All the sound and buzz about China’s investments in Africa is very misleading. India is the one making the most serious play.
Africa is sliding back into economic decline hastened by the collapse of commodity prices that leave the continent exposed to the threat of increased fragility and rising debt. Most worrying of all, the migrant crisis that has assailed European nations is seen as further evidence of desperate Africans fleeing hardship and depravity.
These are the type of storylines that have once again become the stock-in-trade for global – and even some African – media outlets. Are they justified, are they even accurate?
Carlos Lopes, Executive Secretary of the UN Economic Commission for Africa (UNECA), headquartered in the Ethiopian capital Addis Ababa, strongly disagrees and counters these views, which he considers distorted.
Speaking to Mail & Guardian Africa on the sidelines of the Africa Media Leaders Forum in Johannesburg this past week, he said it was incumbent on Africans to take control of this narrative so that there is a more intelligent and truthful understanding of the realities on the continent.
A cross section of the audience at the AMLF conference. (Photo/Johann Barnard/M&GAfrica).
He summarised these truths into five key points:
DISTORTED MESSAGES, BUT BY WHOM?
Those in the know, including the likes of Ernst & Young, the World Bank, Rand Merchant Bank, McKinsey, Deloitte & Touche, and Standard Chartered Bank have all recently expressed positive assessments of economic growth, disposable income, savings and investment attractiveness.
This runs counter to the generally-held view that African nations are slipping back into negative, more risky territory.
“The problem is that the mainstream view gets completely distorted and does not even follow excellent research by institutions that are very credible. [The issue is that] they are not in the business of disseminating good news, they’re in the business of advising their clients,” Lopes said.
DEBT IS NOT ALWAYS A SIGN OF DISTRESS
Contrary to popular perception, Africa is extremely well placed with regards to its debt levels. In fact, far more so than many developed economies that are often presented as worthy of emulation. Japan is a case in point with a GDP to debt ratio of 200%!
Lopes said the problem originates from skewed thresholds used by the International Monetary Fund (IMF) to measure debt sustainability.
“Africa, by far, is the continent with the best sustainability indicators. Those thresholds are very different depending on the country. For instance, for developed economies the threshold is 80% of GDP. For Africa, they will say it is 30%, so the moment it reaches 32% they say it is unsustainable. But this is not Greece nor Japan.”
He added that one of the reasons for the different treatment of African nations is due to risk perception or the way an economy is structured. One of the negative side effects of these reports is that they have influenced the behaviour of central banks.
“Our central banks have between $500-$600 billion in reserves, of which the bulk is not invested in Africa because they say it is too risky. This means our savings are being used elsewhere for others’ benefit.
“This is just one example of how the debt discussion has to be put in context. The Economic Commission for Africa has been engaging central bank governors to be more holistic of the appreciation of their role and to be less risk averse in relation to African investment. It has the best return on investment anyway, despite the risk.
“In terms of the capacity to [take on debt] Africa has the lowest debt to GDP ratio – which means they can actually borrow themselves through the crisis,” he said.
“In a country like Algeria with 2% debt to GDP ratio, what is the problem with getting a bit of debt. A lot of news focuses on countries going to the market and present this as a sign of crisis. It is not, it is a sign of economic activity.”
He cited the example of Nigeria that had recently announced a doubling of the public budget due to growing investment and the decision to leverage this to counter the commodity crisis.
LOOK EAST, BUT NOT AS FAR AS CHINA
Lopes was quick to dispel the myth making the rounds of China’s vast investment in the continent. Africa’s proportion of total Chinese foreign direct investment (FDI) stock is less than 1% of the country’s total global investment.
India, on the other hand, invested as much as 16% of its outward FDI, valued at $70 billion, in Africa in 2013. What is more, Africa is responsible for 26% of India’s total inward FDI stocks at $65 billion – more than Brazil, China, the Russian Federation and the USA.
“We have to confront the public with new narratives. We have to also use them for our negotiations and dialogue with our friends. It is important for people to know that all the sound and buzz about China’s investments in Africa actually is very very misleading,” he said.
THE COMMODITY FALLACY
One of the big stories about African nations’ economies of recent months has been the fall in commodity prices. The truth, however, is much more revealing.
The first point to bear in mind is that not all commodities are the same, and global commodity indexes make no distinction between African commodities and the wholesale basket of these goods.
“We need to make the distinction between commodities and the picture doesn’t look as bad as it appears,” Lopes pointed out.
In addition, only a third of Africa’s growth has come from commodities, with the remainder from internal consumption. This is supported by the burgeoning middle class, increasing disposable income and public savings rates.
THE FUTURE MANUFACTURING POWERHOUSE
Allied to the economic prospects due to internal consumption is the potential for local production to increase to meet this demand. Africa’s population is expected to double to two billion by 2050, of which 500 million will be considered middle-class consumers.
While much of this promise of growth can be attributed to local manufacturing of goods to meet the needs of the continent’s growing population, the agricultural sector holds particularly exciting potential.
“Manufacturing and value addition is about 10% of GDP, which is very low, and agro-processing has huge potential because productivity is very low, so any gain will be quite significant. For instance, we have about 5% of Africa’s agriculture that is irrigated so if we go to 10% that is huge.”
The continent could also benefit from a shift in industrial capacity in China, where labour costs have risen and there’s a move to a more consumer-driven economy, although other regions in Asia hold the competitive advantage with respect to productivity.
“What will make Africa attractive is that it is urbanising faster than other parts of Asia, and these are conditions that could be attractive. And we will have a huge captive market for the low-end value production such as shoes, textiles, toys, plastics, you name it. So we will probably be the next manufacturing powerhouse.”
The picture painted by Lopes is one of tremendous potential waiting to be unleashed.
“From a historical perspective, Germany took 60 years to double its GDP, the UK took 150 years. Africa has done it in 15 years. This is why we should believe this ascendent curve is significant because there is only one country has beaten us, and that is China.”
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