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Vol 54 No 23

Published 15th November 2013


Economic giants change places

New trends in trade and finance will change political as well as economic ties on the continent

In the coming weeks, some statisticians in Abuja could shake up Africa’s economic and diplomatic hierarchy. The boffins look set to chart the rise of Nigeria’s economy to become Africa’s biggest by the end of next year. At the same time, this would confirm the relative economic decline of South Africa and more recently, of Egypt. Nigeria, with a population of 170 million compared to South Africa’s 50 million, has been growing at about 7% over the past decade, compared to SA’s average growth rate of around 3.4%.

All the usual scepticism about the composition of statistics is necessary, although the quality of data collection in Nigeria has improved significantly over the past five years. The rise of Nigeria to the position of Africa’s biggest economy, coupled with its long established position as the most populous African state, will have diplomatic and strategic implications. It also points to a new pattern in economic growth and trade relations within the continent. Nigeria’s economic expansion reflects a wider growth trend in the middle of Africa. Historically, the best economic performers were either in North Africa or South Africa itself. Now those economies are seeking to boost their trade with the rest of Africa, which includes its fastest growing economies.

These trends are confirmed by the statistical rebasing exercise which Nigeria’s National Bureau of Statistics is carrying out with technical assistance from the International Monetary Fund and World Bank. That means a recalculation of the sources – such as agriculture, services and information technology – of the country’s economic growth. The statisticians’ report is likely to show a massive upward adjustment in gross domestic product similar to that of Ghana in 2010 which increased the size of its economy by 60%. The centre of the exercise in Nigeria is the rebasing of GDP based on output and consumption patterns being updated from 1990. Two decades ago, the booming service sector, such as mobile telecommunications, the ‘Nollywood’ film industry, financial services and retail, were either far smaller or did not exist.

Nigeria expects to release new figures early next year and early estimates point to at least a 40% rise. This would increase Nigerian GDP in 2013 – US$270 billion in 2012, according to the IMF – to $400 bn., against projected total South African GDP this year of $392 bn. These raw numbers do not detract from the depth and sophistication of South Africa’s financial markets, infrastructure, institutional strength and corporate governance, versus Nigeria’s oil- dominated economy but they do underline that it is losing relative strength. 

Jolting the markets
The revised growth figures may also jolt the markets. Nigeria’s launch this year of a $9.3 bn. oil refinery and petrochemical plant financed by local and international banks serves as an important pointer to the future direction of African economies. For the rest of Africa, it’s not a life-changing development. South Africa and Nigeria will continue to account for about half of all Sub-Saharan Africa’s economy activity. For Nigeria, a larger economy means higher per capita GDP – $2,178, compared to $1,556 in 2012 – but still well below South Africa’s $7,404. It also means lower tax revenue relative to size of GDP. For South Africa, the figures represent a symbolic loss, although it would play the part of Africa’s United States (with a far higher per capita income and more sophisticated economy) to Nigeria as Africa’s China (which is due to become the world’s biggest economy within a decade).

Regardless of the pecking order at the top, intra-regional trade and financial links have grown rapidly in recent years, but the regional economic communities are a long way from achieving integration among their member countries or with each other. The economic as well as political balkanisation of Africa has been a tremendous brake on progress.

South Africa still shapes the structure of trade within Africa. For at least twelve African countries, exports to South Africa represent more than 1% of their GDP. Meanwhile, frustrated by slow growth at home, South African companies are investing in and stepping up trade with the rest of Africa. Growing financial links facilitate this: both South African (still easily the market leaders) and Nigerian banks are expanding their operations throughout Africa. In 2003, there were three Nigerian banking subsidiaries in the rest of Africa. Now there are 44 in 33 countries. South Africa’s Standard Bank, with its Chinese partner, is one of the leading African institutions.

There are budgetary consequences from these cross-border ties. South Africa and its neighbours are in the Southern Africa Customs Union: half of the customs revenue within the SACU zone goes to the neighbouring states. That makes their fiscal fortunes dependent on the health of South Africa’s trade sector. Similarly, Nigeria’s trade with the rest of West Africa is of growing importance. In the regional grain markets, a 3% increase in Nigerian inflation could spark a 1% increase in inflation in its regional trading partners.

