Economy of Africa

History

Africa's economy was diverse, driven by extensive trade routes that developed between cities and kingdoms. Some trade routes were overland, some involved navigating rivers, still others developed around port cities. Large African empires became wealthy due to their trade networks, for example Ancient Egypt, Nubia, Mali, Ashanti, and the Oyo Empire.

Some parts of Africa had close trade relationships with Arab kingdoms, and by the time of the Ottoman Empire, Africans had begun converting to Islam in large numbers. This development, along with the economic potential in finding a trade route to the Indian Ocean, brought the Portuguese to sub-Saharan Africa as an imperial force. Colonial interests created new industries to feed European appetites for goods such as palm oil, rubber, cotton, precious metals, spices and other goods.

Following the independence of African countries during the 20th century, economic, political and social upheaval consumed much of the continent. An economic rebound among some countries has been evident in recent years, however.

The dawn of the African economic boom (which is in place since 2000's) was similar to the Chinese economic boom that had emerged in Asia since late 1970's. Currently, South Africa and Nigeria ranks among the continent's largest economies, with Egypt economically scrambling and suffering from the recent political turmoil. Equatorial Guinea possessed Africa's highest GDP per capita albeit allegations of human rights violations. Oil-rich countries such as Algeria, Libya and Gabon, and mineral-rich Botswana emerged among the top economies since the 21st century, while Zimbabwe and the Democratic Republic of Congo, potentially among the world's richest nations, have sunk into the list of the world's poorest nations due to pervasive political corruption, warfare and braindrain of workforce. Botswana remains the site of Africa's longest and one of the world's longest periods of economic boom (1966–1999).

Current conditions

In the past ten years, growth in Africa has surpassed that of East Asia Data suggest parts of the continent are now experiencing fast growth, thanks to their resources and increasing political stability and 'has steadily increased levels of peacefulness since 2007'. The World Bank reports the economy of Sub-Saharan African countries grew at rates that match or surpass global rates.

The economies of the fastest growing African nations experienced growth significantly above the global average rates. The top nations in 2007 include Mauritania with growth at 19.8%, Angola at 17.6%, Sudan at 9.6%, Mozambique at 7.9% and Malawi at 7.8%. Other fast growers include Rwanda, Mozambique, Chad, Niger, Burkina Faso, Ethiopia. Nonetheless, growth has been dismal, negative or sluggish in many parts of Africa including Zimbabwe, the Democratic Republic of the Congo, the Republic of the Congo and Burundi. Many international agencies are increasingly interested in investing in emerging African economies. especially as Africa continues to maintain high economic growth despite current global economic recession. The rate of return on investment in Africa is currently the highest in the developing world.

Debt relief is being addressed by some international institutions in the interests of supporting economic development in Africa. In 1996, the UN sponsored the Heavily Indebted Poor Countries (HIPC) initiative, subsequently taken up by the IMF, World Bank and the African Development Fund (AfDF) in the form of the Multilateral Debt Relief Initiative (MDRI). As of 2013, the initiative has given partial debt relief to 30 African countries.

Trade growth

Trade has driven much of the growth in Africa's economy in the early 21st century. China and India are increasingly important trade partners; 12.5% of Africa's exports are to China, and 4% are to India, which accounts for 5% of China's imports and 8% of India's. The Group of Five (Indonesia, Malaysia, Saudi Arabia, Thailand, and the United Arab Emirates) are another increasingly important market for Africa's exports.

Future

Africa's economy—with expanding trade, English language skills (official in many Sub-Saharan countries), improving literacy and education, availability of splendid resources and cheaper labour force—is expected to continue to perform better into the future. Trade between Africa and China stood at US$166 billion in 2011.

