The African Gold Rush: 2014 NYU Africa Economic Forum

Thank you, Dean Henry, for the kind introduction. Let me also thank the NYU Stern School of Business, and the students from “Stern in Africa,” NYU Africa House, and the Wagner Student Association for hosting today’s event.  It is always a pleasure to visit New York, so I appreciate this opportunity.

NYU is well-placed to host this conference which will explore how to make Africa’s strong growth performance of the past decade more inclusive.  Your Africa House program, led by the esteemed Ghanaian Economist Yaw Nyarko, is a dynamic hub for the study of Africa and the African diaspora. I was impressed to read about your NYU Accra Center, notably the focus on Urban and Metropolitan Studies. I was equally intrigued by the Study Abroad program in South Africa and its focus on higher education and social reform.  These are both enriching opportunities for NYU students to experience the continent.

The theme of today’s conference – “Africa’s Gold Rush” – offers an opportunity to take stock of the progress of the past decade, while noting the challenges still facing the continent.

Africa has accomplished exceptional economic growth over the past decade, averaging 4.5% per year, underpinned by prudent macroeconomic management and a steady rise in commodity prices.  Now it is time to build economic growth that is accompanied by reduced poverty and inequality, and greater value addition on the continent. With new discoveries of oil, gas and minerals seemingly every month, we want Africa to build the capacity to extract, refine and market these resources.  At the same time, we must confront the astonishing rate of urbanization in Africa – projected to triple by 2050 – which poses challenges for housing, sanitation, and food security. In short, it is not just about sustaining a trajectory of continued economic growth – it is also important to address the sustainability of Africa’s growth and the composition of these growing economies.

One prominent example comes to mind. The big news in recent weeks was Nigeria’s rebasing of its GDP, which now stands at over $500 billion, thus making it the continent’s largest economy, overtaking South Africa. This rebasing exercise revealed not only the true size of the Nigerian economy – 80 percent larger than we previously thought -- but also its composition.

The proportion of services in Nigeria’s economy has grown dramatically since the 1990s, not only large industries such as banking and entertainment – the so-called “Nollywood” film industry – but the informal sector as well. These small businesses and household enterprises are not typically captured in the modern wage sector, yet they now account for a large part of the economy. Manufacturing has also grown in Nigeria, rising from only 2 percent of GDP to 7 percent. Increasing FDI flows to manufacturing, and to consumer goods industries to cater to the growing middle class, are encouraging signs of diversification away from an oil-centric economy.

Other African countries are also rebasing their GDP calculations, notably Ghana and Kenya, and others are bound to follow. As a result, we are likely to see the GDP of African economies rise by as much as 30 percent.  The numbers themselves are important, but what do they mean?

These rebasing exercises reveal an important trend in the structural transformation of African economies.  It is a subject of fierce debate among leading development economists – the direction in which African economies should diversify, and how to capture this newly measured economic activity.    

Some economists believe the only way for Africa to gain competitiveness and achieve long-term development is through industrialization and boosting manufacturing capacity, as done by China and the so-called “Asian Tigers”.

Others argue that African countries should focus on creating value-added in commodities and agriculture (such as refining and agribusiness), and building their stature as service economies (such as ICT and financial services). 

Regardless of the direction that African economies take going forward, there are a number of fundamental challenges that must be addressed.

The first is building on our greatest natural resource – our human capital.  Africa is the world’s youngest continent, with more than 50 percent of the population under the age of 25.  Every year for the next decade, we expect 11 million young people to enter the job market. This so-called demographic dividend offers a tremendous opportunity for Africa to build the skilled workforce that will serve as the engine for the economic transformation of our continent. To be clear:  it represents a “dividend” only if these young people are educated, trained, and employable.  This generation of talented and ambitious young Africans must be equipped with the modern skills and knowledge they need to formulate and implementAfrican solutions for Africa’s challenges.  As such, our challenge is to improve learning outcomes.   

After decades of limited engagement in post-secondary education, the World Bank Group and other partners are focusing on higher education and the content of university studies and the skills students need to enter the job market – including vocational training -- and contribute to Africa’s growth and development. 

