Standard Bank's Simon Freemantle on the impact of African youth
Standard Bank analyst Simon Freemantle recently produced a series of five research papers on the trends powering Africa’s economic growth. Here is an examination of the likely impact of Africa’s larger, younger and more affluent population.
Africa's workforce is growing faster than in any other region in the world.
More than 2 billion. That is how many people are expected to live in Africa by 2050. “While in 1950 there were more than two Europeans for every African, by 2050 there will be almost three Africans for every European,” says Standard Bank analyst, Simon Freemantle, in a recent research report.
Freemantle notes that within the next four decades, Africa’s population will be greater than that of both India and China.
Africa’s strong economic growth and rising population are also leading to an increase in spending power. “While today Africa’s GDP per capita stands at approximately US$1,800, by 2016, this will have elevated to almost $2,300, effectively resulting in a 25% rise in the continent’s spending power,” says Freemantle.
The demographic dividend
Africa’s young population, falling fertility rates and improving healthcare could have a positive economic impact, otherwise known as the “demographic dividend”.
Young population: Africa’s population is exceptionally young. The continent’s median age is 19.7, compared to 29.2 for Asia, 40.1 for Europe and 45 for Japan. One-third of Nigeria’s population is currently under 10 years old and more than half of the population is younger than 20.
It is estimated than within the next decade, 50 million people (the equivalent of South Africa’s entire population) will be born in Nigeria. The report notes that the continent’s workforce, those aged between 15 and 64, is growing faster than in any other region in the world.
Falling fertility rates: Freemantle says it is a general economic rule that as countries get richer, families get smaller, and as families get smaller, people get richer.
“Africa is unlikely to disturb this economic rule. Indeed, enhanced peace and prosperity across the continent are colluding, with a range of similarly supporting factors, to reduce fertility rates (the average number of children born to each woman over the course of her life).”
Improving health: “In conjunction with declining fertility rates, there are small, but meaningful, improvements in life expectancy in several African countries,” says Freemantle.
In 1950, average life expectancy in Africa was 39 years, whereas today the average African lives until the age of 57. This is expected to reach 70 for those born in 2050.
“As a result of these developments, more people within Africa’s working age population are likely to be able to remain productive for longer.”
Freemantle explains that Africa’s rising population, declining fertility and improving healthcare systems has the potential for a “demographic dividend, where countries, as they adjust from environments of high fertility and high mortality to low fertility and low mortality, witness a mechanical appreciation in the size, and vigor, of the working age population.”
In addition, because families have fewer dependents, they are able “to accumulate, save, and invest a greater amount of their income”.
He notes that a fast-growing economically active population is a catalyst for industrialization, increased employment, enhanced productivity and rising prosperity.
“Shifts in a country’s age structure can, and have in virtually all large economies in the world, produce profound economic gains, fundamentally supporting the development of an industrial manufacturing base, and vastly altering economic performance.”
Threats to the demographic dividend
The Standard Bank analyst, however, warns that for Africa’s rising population to become truly economically productive, it must be supported by effective institutions. “Young people must be provided with the means to better themselves.”
According to previous research, the demographic transition in Africa is already having a positive effect on economic growth, but only in countries with enabling policies and “solid institutional settings”. These include rule of law, efficiency of the bureaucracy, low levels of corruption, political freedom, trade openness, and the freedoms of political representation and expression.
Freemantle concludes by saying that foreign companies will increasingly focus on the potential of Africa’s young and growing workforce, in contrast to rising costs and aging populations in their own countries.
“Indeed, some of this interest will come from Chinese corporations, eager to leverage Africa’s competitive labor market advantages in further entrenching the substance of Sino-African commercial relations.”
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Simon Freemantle and more on the present and future of Africa
Leaving the farm: Africa’s rapid urbanization
“Enticed by the promise of economic prosperity, millions of Africans are converging on the continent’s ballooning urban nodes.”
So says Standard Bank analyst Simon Freemantle in a recent research report on urbanization in the continent.
It is estimated that around 40% of Africans currently live in urban areas, making Africa more urbanized than India, and slightly less urbanized than China.
Freemantle says that “2030 will be the tipping point whereby more Africans will reside in urban than rural areas for the first time in the continent’s history”. By 2050 it is expected that more than 60% of Africans will be urbanized.
It is, however, important to note that a large percentage of urban population growth is through a natural increase of people already living in cities, rather than rural-urban migration. Freemantle says that
“in the initial phase of particularly accelerated urban growth that the continent is currently undergoing, rural-urban migration is likely to account for a larger share of the growth of the continent’s cities than natural increase”
“The scale of expansion in certain more populous nations is leading to the growth, or emergence, of so-called African ‘mega-cities’, large urban commercial centers such as Lagos, Cairo and Kinshasa, each with populations of over 10 million, and growing rapidly,” notes Freemantle.
It is estimated that Kinshasa will be Africa’s fastest growing African city in the next decade, adding a further 4 million inhabitants, amounting to a 50% increase from its current estimated population of almost 9 million. Other rapidly growing urban centers are Lagos and Luanda.
According to the report, Dar es Salaam, Cairo, Ouagadougou, Nairobi, Abidjan, Addis Ababa and Kano will all see their populations swell by more than 1 million people within the next decade.
