Africa: Growth is on the horizon but where should you look?
As labour costs in Asia starts to increase and pressure remains to keep prices competitive, CEOs are increasingly recognising the untapped potential of the Sub-Saharan African (SSA) countries.
This is mainly driven by Africa's unparalleled demographic edge compared to other parts of the world: Africa is the world's youngest continent and is expected to have the biggest labour force in the world by 2040. So where should businesses focus their attention within SSA?
Cities are the typical entry points for businesses trying to expand in new overseas markets. This is because they enable closer interaction with customers in a relatively small geographic space which in turn helps contain distribution costs.
Most Western companies already have some presence in one of SSA's `Top 3' populous cities: Lagos, Kinshasa and Johannesburg (see Figure 4). However, we think the real opportunity lies in the `Next 10' large cities in SSA, the populations of which are projected to almost double in size by 2030, growing by around 32 million people. In fact, the latest United Nations projections* show that, by 2030, two out of the `Next 10' cities (Dar es Salaam and Luanda) could have bigger populations than London has now.
Urban population growth is expected to lead to more economic activity. Figure 5 shows that, on average, the `Next 10' cities are expected to almost double their population and triple their economic output by 2030. Specifically, we estimate that economic activity in the `Next 10' cities could grow by around $140 billion dollars by 2030 (at constant 2012 dollars). This is roughly equivalent to the current annual output of Bangladesh. These estimates are based on the following key assumptions:
However, we see three key hurdles which could derail the pace at which the `Next 10' grow. These are issues that most SSAS countries have been trying to tackle for many decades with limited success:
The challenge that policymakers are faced with is to convert Africa's demographic dividend into economic reality by overcoming these hurdles, but history suggests this will not be a quick or easy process. Potential investors should therefore form their own plans to mitigate these problems (e.g. by supporting infrastructure and skills development programmes).