East Africa’s Chances for Economic Advancement resulting from the Investments made by India

Table of Contents

1. Introduction
1.1. Objective and Personal Motivation
1.2. Business Purpose of this Study

2. Understanding Africa
2.1. Business Facts on Africa
2.2. Diversities and Commonalities of Africa
2.3. India as an Favourable Partner for Eastern Africa

3. Strategies for African Development
3.1. Western Approach
3.2. South-South Cooperation

4. Past and Current Performance of African Countries
4.1. Africa’s Relation with India in the Past
4.2. Past Economic Performance of African countries
4.3. Current Economic Performance of African Countries
4.4. Example for a non-commodity related economic growth, based on industrial diversification

4.5. Globalization Affecting African Development

4.6. Current Relation to India

5. Constraints for African Growth
5.1. Constraints in the past
5.2. Current Economic Restrictions
5.2.1. Corruption
5.2.2. Infrastructure

6. Prospects for East Africa’s Development
6.1. Agriculture
6.2. Human Development
6.3. Scenario Case Study
6.3.1.Scenario A - Rise of the African Continent
6.3.2. Scenario B - Regionalism: Regional Hubs
6.4. Evaluation of scenarios via current trends

7. Road map for Ethiopia
7.1 Happy Planet Index
7.2. Creation of Roadmap
7.2.1. Category 1: Life expectancy
7.2.2. Category 2: Life Satisfaction
7.2.3. Criteria 3: Ecological Footprint
7.3. Ethiopia’s usage of the Happy Planet Index

8. Business Attractiveness of East African Countries
8.1. Talent availability
8.2. Infrastructure
8.3. Business Enablers
8.4. Taxation Costs
8.5. Evaluation of Table Data
8.6. Implications for South-South Cooperation between Eastern Africa and India

9. Final Conclusion

10. Appendix

Suggested reading List for further information about South-South Cooperation

Explanation and Sources Table

References

List of Figures

1. Introduction

1.1. Objective and Personal Motivation

The prime objective of this thesis is to analyze the current interaction between Eastern Africa and India. These relations are part of the so-called South-South-Corporation (SSC), which describes the increasing economic exchange between countries of the global south. This new trade and exchange pattern is a relatively new phenomenon in modern economic history, but understandable given the rapid rise of emerging powers like Brazil, Russia, India and China (BRIC). Their new demands for resources, products and sales markets present new opportunities for traditional recipient countries such as African or Latin American states.

The thesis at hand acknowledges the importance of all participating countries and especially the leading role of China within the SSC. However, due to space limitations the focus was set on the relation between Eastern Africa and India. After setting an African framework, the thesis will therefore concentrate exclusively on the Eastern African countries. Nevertheless the reader is advised to keep in mind that the Eastern Africa - India connection is only one out of several business relations between Africa in its entirety and states like China and Brazil. In order to understand the total magnitude of the SSC a wider approach would be required. However, this is not the prime objective of this paper, and therefore all countries expect for the Eastern African states and India are neglected in the analysis (For further information about SSC in general please refer to the attached reading list in the appendix).

My personal motivation for this study results from an interest in emerging markets and the believe that today’s developing nations will play a major role in the global trade systems of the future. The decision making processes within global alliances will experience a major change as today’s emerging giants like India and China will demand their political say in the short-term as well as some African countries in the long-term. A paradigm shift from a mostly Western dominated world order towards a more balanced global setting must be the logical consequence. Currently developments such as high growth rates in Africa or the increase of foreign direct investment (FDI) in the African continent support this idea. Therefore it is important for future managers to gain knowledge about these new alternatives and opportunities in Africa, as well as the accompanying challenges.

