19 SCN 38-597

SCN 38-597

Suggested by Clive Tasker

THE FIVE TRENDS POWERING AFRICA'S ENDURING ALLURE TREND 1: A LARGER, YOUNGER, AND MORE AFFLUENT POPULATION by Simon Freemantle

From: “Africa Macro - Insight & Strategy”, Standard Bank, September 12, 2011. http://ws9.standardbank.co.za/sbrp Reproduced by The European House-Ambrosetti for the Forum “Developing the Regions of Africa and Europe”, Taormina, October 6 and 7, 2011.

Insight & Strategy — 12 September 2011

A larger, younger, and more affluent population 2

Africa Macro

Insight & Strategy — 12 September 2011

Africa‘s population is swelling rapidly, providing a compelling and conflicting array of opportunities and challenges for the continent‘s 54 nations. Seen from within the sphere of economic theory, a rising, and youthful population, when balanced by generally positive economic growth, carries potentially potent benefits for those countries with the structural means to support a bulging populace. Yet, equally, in the absence of such supporting factors, population growth has the ability to be profoundly destabilising. This report will principally address the potential inherent in Africa’s young and swiftly growing population, before considering the manner in which the continent is prepared for the seismic structural alterations it is so clearly undergoing.

At present, the Africa‘s population stands at just over 1 bn people, a 200 mn increase since the turn of the century.

Population growth over the last two decades in Africa has averaged 2.4%, far ahead of the world (and, perhaps more instructively, the Asian) average of 1.3% since 1990. Future population growth projections are even more seismic. Within the next two decades Africa‘s population will swell to over 1.5 bn, and, by 2050, it will exceed 2 bn. Between 2010 and 2020 population growth on the continent will average 2.2%, compared to 0.92% in Asia. While in 1950 there were more than two Europeans for every African, by 2050 there will be almost three Africans for every European. Within the next four decades, Africa‘s population will overtake both India‘s and China‘s (Figure 1). As a result of this explosion, Africa‘s share of the world‘s population is growing dramatically. While in 1980 Africa‘s population accounted for little more than 10% of the world total, compared to over 20% for China alone, by 2050 the portrait will have adjusted substantially (Figure 2).

For those countries able to offer the necessary support, a strongly rising population carries two broad, and profound, potential advantages. Firstly, coupled with the positive economic growth for which Africa is becoming increasingly renowned, population growth will support the ongoing emergence of Africa‘s consumer base. Already, dynamic local and international consumer-facing firms have locked into this alluring opportunity, adopting nimble and innovative strategies suited to the continent‘s unique commercial terrain.

Meanwhile, a youthful generation of increasingly globalised and brand-conscious consumers is providing a powerful contrast to the previous, and pervasively negative, image of the continent‘s populace. And, secondly, a young and rising population has the potential to yield a so-called demographic dividend—a golden window of opportunity where a rising population is met by declining fertility rates and longer life expectancy brought about by improved healthcare, causing dependency ratios to diminish, and allowing an unprecedented bulge in the working age population. This demographic dividend has been deeply influential in the economic potency of several of the world‘s largest economies—most

Figure 1: Africa’s booming population

2400

Mn people

1800 1200 600 0 1950

1970

1990

2010

Africa India N. America Europe

2030

2050

China Rest of Asia LatAm & Caribbean

Sources: United Nations (UN), Standard Bank Research

Figure 2: Share of world population

24

Percentage

18

12

6

0 Africa

India

China

1980

Latin Europe North America America

2010

2050

Sources: UN, Standard Bank Research

Figure 3: Private consumption per head, USD, 2011

Sources: Economist Intelligence Unit (EIU), Standard Bank Research

3

Africa Macro

Insight & Strategy — xx Month 2011

Figure 4: Growth in private consumption, 2000-2010 (%)

0

The rise of the African consumer

Africa’s middle class is developing Naturally, Africa‘s spending power is intimately correlated with the development of the continent‘s emerging middle class. While agreement on the precise income level requisite for middle class classification remains elusive in Africa, as with much of the developing world, it is clear that the nascent development of a segment of the population increasingly freed of the poverty trap (measured as those living on less than USD1.25 per day) is gaining momentum.

SSA

210

280

152%

Latin America Western Europe

MENA World North America

Sources: EIU, Standard Bank Research

Figure 5: Africa’s top ten have become more wealthy

8,000

Per capita GDP, USD

6,000 4,000 2,000

2000

Kenya

Ghana

Tunisia

Sudan

Morocco

Angola

Algeria

0 Egypt

Considering Africa‘s ten largest economies (which collectively account for 80% of the continent‘s GDP) provides a cogent indication of the manner in which spending power on the continent has elevated, even within an environment of rapid population expansion (Figure 5). Indeed, where in 2000 Africa‘s top ten economies had a combined per capita income of USD1,100, by 2011 this had swelled to touch USD3,000—more than double that of India (Figure 6). By 2016, per capita income in these ten economies will have increased by at least USD700 to reach around USD3,800— substantially lower than the BRIC average of USD6,700, but 80% larger than India‘s. Meanwhile, private final consumption in these select economies will expand by 50% from USD850 bn to touch USD1.2 tr by 2015, and by 2020 will reach USD1.8 tr, equal to final consumption in China in 2009, and thus adding support to positive estimations of Africa‘s ongoing economic surge.

