MGI Research

Lions on the move II: Realizing the potential of Africa’s economies

| Report

Many observers are questioning whether Africa’s economic advances are running out of steam. Five years ago, growth was accelerating in almost all of the region’s 30 largest economies, but the recent picture has been more mixed: while growth has sped up in about half of Africa’s economies, it has slowed in the rest.

Between 2010 and 2015, Africa’s overall GDP growth averaged just 3.3 percent, considerably weaker than 4.9 percent a year between 2000 and 2008. But average growth hides a marked divergence, finds a new McKinsey Global Institute report Lions on the move II: Realizing the potential of Africa’s economies. A much less robust economic performance by two groups of African economies dragged that average down—oil exporters hit by the decline in oil prices and countries affected by the political turmoil of the Arab Spring (Egypt, Libya, and Tunisia). For the rest of Africa, growth actually accelerated to 4.4 percent in 2010 to 2015 from 4.1 percent in 2000 to 2010 (exhibit). In addition, long-term fundamentals are strong, and there are substantial market and investment opportunities on the table.

Future growth is likely to be underpinned by factors including the most rapid urbanization rate in the world and, by 2034, a larger working-age population than either China or India. Accelerating technological change is helping to unlock new opportunities for consumers and businesses, and Africa still has abundant resources. The International Monetary Fund projects that Africa will be the world’s second-fastest-growing region in the period to 2020.

Despite recent shocks and challenges, spending by Africa’s consumers and businesses already totals $4 trillion annually, and is growing rapidly. Household consumption is expected to grow at 3.8 percent a year to total $2.1 trillion by 2025. African businesses are an even larger spender. From $2.6 trillion in 2015, business spending is expected to increase to $3.5 trillion by 2025.

Africa could nearly double its manufacturing output to $930 billion in 2025 from $500 billion today, provided countries take decisive action to create an improved environment for manufacturers. Three-quarters of that potential could come from Africa-based companies meeting domestic demand; today, Africa imports one-third of the food, beverages, and other similar processed goods it consumes. The other one-quarter could come from more exports. The rewards of accelerated industrialization would include a step change in productivity and the creation of up to 14 million stable jobs over the next decade.

While the potential that Africa offers is undoubted, the question remains: will it be achieved? Businesses and governments will need to work harder to capture the opportunity. Africa is home to 700 companies with annual revenue of more than $500 million, including 400 with annual revenue above $1 billion, and these companies are growing faster and are more profitable than their global peers. But Africa needs more of them. It has a lower number of large companies—and they are smaller on average—than one would expect given the corporate landscapes of other emerging regions. Corporate Africa needs to step up its performance to make the most of these opportunities. The top 100 African companies have forged their success by building a strong position in their home market before diversifying geographically, adopting a long-term perspective, integrating what they would usually outsource, targeting high-potential sectors with low levels of consolidation, and investing in building and retaining talent.

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Lions on the move: The progress and potential of African economies

Governments will need to address the continent’s productivity and drive growth by focusing on six priorities emerging from this research: mobilize more domestic resources, aggressively diversify economies, accelerate infrastructure development, deepen regional integration, create tomorrow’s talent, and ensure healthy urbanization.

Delivering on these six priorities will require a transformation in the quality of Africa’s public leadership and institutions, as well as governance. All these imperatives require the vision and determination to drive far-reaching reforms in many areas of public life, and they require capable public administration with the skill and commitment to implement such reforms. What the past five years have shown is that Africa’s diverse economies—its economic lions—now need to improve their fitness in order to make the most of their undoubted long-term growth potential and to continue their march toward prosperity.

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