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Africa: And Things Turned out Very Differently

Just a few years ago, Africa was considered a "lost cause." But in the past 15 years, many of its countries have achieved strong economic growth. What happened? And what's next?

For many years, it seemed to be one step forward and two steps back for Africa. Plagued by poverty and corruption, disease and war, the continent was considered a "lost cause" when the new millennium began. In the year 2000, the Economist ran a cover story on "The hopeless continent." Yet things turned out very differently. 

A Continent, In Fact, Full of Hope

The national economies of Africa have grown by an average of 5 percent annually over the last 15 years, surpassing the growth of many Latin American and Eastern European emerging markets. Along with this economic success, living conditions have also improved. Poverty, malnourishment and infant mortality rates have fallen dramatically, broad sectors of the population have gained access to clean drinking water, life expectancy continues to rise. A middle class has emerged, one already boasting 350 million people and expected to grow to 1.1 billion by 2060 (according to estimates by the African Development Bank). Of course, living conditions still remain extremely modest in many areas and for broad sectors of the population. Food security, access to sanitary facilities and health care all still represent major challenges. 

And yet, Africa has clearly developed into a continent full of hope and, in doing so, has aroused the interest of global investors. Foreign direct investments have risen substantially by an average of around 20 percent annually. Even if the funds have mainly gone into the raw materials sector, they have also benefited other industries including the financial sector, the telecommunications industry, retail and transportation. A variety of factors some originating in Africa and others external have made this impressive growth possible. The decline in the scores of armed conflicts arising in the wake of countries gaining independence conflicts which were in no small part due to the arbitrary borders drawn by colonial powers was certainly one essential factor. In the early 1990s, there were still armed hostilities taking place in one out of every three African countries. Since then, the number of conflicts has seen a significant decline as has their intensity, based on the number of fatalities.

Raw Materials and the Rule of Law

Furthermore, a wave of democratization washed over Africa, and the government leadership of a variety of countries underwent a vast improvement. This development was supported by the spread of modern media and better education of the decision-makers and voting population. Last but not least, the improved governance was reflected in sounder national finances, bolstered by the sweeping debt relief at the beginning of the new millennium. However, state coffers still find themselves in a contradictory position between a relatively small tax base and a formidable need for investment in infrastructure, education and the health care system. 

The raw materials boom, which with interruptions, and until recently drove prices for a variety of natural resources significantly higher in the mid-2000s, also aided the public finances of many countries. The commodities sector has fueled the economies of many of Africa's resource-rich countries, generating significant revenues for the countries. This spike in prices most importantly, paired with enhanced rule of law and reinforced property rights brought forth a torrent of investment and led to skyrocketing extraction rates and exports. The boom seems to be continuing thanks to substantial reserves and a constant supply of new discoveries. The latest "gas bonanza" in East Africa is one example of this. Upon discovering natural gas deposits, multinational corporations invest incredible sums to develop them. In this way, a poor country like Mozambique has the opportunity to become a significant producer of natural gas.

Still a Long Way to Go

At the same time, the commodities sector is shaped by global factors outside of the individual countries' sphere of influence. Price booms bring brisk investment and income, while bear markets rapidly result in shortfalls in state finances. In light of the dominance of the commodities sector in Africa raw materials comprise around 70 percent of all exports fluctuations such as these impact the overall economy. Trade surpluses also drive currency values up, thus lowering the price competitiveness of other sectors, which can severely hamper their growth. This phenomenon was first observed in the Netherlands in the 1960s following the discovery of natural gas deposits ("Dutch Disease").  In the past, conflict, corruption and pollution were often side effects of a boom in natural resources. To this day, researchers still quarrel over whether a country's rich natural resources are a curse or a blessing. 

The Future of Africa

An analysis of the recent past shows that this economic progress was made possible by the convergence of various factors. What conclusions can be drawn from this for Africa's future? Will the prosperity continue, at best on par with the Asian economies which made considerable progress over the course of decades and freed themselves from the yoke of poverty? At least the improvement observed in the institutional parameters gives rise to the hope that this will be the case, and prominent international stakeholders like the International Monetary Fund (IMF) and the United Nation's Economic Commission for Africa (UNECA) are forecasting that growth will remain strong in the upcoming years. Nevertheless, there is still a long way for Africa to go considering the fact that poverty remains widespread and the infrastructure is lacking.

Not least, foreign trade policy is an important component in this. Africa still remains marginalized in terms of global trade, comprising a mere 3 percent share of global exports. And this share is limited mainly to raw materials. The challenge facing African countries today, as presented by UNECA in their latest economic forecast, is that they must define a trade policy which, on one hand, promotes competition, innovation and efficient allocation of resources, while on the other hand does not interfere with the growth of new economic sectors. 

Free Trade Helps

The experiences of some up-and-coming Asian economies demonstrate that selective trade liberalization can yield results. Intra-African trade represents one area of undeveloped potential. The fact that close to 90 percent of intermediate goods destined for production in Africa are imported from outside Africa clearly shows the limited impact of regional value chains. In this respect, a continental free trade agreement has the potential to strengthen African companies and place them in a better starting position in global trade. This is how the success story could continue.