Africa on brink of economic take-off as reforms attract business magnates

A reduction in red tape and an improvement in political conditions means that sub-Saharan Africa is becoming a more attractive destination for foreign direct investment, especially from India.

The South African Institute of International Affairs brought together experts from India and Africa in Johannesburg, South Africa, between June 9 and 10 to look at the scope for deepening engagement between South-South economies and most are of the opinion that economic opportunities abound.

Oti Ikomi, group head of corporate banking products at the Ecobank Group, argues that the decrease in political risk and incidents of conflict in sub-Saharan Africa is creating opportunities. Ecobank is a regional banking institution with branches in west, central and east and southern African countries.

“Added to that, the gross domestic product on the continent is up 70 per cent to 1.76 per cent of the global total. While this is still very small, it is a substantial increase. Average inflation is dropping from 13.6 per cent in 2008 to eight per cent in 2010. Africa is the third fastest-growing region in the world, after the Middle East and Asia. But foreign direct investment is currently relatively flat compared to numbers from 2008,” he says.

Ikomi says in addition to the favourable political conditions, red tape is also disrupting business less in Africa. In general, economic conditions are becoming more favourable: “It now takes two days, and three steps, to set up a company in Rwanda.

“Government debt is still comparatively low in comparison to the first world and access to this capital should be used to uplift communities in Africa. The fact is the African middle classes are growing rapidly. This means there is more money to spend on goods, creating more opportunities for investors,” Ikomi enthuses.

However, there still remains some caution about the overall conditions for foreign direct investment in Africa. Problems include the substantial shortage of human resources and economic skills on the continent. Closer co-operation between African states and India and China could “do much to better the situation”, believes Ikomi. But the interaction must create a win-win situation for all parties.

Stephen Gelb of the University of Johannesburg says statistics show that trade between India, China and South Africa are steadily increasing. Figures from the South African Reserve Bank show that trade totalled $18 million between South Africa and India in 2002. By 2009, these numbers had shot up to $342 million.

Mr Gelb says these numbers may be “a serious underestimation” of the actual trade that happens between India and South Africa.

“The investment from Tata Holdings, alone, could be as much as $1.6 billion.

A large share of Indian investments moves via Mauritius, which then does not reflect on the score sheet. This is done for tax reasons.

“Another factor may be that the official data is simply wrong, as can be seen in the discrepancy between the South African and Indian trade statistics.”

This makes a guess on the true value of the trade relationship between South Africa and India very difficult.

Gelb’s research shows that, in 2010, there were 93 Indian companies operating in South Africa, compared to 47 Chinese companies. Some 45 South African companies were operating in India and 32 in China.

Statistics show that four dollars out of every 10 dollars spent on investing in South Africa goes towards the manufacturing industry, despite local countries taking their money out of manufacturing, Gelb argues.

“Another interesting trend is that these companies are looking to sell in the local and regional markets and are not looking to export the products back home.”

Direct investment

The Indian pharmaceutical company, Ranbaxy Laboratories, is also putting up the first new medicine production plant in South Africa in 20 years.

Mr Gelb says statistics go far in alleviating fears that Africa is being unfairly treated in South-South trade. “A big fear is that both Indian and Chinese investment come with imported labour. However, statistics show that this is simply not true. Both countries operate with more than 90 per cent of their labour recruited in South Africa.”

Anthony Rayment, CEO of South African Coalmine Holdings, which belongs to a large steel manufacturer in India, agrees. “Perceptions are often not the reality, and that is certainly true of investment in Africa. Many companies are actively persuing direct investment on the continent.

“What helps Indian companies to invest is that the operating environment in Africa is similar to what they are used to. It is an emerging market; there is a lot of value that can be exchanged between the continent and India. The markets are well regulated. Entrepreneurs exist in both spheres. All of these factors lead to a similar feeling for investing.”

Africa receives some 12 percent of India’s outward investment, which is about 10 times higher than the global average. And this creates competition with western investment, which also benefits the continent in the long run.

