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AFRICA IS LEARNING A VALUABLE LESSON ABOUT INVESTING IN THE FUTURE










The Economist explains


Why Africa is becoming less dependent on commodities





Jan 11th 2015, 23:50 BY C.W.





FOR DECADES commodities have shaped Africa’s economic growth. When prices were high, growth was good; when prices dipped, so did the continent. But that is slowly changing. Despite big commodity-price falls this year—oil is down by 50%—the continent will probably grow by 5% in 2015 (and more in the following years). While lots of African currencies lost value in 2014, they have performed much better than during other periods when commodity prices were falling. 





Few African countries will fall into recession in 2015—unlike other commodity exporters such as Russia and Venezuela. Why is Africa doing better than many expected?




Two reasons stand out. First, the continent's economic growth is coming from other places. Governments have worked hard to make life easy for investors. 




The World Bank’s annual “Doing Business” report revealed that in 2013-14 Sub-Saharan Africa made more regulatory improvements than any other region. Mauritius is 28th on the bank’s list of the best places to do business. Rwanda, which 20 years ago was in the throes of a civil war, is now a better place for investors than Italy. When moneymen believe that their time will not be wasted or their cash stolen, they will invest. 




After two decades of stagnation, Africa’s total investment as a percentage of GDP increased after 2000. Foreign investment into Africa rose by 5% in 2012 and 10% in 2013. Foreign investors are becoming more interested in the non-resource sectors of African economies: a third of intra-African foreign investment is in financial services. 



The fruits of that investment are starting to show: Nigeria, Africa's biggest economy, has seen strong growth in recent years but most of it has come from non-oil sectors such as financial services. If African economic growth comes from places other than resource extraction, the continent is less at the mercy of commodity markets.




Second, many African governments are better at managing the inevitable booms and busts of commodity markets. 




Barely a decade ago, nearly all African governments spent freely when the economy was hot, only to rein in spending when things cooled down. That is precisely what most economists would advise a finance minister not to do; most recommend that governments should boost spending during downturns. But in recent years, argues Carlos Vegh of Johns Hopkins University, fiscal policies in many African countries have become more sensible. 




These days a larger proportion of African economies save money during the good times, then spend during bad. As a result, a commodity price downturn, need not provoke a recession: the government can take up some of the economic slack. 




There is still a long way to go. Africa is far from a world-beating economic hub; it has huge pockets of grinding poverty and is still the continent most dependent on commodity exports. But gradually it is becoming less so. 





Despite turmoil in commodity markets, Africa is still one of the world’s fastest-growing regions. With more investment and regulatory reforms, the continent could completely break the spell.





Dig deeper:


Why some commodity exporters are coping better with lower prices than others (Jan 2015)




Africa's growth is being powered by things other than commodities (Jan 2015)




Why the oil price is falling (Dec 2014)







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