Nnenna Okore

Anyanwu Abani, 2008

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Capturing Africa’s business

opportunity
 2

In the aftermath of the global crisis, Africa no longer seems

uniquely risky. The opportunities are huge.

Donald Kaberuka Africa was among the fastest-growing parts in 2009, to 2.5 percent, the continent avoided
of the world between 2001 and 2008, with aver- the recession. The impact of the crisis varied across
age growth of 5.6 percent a year. While the commod- regions and countries, though on the whole the
ity boom played a role, stable macroeconomic decline in growth was less severe than expected,
conditions coupled with structural reforms—including allowing for a faster recovery. In sharp contrast
the privatization of state-owned enterprises and to other parts of the continent, southern Africa has
lowered barriers to competition—underpinned the been directly affected by the global crisis because
impressive growth. It was accompanied by large its resource-rich countries are dependent on exports
amounts of foreign direct investment (which more and subject to the “neighborhood effect” ema-
than tripled during these years), including inflows nating from South Africa. But many of these coun-
from the Gulf countries and from emerging Asia tries should recover quickly as commodity and
(China and India). financial markets rebound. The group of middle-
income countries in North Africa, despite their
Resource-rich countries such as Nigeria and South close integration with the European Union, fared
Africa received most of the foreign direct invest- much better, partly because of their less open
ment during the decade, but new patterns have capital accounts and more diversified economies.
emerged in the last three to four years. In east-
ern and northern Africa, for example, new invest- Countries with built-up reserves implemented
ment has arrived in nonresource sectors such stimulus packages and measures aimed mostly at
as tourism, manufacturing, financial services, tele- easing supply-side bottlenecks. African policy
communications, and construction. Also, a sec- makers have resisted the protectionist tendencies
ond tier of smaller but high-performing countries, that often accompany a crisis of this magnitude.
including Ghana, Namibia, and Zambia, has Instead, most countries maintained a prudent macro-
caught investors’ attention. economic stance during the crisis, steered clear
of protectionist measures, and in several cases accel-
In sum, foreign investment has diversified in erated reforms to create a favorable investment
recent years as a number of African governments climate. Some countries, such as Botswana, Ghana,
undertook structural reforms to make their eco- and Seychelles, took advantage of financial-aid
nomies more attractive. But to sustain foreign invest- packages that helped them adjust their economies
ment inflows, governments must pursue mea- significantly.
sures for strengthening governance and legal frame-
works, building financial markets, investing in Having weathered the downturn, the continent faces
human capital, developing infrastructure, and deep- the challenge of returning quickly to high and
ening regional integration. sustainable growth. In March 2010, the African
Development Bank forecast 4.5 percent real
Overcoming the global recession GDP growth for Africa in 2010 and 5.2 percent in
Even though Africa was hit by the global financial 2011, in line with the global recovery. While
and economic crisis, and growth slowed sharply these growth rates are below pre-crisis levels, the
 3 June 2010