Meanwhile, Some Indians and Africans believe Africa is on the verge of becoming a world economic power, but changes are needed to ensure that the continent takes up its rightful place in the global economy. From India’s perspective, South Africa is vital to its engagement with the continent.

Raman Dhawan, managing director of car manufacturer Tata Africa holdings, says economic policy should focus on job creation.

“But the workers must be productive to compete with the rest of the world as well. The money is in manufacturing and services and Africa is not competitive.” Mr Dhawan was speaking at the “India, South Africa and Africa in a Changing Global Landscape” conference in Johannesburg. The South African Institute of International Affairs (SAIIA) hosted the conference . The institution is a think-tank attached to the University of the Witwatersrand in Johannesburg.

Economic growth

He says confidence also plays a big part in filling big shoes on the global stage. “So when you host a successful Soccer World Cup, why do you allow the world to forget about it one year later? Keep on celebrating and marketing the country’s capabilities,” the Tata executive said. “Being good is one thing; being seen is quite another.”

Eltie Links, a member of SAIIA’s national council, agrees Africa is on the brink of an economic take-off due to perceptions that the continent is changing, for the good. “Optimism around this (economic) growth is apparent. Africans are investing in other African countries and that shows that investors believe in their own futures. The fact is that Africans will remain crucial in their own future.”

Links says India can and must play a large part in lifting Africa out of the economic doldrums. “Both Africa and India share a common colonial history. That gives them a platform to build from. Now, however, with constant talks among African countries and India, there is a new narrative that can change the lives of the poor on the continent and in India.

“Over and above that there needs to be changes in the developed world as well to facilitate these changes in the third world,” he adds.

Virendra Gupta, the high commissioner of India to South Africa, reiterates “the need for faster action from both the continent and India to work together to bring about positive changes in the lives of the poor”.

He adds: “The relationship between India and Africa must be approached as part of the changing global context. Developing countries have a unique opportunity to contribute to various international organisations, like the United Nations and the International Monetary Fund.”

“Developing countries have weathered the storm of the global economic crisis well, in some cases better than in the developed world, and this is being underlined by their growth figures. Africa’s voice is now being heard and the countries that make up the continent are becoming more assertive. They are becoming part of the discussions that affect their future,” Mr Gupta said.

“It is becoming more difficult to make decisions that affect the third world without having its inputs in these decisions. Again, this is showing that all countries deserve attention.”

Gupta declares that India is looking at South Africa to anchor its involvement on the African continent.

A roadmap to economic engagement, grants and technical assistance is in place. India does not see aid as a priority.

“We are more interested in capacity building and developing the human resources of South Africa,” Gupta contends. “India does not want to dictate policy, economic or political. It was colonised as well and it understands the dynamics involved.”

Mutual benefits
But Gupta also believes changes are needed: “Government will have to change economic policy to help more than just a few.”

Paul Baloyi, chief executive of the Development Bank of Southern Africa, agrees that time is running out to help poor people. Institutions in South Africa, but also on the rest of the continent, are under pressure to deliver.

“Statistics show that there is more stability on the African continent than in the past and people are more positive. The improvements are small, however, and poverty and the redistribution of wealth remain key issues on the continent.

“In South Africa, executives realise that time is running out to deliver services to previously disadvantaged people. There is a lot of planning taking place, but, because this is not known, people are getting more and more restless.

What is not needed now is a change of government, as this will throw service delivery back to where it was years ago as the new government will start from scratch. What government needs is a long quiet time to implement its plans.” South Africa held local government elections in May that showed a growth in opposition party support.

Mr Baloyi acknowledges that Africa’s natural resources are the rationale for most of the interest from outside the continent.
He cautions that African states should, however, be careful to ensure that benefits accrue to both sides.

“International relations are an opportunity for both sides; to gain resources on the one hand, but also to gain skills on the other.

The size of Africa’s population is another opportunity. The question is, ‘how do you use this market?’ South Africa’s middle class is growing, which means its spending power is growing and that is driving economic development,” says Mr Baloyi.

—afp