140

India

South Africa

Robust economic growth and a rising population are colluding to create dramatic improvements in spending power across Africa. In 2011, nine African countries had private consumption per head of over USD3,000 (Figure 3). Meanwhile, a host of other nations have recorded substantial gains over the past decade. For instance, Angola‘s gross domestic product (GDP) per capita expanded almost eightfold, from USD585 to USD4,477, and Nigeria‘s almost quadrupled from USD390 to USD1389, between 2000 and 2010.

Overall, SSA‘s average GDP per capita has swelled by 70% since the turn of the century, compared to substantially more muted growth of just 15% between 1990 and 2000.

Growth in private consumption between 2000 and 2010 in SSA has been equally impressive, swelling by over 150%, significantly outpacing the world average, though expanding at a slower clip than in China and India (Figure 4). While today Africa‘s GDP per capita stands at approximately USD1,800, by 2016, this will have elevated to almost USD2,300, effectively resulting in a 25% rise in the continent‘s spending power.

70

China

Nigeria

recently China—and can be truly game-changing for those economies able to provide the institutional support to unlock this largely latent human capital promise.

2011

Sources: International Monetary Fund (IMF), Standard Bank Research

Figure 6: Africa weighs in against China and India

6,000

Per capita income, USD

Mn people

1600

4,500

1200

3,000

800

1,500

400

0

0 Africa 10 2000

China 2011

India

Population size RHS

Sources: IMF, UN, Standard Bank Research

4 Africa Macro

Insight & Strategy — 12 September 2011

These trends are in tune with a wider global thrust; according to Court and Narasimhan (2010), the developing world‘s emerging middle class spends a total of USD6.9 tr annually, and accounts for one-third of the world‘s total population.

Accounting for local conditions, the African Development Bank (AfDB) recently suggested that Africans with a daily income of between USD4 and USD20 could be classified as middle class. According to this metric, around 120 mn Africans, or 13.4% of the population, can be placed in this category. Including remittances from abroad, and generously incorporating a ―floating class‖ of people earning between USD2 and USD4 per day, the AfDB asserts that one in three people on the continent could be termed middle class (up from one-quarter of the population in 1990). This effectively means that around 150 mn people have become middle class on the continent over the past two decades (Figure 7).

The classification used by the AfDB is not without precedent. Last year, the Asian Development Bank released a paper in which Asia‘s middle class was measured as those earning between USD2-USD20 per day (though the paper acknowledged that those in the USD2-USD4 per day category remained extremely vulnerable) (Chun, 2010).

According to Euromonitor, a total of 59 mn households could be defined as middle class in Africa in 2009 given available disposable income of USD5,000—USD25,000.

Together, these households account for more than half of all disposable income on the continent. Africa‘s middle class households are further anticipated to grow at a compound annual growth rate (CAGR) of 12% between 2009 and 2014, extending the continent‘s middle class to over 100 mn households. More specifically, in Africa‘s five largest economies—South Africa, Egypt, Nigeria, Algeria and Morocco— the middle class is believed to have swelled by 10% between 2000-2009 and is expected to expand by an average of 6% for the next decade, by which time it will account for almost 60% of total households in Africa (Figure 8). In Nigeria and Egypt alone, 20 mn middle class households will emerge within the next decade. During the same time period, disposable income in these five economies will grow at an average rate of 8%, reaching a collective USD650 bn by 2020.

However, while some African consumers may be deemed middle class by regional standards, they may not be sufficiently affluent to be able to replace products on a regular basis given proportionately low ―truly discretionary income‖ (Court & Narasimhan, 2010). As such, considering spending on non-essential items is particularly critical. In Africa‘s three largest economies (South Africa, Nigeria and Egypt), spending on discretionary items has appreciated markedly since 2000 (Figure 9). Overall, spending on nonfood items increased by 190% between 2000 and 2010 in these three markets, compared to an expansion of 160% on food items.

Figure 7: Africa’s middle class is swelling

100% 75% 50% 25%

0% 1980

1990

2000

2010

Rich class (>$20)

Middle class ($4-$20)

Floating class ($2-$4)

Poor class (<$2)

Sources: African Development Bank (AfDB), Standard Bank Research

Figure 8: Africa 5—more than 50% middle class by 2020

100%

Percent of households

75% 57% 50%

25%

0% 2000

<$1,000

2009

$1,000-$5,000

2020

$5,000-$10,000

$10,000-$25,000 >$25,000 Sources: Euromonitor, Standard Bank Research

Figure 9: More discretionary income in Africa’s top 3

1800

Market demand, USD

250

200

1400

150

1000 100

600

50

200

0 2000

2003

2006

2009

Electrical appliances and houseware

Household audio and video equipment TV sets (stock per 1,000 population) RHS Sources: EIU, Business Monitor International, Standard Bank Research

