African Lions on the rise

| Friday July 2, 2010 00:00

While there remain risks to growth in any individual country, our analysis suggests that the continent's long-term growth prospects are quite strong. Africa's business opportunities are potentially very large, particularly for companies in consumer-facing industries, resources, agriculture, and infrastructure.

Global executives and investors cannot afford to ignore Africa's immense economic potential.

While Africa's increased economic momentum is widely recognised, less known are its sources and likely staying power.

Among our key findings:Africa's growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000. All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent's GDP growth from 2000 through 2008.

Key to Africa's growth surge were improved political and macroeconomic stability and microeconomic reforms. Several countries halted their deadly conflicts. And policy makers across the continent reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, and privatised companies.

Economic growth in coming decades will be supported by Africa's increasing ties to the global economy. Rising demand for commodities is driving buyers around the world to pay dearly for Africa's natural riches and to forge new types of partnerships with producers. And Africa is gaining greater access to international capital; total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007.

The rise of the African urban consumer also will fuel long-term growth. Today, 40 percent of Africans live in urban areas, a portion that is close to China's and continuing to expand. The number of households with discretionary income is projected to rise by 50 percent over the next 10 years, reaching 128 million. By 2030, the continents' top 18 cities could have a combined spending power of $1.3 trillion.

To understand the growth opportunities and challenges of individual economies, we developed a framework that groups them into four broad clusters: diversified economies, oil exporters, transition economies, and pre-transition economies (exhibit). Though imperfect, this framework can guide business leaders and investors developing strategies for the continent and policy makers working to sustain growth.

Africa's economic growth is creating substantial new business opportunities. We project that at least four groups of industries together could generate as much as $2.6 trillion in revenue annually1 by 2020, or $1 trillion more than today (exhibit). The four groups are consumer-facing industries, resources, agriculture, and infrastructure:

*African households spent a combined $860 billion in 2008, more than those in India or Russia. This is projected to rise to $1.4 trillion over the next decade.

*Africa's production of oil, gas, and most minerals, measured by volume, is projected to grow steadily at between 2 percent and 4 percent per year. At current prices, this would raise the value of resource production from $430 billion today to $540 billion by 2020.

*With 60 percent of the world's uncultivated arable land and low crop yields, Africa is ripe for a 'green revolution' like the ones that have transformed agriculture in Asia and Brazil. We estimate that such a revolution could increase Africa's agricultural output from $280 billion per year today to as much as $500 billion by 2020, and $880 billion by 2030.

*African governments and private sources combined are investing about $72 billion a year in building new infrastructure across the continent. However, Africa still has huge unmet needs. By 2020, Africa's total infrastructure investment could reach $200 billion.By 2040, Africa will have a larger working-age population than China or India. Already today, returns on investment are higher in Africa than in other emerging markets. Africa must be part of global business executives' and investors' long-term planning.Report by McKinsey & Company