Monday, January 24, 2011

Falling poverty makes Africa a better bet

EMPIRICAL evidence demonstrating that poverty and inequality in Africa are falling isn’t only good news for politicians, it is good news for investors and potential investors too. The world economy has shifted to a point at which emerging markets, and particularly African markets, can no longer be treated as pariahs.

In their research paper released last year (available here), Xavier Sala-i-Martin and Maxim Pinkovskiy of the department of economics at Columbia University in New York demonstrate that "African poverty is falling, and is falling rapidly". They further show that, contrary to popular belief, income inequality is decreasing. These results go against the United Nation s finding in 2009 that "poverty continues to intensify".

Although Martin Ravallion of the World Bank takes issue with the confidence with which claims of a downward trend in poverty are being presented, he agrees that such evidence is emerging. There is no contention about the relationship between economic growth and poverty. As Richard Adams of the World Bank showed in a policy research paper in 2003: "Growth represents an important means for reducing poverty in the developing world." He says there is a strong statistical link between growth and poverty reduction

Over the past decade, economic growth in Africa has increased substantially. While the developed world slipped into recession, contracting 3% in 2009, African economies grew almost 2%. This year, most African countries will achieve growth of more than 5%, while the world economy will struggle to reach this mark.

In a research report released by the McKinsey Global Institute, Africa’s collective gross domestic product (GDP) was estimated at 1,6-trillion in 2008, and predicted to grow by 1- trillion by 2020, with consumer spending reaching 1,4-trillion. This would mark significant progress in fighting poverty in Africa.

Unlike major economies such as Japan, the US and even France, which have pronounced problems with working populations, Africa will have a working population of 1,1-billion by 2040, while per capita income would have risen from today’s 1600 to 2100 over the next 10 years.

National debt and debt management have improved for African countries — with the help of the International Monetary Fund (IMF) and other initiatives, which led to improved financial management. Many African economies now have national debt of less than 50% of GDP, and therefore below the IMF and World Bank thresholds. Botswana, Ethiopia, Ghana, Nigeria and Angola had debt-to-GDP ratios of less than 40% in 2009 while much of the developed world buckles under its debt burdens.

On the political front, more than 18 emerging African countries are putting behind them the scourge of conflict, stagnation and dictatorships, and have achieved steady economic growth, deepening democracy and political stability. Steven Radelet of the Centre for Global Development makes the following observation in his book, Emerging Africa: "(The) aggregate continent-wide approach is overdone. It combines improvements in one country with deterioration in another, and concludes nothing is changing when quite the opposite is true."

Economists and other social scientist have always understood that poverty and inequality are the breeding ground for social and political unrest and conflict. Thus, as these conditions improve, we should expect more stability and security.

This stability will allow for less investment risk. The rates of investment in Africa suggest investors are starting to see these conditions unfold. In 2008, more than 20 African countries received at least 500m each in investment, and returns on investment in Africa have exceeded those in the rest of the world. Last year, reports show that foreign direct investment and portfolio investment into African economies surged.

The shift in the growth profile of the world, the improvements in the historical profile of Africa with regard to poverty, inequality and political stability, as well as the growing relations between Africa and a growing Asia, should be points of interest to investors this year and in the years to come.