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Africa rising: The new emerging market of the 21st century?

Comment
Africa's nascent consumer base is bound to have a profound impact on future international trade patterns and supply chain dynamics.

As the U.S. and eurozone economies continue to struggle and the hype about the emerging markets of the 2000s has subsided, many multinational corporations are evaluating African economies for potential consumer market and sourcing opportunities. Although the continent as a whole has not resolved such longstanding problems as political instability and corruption, the social and economic fundamentals in some countries are changing for the better, and opportunities for extracting minerals and other raw materials abound. These developments make it worth asking: Could the 21st century be the era when Africa becomes the "new China" or the "new India"?

Some good news out of Africa
Economic evidence increasingly points to the end of the BRIC (Brazil, Russia, India, and China) "party"—the swift growth that made those countries so attractive for the past decade. Real gross domestic product (GDP) growth for each of the BRICs has slowed considerably. Brazil's 2012 real GDP growth rate was just 0.9 percent; IHS Global Insight expects a stronger but still modest 2.2-percent growth rate for this year. Russia's economy is strongly correlated with the world price of oil; about 50 percent of the government's revenue comes from oil production. As a result, the price of oil affects whether and when Russia's GDP rises and falls. China's growth rate in 2012 was 7.7 percent and is expected to remain below the 8.0-percent mark in 2013 and 2014. And finally, India's growth rate came in at 3.2 percent for 2012.

Article Figures
[Figure 1] Regional population growth
[Figure 1] Regional population growth Enlarge this image
[Figure 2] Africa: Real consumer spending
[Figure 2] Africa: Real consumer spending Enlarge this image

Meanwhile, the United States is holding on relatively better than the northern tier of the eurozone economies, while the southern-tier PIGS (Portugal, Italy, Greece, and Spain) remain in a prolonged and deep recession. In addition, most of the emerging markets and advanced economies are faced with aging populations, low fertility rates, and in the case of Germany and Japan, a shrinking work force.

In the midst of this weak economic performance and troubling demographic news in some parts of the world has come an interesting surprise: the strong economic growth and improving socioeconomic conditions in Africa, especially the sub-Saharan countries. The changing—and improving—social and economic fundamentals in many African nations are at odds with the West's image of Africa over the last few decades and have placed the continent on many multinationals' radar screens.

For a long time, most of the news from Africa, especially the sub-Saharan countries, was about political instability, the AIDS (Acquired Immunodeficiency Syndrome) and HIV (Human Immunodeficiency Virus) epidemic, famine, civil strife, and war. However, economic data suggest that things may be stabilizing. IHS Global Insight forecasts that for 2013 to 2017 sub-Saharan African economies are likely to outpace every major regional economic bloc except China in terms of real GDP growth, and that they will be second to none in terms of population growth. (See Figure 1.) Real GDP growth for sub-Saharan Africa is likely to be 4.9 percent in 2013 and in the 5.3-percent to 6.0-percent range from 2014 through 2022. Contrast that with real world GDP growth, which is expected to be in the 2.5-percent to 3.9-percent range for each year between 2013 and 2022.

In sub-Saharan Africa, HIV infections and infant-mortality rates are falling, while life expectancies and enrollment rates for primary school through college are on the rise. From the late 1980s to the early 1990s, approximately one in 20 African nations was considered to be a democracy; today, only a handful of the current 55 African states do not have a multiparty constitutional system. Many of the sub-Saharan African nations, moreover, have benefited from Chinese and Western investments, mostly for commodity and mineral extraction. Interestingly, the U.S. East Coast customs port districts have been reporting sizable increases in imports from West Africa.

But there's more than just commodity extraction driving sub-Saharan Africa's growth. Several consumer market opportunities have also entered the picture. One reason is that the commodity booms have led to robust growth in consumer spending—well over double the 1.9-percent gains expected for 2013 in the United States. As shown in Figure 2, consumer spending is expected to continue its upward trend. Increasing urbanization rates (the percentage of the population living in an urban setting) and growing disposable income over the past few years have given many African households the ability to buy their first refrigerator or send their first child to college. Many more Africans are purchasing their first television or cell phone or are starting to utilize consumer conveniences like disposable diapers. This newfound consumer base is bound to have a profound impact on future international trade patterns and supply chain dynamics.

The big "ifs"
There are several caveats to keep in mind when describing sub-Saharan Africa as the "new" emerging market of the 21st century. Several decades ago the outlook appeared to be similarly promising as several African nations entered the international economic scene only to see economic contractions and tremendous political instability. Sub-Saharan Africa is still plagued with poor infrastructure, a high percentage of its population in poverty, and in many nations, fragile economic and political fundamentals as well as ethnic tensions. Sub-Saharan Africans still spend approximately 40 percent of their consumer outlays on food, and local economies are only a drought or a rapid increase in world food prices away from devastation.

Still, with the region's robust population growth, high fertility rates, new consumer market opportunities, and the beginnings of a new middle class, there is reason for optimism. As Africa's economies develop, more companies are starting to consider sourcing raw materials and finished goods from that continent. However, Africa faces challenges that could restrain development. The region should be carefully monitored and evaluated against others such as China, which it lags well behind, especially in per-capita terms. Nevertheless, supply chain managers should keep a close eye on developments in Africa so they will be prepared to serve this potential growth market.

Chris G. Christopher Jr. is Director–U.S. Macro and Global Economics at the research and consulting firm IHS Markit.

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