1.2. Business Purpose of this Study

The business purpose of this study is to understand the new economic opportunities for engaging with the African market in a sustainable and profitable manner. Africa’s status as today’s least developed continent conceals great business potential for those willing to create customized models for the African business environment. These solutions have to accept, however, the individual requirements of the African business landscape. The engagement of India and other emerging countries has resulted in a currently favourable business environment for investment in a continent with about 1 billion potential customers. According to the McKinsey report ‘What’s Driving Africa’s Growth’ this improved business environment results from the transfer of capital, skills and technology to the African nations. While many Western powers still see Africa as undeveloped, the Asian powers have recognized Africa’s market potential and its quality as a resource supplier. During recent years, researchers have monitored a major shift of the global economic balance towards Asia’s emerging giants: India and China. Consequently the increasing participation of Asian economies in global supply networks is today a prevalent and indisputable fact, acknowledged by many economists around the world. While various studies concentrate on the interaction of European, Asian and American economies, the African continent is often neglected in these reports. This is odd, considering that Africa represents the region with the highest rate of return on foreign investment among the emerging economies (Leke et. al., 2010). These high returns have mostly been facilitated by the previously mentioned SSC. Africa’s lack of capital and technologies result in unsatisfied markets and consequently in high rates of return. The SSC addresses these demands and thus acts like a catalyst for economic growth in Africa (Special Unit For South South Cooperation Website, 2012). The business purpose of this study is to increase the understanding of this phenomenon so that investors can create new value, while simultaneously increasing the economic outlook for African economies. The choice for Eastern Africa and India is based on the fact that Africa has considerable amounts of valuable natural resources and provides an enormous market as the second highest populated continent. Eastern Africa profits further from its traditional relations with India, putting it in the current pole position for Indian investment.

India on the other hand will become the major Asian economic power in the future. According to several news agencies India’s industries are expected to soon catch up with the economic world leaders. Furthermore it is estimated that due to India’s market size, the English speaking work force and good governance some Indian industries will outpace China’s economy in the near future (Vox Website, 2011).

2. Understanding Africa

2.1. Business Facts on Africa

When talking about the emerging markets many people instantly imagine the BRICCountries (Brazil, Russia, India and China) or other South Asian countries like those in Association of Southeast Asian Nations (ASEAN). However, expert knowledge about Africa is often limited in the higher management circles of multinational companies. This is surprising considering the following facts:

- The African continent has with the 2nd highest population (= market)
- Africa has a fast urbanization rate; faster than e.g. India
- The average African business performance has a positive upwards trend
- 9 out of 15 countries with the highest five-year growth rate are located in Africa
- Africa contains an estimated 30% of all global natural resources
- Today 90% of Africa’s countries are ruled by democratic governments (Seruma, 2010)

This general lack of detailed knowledge hampers multinational companies’ investment possibilities in Africa. In order to reach reasonable business decisions it is crucial to know why African countries have performed well in the past. With this knowledge it is possible to separate an auspicious temporary favorable situation from a positive and self-created trend. According to several consultancy reports, the positive African trend is being propelled by current price increases in natural resources. However, the majority of African growth is not connected to the export revenues of raw materials but other industries. About 66% of African growth is achieved in non-extracting industrial sectors and was leveraged by political efforts and restructuring the business environments, thus providing a political stability with improved economic conditions (Leke et. al., 2010).

2.2. Diversities and Commonalities of Africa

In addition to the obstacle a of lack of expert knowledge there is often a cultural ignorance when dealing with Africa. Though there are some common characteristics between African nations, it would be a mistake to consider the continent as a homogenous construct. North Africa and sub-Sahara Africa especially, differentiate intensively. The continent has roughly 2200 ethnical groups, producing an enormous diversity, which needs to be respected when creating a suitable business approach for African states (Mair and Werenfels, 2009). Africa’s reputation today is still based on several prejudices in the Western media. Reports focusing on economic problems, wars, famines and corruption of political leaders are common. While there are still cases of such obstacles, the upward trend of the recent years is often neglected. Many negative aspects of Africa’s past are currently changing and thus there have been major achievements in reducing corruption, patronage and civil wars. Nevertheless these positive developments have currently a underrepresentation in the western media, which results in a twisted image of the current situation (Erdmann, 2009). While it was true that in the past Africa was an above average risky location for a business endeavor, it represents today one of the most attractive emerging markets for long-term investments. Western companies often fail to see this fact, remaining in their narrow- minded attitude of former prejudices. Consequently there is a risk of losing ground against countries like India, who take the opportunity to engender high-quality business relations with Africa.

