Why are African states going under economically?

The economic situation in Africa: between upswing and ongoing challenges

An analysis based on the trade links with Baden-Württemberg and Germany

Dr. Patrick Bremer

Among the ten fastest-growing countries in the world in 2014 were Chad (+ 10.4%), Ethiopia (+ 9.9%), the Democratic Republic of the Congo (+ 9.5%), the Seychelles (+ 8, 7%), the Maldives (+ 8.5%) and Ivory Coast (+ 8.5%) a total of six African countries. A continental comparison also shows that Africa is currently the fastest growing part of the world economically. For example, the average annual growth rate in Africa over the past 20 years was 4.3%, even just above that in Asia (4.2%).

These are probably the reasons why Africa is increasingly stylized as the growth region of the future. The tenor is often exuberant. For example, there is talk of Africa as a future »global engine« or the »African economic miracle«.1 The following facts, however, often receive less attention in this context: Africa is still the continent with the lowest degree of industrialization. Most African countries are still a long way from structural change and are therefore hardly integrated into global value chains. In addition, the number of people living in poverty has even increased in recent years.2

Against this background, the aim of this article is to take an objective look at the economic development of Africa in recent years. A special focus is on the trade links between Africa and Baden-Württemberg and Germany.

The economic development of the African continent since the 1960s, when most countries regained independence from their colonial powers, can be roughly divided into three different phases. While the first decade after independence was characterized by strong, but only brief, growth in many countries, the period from the early 1970s to the mid-1990s was mainly due to an interplay of selfish enrichment in the ruling elites and various people external shocks.3 These factors resulted in significantly lower average growth rates in Africa (+ 2.9%) compared to the Asian continent (+ 4.8%) and America (+ 3.3%). The economic turnaround was not expected to materialize until the mid-1990s. From 1995 to 2014 Africa achieved the highest growth of all continents and with an average annual growth rate of 4.3% was even just ahead of Asia (+ 4.2%) and well ahead of Oceania (+ 3.2%), America (+ 2.6%) and Europe (1.8%). Overall, the African gross domestic product (GDP) grew in real terms by a remarkable 124% in the last 20 years.

This recently above-average growth was largely based on price increases for energy sources and other raw materials, which resulted in particular from a strong increase in demand from the BIC countries4, especially from China. Accordingly, the comparatively low African growth rates in 2013 (+ 2.1%) and 2014 (+ 3.7%) can be attributed to the fall in the price of crude oil and the weaker growth dynamics of the BIC countries.

At first glance, the picture of an extremely dynamic economic development in Africa over the past two decades seems to be justified. However, two aspects should be considered in this context. First, Africa is currently not only the fastest growing continent economically but also demographically.5 For example, the growth in real GDP per capita, at an average of 1.7% per year in the period from 1995 to 2014, was significantly below that of absolute GDP due to the disproportionate population growth. At 2.9%, the average per capita growth rate in Asia was also significantly higher than in Africa.6 According to a study by the German Institute of Global and Area Studies (GIGA), the absolute number of people living in poverty even increased during the aforementioned growth phase.7 A major reason for this is that economic growth based on raw material exports was recently largely decoupled from employment growth and was thus distributed very unevenly between different population groups.8

Second, Africa started its economic catch-up process from an extremely low starting level, because despite the considerable growth rates of the last 20 years, Africa's share of world GDP is just 2.8%. This means that Africa's economic power only exceeds that of Oceania by 0.8 percentage points, despite the fact that Africa accounts for around 22% of the total land area and almost 16% of the world's population. Since 1995, Africa's share of world GDP has risen by only 0.7 percentage points - economic convergence with the other continents, which all of them have grown less strongly but grew from a higher base level, has therefore not taken place.

It also shows that the majority of African economic output is concentrated in just a few countries. In 2014, South Africa (20.4%), Nigeria (19%), Egypt (8.6%), Algeria (8.2%), Morocco (5.7%), Angola (4.1%) ) and Tunisia (2.7%) only seven of the total of 56 countries, that is one eighth of all African countries, over two thirds of the total African economic output.

