By Sven Richter*
IDN-InDepth NewsAnalysis
African demographics are at the start of a long-term trend that will most likely trigger high gross domestic product (GDP) growth in the region for the next decade or two. A by-product of this is likely to be more democracy. Studies show that as GDP increases, the likelihood of democracies becoming autocracies fades and the likelihood of autocracies becoming democracies increases. This holds true for all nations, bar those with a very high GDP per capita where the wealth is derived from a single resource such as oil.
LONDON (IDN) – Economic cycles, over the longer term, are inexorably linked to demographics. This link can disappear in the noise of up-to-the-minute changes in the financial markets, as in August 2011, when debt crises in Europe and the USA prompted large daily falls in stock markets, the largest since 2008. Part of the underlying reason for the crisis (which revolves around government debt levels), has got to do with societies growing more slowly than they have in the past and being unable to work out their debt situations.
This too, can partly be traced back to populations that are aging and not growing. This is why the U.S. with its ability to absorb immigrants has more potential to ride through this crisis, while Europe will have a more difficult time unless they make some fundamental changes.
The Role of Population
When we look at Africa, the demographics are far removed from older economies such as Europe and the USA. Much is made of the demographic dividend and where Africa falls when we discuss this; especially given that the African population has grown from 300 million to around 1 billion in the past 30 years and is expected to more than double over the next 40 years.
The growth has been driven by improvements in health care which has reduced infant mortality and mortality in young children, as well as extending the life expectancy. The point at which the demographic dividend becomes evident, is the point when a country is in the enviable position of having a population pyramid showing more young people than old, where fertility falls due to a recognition that improving health care reduces the need to have a high birth rate, and where incomes have risen to provide people with an incentive to reduce the number of children to improve their own and their children’s lives.
In terms of health, Africa is steadily improving; infant deaths are down from 117 per 100 000 in 1980 to 89 currently, and mortality for under 5 year olds is down from 198 to 147 per 100 000.
The results of this demographic dividend are many, with more emphasis placed on education, levels have improved. There is more productivity as people are released from child care to become more productive as workers; expenditure on goods has extended to those which were previously luxury goods, and there are more opportunities to sell, manufacture and maintain all these goods and services.
Three Key Factors
Demographics alone do not account for GDP growth. According to the work of the Economic Historian Angus Maddison, it can be traced to three inputs working age population growth, labour productivity growth and the labour utilisation rate. These are importantly not absolute levels, but growth; if we have growth in these three factors or in some of them, GDP growth is the result. Labour utilisation rate is the rate at which people work, the hours of work per person, while labour productivity growth is producing more per worker.
It is not easy to forecast a labour utilisation rate, but in general people will work longer if they see a link between what they do and what rewards they can achieve. If salaries are reasonable and can be spent on goods that benefit people’s lives, they are likely to work more to achieve these goods.
Not all these goods are typical consumer goods, they could be other goods such as education for their children. We should also bear in mind that it is labour utilisation at a national level; as more people give up being stay-at-home mothers and enter the workforce, the labour utilisation rate increases. In terms of the other two inputs, Sub-Saharan Africa is in an enviable situation in terms of its ability to grow.
Labour productivity in Africa is generally lower than in many other areas due to poor infrastructure and education. The continent is generally lacking in infrastructure compared to its more developed peers. But across Africa fixed investment is picking up and as the demand for resources continues to increase, we see infrastructure benefitting from this. We are seeing more roads, railroads, electricity and communications. Many of these benefit from technology, especially communications where mobile phones have changed the way Africa communicates.
Often late adaptors, in many areas from communications to manufacturing and mining, can benefit by using the latest technology which drives up efficiency. As infrastructure develops, companies in Africa become much more efficient and the labour utilisation rate increases driving GDP growth. Not only is infrastructure developing in Africa but as the countries start to reap the demographic dividend, education levels are rising and will continue to do so yielding a higher labour productivity rate.
Africa’s large percentage of young people is poised to add significant numbers to the labour force, thus we are also seeing huge working age population growth. This demographic window, when the working age population out numbers the non-working population, tends to last for 30 to 40 years. African fertility rates (the average number of children born to women in that country) have not started to fall significantly yet. We are seeing only the start of a trend. Since 2006 fertility rates are down in Nigeria from 5.7 to 5.6, in Kenya from 5 to 4.9 and in South Africa from 2.6 to 2.5. This is the start of the demographic dividend that will be felt in Africa over the next few decades.
Political Implications
African demographics are poised at the start of a long-term trend that will most likely drive high GDP growth in the region for the next decade or two. A by-product of this is likely to be more democracy. Studies by the chief economist of our sister company, Charlie Robertson of Renaissance Capital Research Portal, show that as GDP increases, the likelihood of democracies becoming autocracies fades and the likelihood of autocracies becoming democracies increases. This holds true for all nations, bar those with a very high GDP per capita where the wealth is derived from a single resource such as oil.
Africa’s countries are thus mostly facing a period when they could see real GDP growth for a significant period into the future. The past ten years have been good for growth in Africa with GDP and GDP per capita increasing, but we are only at the start of a multi-decade period in Africa which is likely to see demographics, labour productivity and labour utilisation working together to grow GDP. With this, we are likely to see firmer and more entrenched democracies.
* This article is republished by arrangement with Think Africa Press . The writer is Head of Frontier Markets at Renaissance Capital. He has over 15 years experience investing in emerging markets. While working at Franklin Templeton Investments, he was responsible for research coverage in the commodities sector in Africa and headed two of the firm’s Frontier Market strategies. [IDN-InDepthNews – October 06, 2011]
2011 IDN-InDepthNews | Analysis That Matters
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