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Africa’s labour force poised to surpass China and India in the next decade, Clement Gillet

28/03/2019

Demography will dominate the conversation in Africa, rising above talk of governance, external debt and a need to realise the potential of agribusiness.

 There is tremendous potential for the development of agribusiness in Africa, according to Clement Gillet, Economist Africa at Societe Generale. “If there is one thing we can say about Africa, a continent that hosts 60% of the world’s uncultivated arable progress in agricultural output has been extremely slow,” said Mr Gillet. “While output has increased, it is only in line with the growth in population, with the average broadly stable since the days of independence.”

Much of the sector remains stuck in subsistence farming, with small farms, unsecure land rights (few land registries outside of the big cities and difficult laws), lack of storage facilities and a poor ability to market crops (both domestically and internationally).

The pressure to improve is driven largely by demographics. A fall in child mortality and fertility rates tends to lead to a stabilising in population growth, although the fall in fertility rates in sub-Saharan Africa, from its peak in 1975-1980, has been far less pronounced than in Asia or Latin America, with the labour force predicted to leap above that of China and India within the next 10 years, reaching 1.5 billion by 2050, according to Mr Gillet.

On the positive side, the region will benefit from the well-know “demographic dividend” (defined by the United Nations as the moment when “the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)"), with Africa’s labour force leaping above that of China and India within the next 10 years, reaching 1.5 billion by 2050, according to Mr Gillet. Nonetheless, demographic pressures will remain high in the region in the foreseeable future. While Africa is engaged in its demographic transition, the pace of this transition is slower than the experience of other emerging regions in the past. For instance, 35 years after peaking in 1975/1980, the average fertility rate for Sub-Saharan Africa now stands at around five births per woman (versus seven, at the peak); in Asia, 35 years after peaking at six births per woman between 1960-1965, this indicator has fallen by around 2.5.

These demographic pressures highlight the importance of job creation. The IMF regional economic outlook on sub-Saharan Africa, published in October 2018, estimates that there is a need to create around 20 million jobs per year over the next 10 or 20 years. “Existing scenarios estimate that, at current growth rates, only around 10 million jobs are being created every year, of which potentially only four or five million could be cautiously designated as formal jobs (jobs for which salaries and full cover benefits are provided),” said Mr Gillet.

“There is no clear answer to how these ‘extra’ jobs can be created,” said Mr Gillet. “Higher growth will be needed, small- and medium-sized enterprises SMEs will play a central role in job creation, technological change will be important… overall, the countries in Africa will need to create their own development paths.” By comparison, recreating what has happened in Asia could be difficult for Africa, according to Mr Gillet,

“Defining this new growth model will be difficult, but the continent has shown a fairly decent amount of resilience and ability to find its own way,” said Mr Gillet.

According to the October report from the IMF, “The overarching policy challenge is to support the new and emerging sectors that drive growth. If successful, sub-Saharan Africa can create the required 20 million good-quality jobs per year for its young and growing population and make progress toward meeting the Sustainable Development Goals.”

Rates of return are higher, which should mean more FDI

Africa makes up around 3%-5% of the world’s GDP and receives the same percentage of the world’s foreign direct investment (FDI). “You could say it makes sense, but also that they would need and should get more than that, because, from an investor’s point of view, rates of return are usually higher than in other emerging or developed markets,” said Mr Gillet. “It means some structural factors continue to hinder foreign investment, such as high fragmentation of markets (both between and within countries); a certain experience required on the investor side, or governance issues. While many countries have made real progress in terms of economic and political governance, Africa continues to lag other emerging regions in most international rankings (such as the World Bank’s ‘Governance Indicators’ or ‘Ease of Doing Business’, and World Economic Forum’s ‘Global Competitiveness Report’).

“Most investors continue to perceive Africa as the riskiest region in the world, with rates of return potentially not high enough to compensate,” said Mr Gillet. “There are, however, increasing differences between countries: non-resources countries display improving economic and political governance indicators, while this is not true on average for ‘rentier’ countries in most cases".

FDI and portfolio investments increased only marginally in net terms during the 1990s, from US$2 billion in 1990 to US$13 billion in 2003, but then took off in 2004 and have averaged approximately US$65 billion per year since 2012, according to ‘Africa is more integrated in global financial flows,’ published by Societe Generale Economics and Sector Research on 1 February 2019.

It is very possible that FDIs in Africa are still only funding pockets of growth, illustrated by stark differences within countries, between big cities that are well-integrated in global commercial and financial flows and rural areas that are sometimes hardly connected to these cities. “If you take Nigeria, you go to Lagos, it’s kind of amazing,” said Mr Gillet. “Cities such as Lagos, Abidjan and Nairobi have been included in financial and commercial flows for a long time.”

A dependency on external debt

Due to the build-up of foreign currency debt, Africa remains extremely dependent on the external environment, whether it is trading partners, interest rates or commodity prices. The prospect of a less supportive external environment (less dynamic activity in China or Europe, higher interest rates, lower and/or more volatile commodity prices) explains why the IMF expects African growth to plateau at around 4% between 2018-2020.

Moreover, the region appears more vulnerable if the external environment were to deteriorate faster or stronger than expected by the consensus. When Africa was hit by the Global Financial Crisis in 2009, it was registering current account surpluses and low debt ratios; the region now has large financial needs and higher public indebtedness (with a larger share of more expensive, private creditors), with the number of countries already in debt distress has increasing from two in mid-2014 to six by the middle of last year, according to IMF and World Bank debt sustainability analysis.

A higher reliance on more costly resources, such as bonds and commercial credits, has increased debt service [costs], in particular in low and middle-income countries of sub-Saharan Africa, according to ‘Africa: a new growth model is needed,’ published by Societe Generale Economics and Sector Research on 1 February 2019.

 Improving fiscal management is an important part of the solution, in particular through improvements in revenue mobilisation. According to the IMF Regional Economic Outlook published in May 2018, [exact report], “the region as a whole could mobilise about 3 to 5 percent of GDP, on average, in additional revenues. This would represent about $50-80 billion, substantially more than the estimated $36 billion in official development received by sub-Saharan African countries in 2016”.

Mr Gillet said, “There are a lot of challenges, but the continent has shown a fairly decent amount of resilience and ability to find its own way. Only 10% of the population of Africa is banked in the traditional fashion: with mobile money, the continent has made good progress in (at least partly) solving the problem of financial exclusion, a problem that was deemed impossible to solve 15 to 20 years ago with traditional banking solutions. That kind of creativity will be required to further the required economic development.”

 

This article references the following research reports published by Olivier de Boysson, chief economist, emerging markets and Clement Gillet, senior economist, Africa in the Risk&Opportunities section of Societe Generale Economics and Sector Research on the Societe Generale website on 1 February 2019:

Africa: a new growth model is needed

Africa is more integrated in global financial flows