Africa’s shifting economic paradigm


By Rabah Arezki

Before the outbreak of COVID-19, Africa experienced 25 years of uninterrupted economic expansion, prompting analysts to proclaim that the continent’s growth momentum was no longer dependent on its extractive industries. As access to education and health care increased, so did life expectancy, nurturing an “Africa rising” narrative. To finance their development needs, African countries turned to international capital markets, many of them for the first time.

A close examination of the data, however, reveals that Africa’s economic growth has not been broadly shared. Per capita growth, in particular, has been far less impressive than it initially seemed. Poverty remains endemic across the continent, with roughly 431 million people in extreme poverty (living on less than $1.90 per day). Without decisive action, the United Nations estimates that an additional 60 million Africans will fall into extreme poverty by 2030.

Moreover, the inefficient delivery of public services like education and health care has led to widespread dissatisfaction. The ambitions of the continent’s increasingly educated young people, in particular, seem to have outpaced actual material progress. Despite significant efforts to increase availability, half of Africa’s population still lacks access to electricity. Consequently, millions of Africans have migrated in recent decades in pursuit of better opportunities.

The economic shocks of the past few years, especially the pandemic and Russia’s invasion of Ukraine, have undermined the “Africa rising” narrative by highlighting the continent’s heavy dependence on imported medicines, food, and fuel. Despite being home to 60% of the world’s uncultivated arable land, these crises have underscored Africa’s slow progress in capitalizing on its vast land and subsoil resources to achieve food and energy security.

The situation in Africa today bears a striking resemblance to the 1990s, a decade marked by wars, coups, and severe food and debt crises. The convergence of internal instability and external shocks has set in motion a vicious cycle of economic and financial distress, raising questions about the continent’s ability to shape its own destiny.

In the face of these challenges, however, African countries have become increasingly proactive in promoting their domestic and regional interests. This shift is reflected in their voting patterns at the UN General Assembly, particularly on issues like the war in Ukraine. African leaders have also assumed a more prominent role in international energy and climate discussions.

This newfound assertiveness is partly the result of a changing geopolitical landscape where African countries are increasingly courted by rival global powers. Political leaders now have a unique opportunity to leverage their growing clout by accelerating the implementation of the African Continental Free Trade Area. The AfCFTA, which came into force in 2019, aims to boost cross-border trade by creating a unified market with rules of origin that provide preferential treatment to African-sourced goods. The establishment of this trade bloc could stimulate industrialization and strengthen Africa’s position in global negotiations.

While the AfCFTA represents a significant shift in Africa’s economic paradigm, unlocking its full potential will require a concerted effort. The continent’s population is projected to increase from 1.2 billion today to 2.5 billion by 2050. While some commentators view rapid population growth as a potential trigger for sociopolitical unrest and a drag on public finances, the economic benefits should not be underestimated. By boosting cross-border trade and streamlining their governance systems, African countries could capitalize on this demographic dividend.

For decades, African policymaking has been dominated by an economic paradigm that focused on meeting international market demand, akin to the export-led growth strategy that underpinned East Asia’s “economic miracle” between the 1960s and 1990s. This approach was predicated on the belief that international competition would force governments to implement domestic reforms and boost productivity.

In reality, however, Africa continued to rely heavily on commodity exports. African economies have often struggled with high interest rates and overvalued currencies. Consequently, the prevailing macroeconomic paradigm fostered an over-reliance on imports, with domestic financial systems catering to governments and import oligopolies rather than diversifying the continent’s economic base.

The new paradigm African countries must adopt relies on domestic demand-driven growth, capitalizing on the continent’s fast-growing consumer base. To achieve this, policymakers must increase local production capacity by leveraging domestic demand. This is particularly relevant to sectors like agri-business, electricity, telecoms, and finance, where demand is rapidly rising and the potential for regionalization is huge.

For starters, African leaders should demonopolize the import sector by fostering more competition in transportation and distribution. Additionally, they should pursue competitive exchange rates while establishing adequate safety nets to mitigate potential adverse effects. By combining exchange-rate adjustments with enhanced product-market competition, policymakers could redirect spending from imports to domestically manufactured goods and avoid devaluation-induced inflation. A renewed focus on industrialization has the potential to integrate a large segment of the population currently working in the informal sector into the labor market, thereby providing workers with better employment opportunities.

While macro-structural adjustments are crucial to attracting domestic and foreign direct investment, African countries must also secure the necessary financing to meet their immense infrastructure needs, especially when it comes to eradicating energy poverty. To support their new economic strategy, many debt-distressed countries must first restructure their existing liabilities, a task that requires the support of international partners.

In terms of priorities, African policymakers must focus on boosting energy production, in addition to shifting to renewables. Governance reforms, supported by regional integration, will be crucial to meeting the continent’s growing energy needs. De-risking strategies, such as guarantees offered by development banks, cannot enhance the attractiveness of energy projects by themselves. By implementing bold, comprehensive reforms, particularly in the electricity, financial, and transportation sectors, countries could make their energy industries more investor-friendly.

Success is far from guaranteed, in part because the interests of politicians and businesses in Africa are often aligned, breeding corruption and deepening public distrust. While the continent’s emerging economic paradigm holds the promise of greater self-reliance, particularly in key sectors like food and energy, its potential cannot be fully realized without the rule of law. African leaders must use this opportunity to reaffirm their commitment to upholding it.

Rabah Arezki, a director of research at the French National Center for Scientific Research (CNRS), is a senior fellow at the Foundation for Studies and Research on International Development (FERDI) and Harvard Kennedy School.

Copyright: Project Syndicate, 2024.

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