In particular, we see a mismatch between what African students are learning at university and the skills employers are actually looking for. The proportion of university students in science, technology, engineering, and mathematics is very low, averaging just 25 percent.  The World Bank organized a high-level forum on Higher Education/Science and Technology last month in Rwanda, which was hosted by President Paul Kagame. The two-day event concluded with a Call to Action by the African Ministers of Education who were present, who set a bold target:  to double the percentage of students graduating from African universities with degrees in Math and Science by 2025. 

Building a skilled workforce can spur increased economic growth, but not without overcoming the second fundamental challenge: improving access to electricity. Inadequate power supply is the largest infrastructure obstacle to Africa’s economic development: only one in three Africans has access to electricity, and those who do typically pay four times as much for it than in the world’s richest countries. A recent study estimated the economic cost of power outages in South Africa, Uganda, and Malawi, to name three extreme cases, at more than 5 percent of GDP per year. Thirty countries in Africa face regular interruptions in energy services, posing a stark obstacle to business activity and sustained growth. 

It is clear that with the cost of electricity generation faced by most African countries (in some cases 54 cents per kilowatt-hour) it is difficult to envisage the growth rates that we need to reduce poverty. We, at the World Bank, are putting a strong emphasis on regional projects that can help produce sustainable energy at a competitive price. Lom Pangar, Suapiti, Rusumo Falls, Ruzizi, Inga, and Banda are good examples of such regional power initiatives. However, to reap the benefits of these investments, to improve the productivity and competitiveness of our economies, to increase household welfare, we need efficient and well-managed distribution companies.

This brings us to the debate on good governance and institutions. Today, a number of distribution companies are not meeting the test of efficient and effective management. The shared responsibility between the international community and African countries demands that countries address the political economy issues surrounding the energy sector. As countries have made significant progress in building institutions for macro and fiscal management, it is now essential to address constraints around micro foundations (including contracts enforcement and competition) and thereby improve the overall investment climate.

Related to the issue of energy is the possibility for Africa to be a great contributor to the Climate Change agenda. Africa has tremendous untapped potential in hydro, geothermal, and solar power, through which the African continent can increase access to electricity while at the same time significantly lowering the level of CO₂ emissions. There are very few parts of the world that can make this contribution. As the international community prepares for the UN Climate Summit in September and the next Conference of Parties (“CoP”) in France in 2015, here is a great opportunity to accelerate access to energy and make breakthroughs in moving towards a clean energy matrix in one of the fastest-growing continents.

With a skilled workforce, and reliable energy supplies, the next challenge is finance. Although many African governments have undertaken prudent macroeconomic management, with fiscal deficits under control, impressive measures to harness inflation, and low levels of debt, bond spreads for African countries do not reflect these macro fundamentals. There remains a perception of high risk for African borrowing that does not accurately reflect the economic fundamentals on the ground. As a result, attracting foreign capital is difficult and investments are more costly than they should be. Short-term sources of capital in foreign currencies significantly increase the cost of infrastructure financing Africa.

Given these high borrowing costs, we now have a new agenda on domestic resource mobilization which raises important questions on how African countries can finance their investments. The first issue is tax revenues. As rebasing exercises across the region reveal higher GDP figures, the share of revenue over GDP is becoming very low and will become an obstacle to long-term development objectives. How should countries reform their tax regimes so as to capture the structural transformation that African economies are going through? Second is the challenge of mobilizing domestic saving towards investment. What are the necessary conditions for institutional investors to invest in the Special Purpose Vehicles that finance investment in African economies? Third, what are the necessary conditions for countries to access long-term non-concessional financing to fill the savings-investment gap? Fourth, is the level of competition in the financial intermediation sector high enough to support the financial inclusion needed to accelerate growth and reduce poverty? These are the issues on which we are currently working very closely with our member states in Africa to reach our twin goals of poverty reduction and shared prosperity.

In addition to financing for investment, boosting regional trade in Africa is another important challenge. Intra-regional commerce is indeed very low. In fact, a number of African countries trade more with Europe or the United States than with their own neighbors. While uncertainty surrounds the global economy and stagnation persists in Europe, there are enormous opportunities for cross-border trade within Africa in food products, basic manufactures and services.  And yet Africa has so-called “thick borders” that prevent the continent from realizing its full trade potential.

This structure of African trade is largely explained by our colonial past, and the supporting infrastructure responded to that reality. It is not by chance that most of the economic activity in the continent is on the coasts and around the ports that export our commodities.

