Africa’s diverse states share a need for governance reform

AS in the majority of emerging markets, GDP growth in Africa has dropped dramatically over the past three years. Of sub-Saharan Africa’s big four economies, two are rapidly contracting (Nigeria and Angola), one is static (South Africa), and only Kenya is growing at a decent emerging-market rate of better than 5% — the base norm that a true emerging market in the region needs in the face of high population growth.

So what then is the “new normal” for Africa?

There has been a severe commodity price correction; debt serviceability by sovereigns is posing crises for many countries; localised conflict is flaring across the continent; and governance is seemingly on the decline.

Is the “Africa rising” narrative dead? Is the continent merely reverting to the pre-commodity-boom trend? Not quite.

The way we have looked at and quantified Africa has always been flawed. The region is so vast, so diverse, with so many economic differences and interests, that it has always been far too simplistic to have a single view or narrative for it. The wide geography, the nascent markets, lack of connectivity, very low collaboration between states (don’t fall for the AU’s rhetoric) and, most importantly, the lack of knowledge networks, all prevent a common crosscontinental view.

The price collapses of minerals in 2013 and of oil in mid-2014 have severely knocked the overly resourcedependent economies in the southern and western regions respectively, but the eastern region’s growth trajectory remains buoyant. Economies such as Ethiopia, Kenya, Tanzania and Rwanda are the frontier growth stories. These countries are increasingly attracting capital and trading with the Middle East and South Asia, a region that is certainly integrating. If you can picture it, this is the new AfricaArabia-Asia economy.

In the next decade, this eastern African region will have a population of 330 million, and it will have a growth trend that is not resource-driven (except for agricultural products). This is unlike the recent growth spurt in West Africa that has proved to be heavily underpinned by temporarily inflated oil prices, driven more by speculators than by real market demand.

The East African Community is forecast by the IMF to grow 6.1% this year. Based on the region’s current growth and extrapolating this forward 10 years, it is forecast that $350-billion (about R4.7-trillion) will be added to consumption in these markets — very close to the current GDP of South Africa.

Since the turn of the millennium, the primary driver of resource demand has been China, but as this economy rebalances — shifting from an investment-driven model to one oriented towards services and consumption — demand will shift from “hard” commodities to “soft”. This will further underpin East Africa’s resource sector offering.

So what of the rest — Nigeria, Angola and other oil-propelled economies — the previous darlings of the obsolete and inherently flawed Africa rising narrative? They need a political-economic reset. The strategy for investors in these countries is now one of fortitude. The pricing and valuations of assets in these economies have been revealed to be based on short-term profiteering and excessive hype.

The distortive effect of oil in Nigeria and Angola was all too evident. There is no (market) reason why Luanda should be the world’s most expensive city. West African economies need to reprice and are in the painful process of doing so. Rapidly dropping asset prices and consolidations across the economy present opportunities for counter-cyclical (read “smart”) investors.

During these challenging times, states need to embark on the dramatic reform that failed to happen when times were good. The ease of doing business needs to improve (check the very useful World Bank’s index), and moribund and anti-competitive stateowned firms need to privatise.

But the actual trend may in fact be the opposite, shifting towards increasing protectionist stances and policies in many countries, including Kenya, Mozambique, Tanzania, Zambia and Zimbabwe.

In Asia, most often the state is the entrepreneur. In Africa, the state is the participant in the economy. Rather than claiming to be agents of development, states themselves need to stop crowding out the private sector and blocking opportunities for entrepreneurs through monopolising so-called “strategic” sectors.

The “developmental state” in most cases in Africa is an oxymoron. States cannot legislate themselves towards diversification and value addition without enabling business and incentivising capital.

The role of African governments is now to cut bureaucracy, create the necessary human capital skills, encourage entrepreneurs and — the most obvious but perhaps the most difficult — improve governance. The emerging-market story is ultimately a governance story. To truly develop, Africa’s leaders need to grasp this simple fact.

It has always been far too simplistic to have a single narrative for it

Davies is MD for emerging markets and Africa at Deloitte