What is driving Africa’s growth?

Acha Leke a principal in McKinsey’s Lagos office
Acha Leke a principal in McKinsey’s Lagos office

The rate of return on foreign investment is higher in Africa than in any other developing region. Global executives and investors must pay heed.

Africa’s growth has quickened, infusing the continent with a new commercial vibrancy. Real GDP rose by 4.9 percent a year from 2000 through 2008, more than twice its pace in the 1980s and ’90s. Telecommunications, banking, and retailing are flourishing. Construction is booming. Private-investment inflows are surging.
To be sure, many of Africa’s 50-plus individual economies face serious challenges, including poverty, disease, and high infant mortality. Yet Africa’s collective GDP, at $1.6 trillion in 2008, is now roughly equal to Brazil’s or Russia’s, and the continent is among the world’s most rapidly growing economic regions. This acceleration is a sign of hard-earned progress and promise.
While Africa’s increased economic momentum is widely recognized, its sources and likely staying power are less understood. Soaring prices for oil, minerals, and other commodities have helped lift GDP since 2000. Research from the McKinsey Global Institute (MGI) shows that resources accounted for only about a third of the newfound growth.1 The rest resulted from internal structural changes that have spurred the broader domestic economy. Wars, natural disasters, or poor government policies could halt or even reverse these gains in any individual country. But in the long term, internal and external trends indicate that Africa’s economic prospects are strong.
Each African country will follow its own growth path. We have developed a framework for understanding how the opportunities and challenges differ by classifying countries according to levels of economic diversification and exports per capita. This approach can help guide executives as they devise business strategies and may also provide new insights for policy makers.
More than a resource boom
To be sure, Africa has benefited from the surge in commodity prices over the past decade. Oil rose from less than $20 a barrel in 1999 to more than $145 in 2008. Prices for minerals, grain, and other raw materials also soared on rising global demand.
Yet the commodity boom explains only part of Africa’s broader growth story. Natural resources, and the related government spending they financed, generated just 32 percent of Africa’s GDP growth from 2000 through 2008.2 The remaining two-thirds came from other sectors, including wholesale and retail, transportation, telecommunications, and manufacturing (Exhibit 1). Economic growth accelerated across the continent, in 27 of its 30 largest economies. Indeed, countries with and without significant resource exports had similar GDP growth rates.

Promising long-term growth prospects
A critical question is whether Africa’s surge represents a one-time event or an economic take-off. The continent’s growth also picked up during the oil boom of the 1970s but slowed sharply when oil and other commodity prices collapsed during the subsequent two decades. Today, individual African economies could suffer many disappointments and setbacks. While short-term risks remain, our analysis suggests that Africa has strong long-term growth prospects, propelled both by external trends in the global economy and internal changes in the continent’s societies and economies.
Global economic ties

Although Africa is more than a story about resources, it will continue to profit from rising global demand for oil, natural gas, minerals, food, arable land, and the like. MGI research finds that over the next decade, the world’s liquid-fuel consumption will increase by 25 percent—twice the pace of the 1990s. Projections of demand for many hard minerals show similar growth. Meanwhile, Africa boasts an abundance of riches: 10 percent of the world’s reserves of oil, 40 percent of its gold, and 80 to 90 percent of the chromium and the platinum metal group. Those are just the known reserves; no doubt more lies undiscovered.

Demand for commodities is growing fastest in the world’s emerging economies, particularly in Asia and the Middle East. Despite longstanding commercial ties with Europe, Africa now conducts half its trade with developing economic regions (“South–South” exchanges). From 1990 through 2008, Asia’s share of African trade doubled, to 28 percent, while Western Europe’s portion shrank, to 28 percent, from 51 percent.

This geographic shift has given rise to new forms of economic relationships, in which governments strike multiple long-term deals at once. China, for example, has bid for access to ten million tons of copper and two million tons of cobalt in the Democratic Republic of the Congo in exchange for a $6 billion package of infrastructure investments,3 including mine improvements, roads, rail, hospitals, and schools. India, Brazil, and

Middle East economies are also forging new broad-based investment partnerships in Africa.
The global race for commodities also gives African governments more bargaining power, so they are negotiating better deals that capture more value from their resources. Buyers are now willing to make up-front payments (in addition to resource extraction royalties) and to share management skills and technology.

At the same time, Africa is gaining increased access to international capital. The annual flow of foreign direct investment into Africa increased from $9 billion in 2000 to $62 billion in 2008—relative to GDP, almost as large as the flow into China. While Africa’s resource sectors have drawn the most new foreign capital, it has also flowed into tourism, textiles, construction, banking, and telecommunications, as well as a broad range of countries.

The rise of the African urban consumer

Africa’s long-term growth will increasingly reflect interrelated social and demographic changes creating new domestic engines of growth. Key among these will be urbanization, an expanding labor force, and the rise of the middle-class African consumer.

In 1980, just 28 percent of Africans lived in cities. Today, 40 percent of the continent’s one billion people do—a proportion roughly comparable to China’s and larger than India’s (Exhibit 2). By 2030, that share is projected to rise to 50 percent, and Africa’s top 18 cities will have a combined spending power of $1.3 trillion.
Africa’s diverse growth paths

While Africa’s collective long-term prospects are strong, the growth trajectories of its individual countries will differ. Economists have traditionally grouped them by region, language, or income level. We take another approach, classifying 26 of the continent’s largest countries5 according to their levels of economic diversification and exports per capita. This approach highlights progress toward two related objectives:

• Diversifying the economy. In the shift from agrarian to urban economies, multiple sectors contribute to growth. The share of GDP contributed by agriculture and natural resources shrinks with the expansion of the manufacturing and service sectors, which create jobs and lift incomes, raising domestic demand. On average, each 15 percent increase in manufacturing and services as a portion of GDP is associated with a doubling of income per capita.

• Boosting exports to finance investment. Emerging markets require large investments to build a modern economy’s infrastructure. Exports are the primary means to earn the hard currency for imported capital goods, which in Africa amount to roughly half of all investment. This is not to say that African countries must follow an Asian model of export-led growth and trade surpluses, but they do need exports to finance the investments required to diversify.

History shows that as countries develop, they move closer to achieving both of these objectives. Most African countries today fall into one of four broad clusters: diversified economies, oil exporters, transition economies, or pretransition economies (Exhibit 3). Although the countries within each segment differ in many ways, their economic structures share broad similarities.

Our framework is useful for understanding how growth opportunities and challenges vary across a heterogeneous continent. Although imperfect, this framework can guide business leaders and investors as they develop strategies for Africa and can provide new perspectives for its policy makers.