Under-the-radar growth increases in Southern Africa

Invest in Africa

Southern African countries will be rapidly growing emerging markets in the near future. The combination of growing political stability and an expanding middle class of consumers makes the region an increasingly attractive investment.

The BRIC countries have dominated the discussion of emerging markets for the better part of a decade, but now that growth in those economies may slow down, it gives investors a chance to step back and see other emerging markets that have been in the BRICs’ shadows.

As you look beyond the BRICs, one of the regions with potential will be sub-Saharan Africa. With more stable governance emerging in several southern African countries – including South Africa, Zambia and Botswana – rapid development is on its way. In fact, it might already be there.

African growth has already started

In a 2012 paper, London School of Economics Professor Alwyn Young showed that despite the burdens of war and the AIDS epidemic, sub-Saharan Africa has grown at an average of 3.4-3.7% per year since 1990. That is nearly four times higher than most estimates, which are notoriously inaccurate due to poor data.

In light of such a discrepancy, two things become clear: the economies of southern Africa are already on positive trajectories, a development that has happened with little acclaim. And second, this growth is speeding up: the UN estimates that the region grew at nearly 5% in 2013.

Southern Africa leads the way

The prospects are not uniform, however, as political instability still is rampant in several countries. The Democratic Republic of the Congo and Central African Republic, for instance, are still among the worst in the world for business. Nigeria’s recent political turmoil also dims its near-term prospects.

On the other hand, several countries in southern Africa – South Africa, Tanzania, Zambia, Botswana, Namibia, Mozambique and Malawi – are ranked as less politically risky than China and India by Maplecroft. These relatively stable countries are still in the process of developing the strong legal institutions required to grow at their full potential.

A good example for the region is Zambia. Since 2011 it has had a peaceful transfer of power in the presidency and parliament, and the new president has stepped up efforts to curb corruption in the public sector. According to Freedom House, however, politicians still regularly wield their influence in questionable ways, and the media is far from free.

In 2012, President Michael Sata attempted to deregister the main opposition party, in what was seen as largely a political move. The party was quickly reinstated, but the situation is illustrative of the issues facing the country’s democratic institutions. While Zambia and many of its neighboring countries are moving towards full democratization, there are still considerable growing pains to overcome in the process.

These political risks exist alongside the region’s other major impediment to growth: a lack of infrastructure. For instance, railways to move agricultural products and natural resources are all too rare. But financing these infrastructure projects has been notoriously difficult, as noted by Oxford economist Paul Collier in this panel discussion for the International Growth Centre. Governments can rarely finance massive infrastructure projects due to the exorbitant interest rates on their sovereign debt and a relatively undeveloped financial system.

Contracts to carry out these projects are also targeted by corrupt officials as ways to line their own pockets and, as a result, rarely produce the infrastructure promised. Lastly, there is a general skepticism towards “outsider” international corporations and investors looking to build and finance these projects themselves, according to Collier. Together, infrastructure looks to remain a major issue facing sub-Saharan Africa and those investing in it.

Opportunity for growth to come

Given the lag that poor infrastructure creates, there is still ample opportunity for these countries to grow in the near future. And whoever can successfully navigate the logistical difficulties associated with building infrastructure in southern Africa will reap the reward. The region will see rewards as well, especially in the agricultural sector.

Right now the sector is much less productive than it could be, given the ample supply of fertile land. With any combination of the introduction of more advanced crop technology and better transportation links to markets, this sector should grow rapidly. More importantly, a more prosperous agricultural sector would be a huge factor in creating a robust middle class that would increase consumption and help stabilize politics.

While rural industry shows promise, the increased urbanization of Africa is already beginning to boost growth. Less than 30% of the African population lived in cities thirty years ago, but by 2030 that figure will rise to 50%. According to McKinsey & Company research, urbanization is leading to tremendous productivity growth in workers and more buying power for a nascent urban middle class. This will make the continent more appealing to multinational corporations and keep fostering the growth of domestic businesses as well.

Investing in the continent has long been incredibly risky. But today, the economic and technological trends are looking increasingly positive. Together with the growing stability in southern Africa, one should not be surprised if these countries become some of the most intriguing emerging markets to watch.

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Categories: Economics, Sub-Saharan Africa

Author:Alex Christensen

Alex Christensen focuses on the impact policymaking has on the economy. He previously was an economic policy analyst at Minnesota 2020, a non-partisan think tank based in St. Paul, Minnesota. As the Hirsch Undergraduate Fellow at the Center for New Institutional Social Sciences, he analyzed how political institutions impact the development of wind power across the OECD countries. Alex is currently studying for his MSc in Economics at the London School of Economics, where his thesis examines the connection between monetary policy and equity prices. Previously, he graduated magna cum laude from Washington University in St. Louis with a degree in economics and political science.

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