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Jul 20, 2012

Africa – a tale of three regions

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Africa|Energy|System|Africa|China|Kenya|South Africa|Zimbabwe|Beneficiation Infrastructure|Energy|Food|Infrastructure|Power|Middle East|North Africa|Sub-Saharan Africa
africa-company|energy-company|system|africa|china|kenya|south-africa|zimbabwe|beneficiation-infrastructure|energy|food|infrastructure|power|middle-east|north-africa|subsaharan-africa
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By: Ridhwaan mayet

The African continent can be primarily divided into three regions: North Africa, sub-Saharan Africa (excluding South Africa) and South Africa.

North Africa received a disproportionate share of investment into the continent prior to its political ‘spring’. However, it proved the correlation between political instability and foreign direct investment/economic growth over the course of the last two years. North Africa is now rebounding as political stability returns to the region. But it has lost the number one ‘hot spot’ of the continent status to sub-Saharan Africa owing to commodity development and emerging market investor confidence in sub-Saharan Africa. The shift towards sub-Saharan Africa is also fuelled by the reluctant return of investment as North Africa is still in unproven political infancy with more than just a sore molar tooth worth of teething problems, further fuelled by broader concerns in the Middle East and North Africa region.

Sub-Saharan Africa has seen several commodity ‘breakthroughs’ in recent times and has gained popularity among emerging investors. Forced economic reforms owing to debt-relief requirements have created a market not too different from post-1978 China.

To achieve sustainable economic reforms, a country requires high economic growth. Such economic growth does not come from economic reforms (though it is aided by economic reforms), but from something much larger (in this case, commodity boom plus middle-class consumer demand). The challenges that exist include inability to harvest full rents from commodities in an equitable market system owing to the lack of beneficiation infrastructure, wage drain created by insufficient skilled labour to harvest ‘commodity wage rents’ and inflationary pressures.

Banana republics have wised up to beneficiation and are seeking to maximise in this area to varying degrees, depending on the country. The challenges of lagging employment growth and inflationary pressure on spending power mean that we sit on fine ice. If all goes well, economic growth, fiscal management and employment growth reinforce greater political stability which, cyclically, results in more investment, growth, and so on.

If employment and inflationary pressures (especially those related to energy and food) increase (this can also be fuelled by poor commodity prices) then we create a negative environment that will lead to a negative cycle (the inverse of the above-mentioned cycle).

What sub-Saharan Africa has that allows for this growth, compared with previous periods, is a combination of an urban population with significant spending power, commodities and market reform. One cannot reverse market reform and urban population growth very fast; therefore, the probability of sub-Saharan Africa growing, rather than continuing along the past economic underperformance trend line, is greater.

South Africa should be looked at through the following lens: a political system with fiscal duties towards the entire popula- tion was born only in 1994, whereas most African economies received freedom 60 years ago. While South Africa stands on a far higher base than most sub-Saharan African countries in many respects, it must not be forgotten many post-colonial (colonialism also employed a public finance management system that was selective in its perceived duties) enjoyed far better infrastructure and economic conditions than their Asian counterparts imme- diately after independence.

In the first few years of demo- cracy, we prioritised economic reform; however, we lacked the growth to create employment. We now have a backlash that is analogous to the rumblings of the Greeks and the Spaniards at the thought of austerity. The only difference between economic reform and austerity is that, in the former, what was ‘released’ by the State was taken up by the private sector and was run in a more productive manner (you can only do this when there are growth drivers) and, therefore, exceeded the State’s welfare abilities through a fiscally prudent method (job creation).

South Africa has failed to find the driver to soften the soil of economic reform. Now we stand with a disgruntled population that is looking for ‘economic deform’ towards a State-dominated system, assuming that this is the only solution to improving economic welfare (since the market system is not succeeding).

This sounds similar to sub-Saharan Africa in the 1980s! Zimbabwe and Kenya were great economies in sub-Saharan Africa when the ‘winds of change’ swept the continent – let us not think South Africa is too big to fail. South Africa’s only hope is to look at piggybacking on sub-Saharan African growth by providing services and strong economic leadership that is apolitical and has the patience to see through the free market system.

South Africa’s ranking as the fourteenth-best prospective foreign direct investment host country reflects the foreign sentiment towards using South Africa as a hub which services other African growth stories. However, failure to create a social system through employment will result in a demand for State welfare, which will reverse foreign investor sentiment towards South Africa.

 

Mayet is CEO of Mayet Economics - ridhwaan@mayeteconomics.co.za

Edited by: Martin Zhuwakinyu
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