In addition, the trade links between Africa and Baden-Württemberg and Germany are examples of the fact that the African continent is still barely involved in global trade. Because measured against the total volume of foreign trade, the movement of goods with Africa plays a subordinate role for both Baden-Württemberg and Germany. Of the total Baden-Württemberg imports of around 156 billion euros in the past year, only goods worth around 4 billion euros were imported from Africa. This corresponds to a share of 2.6% of total imports into Baden-Württemberg. This contrasted with imports of 110.6 billion euros (70.9%) from Europe. 16.6% and 9.8% of all imported goods were imported from Asian and American countries.

The total exports of Baden-Württemberg in 2015 amounted to 194.8 billion euros. Buyers from African countries accounted for a share of 1.8% with 3.4 billion euros, which resulted in an import surplus of 0.6 billion euros. European trading partners also dominated local exports with a share of 61.4%, followed by customers from Asia (19.2%) and America (16.8%). While Asia and America in particular have been able to strengthen their role as Baden-Württemberg's trading partners over the past few years, Africa's foreign trade volume has even declined slightly overall. In terms of proportion, the foreign trade of Baden-Württemberg and that of the entire federal territory with Africa were at a very similar level in 2015. The share of African countries in national imports and exports was 1.9% and 2% respectively. This roughly corresponds to the foreign trade importance of Sweden. However, if you look at the absolute figures, in contrast to Baden-Württemberg, Germany has an export surplus of 6.2 billion euros, because of the 24.1 billion euros in goods exported to Africa, only imports amounting to 17.9 billion euros Billion euros.

From an African perspective, Germany was ranked 12th among the most important customer countries with a share of 2.6% of all goods exported from Africa. In the first two places were Italy (6.4%) and the USA (6.2%). Due to its traditionally high export orientation, Germany played a more important role in Africa's imports and, with a share of 5.8% of total imports, took second place behind China (13.2%).9

If one looks at the structure of goods in Baden-Wuerttemberg's and nationwide foreign trade with Africa, on the import side there is again evidence of the high importance of raw material exports for Africa, which has already been mentioned elsewhere. In 2015, the position of »crude oil and natural gas« corresponded to almost half (49.1%) in Baden-Württemberg and almost a third (32.4%) of all imports originating from Africa in Germany and thus came first by a clear margin imported goods. The second most frequent products were imported from Africa from the product group “motor vehicles and motor vehicle parts”, which in Baden-Württemberg covered 17.8% and nationwide 12.1% of the imports from Africa.10 Overall, the goods purchased from Africa are concentrated in only a few groups of goods. If, in addition to oil and natural gas as well as motor vehicles and motor vehicle parts, you also take into account the third most frequently imported goods category (machines for Baden-Württemberg and agricultural and hunting products for the entire federal territory), these three items in Baden-Württemberg correspond to almost three quarters ( 73.5%) and in Germany significantly more than half (55.9%) of all goods purchased from Africa.

The weighting on the export side, on the other hand, is largely identical to the structure of the goods exported from Baden-Württemberg and Germany worldwide. In total, more than three quarters (77.1%) of Baden-Württemberg's export revenues are generated through sales of goods in the goods groups motor vehicles and motor vehicle parts, machines, electrical equipment and chemical products. The corresponding value for the whole of Germany is 61.3%. A comparison of trade relations between Baden-Württemberg and Germany with Africa reveals once again the outstanding importance of vehicle construction in Baden-Württemberg. While in Germany 41.3% of exports to Africa consisted of motor vehicles and motor vehicle parts, nationwide only around one in four euros (25.8%) was achieved from deliveries of goods in this product group.