5

Africa Macro

Insight & Strategy — xx Month 2011

33,000

22,000

11,000

1980 1984 1988 1992 1996 2000 2004 2008 SSA

North Africa

Sources: World Bank, Standard Bank Research

Figure 11: The fortune at the base of the EM pyramid

4000

3000

2000

1000

0 Asia

Eastern Europe

Income (USD bn)

Latin America

Africa

Population (Mn people)

Sources: IFC, World Resources Institute, Standard Bank Research

Figure 12: In Africa, low-income consumers matter

60

Percent of total

45 30

15

BOP spending

BOP500

BOP1,000

0

BOP1,500

A report by the International Finance Corporation (IFC) and the World Resources Institute recently claimed Africa‘s Base of the Economic Pyramid (BOP) market (including those with incomes below USD3,000 in local purchasing power), is worth USD429 bn, accounting for 71% of the continent‘s purchasing power, and comprising almost 500 mn people in the 22 surveyed countries (Figure 11). More specifically, South Africa‘s BOP market is estimated to have an aggregate income of USD44 bn, outweighed by more populous nations Ethiopia, with USD84 bn, and Nigeria with USD74 bn. The majority of Africa‘s BOP spending is by those with incomes of between USD500 and USD1,000 (Figure 12). In some countries surveyed, the lower income population is even more important. In Nigeria, for instance, those in the USD500 category account for one-third, and those in the USD1,000 category half of Africa‘s total BOP spending. Unsurprisingly, food accounts for the bulk of total BOP spending (USD215 bn), followed by housing (USD42.9 bn); energy (USD26.6 bn); transportation (USD24.5 bn); healthcare (USD18 bn); water (USD5.7 bn); and ICT (USD4.4 bn).

USD mn

BOP2,000

Furthermore, a large amount of the remittances received by African households are sent through informal channels.

Overall, formal remittance flows to Africa have risen strongly in recent years, providing crucial support for millions of households on the continent (Figure 10). In 2010, SSA received formal remittance flows of USD21.5 bn, and North Africa just over USD18 bn. However, previous research by the World Bank suggests that informal remittances are at least as substantial as formal flows. As such, total remittances to SSA last year could have been upwards of USD50 bn. Consider, for instance, that 80% of surveyed households in Uganda admitted to using informal remittance channels.

44,000

BOP2,500

Any measurement of African income is likely to be substantially understated given the size of the informal sector in most economies on the continent. This ―grey‖ income, particularly in large populous nations, is a prominent pillar in the elevation of consumer demand, yet remains elusive in terms of adequate data capturing. The International Labour Organisation (ILO) estimates that more than 70% of the workforce in developing countries operates in the informal or underground economy. Studies have further estimated that the informal economy averages 30% of official GDP in Asia, 40% in Eastern Europe, and 43% in both Africa and Latin America (Schneider, 2005). Consider that, in the case of China, it was recently estimated that, in 2008 alone, hidden income totalled nearly RMB10 tr (USD1.5 tr), and per capita income was 90% higher than official data implied (Wang, 2010). It is estimated that Nigeria‘s informal sector was equivalent to more than 60% of GDP in 2007. Across Africa, it is estimated that informal activities account for 93% of all new jobs and 61% of urban employment on the continent.

Figure 10: Africans are benefiting from higher remittances

BOP3,000

Text box 1: Wealth in Africa’s informal sector

BOP population

Sources: IFC, World Resources Institute, Standard Bank Research

6 Africa Macro

Insight & Strategy — xx Month 2011

To be sure, across Africa, consumer spending patterns are maturing considerably. Within Africa‘s five largest economies, the so-called ‗mass affluent‘ population (with annual disposable income of between USD5,000—USD25,000), accounted for 40% of all households in these markets, and contributed over half of all household spending. This compared to the ‗affluent‘ population (annual disposable income of more than USD25,000 and thus perceived to be middle class), which accounted for 4% of total households and were responsible for 28% of total spending.

Precedent also shows that individual vehicle ownership grows rapidly as incomes elevate from USD5,000 to USD10,000 per capita (Cilliers et al., 2011). This trend is clear in China, which last year overtook the US to become the world‘s largest market for new cars. By 2020 almost half of all new cars sold globally will be bought in China. Similarly robust growth is expected in Africa, which is expected to see ten-fold growth between 2010 and 2050 (Figure 13).

Africa’s demographic window Africa‘s growing population is not only increasingly affluent, but, given rapid growth rates in the past two decades in particular, is also exceptionally young. At present, Africa‘s median age is 19.7 (18.6 for SSA), compared to 29.2 for Asia and 40.1 for Europe (Figure 14). In Japan, notorious for its ageing populace, the median age is 45, with one-quarter of the population over the age of 65. Even within the BRIC economies, a clear transformation is under way, with the median age forecast to increase from 32 today to over 45 by 2060, compared with a more modest increase in the developed world from 40 to 44 within the same time period.

