Africa’s investment hurdle

Economically, the current year in Africa has been dominated by the news that a lot of the powerhouses of the continent are facing faint or negative GDP growth. South Africa has been battling the agricultural consequences of a drought while the Nigerian economy has seen negative growth following a decline in crude oil prices. But across Africa it is apparent that as commodity prices decline so does economic growth. This reliance on commodities for state revenue is problematic for a continent that is experiencing exponential population growth and therefore truly needs capital to invest in infrastructure and services that will help it power its own growth.

This is the initial hurdle that needs to be overcome. Despite Africa’s past and current growth relying heavily on extractive resources and exports, the heart of Africa’s growth potential lies within its own borders. A rising urban population across the continent that is asking for increased accountability from their political leaders is creating fertile ground for a middle-class to emerge. But to create the favourable conditions for this middle-class to thrive, exchange goods and develop, you need infrastructure, transformative industries and the development of an entrepreneurial and service-driven industry. Reliance on exports and the external sector means it can be complicated to create lasting, stable fiscal revenue policies that are needed to create the confidence from lenders and investors. Africa is like a V12 engine that has a 1912 crank-operated starter: hard to start, but once it has you’ll be stuck at the back of your seat as it accelerates.

So, what solutions exist today to overcome this initial hurdle to Africa achieving internal growth? As commodities stabilize and government revenue increases, countries should realize that a lot of what enables growth is not an industry itself, but the favourable conditions that create the ease with which this industry can sell, exchange, and develop. This is especially important for internal, land-locked countries like Rwanda and Burundi, who’s small economies mean they need to be turned outward.

A lot is being done in and by African stakeholders to make this a reality. The African Bank for Development launched the Industrialisation Strategy in Africa 2016-2025. This creates incentives for the development of SMEs and more generally creates an industrial base to diversify economies. It also draws the lessons of the 1950s era industrialisation attempt that was inconclusive, largely due to misunderstandings about the potential for demand growth in Africa  and a capital-intensive industrialisation that did not capture the comparative advantage of the available labour force . Philanthropy that aims at helping development is also evolving. Indeed, classical philanthropy is seen by many as out of breath. The new trend is impact funds. These investment funds invest in scale-ups and start-ups in Africa. They effectively support local entrepreneurs that are the true key to accelerating development. Projects in education, agriculture, transport and security are receiving these funds. In certain cases, like the GPS tracking for moto-taxis in Nairobi, innovation by local entrepreneurs is filling the gap in providing security. By creating cheap GPS trackers for moto-taxis, they aim to reduce the amount of stolen motorcycles and create a more stable environment in which to conduct economic transactions.

This is the lesson to be learned: when states take too much time in providing policy and regulation to promote growth, local and private actors will work to fill the gap. However as highlighted, closing gaps requires funds. This is the most important short and medium-term challenge for many social and economic entrepreneurs in Africa; to attract and create vectors to bring the funds for existing ideas. With limited capital markets and cautious banking sectors that fear the volatility of the market, impact funds and private initiatives are crucial in helping Africa overcome the investment hurdle. Once they have done that, the investment sector will quickly transform from local entrepreneurs struggling to vector funds to their initiatives, to global banks attracting entrepreneurs to them, hoping to benefit from the incredible social and industrial entrepreneurship capital of the continent.


Featured image | A motorbike taxi in Tharaka Nithi, Kenya | flickr

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Best of Africa.

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