How the world's charity case became its best investment opportunity.
- By Norbert DörrNorbert Dörr is the managing partner for McKinsey Sub-Saharan Africa in Johannesburg. Susan Lund is the director of research and Charles Roxburgh is the London-based director of the McKinsey Global Institute. , Susan LundSusan Lund is a principal at the McKinsey Global Institute, the business and economics research arm of McKinsey & Co. Arend Van Wamelen is a principal in McKinsey's Johannesburg office. , Charles Roxburgh
Not so long ago, the world lamented its broken continent. "The state of Africa is a scar on the conscience of the world," declared British Prime Minister Tony Blair in 2001 — and his was a common refrain. Civil war, economic stagnation, and a high disease burden seemed irreversible, condemning the region to perpetual poverty.
A decade later, however, Africa has outgrown the gloom and doom. Far from the misery-stricken place so often portrayed, Africa today is alive with rising urban centers, a growing consumer class, and sizzling business deals. It’s a land of opportunity.
Africa, in fact, is now one of the world’s fastest-growing economic regions. Between 2000 and 2008, the continent’s collective GDP grew at 4.9 percent per year — twice as fast as in the preceding two decades. By 2008, that put Africa’s economic output at $1.6 trillion, roughly on par with Russia and Brazil. Africa was one of only two regions — Asia being the other — where GDP rose during 2009’s global recession. And revenues from natural resources, the old foundation of Africa’s economy, directly accounted for just 24 percent of growth during the last decade; the rest came from other booming sectors, such as finance, retail, agriculture, and telecommunications. Not every country in Africa is resource rich, yet GDP growth accelerated almost everywhere.
Government reforms, greater political stability, improved macroeconomics, and a healthier business environment are now taking hold in a region long dismissed as hopeless. Inflation fell to an average of 8 percent in the 2000s after a decade during which it hovered at 22 percent. African countries have lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, including banking. Africa now boasts more than 100 domestic companies with revenue greater than $1 billion. And capital flows to the continent increased from just $15 billion in 2000 to $87 billion in 2007. With good reason: Africa offers the highest rate of return on investment of any region in the world.
Pockets of great risk and instability certainly remain, but the long-term trends look good. Global demand for commodities is rising, and Africa is well positioned to profit. The fastest-growing demand for these raw inputs comes from the world’s emerging economies, with which sub-Saharan Africa now conducts half its trade. Africa’s production of oil, gas, minerals, and other resources is projected to grow at 2 to 4 percent per year for the next 10 years. At current prices, this will raise the value of resource production to $540 billion by 2020 — and possibly much higher depending on how commodity prices rise.
An even bigger source of growth will be the rise of the urban African consumer. In 1980, just 28 percent of Africans lived in cities. Today, 40 percent of the continent’s 1 billion do, a portion close to China’s, larger than India’s, and likely to keep growing in the coming years. The number of households with discretionary income is projected to grow 50 percent over the next 10 years to 128 million. Already, Africa’s household spending tops $860 billion a year, more than that of India or Russia. And consumer spending in Africa is growing two to three times faster than in the wealthy developed countries and could be worth $1.4 trillion in annual revenue within a decade.
Nothing spawns growth like growth, and Africa’s urbanization is also increasing demand for new roads, rail systems, clean water, power generation, and other infrastructure. Even agriculture, in which Africa has long lagged, is poised for takeoff. The continent is home to 60 percent of the world’s uncultivated arable land. So if farmers brought more of it into use, raised the yields on key crops to 80 percent of the world average, and shifted cultivation to higher-value crops, the continent’s famers could increase the value of their annual agricultural output from $280 billion today to around $500 billion by 2020.
Multinational companies have already shifted their mindsets, even if the political world is still used to thinking of Africa as a charity case. Telecom firms have signed up 316 million new African subscribers since 2000, more than the population of the United States. Walmart recently bid $4.6 billion for one of the region’s largest retailers, confirmation that global businesses think Africa holds commercial potential on a scale not seen since China opened up more than 20 years ago. Those prospects will only grow as Africa urbanizes; already, the continent is home to 52 cities with populations of at least 1 million, as many as in Western Europe today.
While challenges remain, Africa has a bright future — you can bet on it, as countless businesses are doing every day.