Growth - sure, but Africa's competitiveness lags the world
Jennifer Blanke
Published: 03-JUL-07

After prolonged economic stagnation, and at times even decline, Africa is experiencing an economic resurgence. Between 2001 and 2006, growth in gross domestic profit (GDP) averaged 4,9 percent annually, according to the International Monetary Fund (IMF). In 2006, Africa as a whole grew by an impressive 5,5 percent and sub-Saharan Africa in particular by 5,7 percent. In 2007 these rates are expected to increase even further — to 6,2 and 6,8 percent. In particular, foreign direct investment (FDI) has been picking up, with increasing activity by booming emerging markets, drawn by the continent’s rich natural resources. Accordingly, the overall outlook for the region’s economic prospects is broadly optimistic.

Despite this newfound optimism, questions remain as to how sustainable this growth will be over the longer run. Even though the continent is experiencing its highest growth since the 1970s, and even though significant progress has been achieved in stabilising the macroeconomic environment in many African countries, most of the current growth has been fuelled by a confluence of external circumstances and interventions, including high commodity process, debt relief, and a favourable international economic environment. Genuinely sustainable growth, however, must be based on solid domestic foundations rather than cyclical or exogenous circumstances. Moreover, high rates of growth over decades, like those observed in developing Asian countries, are desperately needed in Africa in order to significantly raise the living standards of its people. In this context, African countries must become more competitive.

To illustrate the importance of increasing the region’s competitiveness, a comparison of the growth rates of Africa with those of developing Asia and the world average since 1980 shows that throughout the 1980s and 1990s Africa’s growth rates were mostly below the world average, and consistently below the developing Asia average. Since the beginning of this decade, African growth rates have finally exceeded those of the world average. At the same time, growth rates continue to be much lower than the group of developing countries from Asia, a region that has raised the living standards of its citizens significantly over recent decades. Indeed, these are the magnitudes of growth rates that must be achieved over a long period of time in Africa in order to lift many citizens rapidly out of poverty. Present growth rates in Africa, although high by historical standards, are still short of the estimated 7 percent annual growth that would be required to meet the Millennium Development Goal (MDG) of halving poverty rates in the region by 2015. With a few exceptions, income levels across the continent remain very low, and African poverty rates are the highest in the world. Why has Africa’s overall economic performance been lagging behind other developing regions? And which are the areas requiring urgent policy attention in order to ensure sustained strong economic performance going into the future?

Measuring competitiveness

In order to assess national competitiveness, the World Economic Forum has developed the Global Competitiveness Index (GCI). Competitiveness is defined as the set of institutions, policies, and factors that drive productivity and therefore set the sustainable current and medium-term levels of economic prosperity. In this sense competitiveness is not viewed as a zero-sum game, such as competition among companies vying for a larger portion of a given market share. Instead, by focusing on the drivers and the facilitators of productivity, improvements in one country’s competitiveness do not exclude similar improvements in other countries. The GCI, albeit simple in structure, provides a holistic overview of factors that are critical to driving productivity and competitiveness, and groups them into nine pillars: institutions (public and private), infrastructure, the macroeconomic, health and primary education, higher education and training, market efficiency (goods, labour, financial), technological readiness, business sophistication, and innovation.

The WEF sample covers 128 economies at different stages of economic development, with GDP per capita in the wealthiest country surpassing that of the poorest country by a factor of 117, based on purchasing power parity. Clearly, policy priorities must evolve as countries advance on the development path, since what it takes to achieve productivity improvements in a less-advanced economy –— such as improved health, fighting illiteracy and corruption, or constructing basic infrastructure facilities such as roads and ports — will no longer be sufficient to increase productivity in a more sophisticated economic framework, where productivity gains from these policies have often already been exploited.

To take this process into account, the concept of stages of development has been introduced into the calculation of the index. Specifically, countries are separated into three stages, based on the idea that as countries move along the development path, wages tend to increase, and that in order to sustain this higher income, productivity must improve. This concept is integrated into the index by attributing higher relative weights to those pillars that are relatively more relevant for a country given its particular stage of development.

In the factor-driven stage countries compete based on their factor endowments, primarily unskilled labour and natural resources. Companies compete on the basis of process and sell basic products or commodities, with their low productivity reflected in low wages. To maintain competitiveness at this stage of development, competitiveness hinges mainly on a stable macroeconomic framework, well-functioning public and private institutions, appropriate infrastructure, and a healthy, literate workforce.

As wages rise with advancing development, countries move into the efficiency-driven stage of development, when they must begin to develop more efficient production processes and increase product quality. At this point, competitiveness becomes increasingly driven by higher education and training, efficient markets, and the ability to harness the benefits of existing technologies.

Finally, as countries move into the innovation-driven stage, they are able to sustain higher wages and the associated standards of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete through innovation, producing new and different goods using the most sophisticated production processes.

