What are the key factors that create economic growth? It has become popular now to talk about the world now entering a fourth industrial revolution in the form of artificial intelligence and scientific advances such a genome editing and robotics.
But there is another factor that is often overlooked when it comes to economic growth: demographics. Ageing populations with reducing workforces will eventually experience the impact in terms of reduced GDP growth – Japan is the poster child of this phenomenon.
The world is ageing everywhere, with the notable exception of sub-Saharan Africa. According to World Bank statistics , the total births per woman in Japan is 1.43, while Italy and Spain have an even lower figure of 1.34, far lower than the UN Population Division report ’s required replacement rate of 2.1. Even India has a figure of 2.3, barely above replacement level, and it has been declining for decades as its population gets richer and more educated.
Sub-Saharan Africa, though, is the exception. Niger has a figure of 7.2, Somalia 6.2, and the Congo and Mali both recorded 6 births per woman, according to the World Bank. The average is 4.68 for the region as a whole.
Whether sub-Saharan Africa is able to extract a demographic dividend will be a key challenge both economically and politically for Europe, as well as Africa, over the coming decades.
Stephen Smith, in a recent book entitled The Scramble for Europe , points out that Europe had a population of 275m (excluding Russia) in 1885, at the conclusion of the Conference of Berlin at which the European powers carved up Africa. Africa’s population at the time was 100m.
Yet, Smith says, current demographic trends imply that, in 35 years’ time, there will be an estimated 450m people in Europe and 2.5bn in Africa. The UN’s latest data forecasts Africa’s population will hit the 2.5bn mark in 2050, and 3.5bn by 2075.
The biggest challenge for most African countries is to increase their standards of living and social stability in the face of rapid population growth. For Europe, facing the dilemma of refugees dying in their thousands trying to gain entry, it is a moral, social and economic imperative to help create sustainable societies. As experience has shown in Asia, and China in particular, it is the private sector that holds the key to a transformational growth in living standards.
While generalisations of Africa are not appropriate, there are clear geographic regions within it with common cultural and economic links. Analysis firm RisCura has identified nine distinct areas :
- The Maghreb region in north Africa, including Tunisia and Morocco.
- Egypt and Sudan have a significant commonality of trade facilitation through transport on the Nile River.
- French-speaking West African nations have a common history as French colonies. As well as language they also share similar legal and socio-political systems.
- “Other” West African countries outside of the former French colonies, including Ghana.
- Nigeria is on its own given its size – comparable to the entire Maghreb region on an aggregated-GDP basis.
- East Africa, with Kenya as a hub together with Uganda and Tanzania. Ethiopia, with a population of over 100m, could become more interesting as it becomes more investor friendly.
- Central Africa, centred around the Congo region.
- Southern Africa excluding South Africa.
- South Africa, which has the largest GDP per capita of all the regions identified by RisCura, and represents the most advanced investment destination on the continent.
For investors, a key issue is the choice between public and private markets. Egypt, South Africa, Nigeria and Kenya have the largest stock exchanges. Uganda has a number of companies cross-listed in holdings with Kenya, and there is a West African Exchange. Ghana also has a reasonable stock exchange, while Botswana and Namibia are very closely correlated to South Africa.
Public versus private
The banks, the brewers and the telecoms companies that have shown tremendous growth over the past 10-15 years, and now dominate their local economies, are only accessible through public equities. They also give a route to gaining exposure to the consumer environment in less developed markets: Shoprite and Nampak, South African listed stocks, are the only way of playing the consumer environment in Angola, while Kenya’s Equity Bank is expanding operations in neighbouring markets.
The reality, however, is that liquidity is not always there in Africa’s local listed markets. In addition, while public markets are interesting, they typically represent the “older economy” with banks, telecoms and consumer staples dominating.
Private companies can focus on the theme of Africa’s young and growing population. It is underbanked and underresourced in key areas including healthcare and education, with a fragmented retail distribution. Yet consumers are also sophisticated in terms of the internet accessed via smartphones, which enables certain businesses to be disrupted. These key themes are long-term sources of investment opportunities for any investor.
The importance to Europe
German chancellor Angela Merkel attracted both praise and opprobrium when she allowed a million Syrian refugees into Germany a few years ago. It is unlikely that Europe will continue to allow significant numbers of refugees, whether economic or humanitarian, to cross the Mediterranean if African countries are unable to create and sustain hospitable environments for their own populations. That is both a threat and an opportunity for Europe.
In an age in which ESG issues are increasingly seen as fundamental to institutional investment strategies, creating environments that can sustain and enrich populations in a region that has seen more than its share of troubles represents not only an investment opportunity but also a moral requirement. It is also very much in Europe’s own interest.
As Smith concludes his book: “The massive migration of Africans to Europe is in the interest of neither Young Africa nor the Old Continent.” He adds that Africa has far more to lose than to gain from the large-scale “exportation” of its youth through immigration.
For European investment institutions, it makes sense politically as well as economically to set aside prejudices over emerging market risks and invest more in identifying investments that can help create stable, prosperous societies in sub-Saharan Africa. The failure to do so is the greatest risk Europe may face.