With which African countries do Baden-Württemberg and Germany have the most pronounced trade relations? Table 2 shows that significant foreign trade is concentrated in only seven countries.If Angola is replaced by Libya, these are the same states that, as shown in Figure 2, generated almost 70% of African economic output in 2015. Last year, around 97% and 84% of all Baden-Württemberg and nationwide Africa imports were obtained from Egypt, Algeria, Libya, Morocco, Nigeria, South Africa and Tunisia. At the same time around 89% and 83% of exports from Baden-Württemberg and Germany to the African continent were delivered to these seven countries.

The most important African trading partner of Baden-Württemberg and Germany was again South Africa in 2015. With exports worth a good 1.6 billion euros and 9.6 billion euros and a share of 47.5% or 40% of all exports to an African destination, the country on the southern tip of Africa was by far the most important Export market for Baden-Württemberg and German goods on the African continent. At the same time, South Africa was the most important country of origin for Baden-Württemberg and German imports from Africa in 2015. Last year around a third (33.1%) of all German imports from Africa were of South African origin. For Baden-Württemberg, the corresponding value was recently 3.7 percentage points lower and was thus 29.4%.

In 2015, Baden-Württemberg's exports to South Africa came first in terms of motor vehicle and motor vehicle parts and machinery. On the export side throughout Germany, the goods groups chemical products, data processing equipment, electronic and optical products and electrical equipment are also important. In particular, machines as well as motor vehicles and motor vehicle parts are also traded in the opposite direction. In Baden-Württemberg, for example, 97.5% and 89.7% of all Africa imports in these two product groups can be traced back to imports from South Africa. At the federal level, metals and ores are also imported from South Africa in significant quantities. In addition, the country at the Cape can book a large part of the relatively sparse direct investments in Africa by global comparison (see i-point).

In 2015, both Baden-Württemberg and Germany primarily purchased crude oil and natural gas from Egypt, Algeria, Libya and Nigeria. In total, 96.5% of all Baden-Württemberg and 92.6% of nationwide natural gas and oil imports from Africa came from these four countries. With 35% of all African natural gas and oil imports in the past year, Algeria was the main supplier of this product group for Baden-Württemberg. At the federal level, this role fell to Nigeria (30.1%).

The above-average growth rates in Africa in the past two decades partially hide the continent's persistent and profound development problems. The comparatively small volume and structure of the movement of goods between Africa and Baden-Württemberg or Germany exemplifies that the majority of African countries are still hardly integrated into international value chains, and if so, then mainly as suppliers of raw materials. According to a study by the African Development Bank, 25% of total African economic growth between 2000 and 2010 can be attributed to the rise in the price of raw materials.11 However, this growth, which is based to a large extent on the depletion of non-renewable resources, is neither sustainable nor can it create new jobs on a large scale. In addition, inadequate infrastructure, weak institutions (especially inadequate legal certainty and corruption), political instability and recurring armed conflicts still hamper sustainable economic development in many places.12

In view of this whole series of obstacles, are there also aspects that indicate that Africa can better develop its immense economic potential in the future? Yes, because on the one hand, given the growing wage gap between Africa and China and other Asian countries, it is quite possible that the continent will replace these countries as an important production location due to cost advantages. On the other hand, the demographic development of the continent offers not only certain risks but also enormous opportunities. According to projections, Africa's population would roughly double in the next 35 years.13 In 2050, the African continent is likely to be the only region with a growing number of people of working age and a decreasing dependency ratio14 be. If the right economic and political framework conditions are created for this, this fact alone offers the possibility of realizing a so-called demographic dividend in the form of higher per capita income.

In addition, a growing middle class with an increasing propensity to consume has already emerged in Africa. As a result, not only will goods imports from abroad increase in the future, but also the need for domestic production facilities will increase at the same time. On the one hand, this could create a large number of new jobs in Africa and, on the other hand, it could open up new sales opportunities for the Baden-Württemberg and German export industries.