Thus, although all nine pillars matter to a certain extent for all countries, the importance of each one depends on a country’s particular stage of development. The GCI implements the concept of developmental stages by weighting each of the sub-indexes differently, depending on the state of a given country, placing more weight on those pillars that are most important at a given stage of a country’s development.

The international context

Of all the countries covered in the global competitive index, Tunisia is the strongest performer, ranked among the top 30 of all countries. Tunisia also outperforms all other comparable economies internationally. Within Africa, Tunisia is followed by South Africa and Mauritius, ranked 46 and 58, respectively. A bit farther down in the rankings are the other North African countries, namely Egypt, Morocco, Libya, and Algeria.

All other countries ranked below Algeria are from the sub-Saharan region, with Botswana, Namibia, and Kenya as the only three other countries within the top 100. All of the other 19 countries from sub-Saharan Africa rank among the 27 weakest performers occupying ranks of 102 or lower.

North Africa and sub-Saharan Africa have radically different competitive performances. Specifically, North Africa outperforms the average of the other countries on the continent in all three sub-indexes measured by the index, as well as all nine pillars. The largest gaps can be found in the areas of health and primary education, higher education and training, infrastructure, and the macroeconomic environment. The smallest gaps are in market efficiency, technological readiness, and innovation.

The gaps between the north and south of the continent are echoed in many of the comparisons with other regions and selected countries. Sub-Saharan Africa’s competitive performance, on average, trails well behind all other comparable countries in seven out of the nine pillars: namely, infrastructure, health and primary education, higher education and training, market efficiency, technological readiness, business sophistication, and innovation.

By contrast, North Africa on average matches up quite well and in fact outperforms any internationally comparable countries except for India in the area of institutions. Its infrastructure is assessed as more developed than other countries except for Russia and China. The region’s macroecncimic environment is more stable than all countries ranked in the index except China, Russia, and the Southeast Asia average.

The competitive landscape in North Africa and sub-Saharan Africa get closer to each other once we move beyond the basic factors. In fact, for most of the complex factors captured under efficiency enhancers, innovation, and sophistication factors sub-indexes, North Africa and sub-Saharan Africa alike receive the worst assessments of all countries and regions. This is true for market efficiency, technological readiness, business sophistication, and innovation. Of course, the aggregate analysis masks a great deal of diversity among individual country performances within the region in the various pillars. Tunisia is one of the top three performers in all of the pillars, while South Africa is one of the top performers in six of them and Mauritius in five, mirroring these countries’ positions at the top of the overall rankings.

The macroeconomic environment presents an interesting case, as Africa is home to both the strongest and weakest performances in this area. The two best-rated countries out of all in the region are Libya and Algeria — two economies that have benefited from windfall oil revenues that have significantly improved their public finances. These countries have high government budget surpluses, manageable debt, high national savings rates, and at the same time they have managed to keep inflation at low rates. The third highest country is Tunisia (39), an oil importer, which has also managed to tame inflation and has reasonably balanced public finances.

On the other hand, the macroeconomic environment of most countries is assessed as very weak, with 18 of the 29 African countries ranked among the bottom third. In particular Zambia, Mauritania, Burundi, Angola, Malawi, and Zimbabwe round out the bottom of all countries assessed.

Given the importance of basic factors such as primary education, the results in this pillar are disconcerting. The three countries best assessed in this area are Tunisia (33), Mauritius (44), and Algeria (46), on par with economies such as Estonia and Hong Kong. They are joined in the top half of the rankings by Egypt (51). Only Libya out of the 25 remaining countries is ranked in the top two-thirds.

Education, infrastructure, markets

The quality and quantity of higher education and training becomes increasingly important for countries aiming to improve the efficiency of their business environments. In Africa, with the exception of Tunisia (36) and to a certain extent South Africa (56), the assessment is quite bleak. The third best assessed country is Mauritius, at a low 69 rank overall. Except for a couple of North African countries (Egypt and Libya), all other countries are ranked in the bottom third of all 128 countries. Enrollment rates at secondary and tertiary levels throughout the region remain low, educational systems suffer from poor quality, and in many countries companies are not providing on-the-job training to compensate for these weaknesses. Upgrading educational systems, ensuring higher enrollment levels, and inculcating a stronger culture of training will be important for Africa as it continues on its path to development.

The efficiency of markets for goods and services, labour, and financial interactions are also important for ensuring the proper allocation of resources across the economy. In Africa, two countries are evaluated as having efficient markets: South Africa and Tunisia, comparing well with countries such as Belgium and Spain. South Africa is particularly well assessed for the efficiency of its goods markets (17) and financial markets (27), despite significant stickiness in its labour markets. Tunisia, on the other hand, has quite efficient and flexible labour markets (30) and well functioning goods markets (32), although its financial markets are less developed (45). There are a number of additional success stories. For example, Zambia’s labour markets are rated very positively (26), ahead of all other countries in the region, and Mauritius’s financial market sophistication is second only to South Africa’s in the continent (38).

