We must always be in search of new ways to improve our lives and find the latest methods to do the things that we do, better.
Understanding the economy and economics is almost, without question, a vital part of this process, because they greatly affect how we can take advantage of the unique opportunities or possibilities that we have in life, whether that means investing, making a living, or earning a fortune.
In light of this, today, it may be very profitable for us to learn why Sub Saharan Africa (SSA) has been and still is booming – especially as Europe and the US economies are still suffering from the consequences of the financial crisis that started in 2007.
The current reality is that, if we invest, making a living, or try to earn a fortune in Africa, we may be more likely to achieve a higher level of success than if we carry out the same steps in an already developed nation. But, of course, this will not be the case for everyone or everything.
Within the book, ‘The Fastest Billion: The Story Behind Africa’s Economic Revolution,’ a leading economist of emerging markets, Charles Robertson, argues that:
- Of all the fast growth regions of the world, currently,Africa has the best resources, type of population (demography), finances, and trends. And although there will continue to be major obstacles, like tackling corruption, Africa will progress and be the most exciting and rewarding place to do business for the next 30 years.
- Africa, the rise of the fastest billion, will be the last phase of a global economic transformation. This transformation, believed to have started a little over 200 years ago, causes countries to move from farming to manufacturing, dictatorships to democratic middle-class societies, and increasingly from industrial states to economies driven by information technology.
- In the 19th Century, the world witnessed the US and Germany “borrow” and improve upon the technology from the UK, then Japan did the same thing more quickly in the 20th Century, and China over the past 30 years carried out this process even faster. Consequently, what took centuries to develop in Britain can now be achieved in decades, if not years, and today Africa has the greatest potential to grow off the back of two centuries of global progress.
These are obviously some very optimistic claims, and to learn more, I strongly recommend that you read ‘The Fastest Billion,’ particularly if you are interested in discovering how the author’s employers have already invested $1 billion on the continent.
In the meantime, this review will explore chapter 1 briefly, revealing how the poor financial performance of SSA nations in the past (poor Africa) explains why in the present-day Africa is quickly becoming more wealthy than at any time in its history (rich Africa).
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POOR AFRICA
Making what seems like an endless number of claims, throughout chapter 1, Robertson informs us that:
- In the 1960s, when many Africa countries obtained their independence from their former colonial masters, SSA governments in the first years had low levels of debt, and were receiving high prices for the commodities (for example, gold, cocoa, oil, and copper) that they sold to other countries. As a result, SSA economies (excluding South-Africa) grew from 3.3% in 1960, to 4.3% in the 1970s, during which, growth even reached 10% in 1969-70.
However, public finances in Africa, at the time, were either (1) too often treated as a pot to be raided by politicians and officials for their personal use, (2) used on worthless grand projects, or (3) when an African government had good intentions, was squandered by incorrect financial plans that were sometimes promoted by the West.
- In the 1980s, whilst SSA government debt levels were high and becoming unmanageable, a 20-year decline in commodity prices began. Consequently, with less money coming in from the falling price of commodities, many African nations struggled with or failed to pay their debts throughout the 1980s and 1990s. Rather than investing on infrastructure or education for their citizens, it became common for African governments to spend more paying back their foreign creditors.
This constant outpouring of money to other nations in order to pay their outstanding liabilities, meant that the balance sheet of SSA nations were under tremendous strain. Many SSA governments, simply, would print more of their currency with the sole purpose of continuing to pay their debts, but consequently this would cause high inflation (increase the money and credit supply), the value of their currency to devalue, and make their economy unpredictable, damaging most, if not all, privately owned businesses. As a result, foreign investors avoided SSA like the plague, and many wealthy African nationals choose to send their money abroad, to other countries that had stable economies.
- In 1996, things had become so bad that the IMF and World Bank created ‘The Highly Indebted Poor Countries’ (HIPC) initiative, mainly to ensure that no African country would face a debt burden that it could not manage to repay.
To qualify for the initiative, countries were required to show a track-record of implementing reforms, have sound financial plans through the IMF and World Bank supported programmes, and to work towards accomplishing Millennium Development Goals like providing free education for all. Out of the 36 countries that sign up to the initiative, only 5 were not in Africa.
- In 2012, 24 African countries have completed HIPC deals, reducing their debt ratios by 38-80% of Gross Domestic Product (GDP). For those new to the subject of economics, GDP is the market value of all officially recognised goods and services produced within a country, usually calculated on an annual basis. China’s GDP in 1990, for example, was over $390 billion, but in 2011, it was over $6988 billion, indicating how much the nation had grown (http://www.guardian.co.uk/news/datablog/2012/mar/23/china-gdp-since-1980).
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RICH AFRICA
In contrast to what was happening on the continent in the past (Poor Africa), Robertson informs us that, today:
- With the recovery of global commodity prices, debt forgiveness, better governance, and low debt to earning ratios, SSA currencies have become easier to manage.
