Smart money is on East African growth

FROM THE WEB – by Michael Power, Financial Mail

For much of modern history, the rest of the world has regarded Africa’s economic place as that of a supplier of raw materials, both agricultural and mineral. And, by and large, it still is.

But this is at last starting to change. At the margin, Africa is starting to make things at home, and not merely supplying the ingredients that go into the making of things elsewhere. And having made them, it is starting to export them.

Fittingly, this transformation is occurring in that part of Africa where the sun rises first – in the east. And this is happening in part because of Eastern Africa’s proximity to the economic renaissance of the other East – of Asia.

To the surprise of many Africa watchers, this new trend did not begin in the obvious places. It is certainly not evident in Africa’s largest economy, South Africa, which is if anything deindustrialising as a result of catching a bad dose of the “Dutch disease” post-2000. (In the wake of a rand underpinned by strong commodities prices, South Africa’s resources sector crowded out its industrial sector.) Nor is it happening in North Africa, where the successor regimes of ossified gerontocracies are grappling with a potent mix of unemployed youth and reinvigorated Islam. It is not even happening in Africa’s most populous nation, Nigeria – which may be an even bigger economy than South Africa when the method of calculating its GDP is revised. As its retiring central bank governor, Lamido Sanusi, recently bemoaned, his country remains overly dependent on oil to drive its economy forward.

Rather, Africa’s new economy is taking root in Eastern Africa, with Kenya and Ethiopia at the forefront and Tanzania and Uganda reinforcing this emerging regional cluster of more than 300m people. Reversing the trends of the post-independence, post-1960 era, it is Africa inside the tropics – Middle Africa – much more than the north or south that is now recording the highest levels of GDP growth.

For those not hidebound by the narrative of recent history, this should not be so surprising. After all, East Africa is closest to Asia, and not just geographically. The Indian Ocean has connected the continents’ littoral regions for over 2000 years: the earliest inhabitants of Madagascar made their way there from Borneo some 400 years before the birth of Christ.

Eastern Africa’s lingua franca, Swahili, draws heavily on the longstanding trade links it has with the Arabian Peninsula: swahel means “coastal” in Arabic. Its coastal strip is also overwhelmingly Muslim, practising (except perhaps in the failed state of Somalia) a far more approachable, less militant form of Islam.

Indeed, East Africa has traded extensively with Asia for millennia; 900-year-old coins from Kilwa, East Africa, have been found on the Wessel Islands off the coast of Australia.

China’s links with the shores of the Western Seas – as ancient Chinese writers called the Indian Ocean – extend far back. The frequency and extent of their visits picked up some 800 years ago. Their cartographical knowledge of the region testifies to this: China’s Da Ming Hun Yi Tu is the oldest map of Southern Africa, dating back to 1389; its most celebrated explorer, Admiral Zheng He, visited East Africa nearly a century before Portugal’s Vasco da Gama.

Reinforcing these ancient commercial links with Asia, the Swahili word for money – pesa – is Hindi in origin; indeed, until the mid-1920s, the most widely used currency in the region was the Indian rupee. Even the cuisine of the Swahili Coast reflects strong influences from India’s Kerala region.

Given this history, it is hardly surprising that Asia appears to be favouring capitalist Kenya as its front door into Africa. Both corporate and government sectors seem to be using Nairobi as their “Kilimanjaro” from which to survey the opportunities that the continent offers and for marshalling their resources to take advantage of the high economic growth now being registered in Middle Africa. Though India arguably has a head start over China in terms of its historical closeness to East Africa (evidenced and reinforced by some 400000 East Africans who can trace their ancestral roots back to the Indian subcontinent), China has been working hard to close this gap: Nairobi was chosen to be the African head office for China Central Television and China Daily and the location for Africa’s first Confucius Institute.

But history and geography alone would not have justified East Africa’s preferred position with Asia. Something far more profound underlies the favour that Asia Inc is bestowing upon the region. And that something is an advantage that modern East Africa has largely brought upon itself: the region has, in the estimation of Harvard University’s Observatory – which examines the fundamental causes underlying economic growth – reached a critical stage of what they call “the growth of economic complexity”, a stage that will allow the region to start escaping the trap of merely being a producer of primary products. This tipping point allows East Africa to learn how to make and, critically, to export things.

Over the past 50 years, economists have developed a number of theories to explain why economic growth happens. Their explanations vary from “biodiversity” (Jared Diamond), to “culture” (David Landes) to “institutions” (James Robinson and Daron Acemoglu). But none come close to having the explanatory power of “economic complexity”, the concept developed by Ricardo Hausmann and his team at Harvard.

Economic complexity has two dimensions. First, it reflects the “diversity” of products a country knows how to make and, critically, to export. Second, it reflects the “ubiquity” of these products, how many nations compete with them in the making and export of those products. Embedded in this idea is the assumption that if a country can succeed with its exports in a global market, it can produce them competitively.

