more than a million residents, more than double the number in 1990 and the same number as in Western Europe.
  • Some of the demographic trends praised in the report could turn out to be double-edged swords. By 2040, McKinsey projects, Africa will have 1.1 billion working-age people, more than in China or India. But even now, South Africa, one of the continent’s most dynamic economies, is not growing fast enough to absorb all the young people entering the job market – or providing them with educations that would equip them for the workplace.
  • Today the rate of return on foreign investment in Africa is higher than in any other developing region.
  • In a sign of increasing security, the number of serious conflicts in which more than 1,000 people died annually declined to an average of 2.6 a year in the 2000s from 4.8 in the 1990s.

The report’s Executive summary concludes: “Early entry into African economies provides opportunities to create markets, establish brands, shape industry structure, influence customer preferences, and establish long-term relationships. Business can help build the Africa of the future.”

This echoes a similar sentiment expressed by The Economist Schumpeter column when reporting on the McKinsey data (read it in full here, or an extract below):

Uncaging the lions
Business is transforming Africa for the better
Jun 10th 2010, The Economist

FOR once an investment fad seems justified: the 21st century is shaping up to be that of the emerging markets, just as the 20th was America’s century and the 19th Britain’s. But that leaves open the question of which countries, exactly, will emerge. Will Asia and Latin America mark the limits of the spreading prosperity? Or will the boom reach the perennial laggard, Africa? Will a new pride of economic lions take their place beside the Chinese dragon and the Indian tiger?

Ten years ago The Economist dubbed Africa “the hopeless continent”. Since then its progress has been remarkably hopeful. In 2000-08 Africa’s annual output grew by 4.9% (adjusted for purchasing-power parity), twice as fast as in the 1980s and 1990s and faster than the global average of 3.8%. Foreign direct investment increased from $10 billion to $88 billion—more than India ($42 billion) and, even more remarkably, catching up with China ($108 billion). The Boston Consulting Group notes that, since 1998, the revenues of Africa’s 500 largest companies (excluding banks) have grown at an average of 8.3% a year.

But is this growth sustainable? Or is the current fad for Africa just another bubble? The pessimists have always had three strong arguments. One is that African politics is dysfunctional. Warring strongmen can undo the progress of decades in weeks. A second is that the African economy is unduly dependent on the resource sector. A third is that Africa’s growth does too little to benefit the poor. But over the past decade, all these objections have weakened.

The numerous examples of government failure can now be weighed against examples of success. The continent’s inflation rate has been reduced from 22% in the 1990s to 8% since 2000. The World Bank’s annual “Doing Business” report ranked Rwanda as the world’s top reformer this year, based on the number and impact of steps to promote entrepreneurship there. Mauritius was ranked 17th of the 183 economies covered by the report, ahead of lots of richer places.

It is true that Africa has depended on its abundant natural resources; and they will be a growing advantage in years to come. The hectic pace of growth in the emerging world is not only pushing up commodity prices but also intensifying competition for the right to drill the continent’s oil and mine its minerals. Chinese companies in particular are wooing African governments with lavish expenditure on infrastructure.

McKinsey points out that the natural-resource sector accounts for only about a third of the continent’s growth. Africa is producing a growing number of world-class companies outside the resource industry, from South African giants such as SABMiller, the world’s second-largest brewer, and Aspen Pharmacare, the largest generic-drugmaker in the southern hemisphere, to niche players such as Tunisia’s Coficab, one of the world’s most successful suppliers of wiring for cars.

As to the poor, McKinsey points out that, thanks to rising living standards, some 200m Africans will enter the market for consumer goods in the next five years. The consultancy also notes that the continent’s working-age population will double from 500m today to 1.1 billion in 2040. Consumer-goods companies ranging from Western giants such as Procter & Gamble to emerging-market car companies such as China’s Great Wall and India’s Tata Motors are pouring into Africa. Foreign firms are likely to start using Africa as a base for manufacturing as well, as Europe’s population shrinks and labour costs in India and China rise.

Africa is also seeing the benefits of “frugal innovation”—inventions that are designed to serve the poor. Mobile-phone companies, which have done more than anybody to improve the lives of poor Africans, are continuing to innovate. Kenya’s Safaricom and its rivals are pioneering money-transfer by mobile phone (see article); mobile savings and agricultural-insurance schemes are next. Companies from other emerging markets are also expanding into Africa. Bharti Airtel, which completed its $10.7 billion acquisition of Zain Africa, is a world-leader in improving services while reducing costs.

Nor is innovation confined to telecoms. Vijay Mahajan of the McCombs School of Business at the University of Texas, Austin, produces a long list of innovators in everything from the design to the distribution of products. Nakumatt, a Kenyan retailer, allows people living abroad to buy vouchers for its stores and then transfer them to their African friends and relatives, making remittance payments smoother. Other bottom-of-the-pyramid innovations include the Jiko, a portable charcoal stove that can reduce fuel consumption by 30%; the Q-drum, a doughnut-shaped plastic container that can be used to transport water by rolling it along the ground; the Weza, a foot-powered generator that can be used to charge cell phones and radios; and a $20 washing machine made from discarded motors and iron.

Lions and bulls

A decade of growth has also given Africa’s business people a new élan. Mo Ibrahim, a mobile-phone pioneer, has established an index to measure governments’ performance and an annual prize of $5m, plus $200,000 a year for life, to an African leader who rules well and then stands down. He has also founded a venture fund which plans to invest $200m in Africa this year.

Such successful entrepreneurs can point to countless examples of how business can improve people’s lives. In Kenya, where the government has removed its dead hand from the telecoms market, mobile phones are ubiquitous; in next-door Ethiopia, where the government’s grip is as tight as ever, only 2% of the population has phones. A few African lions are beginning to take their place next to the dragons and tigers.

Could Africa’s dawn truly be rising at last?

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