- SSA currencies are now less likely to experience high inflation, or cause price devaluation as African governments do not desperately need to print more money to pay their outstanding debts (For a more detailed explanation of currencies and inflation, please click on blog-post ‘Protect Yourself Against the Next Financial Crisis’).
- The economies of many SSA countries have experienced relative stability and become predictable. This, in turn, has caused privately owned businesses to thrive, wealthy African citizens to keep their capital at home, and a record number of foreign direct investment (FDI) to flow into the continent.
- Government debt of SSA dropped from 70% of GDP in 2000, to 32% of GDP in 2009, enabling African nations to gain access to much needed external long-term credit for infrastructure project, like building roads, airport runways, power station, etc. To put this massive improvement of SSA debt into context, currently, the US government’s debt to GDP is 101%, whilst Nigeria’s debt to GDP is 14.1% (March 2013: tradingeconomics.com).
In other words, for every £1 that the US government makes, it spends $1.01 in debt repayment, whereas for every $1 that the Nigerian government generates, it only pays back a debt of 14 cents, leaving behind a balance of 86 cents.
- Due to the reasons mentioned above, among many others, the economic situation in Africa is probably the best it has ever been and will support stronger growth in the future – as more and more investors see that Africa’s numbers are much better than those of the US, Europe or Japan.
‘If developed-market finance ministers were offered three wishes today, many would ask for Africa’s public debt ratios, Africa’s budget balances, and Africa’s growth rates (The Fastest Billion).’
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CONCLUSION
Prior to reading this book, ‘The Fastest Billion,’ I had a lot of reservation and concerns about investing time, money, and effort in Africa. The reason is that whilst staying in Ghana (West Africa) for a long period, I saw that the country still had plenty of major problems to overcome such as widespread corruption, and an unreliable water and electricity supply. From a European perspective, I could easily create a list of serious issues that could go on and on, and worryingly Ghana has been and continues to be, by far, one of the best-run countries on the African continent.
However, due to reading ‘The Fastest Billion,’ I now have a larger perspective of Africa, and acknowledge that there are many developments in Ghana, which support most, if not all, of the author’s optimistic claims. For instance, Robertson states that:
- ‘SSA currencies have become easier to manage…less likely to experience high inflation….As a result many SSA nationals choose to keep their capital at home.’.In support, the Ghanaian currency, the Cedi, has in recent years experience relatively low rates of inflation. Consequently, most of the successful Ghanaian businesspeople that I know choose to re-invest their profits in Ghana, as opposed to sending their gains offshore. Furthermore, most of these businesspeople are:(1) Borrowing money at lower interest rates (cheap money) from developed nations abroad (primarily Europe and US),
(2) Investing in Ghana and obtaining greater rates of return, and then
(3) Paying off their debt with interest, whilst still being left with a substantial profit
- ‘…record number of foreign direct investment (FDI) has flowed into the continent.’ .In support, I know a few investment bankers in Ghana, who previously worked in the City of London. They have set up investment funds on the continent, which causes them to travel frequently from London to other big cities in Africa such as Accra, Nairobi, and Lagos. One fund in particular requires its foreign investors to invest a minimum amount of around $100,000 each and, in Ghana; these types of financial firms appear to be on the increase. Ultimately, the activity of these bankers supports the author’s claim that a record number of FDI is flowing into continent.
Whether it is the construction of new roads, shopping malls, large new cities, peaceful elections, or airports, I can give many more examples of how developments in Ghana seem to confirm Robertson’s positive viewpoint of Africa. In light of this and the substantial research of SSA nations presented within ‘The Fastest Billion,’ I have now made a serious commitment towards investing in Africa.
However, as to the claim that Africa’s growth is, ultimately, the start of the last phase of a global economic transformation, which will signify its progression, I reserve my judgment. The reason is that the author’s central argument seems logical; but, there are many incidences in life of large-scale historical events not following any pre-determined logic. And, in light of the deep inherent flaws within highly organised developed nations, to consider the question of ‘what is progress’ would not be an easy assignment.
To familiarise or re-familiarise yourself with almost any type of business or sector in Africa whether that be banking, telecoms, internet, urbanisation, technology, agriculture, education, health, oil & gas, energy, transportation, or mining, I advise you to purchase this book.
I end this review by mentioning that even though Africa is doing extremely well, it cannot avoid the fact that the world is still heading towards a global financial crisis (currency crisis) that will severely affect every nation – regardless of their past or current economic performance. As long as the US dollar is used as the world’s reserve currency, and it is not connected to a precious metal that would impose monetary discipline on the US authorities, then it appears that the world will still face a serious disaster. For a more detailed discussion of the problem associated with the US dollar, please see book review: ‘Protect Yourself Against the Next Financial Crisis.’
Until the next review, mix-up your reading and as my athletics coach used to say: “take no prisoners!”
Tom