I am generally optimistic about Africa’s economic prospects and opportunities for investment, but a recent article “Six Reasons to Invest in Africa” published by the World Economic Forum in conjunction with its Africa-wide meeting in Rwanda last week, is long on generalities and short on specifics.
First, referring to “Africa” as if it were one place is spurious. Africa, with its 54 countries, includes failed or nearly-failed states like Libya, South Sudan, Guinea Bissau, and Somalia; resource-rich rentier economies like Angola, Gabon, Congo-Brazzaville, and Equatorial Guinea; a number of states teetering on the brink and which could go either way – a group that includes Egypt, Tunisia, and Democratic Republic of Congo – in addition to the dynamic, growing, and reforming countries that do genuinely represent some attractive investment opportunities.
The WEF article makes some sweeping statements that are hardly supported by fact. For example:
1) “Africa needs ‘connectors'”. Well, yes. Infrastructure across much of the continent is in a lamentable state, and upgrading existing roads, railroads, bridges, airports, and the like, or building new ones, would be a boon to most African economies. But the investments needed are enormous, and apart from the Chinese Government, which is funding railroads and other big projects, it’s not clear where this money would come from. The article also states, “Lessons from Dubai and Singapore tell us that once an infrastructure race is on in a rapidly expanding market, being the first-mover is a significant advantage for investors.” What does this even mean?
2) “African trade barriers are falling and intra-African trade holds enormous potential.” Also true to some degree, but it will be decades before this promise is realized. The article says, “With the 54-nation Continental Free Trade Area – Africa’s own mega-trade deal – even the smallest African economies could see a lift.” True enough, but this free trade area is barely a gleam in anyone’s eye, announced with some fanfare at the African Union summit in 2012 with planned implementation by 2017. So far there is nothing to show for it but the initial announcement, and numerous African leaders and regional groups have publicly admitted that this target is unrealistic. Former Nigerian President Goodluck Jonathan said, “There are no quick fixes to integration.”
The most ambitious regional trade integration project currently in the works is the Tripartite Agreement – TPA – which will merge the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC) and the East African Community (EAC) into a single free trade area stretching from Egypt to South Africa and comprising 26 countries with an aggregate population of around 600 million. But COMESA itself has struggled for well over a decade to implement its own internal free trade area, while the number of member countries that remain on the sidelines, as well as the carve-outs for industries that different member countries want to protect, remain a serious stumbling block. According to the World Trade Organization (WTO), intra-African trade accounts for around 12% of total trade by African countries, as compared to 60% for Europe, 40% for North America, and 30% for Southeast Asia. Almost all of that 12% consists of trade within existing regional groups. Trade between countries in different regional groups is far less: total trade between Nigeria, the biggest country in the Economic Community of West African States (ECOWAS), and Cameroon, the biggest country in the Central African Monetary and Economic Community (CEMAC) – two countries that share a common border of nearly 2,000 km – amounts to less than one per cent of their total external trade.
3) “Customers are changing… With the growth of Africa’s middle class, we’re seeing development of new expectations. Educated, urban professionals are young, brand-aware and sophisticated in terms of their consumption.” It’s easy to be swayed by the gleaming skyscrapers and glitzy shopping malls in Nairobi, Lagos, Johannesburg, and other African cities, but Africa’s middle class remains tiny. The Economist cites research by The Pew Research Centre, which estimates that just 6% of Africans qualify as middle class, which it defines as those earning $10-$20 a day, and other research by its sister company, the Economist Intelligence Unit, which indicates that “90% of Africans still fall below the threshold of $10 a day and the proportion in the $10-$20 middle class (excluding very atypical South Africa), rose from 4.4% to only 6.2% between 2004 and 2014; over the same decade, the proportion defined as ‘upper middle’ ($20-$50 a day) went from…1.4% to 2.3%.” As The Economist points out, “A low wage is better than none at all, but those living on $10-$20 a day are hardly sipping sangrias at sunset.” Many of the people visiting those malls are there mainly to enjoy the air conditioning and gawp at the high-end boutiques, but continue to do most of their shopping at street markets in the poorer parts of town.
4) “Africa is diversifying.” It is true that many countries historically dependent on oil and minerals now seek to diversify, but becoming competitive in new industries is not easy, especially in places where public administration rather than business has traditionally been the path to prosperity. As a sign of progress, the WEF article says, “Recognizing they can no longer count on growing investment from China, every country now has what are called ‘Investment Promotion Agencies’, which act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.” With a few notable exceptions, most of these agencies are bloated and ineffective clones of the government ministries from which they have sprung.
Those are four of the six reasons, none of them more than half true. What about the other two?
One of them is “digital transformation,” and, as the article says, “Africa leads the world in mobile adoption, which continues to offer the biggest cross-sectoral economic opportunities. Mobile payment networks, pioneered in East Africa, opened the wired, global economy to poor, unbanked city and rural dwellers.” M-Pesa, a mobile payments system pioneered by Kenya’s Safaricom mobile service provider, has transformed the way Kenyans in every economic stratum deposit, withdraw, and transfer money and pay for goods and services. Launched in 2007, by 2014 the value of transactions conducted through the service amounted to nearly half of Kenya’s GDP. M-Pesa itself has expanded to a half-dozen other African countries as well as India, Romania, and Afghanistan, and the service has been imitated in numerous other countries.
The Yaba district of Lagos, the megacity of 20 million people that is Nigeria’s business capital, has become a hotbed of digital innovation, variously referred to as Yabacon Valley and Silicon Lagoon. Nigeria is home to Africa Internet Group, which includes Jumia.com, an online retailer modeled on Amazon and now present in 11 other African countries; Easy Taxi, a mobile taxi app modeled on Uber; and delivery app Hello Food, which offers motorcycle home delivery from restaurants in a dozen countries, earlier this year became Africa’s first “unicorn,” when its latest fundraising round that included French insurer AXA, Goldman Sachs, South African mobile group MTN, and German tech incubator Rocket Internet, valued the group at more than $1bn. (I ordered a pizza from HelloFood in Kigali last week, and although they ought to invest in some hotboxes to keep the food warm, I was pleased, overall, with the convenience and efficiency).
The other reason for optimism, which may be largely true, even if one discounts the breathless tone of the article, is that “Africa can lead in sustainable development.” The gist of this argument is that Africa has less of an installed base of power grids and generating plants, and lots of sunshine, wind, and hydro potential, and may thus be freer to develop alternative energy sources. Africa also has much of the world’s remaining unexploited arable land and low productivity on its existing farms, so big gains in productivity are possible, though climate change could drastically reduce this potential.
The takeaway from all of this is that there are pockets of dynamism and innovation in Africa. Together with a growing population and unmistakable trends in many countries towards greater democracy and economic liberalization, these are cause for optimism. Is that sufficient reason to invest and, if so, how and where to invest?
A continent is not a place to invest any more than an industry is. Telecommunications and IT are a vast and growing sector, but there is an awful lot of variation among companies within that sector. If you had invested $1,000 in Facebook in January 2014 you would now have more than $2,140, an annual return of about 37%. If you had done the same with Twitter you would now have about $233, an annual return of around -47%. If you had invested in the Hungarian stock market index at the beginning of this year your investment would by now have gained 18.4% in U.S. dollar terms. If instead you had put your money into the Italian stock market you’d have lost 13%.
Generalized enthusiasm for a market or an industry is not a sound basis for investment. For the WEF to suggest otherwise, even in the warm glow of one of its celebrated conferences, is foolish and irresponsible.