However, market inefficiencies abound within most other countries in the region. The greatest weaknesses are in the areas of goods and financial market efficiency, where the large majority of African countries are ranked in the bottom third of all countries, with several all the way at the bottom.

With regard to infrastructure, the only countries assessed within the top half of all 128 countries are South Africa, Egypt, and Morocco (ranked 50, 56, and 61). All other countries are ranked 80 or lower, with more than half of the countries ranked below 100.

This emphasises the importance of upgrading infrastructure in the continent to improve competitiveness.

Technology is an important productivity enhancer, especially for those countries aiming to move up the value chain. Africa as a whole is not harnessing these tools sufficiently. The three best ranked countries from Africa — South Africa, Tunisia, and Mauritius — all receive mediocre assessments in technological readiness (ranked 4, 47, and 54 respectively), where ICTs in particular could be adopted more aggressively. Still, these three countries are ranked well ahead of the next best ranked African country, Mozambique (70), and most countries from the region fall significantly lower still in the rankings. This is an area, however, where the region has begun to see some striking improvements (see companion story on ICT).

The sophistication of the business environment and innate innovative potential are not yet very important for the competitiveness of most African countries given their stage of development. However, for those countries approaching stage 3, these factors will become increasingly important in the coming years. This is particularly the case of Mauritius and South Africa, both of which are already in stage 2. With regard to business sophistication, Tunisia and South Africa receive strong assessments (ranked 31 and 32), comparing well with countries such as Australia and Chile because of abundant and high-quality local suppliers and relatively sophisticated production processes. They are followed in the ranking by Mauritius (44) and Egypt (57), the only other countries in the top half of the ranking. Similarly, in terms of innovation, Tunisia and South Africa are assessed as having the two most innovative environments in Africa, on par with the assessments for Estonia and India for example, with relatively high company spending on R&D, strong collaboration between universities and industry in research, and good intellectual property protection by regional standards. The top half of the ranking includes Kenya (48), Nigeria (52), Tanzania (56), and Morocco (61). In the cases of both business sophistication and innovation, most other countries in the region receive significantly weaker assessments.

Although this is not yet the area with the most urgent need for improvement, given that their competitiveness can still be stimulated by improvements in the more basic areas already discussed, it is encouraging to note that there are already a number of successful actors in the region.

On average, the analysis has shown that the competitiveness of most countries in Africa continues to lag behind the rest of the world and even behind other developing regions across all areas measured by the GCI.

The results thus provide a sense of the magnitude of the efforts required in order to raise competitiveness levels.

Although the specific priority areas vary from country to country, there are some common areas of concern. For North African countries, which are already assessed as doing comparatively well in some of the more basic areas measured by the index, the focus should be on improving the factors measured in the pillars of the efficiency enhancers sub-index: particularly technological readiness and improved market efficiency.

In sub-Saharan Africa, efforts are needed on all fronts within most countries. This includes upgrading infrastructure and improvements in the health and education of the workforce, as well as tackling weaknesses in the areas of market efficiency and technological readiness. Indeed, several of the big economies in the region are receiving high scores in the innovation and business sophistication pillars relative to their overall ranking, while neglecting more basic requirements that would help them migrate into a higher stage of development and achieve more sustainable growth.

Although much remains to be achieved, the fact that there are a number of strong performers in the continent in specific areas provides reason for optimism. An analysis of the highest-ranked countries in Africa across the various pillars of national competitiveness has shown that there are strong individual country performances throughout the continent in areas as diverse as institutional quality, macroeconomic stability, business sophistication, and innovation. These countries can serve as benchmarks for other economies in the region, as points of reference in their efforts to improve their competiveness.

The relatively positive economic outlook across much of Africa, coupled with the renewed focus and increased attention from several institutions within the region and beyond, now provide a promising opportunity to make the institutional and structural changes needed to put countries in the region on a more sustainable growth path and to pave the way for a more prosperous future.

  • Jennifer Blanke is a senior economist at the World Economic Forum

    -Business in Africa Online

    Print this page Send this article to a friend

  • Market news on your cellphone
    Get live JSE listed shares, warrants, major indices, brent crude oil, international markets, agricultural futures & daily market analysis via SMS on your mobile.
    Find out more...

    Energy in Africa
    Energy in Africa is an intelligent and in-depth look at how energy impacts people, places, projects, price and development around the African continent.
    Subscribe now...

    African Business Leaders Forum
    African business and public sector leaders define and construct a prosperous future for the continent.
    Find out more...

    Online travel bookings
    Planning to travel? Book accommodation in Africa & South Africa here.
    Book now...

    Contact us | Advertising | Subscriptions | Newsletter | About us | Employee Email

    All material copyright Business in Africa. All rights reserved. Material may not be published or reproduced in any form without prior written permission. Read these terms & conditions. Read our privacy statement and security statement. Powered by Mail & Guardian Online & The domains, are owned by Business in Africa.