Africa is no longer just a continent in need—indeed, it has become a place of opportunity. African economies offer a higher rate of return on foreign direct investment than most emerging economies, write James Manyika and Susan Lund in Foreign Policy.
This week's U.S.-Africa Leaders Summit presents Washington with a historic opportunity not only for broad relationship-building but also for deepening its economic ties to the continent. It would be a mistake to assume that the benefits will all flow from the United States to Africa. There is huge economic potential in this gathering for the U.S. economy, too.
Africa is no longer just a continent in need—indeed, it has become a place of opportunity. Investments from companies like GE and Caterpillar and other private investors such as Blackstone and Carlyle, at $130 billion in 2012, now surpass remittances and official aid as the largest type of capital inflow. Africa stands out for the relative youth of its people—a potential demographic dividend. By 2035, the continent is set to have the largest working-age population in the world, larger than those of China and India, meaning that, for the foreseeable future, Africa will not face the potential drag on growth from shortages of labor that may be in prospect for other economies whose populations are aging.
But formidable challenges await African leaders, including bolstering education, creating jobs, and lifting more people out of poverty.
Still, the continent holds significant economic potential. African economies offer a higher rate of return on foreign direct investment than most emerging economies. Since 2000, the continent has been the second-fastest-growing region in the world; in 2012, the continent was home to six of the world's 10 fastest-growing economies. The continent's real GDP, at $2 trillion in 2013, was larger than India's and Russia's, and on par with that of Brazil.
But the United States has largely missed out on the economic opportunities Africa offers. Over the last decade, American foreign direct investment into Africa amounts to less than one-third that coming from Europe, and it also lags investment from the BRIC quartet of Brazil, Russia, India, and China. Meanwhile, U.S. trade with Africa is less than one-fifth the volume of its trade with Europe, and only 60 percent the level of China's trade with Africa.
Moreover, Africa's rising middle class offers U.S. businesses a huge, untapped new export market for their goods and services. Today, Africa's undoubted wealth in natural resources such as oil, gas, and minerals only accounts for one-third of the continent's GDP growth. But, as incomes rise, consumption is a gathering force in Africa. The continent is changing from one whose economic activity is centered on the export of natural commodities to one where domestic spending is playing a larger role. The continent is already home to nearly 100 million people who have enough income to spend on things they want rather than simply on things they need—the basics such as food and clothing. By 2020, that tally is set to rise to 128 million, according to our research. This new consumer army will be spending a projected $1.4 trillion a year by then.
More than half of African households will have discretionary spending power. Nigeria, now Africa's largest and most populous economy, will have 160 million people in consuming-class households, more than the current populations of France and Germany combined. African industries that cater to consumers will have estimated annual revenue in 2020 of $1.38 trillion, compared with $540 billion in the case of resources industries.
As Africa's trade ties with the world deepen, now is the time for the United States to get in the game. In 2012, the continent's flows of goods, services, and finance were worth $1.5 trillion, or 76 percent of GDP.
Although commodities continue to dominate Africa's exports, there are distinct signs of Africa's trade rising decisively up the value chain. Exports of knowledge-intensive goods and services (which have a high R&D component or use highly skilled labor) are growing. Indeed, Africa's cross-border Internet traffic—made up of everything from international Skype calls and email traffic to e-commerce and video streaming—grew 70-fold between 2005 and 2013, faster than in China or Latin America, although it still lags behind the rest of the world.
Initiatives are already underway to deepen economic ties between the United States and Africa. One example is the Power Africa plan unveiled in 2013, an initiative to double the number of people with access to power in sub-Saharan Africa. Its aim is to enable public and private capital to expand power generation and electrify the continent. In its first five years, Power Africa offers more than $7 billion in financial support and loan guarantees. To date, that government investment has catalyzed more than $14 billion in private project finance. The summit could be an opportunity to expand and broaden this initiative, given that about 550 million people in Africa still lack access to power, according to the World Bank.
Another initiative is the African Growth and Opportunity Act, signed into law in 2000, aimed at offering incentives to African countries to open their economies and embrace free markets. Equally important will be measures to help the continent develop a new generation of business and political leaders, building on the Young African Leaders Initiative. One useful step for the United States to take would be to ease the path for more African students to attend universities and graduate programs; this may require looking carefully at current immigration rules.
But the United States shouldn't stop there. U.S.-Africa trade and investment should expand from its current focus on oil and other commodities to include trade in manufacturing and services. American companies have been slow to grasp the investment opportunities available in Africa beyond the natural resource sectors. For instance, the continent will need over $300 billion in infrastructure investment, an area in which U.S. companies can play a major role. Development finance organizations need to think creatively about risk-mitigation mechanisms to give the private sector the confidence to invest in this dynamic market. New partnerships could be struck to develop Africa's efforts to boost skills.
For its part, African countries can do more to reach out to U.S. investors and help them navigate regulations and local customs. The summit is an ideal opportunity to explore this area and what can be done better. Many African countries—from Angola to Zambia—have set up dedicated investment agencies. Many, such as South Africa, also have public-private partnership agencies. Both of these are useful ways of enhancing engagement with U.S. businesses. African leaders should use the summit as an opportunity to hear any concerns—macroeconomic, regulatory, or security-related—from U.S. companies that may be preventing them from committing funds to Africa.
The historic Washington summit is an opportunity to address the relative lack of engagement with Africa on the part of the United States and the unevenness of economic development in Africa—despite its enormous potential. Summits can too often be mere talking shops and photo opportunities. The importance of this gathering will only materialize with concrete action. Both sides have work to do.
This article originally ran in Foreign Policy.