Considering Africa‘s most populous country, Nigeria, is instructive in this regard. At present, one-third of Nigeria‘s population is under 10 years old and more than half of the population is younger than 20. Overall, out of 100 Nigerians: 55 are younger than 20 (33 of whom are under the age of 10), 28 are aged between 20 and 40, and only 17 are older than 40. Nigeria‘s median age is 18.5. Within the next decade, 50 mn people (the equivalent of South Africa‘s entire population), will be born in Nigeria (Figure 15).

Concomitantly, the population of African‘s in the workforce, measured as those between the age of 15 and 64 years old, is rising faster than in any other region in the world. In some countries, this adjustment is proving to be particularly significant. In 2010, Africa‘s share of the world‘s workforce stood at almost 13%; yet by 2050 one in four workers on the planet will reside in Africa, compared to one in eight from China. Meanwhile, importantly, ageing throughout the advanced world, and certain key emerging markets, most profoundly China, is lowering their proportionate share of the world‘s labour force (Figure 16) (Text box 2).

At present, Africa‘s five most populous nations (Nigeria,

Figure 13: Vehicle ownership points to elevated income 600

Mn units

450

300

150

0 China

Africa 2010

India 2030

US

EU

2050

Sources: Institute for Security Studies, WB, Standard Bank Research

Figure 14: Africa’s median age

Africa LatAm & Carribean Asia

BRIC N. America Europe 0

10

20

30

40

Sources: UN, Standard Bank Research

Figure 15: Nigeria’s youthful population 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 10

5

0 % Female

5 % Male

10

Sources: UN, Standard Bank Research

7 Africa Macro

Insight & Strategy — 12 September 2011

Fertility rates are falling It is a general rule of economic development that as countries get richer, families get smaller, and as families get smaller, people get richer. This correlation between economic prosperity and declining fertility rates has clear recent precedent. In fact, the pace of this transition has occurred far more swiftly in today‘s emerging economies than it did in the developmental trajectories of the advanced world. Consider, for example, that the transition from a fertility rate of five to that of two took 130 years to take place in Britain (from 1800 to 1930), and only two decades (from 1965 to 1985) to manifest in South Korea.

Africa is unlikely to disturb this economic rule. Indeed, enhanced peace and prosperity across the continent are colluding, with a range of similarly supporting factors, to reduce fertility rates—in some instance dramatically. In Mauritius, the drop from a fertility rate of 6.2 to 2.3 took just 20 years, from 1960 to 1980. Globally, the basic replacement ratio at which a population begins to stabilise is 2.1 (two children for two parents, allowing a margin for infant mortalities). If one accepts that Africa‘s replacement ratio is higher than the world average due to a higher infant mortality rate, then the decline in fertility rates will allow the continent‘s population to begin to stabilise within the next 20 years (Figure 17).

Yet, given the varying factors underlying a fall in fertility rates, substantial regional and national divergences are clear on the continent. The correlations to peace and security are equally evident. For example, Somalia‘s fertility rate stands at 6.3, compared to 1.9 in Tunisia. Moreover, for many countries the decline in fertility rates is occurring more gradually than in the cases of Mauritius and South Korea mentioned above. Considering fertility rates alone, Nigeria‘s

1400

Mn people

Percent

1050

700 350

2010

2020

2050

Africa Macro

LatAm & Caribbean

30 25 20 15 10 5 0 -5

2010-2020 growth rate RHS

Sources: UN, ILO, Standard Bank Research

Figure 17: Africa’s declining fertility rates 50

8

40

6

30

4

20

2

10

0 1950

1970

1990

2010

2030

2050

Births per 1,000 people Total fertility rate (RHS) Sources: UN, Standard Bank Research

Figure 18: Regional divergences in Africa’s fertility rates 6

4.5

3

1.5

0 North Southern East Africa Africa Africa 2010 Sources: UN, Standard Bank Research

8

N. America

Africa

Europe

0

India

Providing additional texture to this argument, where now there is roughly one African worker for each European worker, by 2020 there will be 250 mn more workers in Africa than in Europe. The longer term portrait is even more significant; by 2050 there will be 2.5 African workers for each European equivalent. By this stage, as well, China‘s total workforce will have contracted to less than 800 mn, twothirds of the African total. According to the ILO, Africa‘s labour force is expanding at an annual rate of 2.5%, far beyond the global average. Indeed, the share of the working age population is rising in virtually all African countries.

Figure 16: Growth of working age population

China

Egypt, Ethiopia, the Democratic Republic of Congo (DRC) and South Africa) have a total working population of 248 mn. By 2020 this will have swelled to 315 mn—meaning that roughly 70 mn workers will be added to these pivotal economies within the next decade. Nigeria‘s workforce alone is expected to expand by 25 mn by 2020, and will continue growing at a similar clip for the rest of the century, by which stage it is predicted to have quintupled from today‘s size.

