Tuesday, June 29, 2010

Africa set to be major global player

By Ethel Hazelhurst, June 29, 2010

Beyond China and India, Africa presents the economic opportunity of the future - and not just because of its resource wealth. A report by McKinsey Global Institute (MGI), released last week, highlights a new dynamic in Africa: the rise of the urban consumer.

MGI said, by 2040, the continent would have 1.1 billion people of working age, more than either India or China. But, much more important than the growth in population, is the rise in household spending power.

"The number of households with discretionary income is projected to rise by 50 percent over the next 10 years to 128 million," the report says. African households spent a combined $860 billion (R6.5 trillion) in 2008, more than those in India or Russia.

The report forecasts the value of consumption could reach $1.4 trillion by 2020.

MGI identified Egypt, Morocco, South Africa and Tunisia as the four economies that have already built significant manufacturing and service sectors.

"They are among the continent's richest economies, and they have the least volatile gross domestic product growth and the lowest political risk. With all the needed ingredients for further expansion, they stand to benefit greatly from increasing ties to the global economy."

Urbanisation is making it easier for producers to deliver to their potential markets. "In 1980 just 28 percent of Africans lived in cities. Today, 40 percent of the continent's 1 billion people do - a portion close to China's and larger than India's," the report says. Among the most densely populated is South Africa, where 62 percent of the population lives in cities.

The continent has as many cities of 1 million people as Europe and by 2030 its top 18 cities could have a combined spending power of $1.3 trillion.

Against this backdrop, domestic consumption will generate returns for companies in retail, telecoms and banking. A sign that the middle class is on the move is that 316 million subscribers signed up for cellphones in the past decade.

Urbanisation has also improved productivity.

"Companies achieve greater economies of scale by spreading their fixed costs over a larger customer base," MGI said and calculated that the shift from "rural to urban employment accounts for 20 percent to 50 percent of productivity growth".

And urbanisation has knock-on effects, spurring the construction of more roads, buildings, water systems and more.

The labour force is growing more rapidly than anywhere in the world, MGI said.

"The continent has more than 500 million people of working age. By 2040 that number is projected to top 1.1 billion - more than in China or India.

MGI estimated that, over the past 20 years, three quarter's of the continent's increase in GDP per capita came from an expanding workforce, the rest from higher productivity.

The return on investment is higher in Africa than in any other developing region, according to the report which urges investors and global business executives to make the continent part of their long-term planning. "Early entry into African economies provides opportunities to create markets, establish brands, shape industry structure, influence customer preference and establish long-term relationships," it said.