2.3. India as an Favourable Partner for Eastern Africa

As SSC is a system of to partners helping each other, there is the need to understand next to the Eastern African background also the new Indian business situation. “We will play our due and commensurate role in international bodies, and we will seek to promote what is good for India, and what is good for the world at large” (OneIndiaNews Website, 2011). This statement given by the Indian Prime Minister Dr. M. Singh, after the accession to the UN Security Council as a non-permanent member in early 2011 highlights the new self-confidence of India as a global power. With currently 1.2 billion people, of which 600 million are younger than 24 years, India has a young, skilled and English- speaking workforce, which is expected to grow further in the future. Consequently the Indian subcontinent represents an important ally for Eastern Africa in the next decade (Ihlau O., 2008). Especially India’s high level of education and the wide technological background knowledge can have a positive spillover effect for African states. An additional advantage for Eastern Africa is the cultural connections with India. The Asian state has a long history of trade relations with Eastern African countries, but can also take a mediator role with Western or Asian states in order to support African interests. Finally the African high diaspora within India, as well as the high Indian diaspora within Africa has a stabilizing effect on the partnership. There is a reasonable chance for Eastern African countries to grow out of poverty and to improve their acceptance in the international community.

3. Strategies for African Development

There are countless definitions of the term ‘development aid’. For the purpose of this thesis, development aid is defined as ‘a process targeting economic and social transformation of the recipient community with the resulting improvements enabling the recipient country to fend for its own survivability.’

However, development aid is not a universal method, applicable in the same way to each situation. A common mistake in the history of intercultural development aid was the assumption that the recipient country can only make economic progress by approaching exactly the same economic and political structures currently displayed by the donator country. Being based on good intentions the achieved results of such an aid approach lagged significantly behind expectations and thus, over time, triggered over time the understanding that development policies cannot be exported as standardized package to varying cultural backgrounds. With SSC a new type of development assistance was recently introduced. As previously mentioned the business connection between Eastern Africa and India is part of the total SSC approach. For a better understanding this thesis will provide a short comparison of the traditional western approach and the new SSC approach.

3.1. Western Approach

For understanding the benefits of the South-South Cooperation it is required to be aware of the western development approach and its current problems. Based on this knowledge, the reader will recognize differences in the Indian approach, resulting in the increased effectiveness of South-South Cooperations.

Traditionally the dominant, western economies like the USA and the European Union (EU) have provided development aid in order to support emerging markets. Institutions such as the World Bank and the IMF act as financial distributers of aid funds. The money to be lent is gained from IMF member states and handed out to countries experiencing economic difficulties, for example when experiencing a financial crisis.

Both institutions act on a ‘direct financial support’ approach connected to stipulations for the borrowing country. The financial support is termed ‘conditionality’ and common stipulations include demanding increased privatization or restricting spending in undesirable areas like military expenses. Countries refusing to collaborate risk future lending and extremely high interest rates (Wohlwend D. A., p.94-96, 2010). However, this financial support approach is often based on western market theories and ignores the individual environment of African economies (Wang X. and Ozanne A., p.6-9, 2010).

For a long period the western powers attempted to surmount Africa’s economic problems by providing increased financial funds. However, in retrospective, experts had to agree that this effort actually increased the challenges for Africa rather than alleviating them. The reason for this paradox was that the funds, rather than providing the incentive to found a self-supporting economy, in fact, created an enormous dependency of African states, omn the West. Hence in many sub-Saharan economies financial aid programs have been the major source of income for decades and cases are known in which ‘Official Development Assistance’ contributed up to 55% of the total national budget.