West Africa 2050

Central World Africa average

Insight & Strategy — xx Month 2011

population is only expected to begin to stabilise in 2060.

Generally speaking, in East, West and Central Africa, fertility rates remain exceptionally high, though expectations of a tailing-off are clear. By 2050, in Southern and North Africa, the average fertility rate will have fallen well below the replacement rate, as well as the world average (Figure 18).

Figure 19: Improvements in healthcare are evident

80

120

And health is improving In conjunction with declining fertility rates, there are small, but meaningful, improvements in life expectancy in several African countries. For instance, where in 1950 there were around 180 infant deaths for every 1,000 live births in Africa, by 2000 this had decreased to 87, and by 2010 to 71. Looking further ahead, by 2050 the figure, while still unacceptably high, will stand at around 30. Meanwhile, the average African born in 1950 could expect to live for only 39 years, whereas today life expectancy at birth stands at 57, and is expected to reach 70 for those born in 2050 (Figure 19). As a result of these developments, more people within Africa‘s working age population are likely to be able to remain productive for longer.

20

Locked within the convergence of a rising population, declining fertility and improving healthcare systems which allow greater longevity, is the potential for a demographic dividend, or a ―Goldilocks period‖ (Economist, 2009a), where countries, as they adjust from environments of high fertility and high mortality to low fertility and low mortality, witness a mechanical appreciation in the size, and vigour, of the working age population. Concomitantly, dependency ratios are at an all-time low, allowing the working class (which increasingly includes women due to lower fertility rates) to accumulate, save, and invest a greater amount of their income. Low fertility is also a factor enabling a more rapid accumulation of capital per head, thus supporting the development of the economies‘ consumer base. Essentially, theory asserts, a fast-growing economically active population is able to kick start a virtuous cycle of rising industrialisation, increased employment, enhanced productivity and rising prosperity.

Thus, shifts in a country‘s age structure can, and have in virtually all large economies in the world, produce profound economic gains, fundamentally supporting the development of an industrial and manufacturing base, and vastly altering economic performance. Put simply, it is the age composition of the population, rather than the overall size or growth rate that determines the economic influence of demographics (Bloom et al., 2007).

160

60

40

While there is admittedly a long way to reach the Millennium Development Goals (MDGs), according to the UN Development Programme‘s (UNDP) 2010 Human Development Report, key recent achievements mean that, in Africa, ―most people today are healthier, live longer, are more educated, and have more access to goods and services than they did 20 years ago‖ (UNDP, 2010).

200

80 40

0

0

1950

1970

1990

2010

2030

2050

Life expectancy at birth Deaths per 1,000 population Infant deaths per 1,000 live births RHS Sources: UN, US Census Bureau, Standard Bank Research

Figure 20: China’s demographic advantage has been clear

1600000

USD mn

Mn people

1000 800

1200000

600 800000 400 400000

200

0

0 1960

1970

1980

1990

Working age population RHS

2000

2010 Exports

Sources: UN, World Trade Organisation (WTO), Standard Bank Research

Figure 21: Evolution of the dependency ratio in Mauritius

100 80

60 40 20 0 1950 1970 1990 2010 2030 2050 2070 2090 Youth dependency ratio Elderly dependency ratio Dependency ratio Sources: UN, Standard Bank Research

9 Africa Macro

Insight & Strategy — xx Month 2011

Text box 2: An ageing world, including China Africa‘s youthful, and growing population stands in contrast to trends throughout much of the advanced world. The UN anticipates that, collectively, the advanced world‘s population growth will decelerate from an already muted 0.6% between 1980 and 2008 to an annual rate of 0.4% through to 2030. Already, Germany and Japan‘s total populations have peaked, in 2002 and 2006, respectively. Meanwhile, as early as 2025, the UK will have more people older than 60 than under 25 years old and one-fifth of the population of the US will be older than 65 by 2050.

Importantly, these trends are not unique to the advanced world. Recent Chinese census data points to a remarkable change in the country‘s population structure, raising debate around its ability to retain its competitiveness in labourintensive industries such as manufacturing. China‘s population growth rate declined to 0.57% between 2000 and 2010, compared to 1.07% between 1990 and 2000. Consensus suggests that China‘s fertility rate has dropped to around 1.4, far below the replacement rate of 2.1 (Zhang, 2004; Rutherford et al., 2007). As a result, the population is ageing fairly swiftly, causing dependency ratios to elevate. Indeed, data shows that China‘s population is reaching an ―inflection point‖ this year, as the increase in retirees begins to outpace the remaining labour pool (Wolfe, 2010). Almost 15% of China‘s population are now over the age of 60, up from 10% in 2000 (Figure 1). China‘s median age has leapt from 25.1 in 1990 to 34.5 today; by 2030 it will be 4.5.

In part as a product of these shifts, pressure to increase wages throughout China‘s productive coastal provinces has risen, stimulated by an increasing scarcity of China‘s previously abundant internal migrant labour force. New labour legislation introduced in 2008 which protects workers through enforcement of contracts, job security and minimum Figure 1: Will China get rich before it gets old?