1 Extremely positive assessments of the economic developments in Africa can be found, among others, in Sommerfeldt, Nando / Zschäpitz, Holger: 2025 - Africa is the global engine, Stuttgart Stock Exchange, Marktmacher 02/2014 and McKinsey Global Institute, Lions on the move: The progress and potential of African economies, Washington DC, 2010.

2 Kappel, Robert: Africa: neither a hopeless case nor a miracle of advancement, GIGA Focus Africa, 9/2013.

3 Even today, corruption is considered to be one of the greatest obstacles to sustainable economic development in Africa. In the Corruption Perception Index published by Transparency International in 2016, almost three quarters of all African countries were in the lower half of the scale.

4 The BIC countries include Brazil, India and China.

5 While the population in Asia, America, Europe and Oceania only increased by around 25%, 26%, 2% and 34% respectively over the past 20 years, Africa recorded a population growth of almost 61%.

6 Per capita growth in America (1.3%) and Oceania (1.6%) was lower than in Africa, despite the weaker population growth. Europe, on the other hand, recorded the same average per capita GDP growth rate as Africa due to the significantly lower population growth.

7 Kappel, Robert: Africa: neither a hopeless case nor a miracle of advancement, GIGA Focus Africa, 9/2013.

8 Kappel, Robert / Müller, Marie: Broad economic growth in Africa - the big turning point? GIGA Focus Africa, 6/2007.

9 Allafi, Sabine / Koch, Julia: Foreign trade with Africa, Federal Statistical Office, WISTA, 3/2015.

10 In Baden-Württemberg almost 90% and nationwide almost 70% of all vehicles and vehicle parts imported from Africa come from South Africa. Compare also the section »South Africa as the most important trading partner« and the i-point.

11 African Development Bank: Africa 2050: Realizing the Continent‘s Full Potential, Oxford University Press, 2014.

12 Pohl, Birte / Kappel, Robert: How efficient are the economies of Africa? GIGA Focus Africa, 9/2012.

13 African Development Bank, OECD, UN Development Program: Regional Development and Spatial Inclusion, African Economic Outlook 2015, 2015.

14 The dependency quotient represents the ratio of economically dependent age groups, i.e. people who are not yet or no longer of working age to the population of working age.

In addition to the trade in goods and services, two states can also be economically intertwined through the direct investment channel. Foreign direct investment (FDI) describes a form of capital export in which means of production are acquired directly abroad. According to international standards, it is an ADI, provided that the stake is at least 10% of the voting rights or shares.1 In contrast to portfolio investments, direct investments are often associated with a knowledge and technology transfer between the two countries and are characterized by a long-term business relationship and a lasting interest on the part of the direct investor. The main reasons for direct investments abroad can often be assigned to either market access, sales-oriented or cost-oriented motives.

Measured against the total stock of direct and indirect nationwide and Baden-Württemberg direct investments abroad (= active direct investments)2 Africa's share in 2014 was extremely low at just under 1%.3 For investors from Germany and Baden-Württemberg, South Africa is particularly attractive as a production location and sales market. In Germany, 64.3% and in Baden-Württemberg even 76.8% of the total direct investments in Africa were made in the country at the Cape. In this context, the automotive and supplier industries are of particular importance, especially since subsidiaries of German motor vehicle manufacturers have also set up shop in South Africa.

There is no significant African direct investment in Baden-Württemberg or in the whole of Germany. The African share of the total stock of direct and indirect foreign direct investment stocks (= passive direct investment) is less than ¼ percent.

Deutsche Bundesbank: Inventory Survey on Direct Investment, Special Statistical Publication, 10/2016.

Direct investment has a transactional and an inventory component. In this article, the sum of the direct and indirect investment stocks is considered (consolidated representation), since, in contrast to the consideration of transaction flows, short-term developments and exchange rate fluctuations can be hidden.

A detailed overview of Baden-Württemberg direct investments abroad can be found in the following article: Nesensohn, Marcel: "Direct investments in and from Baden-Württemberg", in: "Statistical monthly magazine Baden-Württemberg 11/2015".