Africa will experience a "demographic dividend" by 2035, when its young and growing labour force will have fewer children and retired people as dependents as a proportion of the population, making it more demographically comparable to the US and Europe. It is becoming a more educated labour force, with nearly half expected to have some secondary-level education by 2020. A consumer class is also emerging in Africa and is expected to keep booming. Africa has around 90 million people with household incomes exceeding $5,000, meaning that they can direct more than half of their income towards discretionary spending rather than necessities. This number could reach a projected 128 million by 2020.

During the President of the United States Barack Obama's visit to Africa in July 2013, he announced a US$7 billion plan to further develop infrastructure and work more intensively with African heads of state. A new program named Trade Africa, designed to boost trade within the continent as well as between Africa and the U.S., was also unveiled by Obama.

Causes of the economic underdevelopment over the years

The seemingly intractable nature of Africa's poverty has led to debate concerning its root causes. Endemic warfare and unrest, widespread corruption, and despotic regimes are both causes and effects of the continued economic problems. The decolonization of Africa was fraught with instability aggravated by cold war conflict. Since the mid-20th century, the Cold War and increased corruption and despotism have also contributed to Africa's poor economy.

Infrastructure

According to researchers at the Overseas Development Institute, the lack of infrastructure in many developing countries represents one of the most significant limitations to economic growth and achievement of the Millennium Development Goals (MDGs). Infrastructure investments and maintenance can be very expensive, especially in such areas as landlocked, rural and sparsely populated countries in Africa.

It has been argued that infrastructure investments contributed to more than half of Africa's improved growth performance between 1990 and 2005 and increased investment is necessary to maintain growth and tackle poverty. The returns to investment in infrastructure are very significant, with on average 30–40% returns for telecommunications (ICT) investments, over 40% for electricity generation, and 80% for roads.

In Africa, it is argued that to meet the MDGs by 2015, infrastructure investments would need to reach about 15% of GDP (around $93 billion a year). Currently, the source of financing varies significantly across sectors. Some sectors are dominated by state spending, others by overseas development aid (ODA) and yet others by private investors. In sub-Saharan Africa, the state spends around $9.4 billion out of a total of $24.9 billion.

In irrigation, SSA states represent almost all spending; in transport and energy a majority of investment is state spending; in Information and communication technologies and water supply and sanitation, the private sector represents the majority of capital expenditure. Overall, aid, the private sector and non-OECD financiers between them exceed state spending. The private sector spending alone equals state capital expenditure, though the majority is focused on ICT infrastructure investments. External financing increased from $7 billion (2002) to $27 billion (2009). China, in particular, has emerged as an important investor.

Colonialism

The economic impact of the colonization of Africa has been debated. In this matter, the opinions are biased between researchers, some of them consider that Europeans had a positive impact on Africa; others affirm that Africa's development was slowed down by colonial rule. The principal aim of colonial rule in Africa by European colonial powers was to exploit natural wealth in the African continent at a low cost. Some writers, such as Walter Rodney in his book How Europe Underdeveloped Africa, argue that these colonial policies are directly responsible for many of Africa's modern problems. Critics of colonialism charge colonial rule with injuring African pride, self-worth and belief in themselves. Other post-colonial scholars, most notably Frantz Fanon continuing along this line, have argued that the true effects of colonialism are psychological and that domination by a foreign power creates a lasting sense of inferiority and subjugation that creates a barrier to growth and innovation. Such arguments posit that a new generation of Africans free of colonial thought and mindset is emerging and that this is driving economic transformation.

Historians L. H. Gann and Peter Duignan have argued that Africa probably benefited from colonialism on balance. Although it had its faults, colonialism was probably "one of the most efficacious engines for cultural diffusion in world history". These views, however, are controversial and are rejected by some who, on balance, see colonialism as bad. The economic historian David Kenneth Fieldhouse has taken a kind of middle position, arguing that the effects of colonialism were actually limited and their main weakness wasn't in deliberate underdevelopment but in what it failed to do. Niall Ferguson agrees with his last point, arguing that colonialism's main weaknesses were sins of omission. Analysis of the economies of African states finds that independent states such as Liberia and Ethiopia did not have better economic performance than their post-colonial counterparts. In particular the economic performance of former British colonies was better than both independent states and former French colonies.