Today, an important driver of trade is the regional value chain. As African economies transform, each country will specialize in producing inputs along a value chain until reaching a final product. Building this value chain will increase trade across countries and allow them to focus on their competitive advantages. We encourage our clients to shift their focus from simply building infrastructure to thinking about trade logistics: how to move goods from one point to another at the lowest cost and the fastest possible pace. This includes better infrastructure, but also better policies and removal of non-tariff barriers and other obstacles to trade. A higher degree of regional integration will also be a factor in increasing Africa share in the global trade.

Beyond trade barriers and infrastructure, the broader business climate is essential for Africa to realize its growth potential.  Access to credit, integrity of property rights, permit requirements, and costs of starting a business are among the important investment climate indicators that can attract – or deter – investors to our continent.  Governance remains a concern in a number of countries – whether it is petty corruption, social accountability to citizens, or building transparent systems of procurement and public financial management. Continued improvements in rule of law will further help to build investor confidence and spur greater growth.

Similarly, conflict and instability, largely driven by scarcity of resources and inequality within and between countries, is another risk factor.  The outbreak of violence can derail economic growth and has contagion effects in neighboring countries.  Recent violence in the Central African Republic, South Sudan, and Somalia is having devastating effects, both on local populations and on the economy. The Central African Republic’s GDP has contracted by 36 percent as a result of the ongoing conflict, along with the profound human suffering that has followed.  The historic joint trips last year by the UN Secretary General, and our World Bank President Jim Kim, to the Great Lakes Region last May, and to the Sahel Region last November, highlight the importance of a comprehensive approach to sub-regions in Africa. The nexus of peace and development entails resource scarcity and long-standing conflict, and requires a range of partners to identify ways to strengthen service delivery; resilience to climate change; and improve human development outcomes such as reduced birth rates, improved maternal and child health, and irrigation to support food security.

Looking ahead, where do you – future MBAs who can shape the investment climate – fit in this picture of Africa’s growth?  The African Diaspora community here in the US represents a powerful engine for Africa’s growth, but catalyzing their rich potential will require support from a range of stakeholders – policymakers, IFIs, and academics -- both here and in Africa.  In my recent travels to US universities I have been impressed by African students who are keen to complete their studies and return to the continent.  Earlier this month when I met with a group of African graduate students at the University of Michigan, one of them taught me the terms “Afropolitan” and “Afropreneur”.  The first refers to a generation of African emigrants who have studied abroad and gained a global outlook given the ease of traveling back and forth to Africa. The latter term was adopted by a young Nigerian to describe the wave of tech-savvy young African men and women who have studied abroad and have a passion for innovation and empowering communities across Africa.     

I met one such “Afropreneur” earlier this month, during the World Bank Spring Meetings in Washington.  Simbarashe Mhungu, a young Zimbabwean, left his country to pursue a college degree in the US.  After working a few years here in New York, he returned to Zimbabwe and founded a successful agriculture business called Harvest Fresh. Getting started wasn’t easy. Financing terms from a local commercial bank were impossible to meet and he faced stiff competition from large Chinese companies. But Simba knew there was a gap in the market and persisted until he landed his first clients. 

Similarly, Alexandre Laure, a Chadian who left his native country to pursue business studies in Europe, founded Green Bio Energy Ltd, a renewable energy company based in Uganda.  Alexandre hired all his staff locally, and applied the business methods he learned abroad to the Ugandan context. The company was successful in creating jobs and is still active today. The interesting part is that a number of Alexandre’s employees left the firm after a few years. The basic accounting, finance, and project management skills they learned at Green Bio Energy enabled them to pursue their own businesses.

In closing, I wish you a fruitful day of discussion on the challenges and opportunities for achieving Africa’s full economic potential.  If we can harness this demographic dividend, and create economic growth with jobs and shared prosperity, we have the prospects for a stronger Africa trading not only with the rest of the world but increasingly trading with itself.  This would offer even greater opportunities for African investors, and foreign investors, and thereby allow African economies – and their citizens – to truly share in this “African Gold Rush”. 

I appreciate the honor of opening today’s session, and I look forward to future opportunities to explore these issues with the NYU community – here on your New York campus, at your NYU center in Washington, DC, or perhaps at one of your centers on the continent. 

Thank you.