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More Household Spending plus Increased Investments in Natural Resources and Infrastructure Mean Higher Growth for Africa

STORY HIGHLIGHTS
  • The latest Africa’s Pulse shows economic growth rising from 4.7% in 2013 to 5.2% in 2014
  • Natural resource exports are driving much of the growth
  • More spending at the household level due to increased remittances and lower food and fuel prices is boosting growth figures

WASHINGTON, April 7, 2014— For the past 19 years Sub-Saharan Africa has continued to make impressive strides in sustaining economic growth. After five years of prolonged weakness in the global economy, most countries in the region have continued to register relatively vigorous growth.

Despite emerging challenges, economic activity throughout the region continues to expand: GDP growth is projected to reach 5.2% in 2014, compared with 4.7% in 2013, and will rise to 5.4% in 2015, according to the World Bank’s new Africa’s Pulse, the twice-yearly analysis of the economic trends and latest data on the continent.

According to Africa’s Pulse, the growth in the region is broad based and the prosperous economic activity is supported by strong public and private investment demand and robust household consumption. The rise in commodity prices, and the surge of foreign capital spurred by accommodative monetary policies in high-income economies, is key to the region’s sustained growth since the mid-1990s, the report notes.

“Although Sub-Saharan Africa’s exports remain concentrated in a few strategic commodities, the region’s countries have made substantial progress in diversifying their trading partners,” says Francisco Ferreira, Chief Economist for the World Bank’s Africa Region. “Over the last decade, exports to emerging markets such as the BRICs—Brazil, Russia, India, China—have grown robustly, primarily due to the prolonged boom in commodities demand. The BRICs received only 9%of Sub-Saharan Africa’s exports in 2000 but accounted for 34% of total exports a decade later.”

Across the region there has been a rapid growth in foreign direct investment (FDI). Two investment trends are central to driving this expansion—the extended commodities boom brought about by the unprecedented scale of development in Asia, and the massive expansion of moving international trade activities offshore. The new wave of FDI not only delivers investment and employment but also opens up new opportunities through deeper global trade integration.

Patterns of growth in Sub-Saharan Africa show considerable variation across countries, with resource-rich countries growing at a faster pace than non-resource-rich countries. In fact, the best growth performers in the region (in terms of median annual rates) grew nearly four times as fast as the slow-growing nations in Africa (3.3 and 0.9 percent per annum, respectively, during 1995-2012). Among best performers, resource-rich and non-resource-rich countries such as Rwanda and Ethiopia had comparable growth rates (that exceed 4 percent per annum).

Natural Resources and the Services Sector

Africa’s Pulse shows that the resources and services sectors are Sub-Saharan Africa’s best performers: The share of the resources sector rose from 9%during 1995-99 to 12.5%during 2007-11 while that of services grew from 40% to 47%.

Sub-Saharan Africa’s exports grew at a robust pace, driven by the region’s natural resources. During 1995-2012, the region’s total exports increased from $68 billion to over $400 billion. Most of this increase came from natural resources export. For example, petroleum, minerals, and metal exports ballooned from $38 billion to $300 billion during this period.

While high commodity prices have helped the region in recent years, the heavy reliance on resource-based exports also makes the region highly vulnerable to the shocks in commodity prices.

Growth and Trade Patterns

Export diversification has been limited, mirroring sectoral shifts in the region’s economies, but there has been substantial progress in diversifying trading partners. Strong growth in countries in the region have characteristics that are associated to the structure of production, advances in structural reforms, the influence of the country to the world economy, or sound macroeconomic frameworks.

The challenge for many African countries, particularly oil exporters, is to diversify their exports. Oil-exporting countries rely heavily on a single commodity as their revenue source. For example, Angola, Chad, Equatorial Guinea, Gabon and Nigeria received, on average, more than 92% of their export earnings from oil during 2010-13.

Although, the export revenue share from minerals and metals may not be as high as that from oil, it is still high for some nonoil resource-rich countries—Botswana, Guinea, Mauritania, and Sierra Leone—with earnings more than 50%of their revenue from natural resources.

Some countries have had success in diversifying exports. An example is Tanzania. The country saw major increases in and diversification of output and exports. The production and export of traditional agricultural cash crops (such as cashew nuts, coffee, cotton, tea, sisal, and tobacco) declined considerably in importance. The geographic distribution of Tanzania’s exports also changed considerably over the last decade. Exports to the EU fell, while regional trade, especially with the East African Community (EAC) and South Africa, increased.

Looking Into the Future

There are broad areas in which Sub-Saharan Africa governments need to invest to ensure that growth continues and is shared among entire populations. The report suggests that good governance and institutions; investing in the people of Africa—especially the youth; promoting infrastructure across the region; reducing barriers to trade and investment; and making sure there are adequate services and infrastructure for the rapidly expanding urbanization of African cities and secondary cities are key to maintaining and sharing growth within the region.

Globalization of services is a potentially important source of growth for the Africa region. Several favorable trends that support this view include: services trade is the fastest-growing sector within global trade; the share of modern services is rising; and the share of developing countries in world service exports has been rising. Technology and outsourcing are enabling traditional services to overcome their old constraints such as physical and geographic proximity. Modern services, such as software development, call centers, and outsourced business processes, can be traded like value-added, manufactured products, enabling developing countries that focus on such services, innovation, and technology to leverage services as an important driver of growth.

The question that the region faces is, “Has Sub-Saharan Africa tapped this potential?” The region’s services exports, which total $50 billion, trail all other developing regions; however, these exports are expanding annually at about 12%, on average. Traditional services such as transportation and travel have declined from 73% of total services in 2005 to less than 64%in 2012, while modern services exports in the region have increased their share by over 10 percentage points from just over 26%of total services to about 36% over the same period.

In some countries such as Mauritius, Rwanda, and Tanzania, modern services recorded annual growth rates of over 10%between 2005 and 2012, with Rwanda starting from a low base of less than $40 million in modern services exported in 2005 to over twice that amount at almost $85 million by 2012. In both Mauritius and Rwanda, rapid expansion in modern services is a result of increased activity in tradable business and financial services. Over 60% of those employed in large companies in Mauritius work in the service sector, which offers more employment opportunities than either agriculture or manufacturing. While these countries have experienced the fastest increase in modern services, others like Kenya are also emerging as places where modern services are becoming drivers of growth and development.

“This,” says Punam Chuhan-Pole, Lead Economist in the World Bank’s Africa Region, and author of Africa’s Pulse, “is exciting news for other African countries looking to expand into the globalized services business.”