Africa's relative poverty predates colonialism. Jared Diamond argues in Guns, Germs, and Steel that Africa has always been poor due to a number of ecological factors affecting historical development. These factors include low population density, lack of domesticated livestock and plants and the North-South orientation of Africa's geography. However Diamond's theories have been criticized by some including James Morris Blaut as a form of environmental determinism. Historian John K. Thornton argues that sub-Saharan Africa was relatively wealthy and technologically advanced until at least the seventeenth century. Some scholars who believe that Africa was generally poorer than the rest of the world throughout its history make exceptions for certain parts of Africa. Acemoglue and Robinson, for example, argue that most of Africa has always been relatively poor, but "Aksum, Ghana, Songhay, Mali, [and] Great Zimbabwe... were probably as developed as their contemporaries anywhere in the world." A number of people including Rodney and Joseph E. Inikori have argued that the poverty of Africa at the onset of the colonial period was principally due to the demographic loss associated with the slave trade as well as other related societal shifts. Others such as J. D. Fage and David Eltis have rejected this view.

Language diversity

African countries suffer from communication difficulties caused by language diversity. Greenberg's diversity index is the chance that two randomly selected people would have different mother tongues. Out of the most diverse 25 countries according to this index, 18 (72%) are African. This includes 12 countries for which Greenberg's diversity index exceeds 0.9, meaning that a pair of randomly selected people will have less than 10% chance of having the same mother tongue. However, the primary language of government, political debate, academic discourse, and administration is often the language of the former colonial powers; English, French, or Portuguese.

Trade based theories

Dependency theory asserts that the wealth and prosperity of the superpowers and their allies in Europe, North America and East Asia is dependent upon the poverty of the rest of the world, including Africa. Economists who subscribe to this theory believe that poorer regions must break their trading ties with the developed world in order to prosper.

Less radical theories suggest that economic protectionism in developed countries hampers Africa's growth. When developing countries have harvested agricultural produce at low cost, they generally do not export as much as would be expected. Abundant farm subsidies and high import tariffs in the developed world, most notably those set by Japan, the European Union's Common Agricultural Policy, and the United States Department of Agriculture, are thought to be the cause. Although these subsidies and tariffs have been gradually reduced, they remain high.

Local conditions also affect exports; state over-regulation in several African nations can prevent their own exports from becoming competitive. Research in Public Choice economics such as that of Jane Shaw suggest that protectionism operates in tandem with heavy State intervention combining to depress economic development. Farmers subject to import and export restrictions cater to localized markets, exposing them to higher market volatility and fewer opportunities. When subject to uncertain market conditions, farmers press for governmental intervention to suppress competition in their markets, resulting in competition being driven out of the market. As competition is driven out of the market, farmers innovate less and grow less food further undermining economic performance.

Governance

Although Africa and Asia had similar levels of income in the 1960s, Asia has since outpaced Africa. One school of economists argues that Asia's superior economic development lies in local investment. Corruption in Africa consists primarily of extracting economic rent and moving the resulting financial capital overseas instead of investing at home; the stereotype of African dictators with Swiss bank accounts is often accurate. University of Massachusetts Amherst researchers estimate that from 1970 to 1996, capital flight from 30 sub-Saharan countries totalled $187bn, exceeding those nations' external debts. This disparity in development is consistent with the model theorized by economist Mancur Olson. Because governments were politically unstable and new governments often confiscated their predecessors' assets, officials would stash their wealth abroad, out of reach of any future expropriation.

Foreign aid

Food shipments in case of dire local shortage are generally uncontroversial; but as Amartya Sen has shown, most famines involve a local lack of income rather than of food. In such situations, food aid—as opposed to financial aid—has the effect of destroying local agriculture and serves mainly to benefit Western agribusiness which are vastly overproducing food as a result of agricultural subsidies. Historically, food aid is more highly correlated with excess supply in Western countries than with the needs of developing countries. Foreign Aid has been an integral part of African economic development since the 1980s.

