Is a China-driven world good for Africa?

 

Governor Kajiado County, Dr. David Nkedianye(centre) taking time with some of the companies that were exhibiting their products during the two day Kajiado Investors forum. The county is set to receive investments worth sh363billion after the successful forum that attracted both local and foreign investors.BY PONCIANO ODONGO.  NATION MEDIA GROUP

By SAMORA KARIUKI

In Summary

• Arguably, well-diversified economies with sound politics will benefit. Kenya is therefore well positioned to take advantage of the improving narrative. However, this will only occur if the politics improves.

According to the Economist magazine, six of the 10 fastest growing economies between 2001 and 2010 were African countries. Moreover, between 2011 and 2015, Africa is expected to contribute seven of the 10 fastest growing economies in the world.

The key drivers for this growth are the commodity price boom witnessed over the last 15 years, growing intra-African trade, growing disposable incomes that will drive consumption spending, improved macro-economic policies and increased investments in infrastructure.

The African growth story should be very attractive for investors. Nonetheless, there are causes for concern that could lead to a reversal of the growth story.

In essence, investors and policy makers should proceed with caution. For one, the African growth story at the moment is largely being fuelled by an improving narrative from local and importantly, global commentators.

The narrative was catalysed by the December 2011 article on The Economist that suggested that the coming decade would belong to Africa. The improving narrative has somewhat convinced global investors that indeed Africa is the place to be.

However, it can be rightly argued that the narrative has often over-looked some fundamentals. It could be a case of George Soros’ theory of reflexivity. The theory of reflexivity suggests that market players have an impact on prices or economic outcomes.

That an improvement in market sentiment can drive prices regardless of any changes in fundamentals; to be fair, the theory suggests that at first, fundamentals have to be in place.

Nonetheless, as a continent, we could be in the grip of a high-level phase of reflexivity. Where only positive narrative is driving investment; this is particularly so as developed market yields are at historic lows and investors are therefore buying into the African growth story hype in search of yield.

The minute the narrative changes; then sudden and ugly reversals take place hurting Africa’s prospects. Older readers will particularly reflect on the 1970s where hope and positivity flourished before Africa witnessed two lost decades.

The second aspect is the fundamentals. An interesting report by Chatham House makes the case that fundamentals are yet to change, particularly political and social fundamentals.

The question remains whether the social order in Africa has improved. Kenya for instance is making sound progress in democratisation, however some elements of recent legislation and the events in Tullow’s fields in Turkana put these matters into doubt.

The third aspect is the economic drivers; the last decade was a boon for Africa due to China’s voracious demand for commodities to fuel its investment driven economy.

According to World Bank statistics, commodity prices grew at an annual rate of 16 per cent between 2002 and 2012, essentially doubling every 5 years.

Some commentators suggest that growth was more consumer driven than commodity driven. However, this is purely an argument of the chicken and the egg.

As an economist would say, there is a significant degree of endogeneity between these two metrics. Nonetheless, how will Africa prosper in an era driven by China adjusting towards a more consumer driven economic model?