Bulging in the middle

The Economist October 2012

Africa's economy

Bulging in the middle

A boom in sub-Saharan Africa is attracting business talent from the rich world

AFTER giving a speech at a business conference in London a young analyst chatted with investment executives in the audience, then followed two of them to a nearby hotel lobby. Over glasses of Chablis the executives raved about their company’s worldwide network of extravagantly decorated offices and their fat annual bonuses. Then they offered the analyst a job. What surprised him was not their interest, nor the chunky salary, but the place where they wanted him to help invest their millions: west Africa, the most backward part of a poor continent.
In recent years investors have been piling into Lagos and Nairobi as if they were Frankfurt and Tokyo of old. Anaemic growth in the rich world has made sub-Saharan Africa an attractive destination for money and its managers. Foreign direct investment has increased by about 50% since 2005. Once regarded as casinos, local capital markets now seem less risky. J.P. Morgan has just added Nigeria to its government-bond index for emerging markets; South Africa had hitherto been the only African country on its list. The American bank, the world’s biggest underwriter of emerging-market debt, predicts that adding Nigerian bonds to its benchmark will lure an extra $1.5 billion to the country. New funds will pay for so far non-existent infrastructure on a continent with a land mass equivalent to that of China, India, Japan, America, Mexico and Europe combined (see map).

Some business people remain sceptical about Africa’s long-term prospects. Sales blather in Western financial circles hailing an African “golden age” is overblown. Most Africans are still poor, even if local managers drive flashy cars. A gaggle of truly wretched states is still trapped in misery and is unlikely to attain even modest prosperity soon. A recent survey found that nine out of 11 countries in the world at “extreme risk” of having a food crisis are African.
But even the sceptics accept that the latest outlook for Africa is good. The IMF says the continent’s GDP will grow by 5% this year, down from a predicted 5.4% but still much faster than almost anywhere else. In 2013 growth may nudge up to 5.7%. Further economic problems in the rich world could hit South Africa, but countries to its north are still likely to do well.

A new research paper by two World Bank economists says that if Africa were one country it would already be “middle income”, defined by the bank as having income per person of more than $1,000. Africa’s average is $1,700. In sub-Saharan Africa 22 countries have passed this admittedly still quite low middle-income threshold. Together, their population is 400m; they include odd cases such as Angola and Sudan, which were both ravaged by years of bloodshed until recently and where inequality is rife.

Wolfgang Fengler, one of the two World Bank economists, has identified four causes of Africa’s economic rise. First, the continent has the right kind of population growth: most Africans live increasingly longer while having fewer children, rather than the other way round. The UN says that Nigeria may overtake the United States by 2055 as the third-most-populous country after India and China, yet simultaneously reduce its birth rate.

Second, rapid urbanisation is creating efficiency gains and luring investors to capital cities that have begun to thrive and where growing population density cuts transport times and fosters small-scale industrialisation.

Third, technology is having a bigger effect on Africa than anywhere else, because it started from such a low base. In the past decade the use of telephones went from 0.7% of the population when land lines were rotten to 70% with the advent of mobile phones; Africa is a global pioneer in banking on mobile devices, not least since most people have no access to conventional banking.

Fourth, governance and economic management by officials have got better, again from very modest beginnings. The growing popularity of African sovereign debt is a good indicator.

“If current trends continue, most of Africa will be middle-income by 2025,” says Mr Fengler. But he warns that things will get harder. A lot of recent growth has been a matter of catching up, as well-known Western and Asian ideas and practices take root. Some say that the easiest ways to make money have already been exploited. Now Africa needs to build its still creaky infrastructure and diversify its companies if it is to keep up its fast growth. For that, it desperately needs two things: more capital and skilled workers.

Both are available in abundance in the West, where interest rates are low and job prospects grim. Hence the proliferation of African investment conferences in London and New York. There is much talk of where in Africa factories can be built and bonds bought. But equally high on the agenda is hunting talent from all parts of the world, Africa included. Managers search lunch tables for staff to poach and for investment professionals with experience in other emerging markets that could be useful in Africa.

According to one executive from a big Wall Street firm, salaries for Africa positions have gone up by 30% in the past year. “The continent is taking off but it’s still a tricky place to make money,” he says. “Political risks are high and contracts hard to enforce. Success often depends more on the quality of your people than on the attractiveness of the local market.”

Leading business schools in the West are getting in on the game. The London Business School held an “Africa Day” in May with a title unthinkable when colonial memories were still fresh, “Africa: Taking Ownership”. INSEAD, based in France, has an Africa Club full of former management consultants and investment bankers who want to move to the continent because—says one—they sniff an “opportunity to work at senior level with relatively little experience”. For them “Africa is like India and China ten years ago.”