3.2. South-South Cooperation

As mentioned the SSC represents the general economic approach for partnerships like those between Eastern Africa and India. The concept of South-South Cooperation had its first official recognition at the 1978 the “Conference on the Technical Cooperation among Developing Countries” in Buenos Aires. As a consequence the participating countries of the global South agreed on intensifying technical cooperation and on increasing trade volume as well as capacity building among each other (Bartels F. L., p.1, 2009). Today both parties, donors as well as the recipient countries profit from SSC. However with increasing popularity the lattice of relationships is getting more and more intricate. According to a research publication issued by the Standard Bank emerging donors like China, Brazil, Saudi Arabia or India compete in the recipient states for market shares and favorable investment opportunities. On the other hand recipient countries like African states rival each other for the support granted by the donors. The high competition among participants results in the increased business efforts from each participant and in the long-term an economic synergy is created. The currently high growth rates of several African states are results of exactly this tough competition simulated by SSC (Freemantle and Stevens, p.4, 2009).

This economic concept of emerging countries helping each other in their development is fueled by globalization and the international value chains of multinational companies. The modern business model of a spatial and temporally distributed production pattern enables developing economies to specialize in an individual subcomponent and compete on the global market with low labour costs and acceptable quality for this particular item. Thus emerging countries have the possibility to go step-by-step, increasing their specialization until they can compete on the final products level. SSC allows an extended learning curve for emerging economies with simultaneous revenue sources, as access revenues in some parts of international production chains are already generated.

Thus, companies in Eastern Africa need to increase their ability to handle the separation of production spaces, increase their vertical specialization and prove geographical independence in order to participate in SSC. Finally, multinational companies are the combining element, bringing together the subcomponents produced by the geographically fragmented workforce and afterwards selling the final product (Bartels F. L., p.2-5, 2009). The general concept of SSC highly resembles that of globalization, however, prior to the rise of emerging donators like China and India, countries of the global South suffered difficulties engaging in western production chains. The key element responsible for strong growth performance among southern countries is the successful cooperation between new, non-western actors. These alliances have a better success rate than western-southern partnerships due to the better cultural understanding within SSC. While the traditional relation was mainly a power cascade setting the capital and technology possessing developed countries above the poorer developing countries, the SSC participants see each other rather as partners for sustainable growth. The increased understanding of investment processes in the target country, combined with similar demands concerning technologies and especially the greater willingness to accept higher risks resulting from political instability in many emerging economies, make southern partners more suitable for other southern countries than the traditional western countries ever have been in the past. Even if the traditional western-southern/northern-southern relationship still provides advantages and is necessary for development, the new angle of SSC has the potential to set development assistance on a entirely new level. The rise of Southern giants like the BRICs consequently resulted in the growing economic importance of SSC in recent decades. Figures prove that between 1995 and 2004 there was a 17.6% increase in SSC trade volume from 222bn USD to 562bn USD. In comparison, the South-North trade volume grew by just 12,6% and the North-South volume by only 9,7%. Alongside the trade volume as a whole, individual industries also experienced similar trends. The global banking sector for example saw an increased South-South investment accompanied by political support in the form of tax reductions or favorable import-export regulations for each other. Those trends have been supported by several international organizations formed amongst Southern states like COMESA, EAC (both Africa), ASEAN (South East Asia), MERCOSUR (South America) etc. But increased collaboration has not been limited only to between the Southern states. The new acceptance of Southern countries in the international community can also be seen by the enlargement of the G8 to G20 in 2008. The inclusion of several emerging southern powers in this economic forum prove the increased esteem of southern countries (Chahoud T., p.1-4, 2007). Finally, most surveys assessing global economic development state a strengthening of SSC. For example its share of the global GDP increased from 21% in 2001 to 28% in 2008 and is expected to grow further (eximbankindia.in Website, 2011).

