Africa's health 'on the mend': Africa's political and economic landscape is improving steadily according to a number of external reports on the continent's health. However, the same reports often display a reluctance to acknowledge Africa's successes.

The structural economic and political landscape of this astonishingly rich mineral and energy region is changing for the better, enabling African economies to catch up with their Asian counterparts and compete for greater shares of global trade and investment. Due to the lost decade of the 1980s, a tarnished world image of Africa still remains in the minds of many investors even though Africa, given the opportunity, has much to offer the world. The past few years have witnessed a marked progress in sovereign governance, the benefits of which is evidenced by buoyant economic growth and a more business conducive climate.

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CDC Group, the UK government-owned fund of funds has remarked: "The trend is definitely positive as the likes of Ghana and Nigeria are far better run today. We are still not sure where on the economic curve Africa lies at the moment. People were still worried about investing in Asia five years ago and Africa is about five years behind that story, but it is heading in the right direction."

John Niepold, who manages $800m in frontier African markets for Washington-based Emerging Markets Management, is similarly upbeat. He says: "There have been significant improvements in debt levels, current accounts and foreign exchange reserves, which means many African countries are no longer swimming against the tide."

In fact, Africa's total external debt has declined from over 100% to roughly 20% of GDP since 2005 thanks to the enhanced Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).

Democratic values

Of equal importance to debt relief has been the spread of democracy and market liberalisation across Africa. Complementing these developments has been the building of sound institutions upholding law and order, democratic accountability and good governance.

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The number of African democracies has increased from 10 in 1980 to 33 in 2006. Today, two-thirds of the African Union's 53 member-states are elected governments with a strong emphasis on fiscal probity and service delivery. Professor Calestous Juma of Harvard University has pointed out: "Africa has done in 10 years [on electoral changes] what it took Latin America 40 years to do. Africans are embracing changes as the new order." Thus, political risk in the region has reduced, which should broaden appeal and confidence in sub-Saharan Africa's fledging capital markets.

According to US-based think-tank, Freedom House, 11 SSA states are 'free' and 22 'partly' free, while only three remain 'not' free or politically repressed compared to the situation in 1977 when 23 and 16 states were deemed to be not free and partly free and just three were considered free. Freedom House defines a free nation as where "there is broad scope for open political competition, a climate of respect for civil liberties, significant independent civil life and independent media". A partly free state is where "there is limited respect for political rights and civil liberties".

At the extreme scale, unfree states deny basic human rights and they often feature a single political party "that enjoys dominance despite a facade of limited pluralism". Such 'repressed' regimes suffer from endemic corruption, weak rule of law and ethnic strife. Private investors fear expropriation in such countries. But sooner or later, despotic governments are frequently toppled by the mass actions of their citizens.

Encouragingly, trained technocrats with proven private sector records are increasingly running African economies. President Ellen Johnson-Sirleaf of Liberia is by profession a US-educated banker. Meanwhile, post-conflict countries (notably Burundi, DR Congo, Liberia, Rwanda and Sierra Leone) have undertaken the huge task of nation building as they recover from turmoil.

Sustainable expansion

The sub-Saharan economy has been restructured significantly in recent years, a development reflected in the deregulation of power and water utilities, telecoms, transport and banking sectors. Privatisations of these services has also attracted more foreign direct investment (FDI), which in 2006 totalled $12,221m (excluding North Africa), according to the World Investment Report 2007.

All of these positive trends have enabled SSA annual GDP growth to outpace the OECD average for the past five years; the International Monetary Fund (IMF) forecasts growth to reach 6.7% in 2008, up from 6% this year.

Inflation, despite higher commodity prices, is running at about 7.5% (excluding hyperinflation in Zimbabwe). In short, Africa is experiencing its most robust growth and lowest inflation in more than three decades and international business is taking notice of the benign economic conditions in key markets like South Africa, Nigeria, Kenya and Egypt.

"The region looks well-poised to sustain its growth momentum," Abdoulaye Bio-Tchane, director of the IMF's Africa Department, said in the October 2007 Regional Economic Outlook report. He added: "There's still plenty to do, of course. Sustaining the current expansion and reducing poverty ultimately depends on each country's ability to carry forward structural and institutional reforms that increase productivity, boost the economy's resilience to shocks and attract private investment."