Economic performance between South Africa and the rest of Africa has been diverging, with the continent benefiting from stronger macroeconomic management, fast growing trade with Asia and higher inflows of foreign direct investment. Growth in South Africa has averaged a sluggish 3.4% for the decade 2003-12, against 6.1% north of the border. Even these growth figures flatter by including Africa’s fragile states and slow-growth economies. Among stronger performers, eleven are forecast to grow at between 7% and 14% during 2013-14. South Africa is expected to be the fifth slowest growing economy on the continent this year and next. Economic performance, on a downward trajectory, leaves South Africa at risk of being caught in a slow-growth trap of 2-3% per annum as long standing weaknesses become apparent (AC Vol 54 No 20, Political mould starts to break).

Investors say they have taken note of the strikes, the slowing economy and the government’s declining ability to manage social tension. The central bank, the South African Reserve Bank, warned on 29 October that the country’s sovereign credit rating was again at risk: that would curb capital inflows and raise government financing costs. Last month the IMF also warned of a disorderly adjustment to the current account and fiscal deficits due to the escalation of labour and social unrest.

Regional economies are also watching South Africa closely. Botswana and Namibia are working to attract industrial investment into the SACU common market. Even high-cost Mozambique has had some success in attracting companies to Maputo’s Beluluane Free Zone, selling to the South African market. Yet it is competing primarily on more favourable tax terms and market proximity. None of the regionals yet have serious cost or productivity advantages relative to South Africa and rank well below it in the World Bank’s annual Doing Business survey of private sector operating conditions.

Botswana is the most ambitious – improving its global ranking to 56th of 189 countries in the latest Doing Business report, where South Africa ranks 41st – and launching programmes to improve economic competitiveness. A high-profile Economic Diversification Council oversees policies to improve productivity, lower business costs and streamline regulation. It is also works on growth and innovation in the diamond mining, transport and agricultural sectors. This month, South Africa’s De Beers completes the transfer of its London selling operations to Botswana. That involves operations with annual sales valued at $6 bn. The decision to move was announced in 2011 but the transfer starts when the 80-year-old London diamond auctions close, resuming in Gaborone before the end of November. That shows how an African country can extract additional value from natural resources: it also entails workers moving from London’s international financial centre to Gaborone, where new offices have been built.

Some foreign investors are bypassing South Africa in favour of other regional economies. The mature but still lucrative mining sector is losing investment, deterred by policy uncertainty and less favourable mine title and tax terms. The governing African National Congress (ANC) narrowly defeated a grassroots proposal to nationalise mining at its Mangaung party conference last December but did opt to increase state involvement (AC Vol 54 No 8).

More favourable tax treatment and more lucrative exploration prospects have sent mining investment to Congo-Kinshasa, Mozambique and Zambia. Lesotho has taken advantage of lighter regulation and lower wage costs to attract labour-intensive manufacturing at the expense of South Africa’s beleaguered textile sector, benefiting from access to the US market through the African Growth and Opportunity Act.

Long-term prosperity for Southern Africa and the continent requires competing in the global, not regional, market: it is not on Africa’s interest for South Africa to be a weakened economy. The current period of high growth in Africa, the longest and most sustained in decades, has been supported by a commodity boom and more investment in roads, ports and power generation have followed. Gaining a share of global manufacturing – Africa’s long-standing aim of sustainable and diversified growth – is now realistic, although the sector has actually declined as a share of GDP in the past decade. Research by former World Bank economist Paul Collier at Oxford University’s Centre for the Study of African Economies points to wage costs in Ghana being one quarter of those in China.

The loss of China’s cost advantage means that its share of labour-intensive manufacturing is falling and over the next decade, this will shift output to other low-wage areas. The opportunity for African countries is that this might include them, rather than low-wage Asia. Of course, Africa’s increasingly militant trades unions will see things differently: they want more jobs but don’t want to serve as a low-wage alternative to China. Another constraint is that Africa’s non-wage operating costs are still among the highest in the world.

Research by the World Bank and McKinsey Global Institute indicates that African countries remain among the most expensive in which to operate a business. Another risk is that the current commodity boom is eroding competitiveness in other sectors, including through currency appreciation, the so-called ‘Dutch disease’. A more serious threat is complacency, as African leaders, benefiting from higher growth, feel less need to pursue bold or politically risky reforms that could modernise their economies.

The development of African capitalism is still very much a work in progress as the robber barons and monopoly capitalists cautiously eye new opportunities for productive enterprise. This capitalist class, largely protected by the state and the ruling parties, has little appetite for innovation and vision. It has grown fat on the revenue from state capture and weak governance. In this regard, South Africa’s challenges are very much in line with the rest of the continent. 

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