These numbers reveal that the SSC is a beneficial development for emerging countries and has a positive impact on the global aid systems. Nevertheless the lion’s share of development aid is still issued by the western traditional donors. Furthermore there are critical voices, that see the engagement of some countries, especially China, as an attempt to secure natural resource supply for the future, rather than the selfless desire to improve the living conditions of the local population in the recipient country. In the short-term, however, it is exactly this non-interference of Southern donors, which constitutes the high desire of recipient countries. India for example respects the sovereignty of Eastern African countries within their national territories and therefore does not combine financial support with macro-economical or governmental conditionalities, like western powers. As a result the money granted by India flows faster and is often more practical then financial support issued by the EU. The lack of conditionalities also gives greater freedom and flexibility to African states in spending these funds. While this seems to be an advantage of the SSC at the first glance, in reality it is a downside of this approach. By not attaching conditions to aid measurements, the new investors also support may countries with unacceptable human rights conditions, social discrimination, environmental pollution or other precarious factors. Without conditionalities there is no incentive for positive improvement and even more crucially, IMF funds connected to conditionalities are losing their importance as funds, as the new donor funds are available easier. Next to the reluctance to implement conditionalities there is also a great lack of transparency, often resulting in corruption. As venality is already a major problem in several African countries the circumnavigation of conditionalities proves to be a long-term disadvantage of SSC in terms of fighting corruption. Furthermore, there is a deficient observation of financial aid flows is deficient in many SSC donor administrations resulting from the non-existence of a centralized coordination. Additionally, main donors within SSC, for example China, are reluctant to revel exact numbers of funding, therefore reducing the transparency (Reality of Aid Management Committee, p.1-4 and p.13-15, 2010).

The greatest danger for African economies with high commodity resources is, however, to become a ‘resource basket’ for other emerging giants. As there is no external incentive to create sustainable growth, African countries risk profiting only in the short term from higher income. Using SSC, African countries are required to initiate policies themselves, as there is no donor forcing them to develop their industries. If African countries ignore long-term sustainability and development the financial upward trend would disappear as soon as resources got scarce. In this cases the poverty of African countries could even increase after regressive SSC, as their natural resources would be depleted without having created a substitute income source for the future. Hence, African states need to improve their sustainability by themselves, if they rely on SSC funding. For Eastern Africa this issue is, however, of smaller magnitude as there are no major resource exporters in this area.

4. Past and Current Performance of African Countries

4.1. Africa’s Relation with India in the Past

The thriving modern business relations between Eastern Africa and India build on the well- grounded mutual history of both regions. The earliest evidences of trade date back about two millennia. Supported by the monsoon winds above the Indian Ocean, African and Indian tradesmen were able to engage in trade. Consequently today’s high understanding between both nations is based on two factors. First, the common colonial history, second, the large Indian diaspora in the African countries, as well as the African diaspora within India (Kamini K., p.17, 2008).

Africa’s and India’s trade based engagement continued steadily for several centuries. An increase in interaction between the two regions took place in the 1800s due to the British Empire. The British government imported many Indians to Africa, as workers, especially during the construction of railways. A second wave of voluntary immigrants followed, in the hope of new business opportunities. This changed the African society from a barter to a money economy. Firstly, a group positioned between the ruling British and the dominated Africans, the migrated Indians soon started to merge with the African society. Young, good educated Indians and Africans joined forces in their “quest for equity”, which resulted in the first African labour unions. The first wave of free African journalism - supported by many Indians - facilitated the political awakening of Africans. Even the efforts of the British rulers could not impede this open support, and the loyalty of many Indians is one of the reasons for the trustful and mutual understanding that exists today between both regions. (High Level Committee on Indian Diaspora, p.93-97, 2001).