Although Africa’s mega-cities are growing, the greatest increase in urbanization is taking place in the continent’s smaller cities and towns. Freemantle says that between 1990 and 2006, Nakuru in Kenya and Dire Dawa in Ethiopia grew at average annual rates of 16.6% and 7.8% respectively.
In Nigeria, for example, 34% of urban residents live in the country’s 11 large cities, meaning that over 50 million people live in smaller and secondary urban areas.
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Why urbanization is important for the economy
According to Freemantle, there is a mutually enforcing relationship between economic growth and urbanization. “While, for the most, urbanization supports socioeconomic development, it is also true that economic growth inspires more rapid rural-urban migration.”
Coupled with economic growth, urbanization is able to have the following economic benefits:
Productivity: Urban-based businesses are generally more productive than their rural equivalents. “Elevated accessibility to large and relatively diversified pools of labor . . . positively influences productivity.
Meanwhile, a broader local market enables easier access to the benefits of scale in production, facilitates enhanced access to suppliers and specialized services, and reduces transaction costs. Urban employees also tend to earn significantly higher wages than rural workers, enabling a greater swelling of the consumer base,” says the report.
Infrastructure: “Given the immense challenges posed by inadequate infrastructure in Africa, urban conglomerations allow for greater and more immediate benefit for public spending on key infrastructure projects supporting economic growth.
As a result, urban inhabitants have greater access to basic infrastructure services, providing profound support to relevant commercial aspirations,” explains Freemantle. “Moreover, with high user volumes, infrastructure projects in large cities become more economically viable, and are thus more likely to be able to attract private funding.”
Link between urban and rural prosperity: Urban areas are often the largest markets for agricultural produce, generating income that flows back to the rural areas. Many city dwellers also continue to financially support their rural families.
Civil society: Freemantle notes that a concentration of people in urban areas supports the development of viable civil societies, often allowing for necessary political and social change. “Recent protests in Cairo and Tunis, for instance, were more pointed, attracted more attention, and ultimately exerted greater influence than more dispersed rural dissension.”
Although urbanization holds clear economic advantages, the current pace of change on the continent is putting significant pressure on existing infrastructure.
Africa’s mushrooming cities are pushing more people into informal settlements, where the living conditions are often much worse than in rural areas. Freemantle says that governments need to address these challenges in order to experience the full benefits of urbanization.
How Africa’s economy is benefiting from the ICT revolution
Africa’s ICT revolution has been well-documented in this publication and others. In 2000 there were only 15 million mobile subscriptions on the continent, by 2010 there were believed to be in excess of 500 million.
It is expected that mobile subscriptions will reach 800 million by 2015. In the period between 2000 and June 2011, internet usage on the continent grew by 2,527%, compared to a world average of 480%.
“Few alterations of Africa’s macroeconomic vista have been as noticeable and inclusive as the growth of the continent’s ICT sector,” says Standard Bank analyst Simon Freemantle in a recent research report.
Freemantle says there is growing evidence of the economic gains possible from greater ICT penetration in emerging markets. “Without the telecommunications industry, it is estimated that Kenya’s GDP growth since 2000 would have been 0.9 percentage points (pps) lower on average.
And, a recent study has shown how the incomes of Kenyan rural households have increased by 5%-30% since they began using mobile banking.”
The World Bank says that for every 10 pps increase in fixed line access, economic growth is likely to advance by 0.43 pps in high income countries, and 0.73 pps in low- and middle-income countries. It has further been found that an extra 10 phones for every 100 people in an average developing country could boost GDP growth in the respective country by as much as 0.8 pps.
“Much of the importance of mobile phones in the African context rests in the manner in which they allow Africans to sidestep pervasive infrastructure constraints, share information more freely, thus making markets more efficient, and stimulate and support entrepreneurial verve,” notes Freemantle.
One of Africa’s most talked-about ICT success stories is the rise of mobile money transfer services, led by Kenyan mobile operator Safaricom’s M-Pesa platform. In only five years since it was launched in 2007, over 14 million Kenyans have used the M-Pesa service. In 2010 an estimated US$7 billion (equivalent of 20% of Kenya’s GDP) was transferred through M-Pesa. The platform’s success has led to the launch of various other similar services.
Mobile phones have also supported poverty-alleviation and empowerment schemes on the continent. These include mobile phone applications such as Farmer’s Friend, Health Tips and Clinic Finder, which provide agricultural and health information.
While Africa’s ICT sector is set to continue on its growth path, various challenges remain.
The high cost of fixed line broadband is an issue that urgently needs to be addressed. “At present, broadband costs in Africa are exorbitantly high, due in part to heavy residual reliance on satellite communications and microwave networks,” says Freemantle.
“Last year it was reported that the top five most expensive places in the world for fixed line broadband were all in Sub-Saharan Africa – led by the Central African Republic, where the cost was nearly 40 times the average monthly income of the population.”
A number of new fiber optic cables linking Africa to international networks are, however, set to provide a major boost to overall connectivity. “African corporate enterprises – large and small – will benefit from the increasing bandwidth capacity and reduced cost of internet services,” explains Freemantle.
However, for the continent to benefit from the new fiber optic cable capacity, inter-African back haul networks are essential. Without substantial investments to improve the current intra-regional linkages, broadband costs are expected to remain high.
According to Freemantle, many telecommunications markets also remain inadequately liberalized. He says that those countries with investor-friendly policies in the ICT sector will gain an edge in unlocking the potentially profound gains technology is able to generate.