The Return of 'Afro-Optimism'

Sub-Saharan Africa has long suffered from very external pagenegative representation in the mediacall_made. It was only a few years ago when The Economist called it a "external pagehopeless continentcall_made", and the G8 in Gleneagles (2008) considered it a "scar on the conscience of the world". In some circles, images of poverty and despair became a distorted way of 'branding' Africa. Driven by genuine intentions to help the disadvantaged, some donation-hungry humanitarian organizations spread images of social degradation using a much criticized communication technique recently discarded as "external pagepoverty-porncall_made" by external pageintellectuals-turned-bloggerscall_made.

However, 2010 may have given rise to a new trend and indeed a new way of seeing Africa. South African President Jacob Zuma said at a recent press conference that the World Cup gave birth to " external pagea new era of Afro-optimismcall_made". A series of influential publications last year led by McKinsey's "external pageLions on the Movecall_made", Steve Radelet's "external pageEmerging Africacall_made" and the recent IMF external pageRegional Economic Outlookcall_made provided optimistic prospects for this years' growth in the region and for future development opportunities.

After the 'lost decade' of the nineties, when numerous economies in the region stagnated or registered negative growth, the continent has grown at an average of five percent per year since the new millennium. Demonstrating an unexpected macroeconomic solidity, most countries were relatively unharmed by the 2007-2008 global financial meltdown. Indeed the continent is estimated to grow at an average of 5.5 percent in 2011. Growth estimates for the next five years show that external pageseven out of the ten fastest growing world economies will be from Africacall_made, particularly Ethiopia, Mozambique and Tanzania.

Growth in the coming years will be driven by increased investments as well as an expansion of trade and domestic consumer markets. However, international investors are aware of the daunting problems afflicting the sub-Saharan region and the immediate risks linked to corruption, weak political systems and social tensions, which may get worse in 2011 as 17 presidential elections are scheduled to take place across the region.

Investment opportunities

Returns on investments in Africa are today the external pagehighest in the developing worldcall_madeand, not surprisingly, foreign direct investment (FDI) has boomed over the past few years. According to UNCTAD's external pageWorld Investment Reportcall_made, FDI increased from about $9 billion in 2000 to $18 billion in 2004 and $88 billion by 2008. Nearly twice the value of official development aid, FDI can drive growth and encourage technological and human capital spillovers.

Excluding South Africa, financial markets in the sub-Saharan region have remained rather thin. However, several African countries have started to show interest in bonds and equities markets. In 2011, Zambia, Angola, Tanzania, Kenya and Uganda are external pageexpected to issue bondscall_made. African equities markets are still immature, but there are external pagepromising prospectscall_made for the coming years, especially if FDI inflows continue to grow at fast speeds.

Agriculture provides the other great chance for sustained growth. McKinsey estimated that 60 percent of the world's total uncultivated arable land is located in Africa and the continent is "ripe for a green revolution like the ones that transformed agriculture in Asia and Brazil." With the appropriate techniques, output could triple from $280 billion today to $880 billion in 2030.

Trade

Parallel to the global shift of economic power East, African countries are finding a wealth of opportunities in Asia. The totalexternal pagetrade with China surged to $115 billion in 2010call_made and external pagetrade relations with Indiacall_made are increasing at a fast pace, especially in East and Southern Africa. It is estimated that economic relations with emerging countries now account for approximately one-third of total merchandise trade, and the percentage is increasing especially for oil-exporting countries such as Angola and Nigeria. Trade between developing Asian countries and non-commodity exporters such as Kenya and Uganda is increasing but at a slower rate.

Nevertheless, the EU and US remain major trade partners, accounting for more than half of total exports of goods. If we also consider trade in services, tourism and remittances, then the position of western countries is predominant throughout the region. According to the IMF Regional Economic Outlook, "despite the heterogeneity of sub-Saharan Africa, this finding is true even at the level of individual countries," confirming the key importance of bilateral African-EU/US trade relations.

Consumer markets

Africa's future growth will be driven by the expansion of the domestic market linked to demographic trends. Fast rural-urban migration over the past decades and demographic pressures have had enormous consequences in terms of precarious employment, expansion of informal settlements, crime and environmental hazards in African cities.

Since 1980, the urban population is estimated to have increased from just 28 percent to over 40 percent in 2008 and the external pagegrowth rate in the largest African citiescall_made between 2010 and 2025 is predicted to be extremely high throughout the continent, especially in Eastern and Central Africa.

On the one hand, uncontrolled urbanization has brought governance and infrastructural challenges that most governments have failed to tackle. Despite the support of non-governmental and civil society organizations, most African city dwellers still struggle because of poor planning and the lack of appropriate sanitation, hygiene and sewage services.

On the other, economists agree about the large opportunities that may emerge at the aggregate level thanks to urbanization. The shift from rural-based jobs to urban employment will promote a rise in the average income levels over the next two decades, which could turn Africa into a major consumer market. According to McKinsey, in 2008 over 85 million Africans earned over $5,000 - a "threshold" level which gives consumers the possibility to spend over half of their income on non-food products. The consumer market in 2008, estimated at $860 million, is of comparable size to economies such as India and Russia.

Risks

The recent resurgence of optimism for African development will probably benefit growth and attract investors. However, risk analysts are aware of the variety of threats on the horizon in 2011, related to uncertain international economic scenarios and the busy African electoral agenda.

Skeptics of African growth are wary of two particular factors: first, the fundamental uncertainties still underlying the global economy, in particular the sovereign debt crises in Europe, which may cut imports from Africa. Forecasts predict recovery in the US and moderate growth in the EU; however, the situation could collapse in case of sovereign defaults in Portugal, Spain or even Italy. Even though African economies are increasingly attached to the business cycles of emerging markets, in the short-term they continue to be strongly linked to European economies, and therefore their fate also depends on the European Central Bank's (ECB) strategies to tackle the debt crisis.

Second, skeptics argue that current growth levels in Africa are not sustainable because they depend excessively on high commodity prices. Prices for key export markets such as oil and mineral resources have surged since 2000 and last month's external pagefood prices reached a 20 year highcall_made, with a positive impact on GDP growth but dangerous consequences for the purchasing power of low-income populations. However, according to McKinsey, commodities contributed only 24 percent of GDP growth since 2000, whereas 76 percent was created in other sectors, especially retail, agriculture, manufacturing and telecommunication. This demonstrates an unprecedented level of economic diversification on the continent.

Arguably, in 2011 the greatest political risk is related to the external pagebusy election agendacall_made. In addition to the recent vote for independence in South Sudan, this year will see 17 presidential elections on the continent, including the delicate cases of Nigeria, the DRC and Uganda.

Election years are risky because they can provoke financial mismanagement on the part of governments, as many political parties fund costly campaigns at the external pageexpense of macroeconomic soliditycall_made in their countries. They can also exacerbate social tensions, as recently as last month on the Ivory Coast and in Kenya in 2008. The socioeconomic, let alone political, consequences of such tensions and related violence are enormous.

The challenge for African governments in sustaining development and continuing to attract investors is to build political institutions capable of maintaining peace and representing the complex social structures of their societies. In the short term, the international community must try to actively contribute to the easing of electoral tensions and the promotion of smooth voting processes.