recovery is broad-based, with more than 15 coun- can be done to achieve high and broad-based growth
tries projected to grow by upward of 5 percent in Africa. Differences across African countries
in 2010. notwithstanding, the African Development Bank’s
experience suggests that critical reforms would
It remains to be seen if the recovery in the advanced enhance Africa’s competitiveness:
economies, a key factor in Africa’s own recovery,
will be robust and if adequate financial aid to low- • Governance and legal frameworks should be
income countries follows in a timely manner. So strengthened, including property rights, which
it is even more important that African countries facilitate transparency and accountability in
create an economic and business climate to attract the management of public resources.
stable private capital flows.
• Encouragement should be given to the develop-
Challenges and opportunities ahead ment of financial markets and the creation of
While Africa’s growth from 2001 to 2008 marked access to credit for private-sector projects, which
a turnaround relative to the previous three decades, require funding from sound banking sectors,
it was more subdued when measured in terms of well-regulated stock exchanges, and venture capital.
per capita GDP growth. In this respect, Africa still
lagged behind most parts of the world, and the • The quality of human capital should be enhanced—
income gap between Africa and developing coun- in particular, by improving the quality of ter-
tries in other areas closed only slightly. The key tiary education and stemming the loss of talented
question is when Africa’s low-income countries will citizens to emigration. The gender gap in edu-
reach a high, sustainable growth path that would cation could be closed further.
allow them to narrow the income and productivity
gaps with the more advanced economies. • The infrastructure gap should be narrowed
through the development of energy and
Poor infrastructure is a major impediment to growth. transportation, which are the main obstacles to
A recent study1 of 24 countries, conducted by competitiveness in Africa and put African
the African Development Bank and its Africa Infra- entrepreneurs at a disadvantage to the major
structure Country Diagnostic (AICD) partners, competitors in Asia. Challenges in the energy
estimated that the total cost of bridging Africa’s infra- sector are particularly complex, requiring the
structure gap over the next decade will be about harmonization of the activities of donors
$93 billion a year, with about 40 percent in the power and countries, as well as the creation of proper
sector. Furthermore, it found that the continent institutional and legal frameworks.
has the weakest infrastructure on the planet, with
Africans in some countries paying twice as much • Regional integration to create economies of scale
for basic services as people do elsewhere. The study and to leverage the strengths of individual
argues that a well-functioning infrastructure is countries should increase. Power pools, transport
essential to Africa’s economic performance and that corridors, and cross-border climate change
reducing inefficiencies and waste could result in problems are among the areas to be addressed.
1 Vivien Foster and Cecilia
major improvements in African lives.
Briceño-Garmendia, eds.,
Africa’s Infrastructure: A Time In addition, Africa’s fragile states face unique
for Transformation, Agence Despite the significant progress in creating an challenges. Given these countries’ weaknesses and
Française de Développement
and the World Bank, 2010. environment for private-sector development, more market failures, the development of a vibrant
Capturing Africa’s business opportunity 4

private sector cannot be left to free markets Africa, have investment-grade ratings on the
alone. Experience in many countries shows that an sovereign and corporate levels. On the other, certain
improving business environment is just one countries perform below their potential but
condition for private-sector growth. The problem is offer some highly attractive projects in mining,
that in countries with small productive bases, pharmaceuticals, and telecommunications.
private-sector development often involves entering While minerals, particularly hydrocarbons, will
into completely new activities and hence incur- most likely attract the bulk of the investment
ring large fixed costs and risks, which private actors in the medium term, other sectors with growth
may not want to shoulder alone. Industrial policy potential include renewable energy, financial
aimed at encouraging the most profitable activities services, and food production. These sectors have
and easing the constraints to productive entre- registered rapid growth in the last five years,
preneurship can facilitate the private sector’s takeoff. largely because of Africa’s rising urban population.
Growing global demand for food and the poten-
The African Development Bank and other multi- tial of Africa’s land make the agricultural sector
lateral institutions have done their share by working attractive for investment. The telecommuni-
with investors and recipient governments to cations sector has continued to draw investment
improve Africa’s business climate. To demonstrate despite the crisis, given Africa’s large potential
that successful projects can be undertaken in market and the limited impact of the crisis on demand.
African countries, the bank has raised its capacity
to finance private enterprises and public–private Over the last ten years, macroeconomic and gover-
partnerships. During the past three years, it has nance reforms on the continent have changed
approved nonsovereign financing (including the institutional context of social and infrastructure
about 15 percent in equity) totaling $4.7 billion for development markedly, including the roles of
80 projects, primarily in infrastructure and various actors. Projects and sectors that in the past
financial services. This financing, with its typical would have been entirely funded, owned, and
multiplier of about five, has helped mobilize operated by the public sector now involve partner-
$23.5 billion from private and multilateral investors. ships with the private sector. The private sector
Examples of such flagship infrastructure oper- invests in development and helps secure financing,
ations financed by the bank include a power gene- diversify risk, and bring in management know-
ration, transmission, and distribution project how for such projects. The reassessment of African
in southern Africa, two submarine cables along the risk in the aftermath of the global financial and
east and west coasts of the continent, and two economic crisis is creating a unique window of oppor-
communications satellite projects. tunity for making the continent an attractive
place for profitable investment.
Africa continues to offer numerous opportunities
to investors in the post-crisis world, with the options
as varied as the countries. On the one hand, some,
such as Botswana, Mauritius, Morocco, and South

Donald Kaberuka is president of the African Development Bank. Copyright © 2010 McKinsey & Company.
All rights reserved.