By calculating the evolution of complexity, the Harvard team are able not only to audit the economic growth of the past but to predict the economic growth of the future. And if their forecasts pan out, Africa is facing very sunny prospects. Of the 11 fastest-growing economies of the decade to 2020, 10 are predicted to be in Africa. Only India – at number one – stops a clean sweep. And of those 11, seven are in Eastern Africa as the region is defined by the United Nations: the core three of Kenya, Uganda and Tanzania plus Malawi, Zambia, Zimbabwe and Madagascar.

Eastern Africa appears to be part of a wider growth cluster, too: the Harvard research reveals the Indian Ocean basin to be the hottest economic region on Earth. If this projection holds, the Harvard team have identified the countries that are in the waiting room for industrialisation as the Age of the Factory migrates from East Asia to South Asia and on to Eastern Africa.

Much has recently been made of the observation that China’s labour costs have risen so much that it is no longer a profitable base from which to manufacture and export many items. The West appears to be hoping that, having endured the pain of “off-shoring” for much of the post-1990 period, it will regain that manufacturing as a result of the Chinese development. A few isolated examples of this have happened. But far more manufacturing capacity has moved further down the cost ladder: the shoe industry has migrated to Vietnam, while garments have gone to Bangladesh. This translocation process is now moving up the value-added chain: last month Samsung announced it was moving 40% of its smartphone production from China to its new US$2bn plant in Vietnam.

And this migration is not stopping in Asia. As the financial magazine Barron’s recently noted: “China’s pain is Kenya’s gain.”

Thus far Kenya has won mostly car and motorcycle assembly plants, nearly all from Asia: Tata, Hero and TVS from India; Foton and Chery from China; Honda and Toyota from Japan. My explanation for this is that Kenya’s vibrant outdoor “metal bashing” sector (part of its jua kali or “hot sun” tradition) has underpinned the engineering skills development necessary for car and motorcycle assembly plants to be established there. In addition, the highly developed agribusiness sector has created a set of skills, especially in processing and packaging, that are easily transferable to a factory environment.

Ethiopia has benefited more from migrating textile and shoe factories: Swedish retailer H&M has been replacing Chinese garment suppliers with Ethiopian ones, more than 50 Turkish textile companies have moved to an industrial park outside Addis Ababa, and the world’s largest shoe company, China’s Huajian, has moved productive capacity from China to another Addis Ababa industrial park. Masterminding Ethiopia’s emergence as a textile manufacturing and export centre have been advisers and investors from South Korea’s public and private sectors. Given what this same team did for Bangladesh, the chances of Ethiopia succeeding in this field appear very good. These moves make excellent sense: with equivalent productivity, wages in Ethiopia are 50% those of Vietnam. Even after adjusting for higher Chinese productivity, Ethiopian wages are still one-third of those in China.

According to The Economist, Kenya now leads the world in the field of mobile money, with some 30% of the country’s GDP now transacting through cellphones every day. Like Vietnam, the country is also attracting technology companies: Samsung is establishing a factory to assemble laptops and printers; China’s Tecno assembles phone handsets in Kenya, as it does in Ethiopia. And Kenya’s tech footprint goes beyond product manufacture: Microsoft, Google, Oracle and IBM are residents of Kenya’s bustling Silicon Savannah and have based R&D hubs there. Google executive chairman Eric Schmidt (and McKinsey) nominated Nairobi as Africa’s most tech-savvy city. Like India, the country’s business language is English – as is the case throughout most of the Eastern African region — which has facilitated its easy integration into the World of Tech. What makes this so relevant is that technology lies at the very heart of building economic complexity.

A number of related developments have reinforced the claim that something profoundly new is coming out of East Africa. Uganda, Tanzania and Rwanda are very much on board the regional bandwagon, working through the increasingly effective East African Community (though Ethiopia is not currently a member of this common market). Labour can now move freely between member states and the core three — Kenya, Uganda and Tanzania – have launched a cross-border integrated payments system. Even investors from the rest of Africa are sensing that something good is happening; Nigeria’s Aliko Dangote is building cement plants in Ethiopia, Kenya and Tanzania. And the power sector, so vital in facilitating any economic take-off, has been invigorated by the governments of the bloc deciding to let the private sector take the lead in financing capacity expansions. This will happen overwhelmingly in the sustainable energy sectors – thermal, wind and hydro. That said, oil and gas have now been found in very commercial quantities in the core three nations, which serves to reinforce the bloc’s improving economic prospects.

In his book The Rise and Retreat of American Manufacturing, Vaclav Smil, reputedly Bill Gates’s favourite author, wrote: “Making things remains a quintessential human endeavour without which there can be no prosperous large economies and no socially stable populous societies.” Africa has thus far been only a marginal part of the global economy, largely because it has been only very peripherally involved in the making and the exporting of things. This is now on the cusp of changing. Not since the independence era of the 1960s has an economic event of this magnitude happened.

Back then, Africa began to take control of its political destiny. Once industrialisation spreads from its launch-pad in Eastern Africa, the continent will have greater control over its economic destiny too.