During the African fight for independence in the late 1950s, there was again moral support from India. For many Africans, India symbolizes a shining example of gaining independence from British colonial rule. The Indian support and commitment to decolonization can be seen in a statement made by the first Indian Prime Minister, J. Nehru, when stating than India’s new freedom is useless until all nations have achieved freedom from colonialism. In addition to the Indian diaspora located in Africa, the Indian government also supported African interests, for example within the United Nations: the “common enemies of poverty and diseases” tied a strong bond between both populations (Kamini Krishna, p.17, 2008).

However, the Indian diaspora did not engage in any violent riots during Africa’s claim for independence, but continued in the type of non-violence protest that was traditional in India. After gaining independence from the British Empire in the early 1960s many Eastern Africans desired a new, harmonious, multi-racial society under their rule. While many British left Africa, Indians were often allowed to apply for African citizenship and thus to stay indefinitely. However, depending on the African country this process had different levels of success. While Tanzania had a smooth transition and many Indians stayed, the Kenyan population were offended, that more than half of the Indian population within Kenya applied for a British, rather than Kenyan citizenship. In Uganda on the other hand the cut from foreign powers was so deep that even Indians with a Ugandan passport had to leave the country. Consequently, the present-day composition of non-African minorities residing in Eastern Africa differs from country to country (High Level Committee on Indian Diaspora, p. 98-103, 2001).

Nevertheless, a profound friendship has developed between African and Indian political leaders based on the common struggles against colonialism, racism, and injustices like apartheid. These emotional episodes adhered both regions strongly to each other and built the foundations for the modern-day collaborations. With the economical rise of India, there have been several spillover effects on Africa. Prime examples include the arrangements to educate African students in Indian universities; the financial support for African economic development; the political support; and the e-connectivity programs. One of the most important e-connectivity programs includes the ‘Pan-African-e-Network’, which connects several African countries and India for e-education and e-medicine purposes. Eastern Africa plays a crucial role in this e-Network, as the submarine cable reaches the African continent in Kenya (Alam M. B., 2011).

In recent decades, the trade volume between Africa and India has been was growing significantly. This highlights the increasing awareness of reciprocal dependency. While the bilateral trade in 1990 reached a value of 1bn USD, it increased to 3bn USD in 2000, and then escalated to 36bn USD in 2008. However, during the financial crisis it dropped to 32bn USD (Barka H.B., 2011). Based on mutual understanding due to historical interaction, the modern African-Indian relationship offers enormous business potential, if both regions maintain their program of economic reforms.

4.2. Past Economic Performance of African countries

The purpose of this study is to gain knowledge about new economic opportunities in Africa and this can only be achieved by understanding the continent’s past performance, as well as the reasons for this performance. For this very reason companies conduct risk-analysis before investing in a certain country. However, in the case of Africa, perception is sometime influenced by the already existing reputation. Though, changes in the business environment prove these perceptions to be rather incorrect nowadays. Furthermore, there is the problem of the overall business environment. A generally good candidate can perform worse than a generally bad candidate, if the good candidate is hampered by negative external influences, while the bad candidate is boosted by positive influences. Consequently a high-quality scientific approach must be used to gain an understanding of the historical background, which allows these interferences to be considered when making projections of future performances.

As aforementioned, Africa is not a homogenous economic area, therefore the information presented in this paragraph does not claim absolute accuracy for each individual East African state. Depending on the individual country the information presented might be more or less accurate and in some cases even contrary. However, the information is correct for Eastern Africa viewed as a region. Individual country analyses will be provided in the case study section in chapter 5.

African economies declined in the 1970s shortly after decolonization in the 1960s. In contrast, the rest of the world had an average growth of 2% annually between 1960 and 2000. A constant decline in growth reached a minimum in the early 1990s, having been negative for the previous 15 years. The consequences for modern Africa are high poverty and an underdeveloped industry. In numbers this means that compared to 1974 (the last year with positive growth), the current GDP of sub-Saharan Africa is 11 percent lower, and poverty has increased from 10% in the 1970s to around 50% in 2000 (The National Bureau of Economic Research, 2011) (See Figure 1).

