Africa’s economic growth forecast for the next two years is less than 4% per year.1 That’s not good news for a continent where a third of the population lives on less than US$2.15 a day and is growing at just over 2.5% per year.23 That means less revenue for governments and even less money in the pockets of ordinary citizens whose incomes have been eroded by inflation. Africa faces a range of challenges heading into 2024. Here are three lessons we can learn from East Asia to prepare for the headwinds ahead.
First, reduce dependency on external sources and mobilize domestic capital. A strong US dollar and high interest rates make debt repayment much harder. It is unwise to continue borrowing from international creditors. Africa needs to tap its own pool of wealth. Start with the US$2.3 trillion worth of investment funds, pension funds and sovereign wealth funds trapped overseas. These could be pumped home if capital markets were stronger. South Korea financed its industrialization by channeling much of its domestic retirement savings into large domestic companies such as Samsung and Hyundai. It was able to do so because it had well-regulated and functioning capital markets that facilitated such transactions. One of the main factors that has stymied industrialization in Africa is the underdevelopment of capital markets. Capital markets are perhaps the best vehicle for channeling domestic private savings into productive sectors of the economy. Capital markets are catalysts for capital formation, allowing small savings to be pooled into larger investments. The more widespread the participation of citizens in capital markets, the less a country will need to rely on foreign borrowing for development. Investors see the ability to borrow through financial markets as a sign of competitiveness. Thus, the success of the African Exchange Linkage Project, a pan-African experiment that seeks to integrate seven regional stock markets, could be transformative. A properly regulated deep financial market is like a well-oiled internal combustion engine. It may not be perfect, but once started, it can move capital from where it is available to where it is needed with little friction. A successful Pan-African Payment and Settlement System that allows cross-border payments to be made almost instantly in local currency would not only remove a major obstacle to intra-African trade, but also end African trade’s dependency on hard currencies such as the US dollar and third-party banks in the US and Europe.
Second, build official grain reserves and encourage farmers to produce more indigenous staple crops by subsidizing seeds and fertilizers, providing extension services, and guaranteeing minimum price support for their produce. Food security cannot be left to the whims of the market or the dictates of the state. Look at China. After suffering the worst man-made famine in living memory, Beijing is so nervous about food security that it now stockpiles enough rice and wheat to feed its 1.4 billion people for more than 18 months. 4 China’s dependence on grain imports is less than 19% of its needs, and 9% and 30% for meat and dairy, respectively. 5 The IMF estimates that 158 million Africans are severely food insecure. This represents about 13% of the African population. 6 African governments, on average, spend less than 5% of their annual national budgets on agriculture. 7 In 2003, the African Union called on African governments to at least double public spending and allocate at least 10 percent of their annual budgets to the agriculture sector. Africa also needs to build strategic grain reserves to counter the inevitable and more frequent crop failures that will accompany climate change.
Third, industrialize at lightning speed. Manufacturing is a proven path to economic transformation. When East Asia first entered the global manufacturing value chain, it was at the bottom, producing cheap toys, footwear, and clothing. But as incomes rose, so did wages, and those very manufacturing jobs moved to South and Southeast Asia, where labor costs were much more competitive. While labor costs in manufacturing in Africa are still higher than in South Asia, the gap seems to be closing. 8 With a few exceptions, African economies are dominated by low-productivity service sectors. According to the World Bank, the service sector accounts for almost 47 percent of economic activity in sub-Saharan Africa by value. But these are typically low-productivity services that contribute little to raising per capita incomes. No sector can convert unskilled informal labor into productive formal labor as quickly as manufacturing. 60 percent of Africa's imports are industrial products, by value. 9 If some of these products were manufactured locally, Africa could retain a greater portion of its value domestically and create new jobs. As manufacturing expands, so will the demand for higher-value services. But Africa needs to position itself differently. China industrialized using wage arbitrage when labor was still the primary factor cost in manufacturing. But robotics and AI could soon wipe out the wage-cost advantage of industrial latecomers. As supply chains shift and global trade fragments along geopolitical lines, Africa has a short window to industrialize.