The Aid model has been criticized for supplanting trade initiatives Growing evidence is showing that foreign aid has made the continent poorer. One of the biggest critic of the aid development model is Economist Dambiso Moyo(A Zambian Economist based in the US), who introduced the Dead Aid model that highlights how foreign Aid has been a deterrent for development initiative and provides an alternate model.

Today, Africa faces the problem of attracting foreign aid in areas where there is potential for high income from demand. It is in the need for more economic policies and active participation in the world economy. As globalization has heightened the competition for foreign aid among developing countries, Africa has been trying to improve its struggle to receive foreign aid by taking more responsibility at the regional and international level. In addition, Africa has created the ‘Africa Action Plan’ in order to obtain new relationships with development partners to share responsibilities regarding discovering ways to receive aid from foreign investors.

Trade blocks and multilateral organizations

The African Union is the largest international economic grouping on the continent. The confederation's goals include the creation of a free trade area, a customs union, a single market, a central bank, and a common currency (see African Monetary Union), thereby establishing economic and monetary union. The current plan is to establish an African Economic Community with a single currency by 2023. The African Investment Bank is meant to stimulate development. The AU plans also include a transitional African Monetary Fund leading to an African Central Bank. Some parties support development of an even more unified United States of Africa.

International monetary and banking unions include:

Major economic unions are shown in the chart below.

Economic variants and indicators

After an initial rebound from the 2009 world economic crisis, Africa’s economy was undermined in the year 2011 by the Arab uprisings. The continent’s growth fell back from 5% in 2010 to 3.4% in 2011. With the recovery of North African economies and sustained improvement in other regions, growth across the continent is expected to accelerate to 4.5% in 2012 and 4.8% in 2013. Short-term problems for the world economy remain as Europe confronts its debt crisis. Commodity prices—crucial for Africa—have declined from their peak due to weaker demand and increased supply, and some could fall further. But prices are expected to remain at levels favourable for African exporter.

Regions

Economic activity has rebounded across Africa. However, the pace of recovery was uneven among groups of countries and subregions. Oil-exporting countries generally expanded more strongly than oil-importing countries. West Africa and East Africa were the two best-performing subregions in 2010.

Intra-African trade has been slowed by protectionist policies among countries and regions. Despite this, trade between countries belonging to the Common Market for Eastern and Southern Africa (COMESA), a particularly strong economic region, grew six-fold over the past decade up to 2012. Ghana and Kenya, for example, have developed markets within the region for construction materials, machinery, and finished products, quite different from the mining and agriculture products that make up the bulk of their international exports.

The African Ministers of Trade agreed in 2010 to create a Pan-Africa Free Trade Zone. This would reduce countries' tariffs on imports and increase intra-African trade, and it is hoped, the diversification of the economy overall.

Economic sectors and industries

Because Africa’s export portfolio remains predominantly based on raw material, its export earnings are contingent on commodity price fluctuations. This exacerbates the continent’s susceptibility to external shocks and bolsters the need for export diversification. Trade in services, mainly travel and tourism, continued to rise in year 2012, underscoring the continent’s strong potential in this sphere.

Agriculture

The situation whereby African nations export crops to the West while millions on the continent starve has been blamed on developed countries including Japan, the European Union and the United States. These countries protect their own agricultural sectors with high import tariffs and offer subsidies to their farmers, which many contend leads the overproduction of such commodities as grain, cotton and milk. The result of this is that the global price of such products is continually reduced until Africans are unable to compete, except for cash crops that do not grow easily in a northern climate.