Figure 1

This seems surprising, as most experts in the 1960s expected a much brighter economic future for Africa than for most other developing regions, for example Asia. After decolonization in the 1960s, Africa had a wealthier population than any other emerging region and a high availability of natural resources, and was therefore regarded as a solid foundation for future economic growth. Compared to the poorer and overpopulated Asian continent, Africa seemed well prepared for the future. In retrospect, we know that Africa performed worse than Asia and is today the poorest continent. When ranking growth performances of all countries between 1960 and 2004, there are 15 African countries among the 20 slowest growth performers, but only 2 among the 20 fastest growing countries. For Eastern Africa Burundi (0.3%), Rwanda (0.2%) and Madagascar (-1.3%) showed the slowest growth rates (World Bank Website, 2011). These results are even more devastating when taking into account that during the same period of time billions of dollars have been provided by institutes like the World Bank, the International Monetary Fund (IMF), the United Nations or the African Development Bank. African institutions were also founded in order to optimize the use of funds; and to increase collaboration and facilitate trade between African states. Prime examples include the African Union or regional bodies like the East African Community. Nevertheless growth remained disappointing until the middle of the 1990s when Africa’s economies started growing again (Guseh and Oritsejafor, p.123-127, 2009) (See Figure 2).

Figure 2

Past and Current Performance of African Countries 14

Until today, there is no conclusive explanation for this development, and various solutions approach this subject from different angles. The attempt to find a universally applicable solution is hindered by inconsistency between the development progress of different African countries which had similar prior conditions (See Figure 3). Nevertheless the following section will explain several factors, which influenced the economic decline of Africa.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3

4.3. Current Economic Performance of African Countries

All currency amounts presented in the following are in US Dollars

Africa’s current economic upswing is based - for the major part - on a fundamental shift in the global trade balance. The predominant system of western liberalism was forced to widen its structure by incorporating new economic powerhouses like India and China. Therefore, international trade flows are not entirely controlled by western powers anymore. The emerging giants from Asia pressed ahead with their economic and population based weight, demanding more say in the global community. As a fortunate spin-off accompanying this paradigm shift, Africa currently achieves record growth rates and has become more attractive for foreign, and in particular southern, investors (Schoeman M., p. 33-34, 2011). Today, the African continent presents itself as favourable investment location and experts suggest the continuance of this trend, and potentially even greater favourable investment conditions in the future. The newest McKinsey Report ‘Lions on the Move - The progress and Potential of African Economies’ corroborates this statement:

Abbildung in dieser Leseprobe nicht enthalten

A noteworthy fact is that Africa’s GDP value of 2008 was already comparable with those of Brazil and Russia. The global share of 60% unused arable land will provide Africa with a major negotiation advantage in times of a fast growing world population. The potential of the African agriculture sector are enormous, and will be covered more detailed later in the thesis.

Africa’s reputation of being a junior partner must be abandoned. This is supported by current investment reports that state that Africa has a total of 52 cities, with more than 1 million habitants, and 20 home companies, generating more than 3 billion USD revenue. These numbers support the economic upswing of African economies. Estimates suggest that until 2020 the African purchasing power will further be boosted by 128 million households with disposable income. Additionally the young African workforce is expected to reach the size of one billion in 2020 and thus high expectations for this continent are justified (Roxburgh C., et. al., p1, 2011). Furthermore, Ernst & Young’s 2011 Africa attractiveness survey points out that 68% of participants attest Africa as growing in attractiveness over the last years. (See Figure 4).