500

Mn people

375

250

125

0 1950

1970

1990 15-24

2010 60+

2030

2050

wage compliance are also adding support, while workers have also been demanding wage increases in response to persistently high levels of inflation. Indicatively, the average wage per hour in China‘s manufacturing sector has increased from USD1 in 2005 to USD2.4 in 2010.

Yet, talk of the end of China‘s demographic advantage is undoubtedly premature. Considering dependency ratios alone, China‘s demographic window, which began in earnest in around the mid-1980s, will only begin to diminish substantially in 2025. There also remain several means for China to retain core competitiveness. Firstly, factories are able to relocate from China‘s more globalised coastal regions to the inland provinces, where labour pools are large, and wages still comparatively low. And, secondly, China‘s manufacturers will increase the use of labour-saving technologies to offset prevailing pressures. Many Chinese companies have boosted spending on research and development (R&D) in recent years. Meanwhile, signs of a softening in China‘s one-child policy are already evident in certain provinces. The example of electronics manufacturing firm Foxconn (China‘s largest private employer) is instructive. In response to rising wages largely at its Shenzhen headquarters, Foxconn is looking to shift production of key products to new factories in Hunan, Sichuan and Hubei Provinces.

Meanwhile, the company has also announced plans to increase its use of robots from 10,000 today, to 300,000 by the end of 2012 and 1 mn by 2014.

Nevertheless, shifting population patterns and declining productivity gains in China do undoubtedly present opportunities for other emerging markets, most principally in the rest of Asia, but also in Africa, where average wages remain comparatively low. Chinese consumer goods sourcing and logistics firm Li & Fung has been particularly outspoken of a ―new era‖ in sourcing with higher prices from China. Li & Fung have already begun to relocate labour-intensive work on products such as garments to lower-wage countries, such as Bangladesh, Vietnam and Indonesia.

According to the World Bank, rising labour costs will push over 80 mn Chinese jobs in light manufacturing abroad over the next three to five years, with certain African nations wellplaced to absorb some of these new opportunities. However, in order to benefit from these shifts, substantial structural improvements in Africa are required. According to the UN, Africa‘s share of world manufacturing dropped between 2000 and 2008 from 1.2% to 1.1%, while developing Asia‘s swelled dramatically from 13% to 25% in the same period.

Labour-intensive manufacturing exports accounted for just 18% of Africa‘s total exports in 2008. Ultimately, African countries able to provide the institutional support necessary for the effective capitalisation of rising demographic opportunities will be favoured. Quite clearly countries able to produce the goods increasingly demanded by Africa‘s growing consumer population will excel.

Sources: UN, Economist, Standard Bank Research

10 Africa Macro

Insight & Strategy — xx Month 2011

Precedent for the advantages inherent in the demographic dividend are multitudinous. The post-World War II baby boom between 1945 and 1965 in Europe produced three decades of enhanced growth and prosperity. China‘s dramatic rise as the world‘s second-largest economy, and the globe‘s most prominent manufacturer and exporter, has in many ways been forged on the spine of its demographic advantage (Figure 20). Indeed, according to Bloom et al.

(2007), the demographic dividend accounted for one-third of East Asian growth between 1969 and 1990.

Naturally, as populations begin to stabilise, and even decline, elderly dependency ratios begin to ascend. In essence, the demographic advantage begins to rescind. This is already clear in much of the advanced world. In Africa, the case of Mauritius provides evidence of this trend. Having dipped consistently for the past 50 years, dependency ratios are expected to begin to elevate within the next decade as the population ages (Figure 21).

Seen purely within the prism of declining dependency ratios, it is clear that Africa‘s demographic window is emerging far later than the rest of the world, essentially only fully manifesting towards the middle of the 21st century (Figure 22).

Considering three divergent economies on the continent— South Africa, Nigeria and Mauritius—neatly displays the manner in which a traditional reading of the demographic dividend in Africa (based largely on falling dependency ratios) manifests in varying timeframes. For Mauritius, the demographic window arguably began in around the mid1990s, and will begin to tail off within the next 15 years.

South Africa‘s still largely youthful population will only see dependency ratios bottom out in 2045, though they have clearly been falling steadily since 1970. For Nigeria, a large and youthful population is matched by a still high fertility rate of almost 5.5. As such, dependency ratios will only reach their lowest point (still comparatively high) in around 2085.

Meanwhile, the population will begin to stabilise in around 2060, whereas stabilisation began in Mauritius in around 1980, and in South Africa in around 2005 (Figure 23).

