Africa Still Poised to Become the Next Great Investment Destination

Workers fill up form to make a pump's body at an iron foundry in Bobruisk, southeast of Minsk, March 11, 2015. [Photo/Agencies]

The commodities boom may be over, but sub-Saharan Africa is still experiencing growth. By adopting sound macroeconomic policies over the past two decades and sector reforms, many African economies have already shown that they can sustain a trajectory of economic growth and beat the “resource curse.”

The continent has become the second most attractive investment destination in the world – ranking just behind North America.as investors are looking beyond the more established markets of South Africa, Nigeria and Kenya. Foreign direct investment (FDI) in the region has hit a record $60 billion, five times its 2000 level. Intra-African investment is also on the rise, creating a virtuous circle that encourages greater foreign investment.

The reason for this trend is simple. The world’s eyes are turned toward Africa’s market of one billion people, including a growing middle class. Investors also see significant opportunities to invest in Africa’s non-commodities sectors: financial services, construction and manufacturing now account for 50 percent of Chinese FDI in Africa. And while to date relocation of manufacturing is relatively limited, the potential is significant.

With rising production costs in Asia, manufacturers have been looking at countries such as Ethiopia, Kenya and Rwanda. In an industrial zone outside Addis Ababa, the Chinese-owned Huajian factory reportedly plans to expand its workforce to 30,000 as part of a $2-billion investment, one more indication that “made in Ethiopia” could become the next “made in China.” But can Africa become a global outsourcing hub? Only if the right conditions are in place.

Africa needs a skilled labor force. The sub-Saharan region will see more people joining the labor force in the next 20 years than the rest of the world combined. To provide young people with the necessary skills to meet market demands, African countries and institutions are stepping up efforts to close the skills gap and capitalize on growing FDI flows to build greater technological capability, and enroll more students in science and technology disciplines. Currently, only 22% of African university graduates are emerging with degrees in the “STEM” disciplines, compared with a 40% ratio in China.

Africa still needs a more conducive investment climate. This will require not only lowering transport and energy costs, but also eliminating formal and informal barriers to trade; increasing the flexibility of labor markets; and ensuring effective competition policies. By improving its regulatory structure for business, Rwanda — a country lacking natural resources — has seen its FDI increased more than threefold in the past five years.

Africa needs infrastructure. Sub-Saharan Africa, where infrastructure financing needs are estimated at $93 billion a year for the next decade, won’t be able to compete with other regions without roads and universal access to electricity, as well as enhanced ICT. In a region with limited participation in global trade, road freight moves no faster than a horse-drawn cart, and major ports are chronically choked due to lack of capacity. Inadequate power supply remains the most serious infrastructure challenge. Only one in three Africans has access to electricity and regular power outages cost the African economy as a whole between 1 and 4 percentage points of GDP.

Africa needs agribusiness. It is also time to accelerate the continent’s progress in boosting agriculture productivity. Agriculture still employs 60 to 70% of the workforce but accounts for less than 20% of total value-added. Despite substantial policy commitments, productivity in the agriculture sector remains disappointing. Supporting smallholders through investments in improved technologies, rural financial services and better access to markets is vital. Agriculture and agribusiness are expected to become a $1-trillion industry by 2030.

To boost responsible investment on the continent, the government of Ethiopia, China Development Bank (CDB), the World Bank Group (WBG), and the United Nations Industrial Development Organization (UNIDO) have joined forces to host the “Investing in Africa Forum,” in Addis Ababa on June 30 and July 1. Policy makers, development partners, and foreign and local private investors will discuss what it will take to make Africa the next great investment destination.

The bottom line? It will take partnerships between governments and the private sector, between African countries and their neighbors, between Africa and non-neighbor countries, and between Africa and its development partners. The time for action is now.

Makhtar Diop, World Bank Vice President for the Africa Region | @Diop_WB

Yuan Li, Executive Vice President, China Development Bank, People’s Republic of China

Li Yong, Director General, the United Nations Industrial Development Organization (UNIDO)

H.E. Ato Ahmed Shide, State Minister of Finance and Economic Development, Federal Democratic Republic of Ethiopia