Abbildung in dieser Leseprobe nicht enthalten

Figure 4

The latest growth numbers of 2010 support this finding, stating that Africa’s growth (4.7%) outperformed the global average of 3.6% (Elhiraika A. et. al., p.11-12, 2011). Nevertheless, Africa is still at the beginning of its economic development. During the United Nations Conference on Trade and Development the discrepancy between the current and the desired state was demonstrated. The comparison of a global GDP share of 2.5% (2008) versus a global population share of 14.6% is an undeniable sign for the initial stage of African development. However, while still low in absolute numbers, there are several visible trends which prove the positive relative development of African economies. When examining GDP growth according to individual industrial sectors, encouraging results can be seen in some sectors. For example, the African merchandise trade showed an increased volume from 217 billion in 1995, to 986 billion in 2008. Within this section especially, the business with other developing countries represents a nine-fold growth performance from 34 billion to 283 billion. This increased engagement with developing countries, and therefore drawing away from traditional trade partners (the EU and USA) can be proven by various statistics. The share of total African trade with non-African developing countries rose from 19.5% to 32.5% between 1995 and 2008. Intra-African trade presents similar increases with a rise from 15.4% to 28.7% (1995-2008). Nevertheless, the EU is still the most important trade partner in absolute numbers, even though in the last 15 years, it has lost, about 15 percentage points of the African trade share, now ranging at 40% (Lebale N et. al., p.29-36, 2010) (See Figure 5).

Figure 5

Among developing countries the BRIC states are the major trade group for Africa. Statistics show that BRIC-Africa trade increased eight-folded from 22.3 billion in 2000, to 166 billion in 2008. For Africa especially, this alliance is of tremendous importance. United Nations statistics suggest an increase of the trade ration BRIC-Africa/BRIC-world from 1.8% in 2001 to 3.3% in 2008. The Africa-BRIC/Africa-world ratio, however, increased from 4.6% in 1993 to 19.2% in 2008. This demonstrates the high relevance of BRIC-countries trade for (Eastern) Africa. The fact that the BRIC-Countries recently overtook the USA in terms of trade volume with Africa, is another indicator for this trend. Particularly China (2nd), India (6th) and Brazil (10th) established themselves as crucial business partners. While China still outperforms all others in absolute numbers, India reaches China’s level of engagement in Africa if applying a GDP weighted comparison. Africa is currently exporting many resources to the BRIC states, however, there is also an increased import coming from these countries. Between 1998 and 2008, the absolute value of global imports to Africa increased from 104.7 billion to 380 billion. Included in this amount is a growth in BRIC-countries imports of 22%, representing an increase in the value from 10 billion in 2001, to 71 billion in 2008. Similar values apply to exports leaving Africa, with the BRIC-countries trade share increasing from only 8.6% in 1998 to 19.7% in 2008.

Furthermore, African governments managed to reduce the budget deficits and foreign debts, which lowered the inflation and prepared the basis for healthy economic growth. Further political change and progress, resulted in new policies that concentrated on energizing markets. These endeavors included privatization, reduction of trade barriers, tax cuts and strengthening of regulatory and legal systems. Positive reactions to these policies are increased urbanization and disposable income rates. While in the 1980s only 28% of Africans lived in cities, in 2010 the urbanization rate was already at 40% and is expected to grow to 50% by 2030. This gives Africa today a higher rate than India and one close to that of China. In terms of income, there is a positive trend as well, considering that in 2008, 85 million households in Africa could already spend more than half of their income on non-food items. It is obvious that Africa is still at the beginning of its economic stabilization process; nevertheless, recent growth numbers demonstrate there is an internal development. This development is supported by external factors, but was created by internal African reforms and endeavors. Evidence for an increase in internal efficiency is a 2.7% growth in productivity between 2000 and 2008, compared to the constantly decline during the last two decades of the old millennium. (Roxburgh C., et. al., p1ff, 2011). At the country level in Eastern Africa, Tanzania gives a prime example for the interdependency between growth and internal forces like productivity.