Figure 22: Africa’s dependency ratios differ to world trend 100 90 80 70

60 50

40 1950 1975 2000 LatAm & Caribbean World Asia

2025

2050 2075 N. America Africa Europe

2100

Sources: UN, US Census Bureau, Standard Bank Research

Figure 23: Africa’s demographic windows vary greatly 100

80 Nigeria

South Africa

60 Mauritius

40

20

1950 1970 1990 2010 2030 2050 2070 2090 South Africa

Nigeria

Mauritius

Sources: UN, Standard Bank Research

Figure 24: Dependency ratios falling at different times

The divergent patterns displayed by South Africa, Mauritius and Nigeria are clearly evident across the continent. By and large, the majority of African countries will see dependency ratios bottom out between 2030 and 2090, with select outsiders on both sides of the spectrum. In Malawi and Somalia, for example, dependency ratios are expected to remain high for the rest of the century (Figure 24). Yet, this is not to suggest that Africa‘s demographic dividend can only be appreciated towards the tail-end of the current century. Indeed, crucial nuances, within the continent, as well as a range of structural determinants indicate a more immediate demographic advantage for the continent is plausible.

65

That said, there is nothing certain about the realisation of the demographic dividend. In essence, an optimal population bulge must be supported by effective institutions, lo-

30

Zambia 60

Tanzania 55

Malawi Somalia Niger

Gabon

50

Uganda

Egypt Namibia

45 40

Tunisia

Zimbabwe Swaziland Libya Mauritius

35

2000

2020

2040

2060

2080

2100

2120

Sources: UN, Standard Bank Research

11 Africa Macro

Insight & Strategy — xx Month 2011

Incorporating these varying metrics, as well as economic growth and demographic forecasts, Bloom et al. argued that Ghana, Cote d‘Ivoire, Malawi, Mozambique, and Namibia have a very high potential to benefit from the demographic dividend over the next two decades. More muted, but still positive, outlooks were offered for South Africa and Botswana. Meanwhile, countries such as Senegal, Cameroon, Tanzania, Togo, and Nigeria, while all likely to see sharp increases in working age populations, suffer from important structural institutional deficiencies.

Quite clearly, a vast range of factors can determine a nation‘s ability to reap demographic dividends. Beyond those institutional determinants outlined above, two additional internal factors—education and healthcare—are particularly critical, and provide a salient barometer for which African nations are best positioned to excel in realising the opportunities locked within their respective demographic alterations.

In Figure 25 and Figure 26 average life expectancy is juxtaposed with secondary school enrolment as a percentage of the total secondary school age population. The results indicate that North African countries, as well as a host of smaller nations, have fairly sound fundamentals in place to support demographic opportunities. Egypt in particular has emerged in recent years as a prominent global outsourcing destination for light manufacturing and business process outsourcing (BPO) activities. Indicatively, in its most recent Global Services Location Index, AT Kearney ranked Egypt as the fourth most attractive offshoring destination in the world, behind only India, China and Malaysia, and ahead of Indonesia, Mexico, Thailand and Vietnam. Other African countries to rank in the top 50 were Tunisia (23); Ghana (27); Senegal (29); Mauritius (36); Morocco (37); and South Africa (45). In terms of financial attractiveness, Senegal and Ghana ranked first and second, respectively, in Africa, while in terms of people skills and availability, Egypt and South Africa were prominent and Mauritius‘ business environment was deemed to be the continent‘s most attractive.

Figure 25: Large divergences in health and education

Gross secondary enrolment ratio (%)

120 Seychelles South Africa

90

60

Libya Mauritius Botswana Egypt Cape Namibia Verde Cote Morocco d'Ivoire Comoros Sudan

Swaziland

Algeria

Zimbabwe Ethiopia Nigeria Burkina Angola Faso CAR Tanzania

30

0 40

50

60 Life expectancy

70

80

Sources: UN, World Bank, Standard Bank Research

Figure 26: North Africa comes out on top

95 North Africa 75

Life expectancy

cated within a stable environment, in order to become truly economically productive. Young people must be provided with the means to better themselves. Bloom et al. (2007) found that the demographic transition in Africa is already having an effect on economic growth, but only in countries with conducive policies and ―solid institutional settings‖ including rule of law, efficiency of the bureaucracy, corruption, political freedom, trade openness, and the freedoms of political representation and expression. Stability is also crucial, conflict generally destroys the foundation on which the demographic transition can be of benefit to the economy.

Moreover, Cilliers et al. (2011) show a clear link between state fragility and lower per capita income.

Southern Africa 55 East Africa 35 Central Africa

15 50

55

West Africa

60

65

70

75

Gross secondary enrolment ratio (%) Sources: UN, World Bank, Standard Bank Research

Figure 27: Economic freedoms are paramount

These metrics should also be balanced by political and economic freedom in order to elevate representativeness. In Figure 27, the manner in which African nations have supSources: Heritage Foundation, Standard Bank Research

12 Africa Macro

Insight & Strategy — 12 September 2011

ported critical economic freedoms is assessed. Here, Southern and East African nations, as well as select West African countries such as Ghana and Burkina Faso, stand out, a measurement which is supported by an assessment of political freedoms (incorporating political rights and civil liberties).

Considering economic freedoms, Egypt, Morocco and Tunisia are also prominent.