In recent years countries such as Brazil, which has experienced progress in agricultural production, have agreed to share technology with Africa to increase agricultural production in the continent to make it a more viable trade partner. Increased investment in African agricultural technology in general has the potential to reduce poverty in Africa. The demand market for African cocoa has experienced a price boom in 2008. The Nigerian, South African and Ugandan governments have targeted policies to take advantage of the increased demand for certain agricultural products and plan to stimulate agricultural sectors. The African Union has plans to heavily invest in African agriculture and the situation is closely monitored by the UN.

Energy

Africa has significant resources for generating energy in several forms (hydroelectric, reserves of petroleum and gas, coal production, uranium production, renewable energy such as solar and geothermal). The lack of development and infrastructure means that little of this potential is actually in use today. The largest consumers of electric power in Africa are South Africa, Libya, Namibia, Egypt, Tunisia, and Zimbabwe, which each consume between 1000 and 5000 KWh/m² per person, in contrast with African states such as Ethiopia, Eritrea, and Tanzania, where electricity consumption per person is negligible.

Petroleum and petroleum products are the main export of 14 African countries. Petroleum and petroleum products accounted for a 46.6% share of Africa's total exports in 2010; the second largest export of Africa as a whole is natural gas, in its gaseous state and as liquified natural gas, accounting for a 6.3% share of Africa's exports.

Infrastructure

Lack of infrastructure creates barriers for African businesses. Although it has many ports, a lack of supporting transportation infrastructure adds 30-40% to costs, in contrast to Asian ports. Many large infrastructure projects are underway across Africa. By far, most of these projects are in the production and transportation of electric power. Many other projects include paved highways, railways, airports, and other construction.

Telecommunications infrastructure is also a growth area in Africa. Although Internet penetration lags other continents, it has still reached 9%. As of 2011, it was estimated that 500,000,000 mobile phones of all types were in use in Africa, including 15,000,000 "smart phones".

Mining and drilling

The mineral industry of Africa is one of the largest mineral industries in the world. Africa is the second biggest continent, with 30 million km² of land, which implies large quantities of resources. For many African countries, mineral exploration and production constitute significant parts of their economies and remain keys to future economic growth. Africa is richly endowed with mineral reserves and ranks first or second in quantity of world reserves of bauxite, cobalt, industrial diamond, phosphate rock, platinum-group metals (PGM), vermiculite, and zirconium. Gold mining is Africa's main mining resource.

African mineral reserves rank first or second for bauxite, cobalt, diamonds, phosphate rocks, platinum-group metals (PGM), vermiculite, and zirconium. Many other minerals are also present in quantity. The 2005 share of world production from African soil is the following: bauxite 9%; aluminium 5%; chromite 44%; cobalt 57%; copper 5%; gold 21%; iron ore 4%; steel 2%; lead (Pb) 3%; manganese 39%; zinc 2%; cement 4%; natural diamond 46%; graphite 2%; phosphate rock 31%; coal 5%; mineral fuels (including coal) & petroleum 13%; uranium 16%.

Manufacturing

Both the African Union and the United Nations have outlined plans in modern years on how Africa can help itself industrialize and develop significant manufacturing sectors to levels proportional to the African economy in the 1960s with 21st-century technology. This focus on growth and diversification of manufacturing and industrial production, as well as diversification of agricultural production, has fueled hopes that the 21st century will prove to be a century of economic and technological growth for Africa. This hope, coupled with the rise of new leaders in Africa in the future, inspired the term "the African Century", referring to the 21st century potentially being the century when Africa's vast untapped labor, capital, and resource potentials might become a world player.

This hope in manufacturing and industry is helped by the boom in communications technology and local mining industry in much of sub-Saharan Africa. Namibia has attracted industrial investments in recent years and South Africa has begun offering tax incentives to attract foreign direct investment projects in manufacturing.

Countries such as Mauritius have plans for developing new "green technology" for manufacturing. Developments such as this have huge potential to open new markets for African countries as the demand for alternative "green" and clean technology is predicted to soar in the future as global oil reserves dry up and fossil fuel-based technology becomes less economically viable.