In the past, SSA's growth proved short-lived and often ended with a slump in output. The causes, says the IMF, were volatile terms-of-trade, exogenous shocks and weak state institutions. In the current expansion, many oil exporters are saving more of their windfalls (notably Algeria and Nigeria), where forex reserves have swelled to $97bn and $44bn, respectively, as of August 2007, while even non-oil producing countries are benefiting from expanding trade and rising investment.

As the IMF puts it: "The strong growth in the region reflects the fruit of institutional improvements, structural reforms and the more rigorous economic policies that have started to bear fruit in many countries."

Despite tremendous progress, SSA still lags behind global league tables in terms of competitiveness, governance scores and economic freedom. The 2007 Africa Competitiveness Report, published by the World Economic Forum (WEF), noted that the overall picture is one of "stagnation or even of slightly weakening performance". The region's average score (3.29 out of 10) fell below South America (4.07), East Asia (4.29) and China (4.42). Only Tunisia (ranked 29) and South Africa (46) occupied the top 50 places in the 128-state ranking.

But 16 SSA economies were in the bottom 20 places with Angola ranked as the world's least competitive economy, followed by Burundi (127) and Chad (126).

Competitiveness is judged by three sub-indexes:

(1) Basic Requirements -- focusing on institutions, security, education and health, physical infrastructure and macro-economy;

(2) Efficiency Enhancers -- deals with technological capacity, market efficiency, higher education and vocational training; and

(3) Business Sophistication and Innovation.

Economic liberties

SSA scores poorly on infrastructure, technical readiness, higher education, training and innovation. North Africa, led by Egypt, generally fares better than the sub-Saharan region. The 2007 Index of Economic Freedom compiled by Washington-based Heritage Foundation and the Wall Street Journal, of 157 countries (40 Africans) on a [0-100%] scale allocated Africa an average score of 54.7% (5.9% below the global mean).

Just eight countries were deemed 'moderately free' and 25 'mostly unfree', whilst seven fell into the 'repressed' listing. The five freest nations were Mauritius (with a global ranking of 34), Botswana (38), South Africa (52), Namibia (55) and Uganda (59). Not surprisingly, Zimbabwe ranked bottom, followed by Congo (Brazzaville) and Angola. What's striking, however, is the inclusion of China (the world's fastest-growing economy) in the 'mostly unfree' group.

Economic liberties are judged on 10 sets of criteria. These include business freedom (evidence of liberalisation and privatisation policies); trade openness (average tariff rates and forex controls); fiscal freedom (the tax burden on businesses and the 'average' citizen); freedom from heavy-bureaucracy (red tape within the private sector); investment freedom (majority ownership of local companies and land); monetary freedom (low predictable rates of inflation and interest rates that underpin economic prosperity); financial autonomy (whether credit allocation is state-controlled and the freedom of private banks); governance issues (the confidence in judicial systems to uphold contracts and provide effective checks on corruption); property rights (adequate investor protection against expropriation); and flexibility of the labour market and laws on minimum wages.

Looking ahead

A decade and a half of reforms has restored economic stability and reduced income volatility in most African countries. However, policymakers must also improve micro-business conditions--a prerequisite for attracting much-needed FDI, especially into resource-poor countries.

Business costs in Africa are among the highest in the developing world, while bureaucracy and low credit availability remains a hurdle for small and medium-sized businesses. Experience suggests strengthening the business-investment climate is a long-term programme, requiring financial and technical assistance from multilateral institutions. But the doubling of official aid to SSA pledged by the G-8 in July 2005 "is not on track and debt-relief grants are likely to taper off", says the IMF.

Hopefully, the coming years will improve Africa's competitiveness in vital areas such as infrastructure (mainly power supply and transport), information communications technologies, trade liberalisation, and health and education facilities--thus boosting productivity, reducing business costs via streamlining licensing procedures, increasing access to affordable formal bank financing, expanding intra-regional trade and investment and most importantly, eradicating a culture of corruption within official circles.

The World Bank's 2007 Governance Matters Survey found that bribery worldwide cost an estimated $1 trillion and the "burden of corruption falls disproportionately on the bottom billion people living in extreme poverty". Encouragingly, the quality of government has improved in Africa over the past decade, according to the survey.

In sum, the continent cannot just rely on buoyant commodity markets for sustainable growth, but further reforms are needed to underpin a vibrant sub-Saharan economy.

The WEF report cautioned Africa's resurgence is due mainly to the "confluence of external circumstances and interventions including high commodity prices, debt relief and a favourable international economic environment. It argues: "Genuinely sustainable growth must be based on solid domestic foundations rather than cyclical or exogenous circumstances."