Tuesday, September 28, 2010

McKinsey report - 'Lions on the move: The progress and potential of African economies'

Africa presents myriad opportunities for growth and investment in the near future and beyond. So says The McKinsey Global Institute, a think tank focusing on business and economics research worldwide. McKinsey partners presented the findings of their June 2010 report Lions on the Move: The progress and potential of African economies at the Gordon Institute of Business Science (GIBS) on 14 September. Their conclusions were both surprising and encouraging.

Mutsa Chironga, Engagement Manager in McKinsey’s Sub-Saharan Office, observed that in the global political economy most growth has come from emerging markets, and that Africa forms part of this new dynamic fold. “Growth has headed South, while debt has headed North”, he said.

Mutsa Chironga

This growth is about far more than simply resources, Chironga observed. Referring to the report, he noted that although the boom in commodity prices had certainly helped Africa, this growth was also the result of government actions to improve the political and macroeconomic environments and to create a healthier overall business climate.

“Africa’s business opportunities are potentially very large, particularly for companies in consumer-facing industries, resources, agriculture, and infrastructure,” the report noted. The question to ask from here is whether this growth will be sustained if the oil price drops?

The answer is: most likely. Africa is seen as the final frontier of growth, Chironga said, and the last opportunity for many companies to significantly grow their market share, especially in strategic industries such as telecommunications, banking and retail.

Chironga pointed to some key factors that could lead to potential long-term and sustained success. For instance, investment in Africa has increased seven-fold in the last decade. In addition, GDP growth has reached levels of USD 1,5 trillion, making the combined value of the continent’s economy the tenth largest in the world.

With approximately a billion people within its borders, Africa comprises about 14% of the global population. Half of these people are under the age of 35 years, representing a huge untapped reserve of potential skilled and unskilled labour. In this light, the report notes that, “[by] 2040, the continent will be home to one in five of the planet’s young people, and the size of its labour force will top China’s.” (p.50.)

However, Chironga cautioned that the downside to this remarkable story is political risk and uncertainties surrounding stability and security. Perceptions of these risks are still high, and are the number one factor hindering investment. Another challenge is in education, where improvements have been made, but not at the desired rate.

Arend van Wamelen, a Principal in McKinsey & Company’s Johannesburg office, developed these concepts further.

He referred to a key element of the report: “Long-term growth also will be lifted by internal social and demographic trends, particularly Africa’s growing labor force, urbanisation, and the related rise of middle-class consumers.” (p.1.). Although urbanisation is not uniformly good, and comes with many challenges (e.g. slums and strains on services), urban dwellers tend to be more productive and add positively to consumer spending, he said.

Another topic van Wamelen addressed was the role of China on the continent and the growing infrastructure investment that the world’s second largest economy has provided for many African countries (levels that are now higher than that of the World Bank’s).

Arend van Wamelen

Van Wamelen took note of, but ultimately dismissed, fears that this represents a neo-colonial push that will benefit only one partner. African governments, he said, were becoming far shrewder in their dealings with China, and the demand for commodities which has bolstered growth has come largely from the East.

Rates of credit provided by the Chinese were also far lower than those offered by other Development Finance Institutions (DFIs) such as the IDC and DBSA, which aided development.

Both speakers were particularly excited about the potential for an “African Green Revolution” on the level of those experienced, for example, in India and Bangladesh. According to the report, Africa contains 60% of the world’s unused arable land.

If, and only if, improvements in policy and technology can be applied to the agricultural sector then this too could potentially contribute to Africa’s economic growth. The McKinsey report underscored that this is by no means a certainty, and that a lot of work will have to be done to realize this potential.

Generally speaking, this is exciting news for a continent long mired in low rates of growth, hyperinflation and political instability. With the cessation of several major conflicts and the liberalization of many core economies, Africa is now set to lift off, but the right buttons will have to be pushed before that can happen.


Photo: David Ansara
Graph: McKinsey Global Institute & International Monetary Fund


This article was originally written for MBAnetwork, an information portal and networking site for prospective and current MBA students in South Africa.

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