Nigeria in recent years has been embracing industrialization, It currently has an indigenous vehicle manufacturing company, Innoson Motors (IVM) which manufactures Rapid Transit Buses, Trucks and SUVs with an upcoming introduction of Cars. Their various brands of vehicle are currently available in Nigeria, Ghana and other West African Nations. Nigeria also has few Electronic manufacturers like Zinox, the first Branded Nigerian Computer and Electronic gadgets (like tablet PCs) manufacturers. In 2013, Nigeria introduced a policy regarding import duty on vehicles to encourage local manufacturing companies in the country. In this regard, some foreign vehicle manufacturing companies like Nissan have made known their plans to have manufacturing plants in Nigeria. Apart from Electronics and vehicles, most consumer, pharmaceutical and cosmetic products, building materials, textiles, home tools, plastics and so on are also manufactured in the country and exported to other west African and African countries. Nigeria is currently the largest manufacturer of cement in Sub-saharan Africa. and Dangote Cement Factory, Obajana is the largest cement factory in sub-saharan Africa. Ogun is considered to be Nigeria's industrial hub (as most factories are located in Ogun and even more companies are moving there), followed by Lagos.

Investment and banking

Africa's US$107 billion financial services industry will log impressive growth for the rest of the decade as more banks target the continent's emerging middle class. The banking sector has been experiencing record growth, among others due to various technological innovations.

China and India have showed increasing interest in emerging African economies in the 21st century. Reciprocal investment between Africa and China increased dramatically in recent years amidst the current world financial crisis.

The increased investment in Africa by China has attracted the attention of the European Union and has provoked talks of competitive investment by the EU. Members of the African diaspora abroad, especially in the EU and the United States, have increased efforts to use their businesses to invest in Africa and encourage African investment abroad in the European economy. Remittances from the African diaspora and rising interest in investment from the West will be especially helpful for Africa's least developed and most devastated economies, such as Burundi, Togo and Comoros. Angola has announced interests in investing in the EU, Portugal in particular. South Africa has attracted increasing attention from the United States as a new frontier of investment in manufacture, financial markets and small business, as has Liberia in recent years under their new leadership.

There are two African currency unions: the West African Banque Centrale des États de l'Afrique de l'Ouest (BCEAO) and the Central African Banque des États de l'Afrique Centrale (BEAC). Both use the CFA franc as their legal tender.

Stock exchanges

As of 2012, Africa has 23 stock exchanges, twice as many as it had 20 years earlier. Nonetheless, African stock exchanges still account for less than 1% of the world's stock exchange activity. The top ten stock exchanges in Africa by stock capital are (amounts are given in billions of United States dollars):

Between 2009 and 2012, a total of 72 companies were launched on the stock exchanges of 13 African countries.

Trade blocs and multilateral organizations

The African Union is the largest international economic grouping on the continent. The confederation's goals include the creation of a free trade area, a customs union, a single market, a central bank, and a common currency (see African Monetary Union), thereby establishing economic and monetary union. The current plan is to establish an African Economic Community with a single currency by 2023. The African Investment Bank is meant to stimulate development. The AU plans also include a transitional African Monetary Fund leading to an African Central Bank. Some parties support development of an even more unified United States of Africa.

International monetary and banking unions include:

Major economic unions are shown in the chart below.

Regional economic organizations

During the 1960s, Ghanaian politician Kwame Nkrumah promoted economic and political union of African countries, with the goal of independence. Since then, objectives, and organizations, have multiplied. Recent decades have brought efforts at various degrees of regional economic integration. Trade between African states accounts for only 11% of Africa's total commerce as of 2012, around five times less than in Asia. Most of this intra-Africa trade originates from South Africa and most of the trade exports coming out of South Africa goes to abutting countries in Southern Africa.

There are currently eight regional organizations that assist with economic development in Africa: