Africa: on track to a brighter future?

Africa has long been a continent of unfulfilled promise but is it poised to finally become the economic force it wants to be? Investment in infrastructure like railways, roads and ports could light the touchpaper to a brighter future.

Conductor climbing onto Ethiopian Railways train - Rathbone Investment Management

James Ward, Investment Director, Rathbones

It was the sort of celebration that regular visitors to the continent would quickly recognise as uniquely African. Tribal musicians in traditional costumes danced down the aisles, their enthusiasm infectious. Politicians and celebrities from across the Horn of Africa, in their best clothes, smiling for the photographers, joined in the singing, swaying in their seats, full of joy.

Less familiar was the setting — a pristine, modern, air-conditioned railway carriage speeding quietly out of Djibouti’s capital towards Addis Ababa in Ethiopia.

It was the official launch earlier this year of Africa’s first electric transnational railway — a 466-mile track that has taken six years to build at a cost of £3 billion.

Set to help transform the social and economic landscape of the two countries, the line, with its fleet of new passenger and freight trains, was built by two state-owned Chinese companies and largely funded by Chinese banks.

A journey that takes several days by dusty, pot-holed roads can now be done in just 10 hours and for less cost.

It is easy to see the potential difference this might make to landlocked Ethiopia. Around 1,500 trucks a day currently lumber along the old road to the Djibouti port at the southern entrance to the Red Sea. This newly modernised and extended, world-class complex is the gateway to Asia, Europe and the rest of Africa through which the bulk of Ethiopia’s exports and imports travel.

The railway is the first step in a 3,100-mile network which Ethiopia hopes to build in the next decade, linking it to Kenya, Sudan and South Sudan. A 250-mile extension to the north, costing £1.3 billion, is due to open later this year. The Djiboutis, set to benefit from opening up their own businesses to the Ethiopian market, dream of the line eventually extending right across Africa to the Atlantic.

Throughout Africa a number of large-scale railway building projects are under way. This year has seen completion of another — a 290-mile replacement line between the Kenyan port of Mombasa, the largest in East Africa, and the country’s capital Nairobi. This line, 90% funded by the Chinese, will eventually stretch into Uganda and Rwanda.

What is exciting about many of these rail projects is how they extend beyond borders, encouraging regional integration, which the African Development Bank sees as fundamental to unlocking Africa’s potential. They promote the free movement of goods, people and capital, opening up markets and stimulating economic investment and development.

Silk road to prosperity

New railways are important, but Africa’s road map to prosperity also requires, well… roads. Ethiopia is looking to double its road network in the next three years.

This would have a huge benefit for Ethiopia’s farmers. Research shows that the closer a farmer is to a large population centre, the greater their access to markets, tools and fertilisers. One study has suggested that reducing travel time to a city with a population of 100,000 from eight hours to four can result in a nine-fold increase in productivity.

One of the greatest challenges Africa faces is feeding itself. Though agricultural production is up 160% over the past 30 years, Africa is still a net importer of food. Yet it has 60% of the world’s uncultivated arable land. Smallholder farmers contribute up to 80% of sub-Saharan Africa’s food supply. Increasing their capabilities and access to markets could vastly increase food output.

In Ethiopia, much of the funding for roadbuilding has come from the Chinese. Since 2000, the country has been the second-biggest recipient of Chinese loans to Africa after Angola — it has received over £9 billion. It has also seen heavy investment from Chinese companies.

China clearly sees opportunity in Africa and contributes around a sixth of all lending there. In 2013 President Xi Jinping unveiled the One Belt One Road initiative, a development strategy to build connectivity and cooperation between Eurasian countries, taking in the Horn of Africa. But China’s influence has spread far across the continent to encompass Sierra Leone, Liberia, Guinea and Togo in the west and Angola, Mozambique, Zambia and Zimbabwe further south.

Critics have challenged the motivation. Clearly China wants access to Africa’s rich supply of oil, copper, uranium, iron ore and cobalt — vital in the production of electric car batteries. But it also sees Africa as a promising marketplace — the continent’s consumers will be spending $2 trillion a year by 2025.

Though resource-poor, Ethiopia, for instance, offers a large potential market for Chinese manufacturers and construction companies. In 2000, China-Africa trade was estimated at around $10 billion. By 2014 that had risen to $220 billion.

Demographics and industrialisation

Maybe the Chinese are looking for a cheap workforce too.

Fertility levels are falling in Africa and, indeed, Ethiopia has been one of the most progressive and successful countries at encouraging use of contraception. But with 4.7 children born per woman on average across the continent (compared with a global average of 2.5) the UN estimates that Africa’s population will still rise from 1.3 billion to over 2.5 billion by 2050, accounting for more than half of the world’s predicted population growth.

Where populations elsewhere in the world are ageing, Africa is young — 41% of its population is under 15. It currently has 12% of the world’s workforce. By 2050 it is estimated this will have nearly doubled to 23%.

So at a time when labour costs in Asia are rising sharply, Ethiopia and other African countries offer a cheaper alternative.

Many of those optimistic about Africa’s future call this the ‘demographic dividend’.

But there is a flip side. More mouths to feed is a challenge and a young workforce is only a benefit if it can be productively engaged — over 50% of Africa’s graduates are without jobs.

Youth unemployment has become the most serious economic challenge across the continent, laying seeds for social and political instability. Can African countries achieve the manufacturing growth required to provide adequate employment?

This is why many see industrialisation and manufacturing as crucial to Africa’s success. It must move from exporting raw materials to exporting finished products, finding skilled jobs for the educated young people it is producing and incentivising learning and skills development.

Manufacturing accounts for only 11% of the economic output of the continent and Africa’s manufacturing industry accounts for less than 2% of the world’s manufactured products.

Ethiopia’s biggest international earner is currently its coffee crop and three quarters of the population are farmers. Prime Minister Hailemariam Desalegn — a civil engineer by training — is keen to diversify and develop. His infrastructure strategy does not end with road and rail. He has an ambitious target to make Ethiopia the leading manufacturing hub in Africa by 2025, making the most of its emerging transport network.

The 350-acre Hawassa Industrial Park in Southern Ethiopia is one of a dozen huge industrial parks under construction across the country. Claimed to be the biggest in Africa, the park opened just six months ago and is already hosting more than 10,000 jobs in the textile industry. That number is expected to rise to 60,000 in the next year or so.

Eighteen companies from 11 foreign countries have invested in building capacity at the park, making clothes for well-known Western brands like Calvin Klein and Tommy Hilfiger.

Industry requires power — another of Africa’s problems. Nearly half the population still live without electricity. At the end of 2016 Desalegn inaugurated the controversial 800ft Gilgel Gibe III Dam — a hydroelectric plant that effectively doubled Ethiopia’s energy supply overnight. But more power stations will be needed.

Political tension

It is difficult to talk about Africa without referencing its politics — civil war, dictatorships, brutal regimes and repression. Around 40% of Africans live in absolute poverty.

Ethiopia is not without its critics — a 10-month state of emergency that brought mass detentions and restrictions on movement and communication was only lifted in August 2017.

Like many other African countries it is also horribly susceptible to natural disaster. Millions of people in the country received emergency food aid this year as a result of yet another crippling drought followed by flash floods that have devastated livestock and crops.

Clearly there are enormous problems to resolve. But it is easy and wrong to assume this massive continent is doomed to perpetual tragedy.

Progress is being made. Across large parts of Africa enormous infrastructure projects have been put in place to try to unleash its potential. The 2008/9 financial crash thwarted development as the global market for commodities plummeted, but recovery is under way and many governments are looking to reduce their reliance on commodities.

There will be setbacks and progress will be mixed, but maybe, just maybe, Africa is finally on track to a brighter future.

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