Finally, in order for Africa‘s youthful population to find an outlet for their elevating ambitions, economic growth momentum is critical. On this account, Africa‘s portrait, while admittedly varied, is generally positive. According to the IMF, seven of the world‘s ten fastest growing nations for the next five years will be from SSA—namely: Ethiopia, Mozambique, Tanzania, the Democratic Republic of Congo (DRC), Ghana, Zambia and Nigeria. In 2011, Ghana‘s economic output is expected to advance by between 12% and 15%, bolstered by recent offshore oil discoveries. Stellar advances are also expected in Ethiopia (8.5%), Angola (7.8%) and Nigeria (6.8%). Across SSA, growth will average an estimated 5.5% in 2011, and 6% in 2012. Growth in large, structurally deficient economies will be particularly important in elevating the means for benefiting from relative demographic advances.

Conclusion Africa‘s rising population presents a potent combination of opportunities and threats. This paper has concentrated on some of the prominent and alluring benefits inherent in the successful leveraging of demographic advantages, particularly when supported by positive, and structurally robust, economic growth. Effective usage of these shifts, and the concomitant bulging of a more productive workforce, will in turn provide profound support to economic growth. Strong evidence also exists of the link between the speed at which a country advances, and the size and share of income held by its middle class (Chun, 2010; Easterly, 2001). Africa‘s declining fertility rates also speak to an important alteration in the confidence of its people in the structural fundamentals of recent socio-economic reforms, as well as relatively high levels of stability. Meanwhile, the potency and potential of Africa‘s workforce, particularly in those countries outlined above, will be increasingly viewed in contrast to rising costs, and ageing populations, throughout several core emerging and advanced economies. Indeed, some of this interest will come from Chinese corporations, eager to leverage Africa‘s competitive labour market advantages in further entrenching the substance of Sino-African commercial relations.

Though there remain pervasive hurdles impeding the fluidity of regional integration mechanisms across the continent, it is clear that the momentum to foster deeper intra-regional commercial cooperation is advancing. Already, East African Community member states (comprising Kenya, Uganda, Tanzania, Rwanda and Burundi) have enacted a common market and customs union for the region. Eventual ambi13

Africa Macro

tions, while perhaps blunted by ongoing trauma in the European Union, include the creation of a political federation and a monetary union. As these initiatives mature, creating economies of scale, investment inspired by Africa‘s burgeoning consumer base is likely to elevate.

Yet, while some may prosper, countries without a conducive policy environment and weak or deteriorating institutions will face immense challenges, and their deficiencies will be emphasised, by a young and aspirant populace. While the causal factors were undoubtedly multitudinous, unrest in North Africa throughout much of the first half of 2011 was in part fuelled by frustrations, particularly amongst the region‘s increasingly connected youth, at a lack of meaningful opportunities. These and other tensions will become more pronounced as income disparities increase—recent data points to an alarming disparity in income in many rapidly-advancing SSA economies, as well as more established markets such as South Africa. In fact, South Africa‘s Gini index, used to measure the distribution of family income, stands at around 65, the highest in the world and compared to 41 for China, and 36.8 for India. Other African economies with remarkably pronounced income inequalities are Botswana (63); CAR (61.3); and Namibia (70).

Quite clearly, generalised observations of Africa‘s appeal will remain elusive. A nuanced approach, incorporating the varying degrees of preparedness for the current, and future, demographic alterations is essential in understanding which African economies will lead, and which will lag, in absorbing the pressures of an increasing population. Meanwhile, virtually across the continent, economic growth is leading to an often pronounced increase in per capita income, providing new opportunities at both ends of the economic pyramid.

Firms nimble enough to negotiate challenging operating environments will certainly prosper, and first-mover advantage will be meaningful. In essence, Africa‘s rising population and positive growth momentum will be an ever important determinant of the nature, scale and importance of the continent‘s constantly reconfiguring global role.

References African Development Bank. 2011. The Middle of the Pyramid: Dynamics of the Middle Class in Africa.

AfDB Market Brief. April 20, 2011.

Bloom, D; Canning, D; Fink, G; Finlay, J. 2007. Realizing the Demographic Dividend: Is Africa any different? Program on the Global Demography of Aging (PGDA) Working Paper No.23. Harvard University, May 2007.

Brautigam, D. 2008. The Dragon’s Gift: The Real Story of China in Africa. New York: Oxford University Press, 2008.

Insight & Strategy — 12 September 2011

Cai, Y. 2008. An Assessment of China’s Fertility Level Using the Variable-r Method. Demography, May 2008; 45(2): 271–281. As quoted in Wolfe (2010).

Chun, N. 2010. Middle Class Size in the Past, Present, and Future: A Description of Trends in Asia.

Asian Development Bank Working Paper Series, No.217, September 2010.

Cilliers, J; Hughes, B; Moyer, J. 2011. African Futures 2050: The next forty years. Institute for Security Studies, Monograph 175. January 2011.

Court, D and Narasimhan, L. 2010. Capturing the world’s emerging middle class. McKinsey Quarterly, July 2010.

Easterly, W. 2001. Middle Class Consensus and Economic Development. Journal of Econ. Growth, 6(4).

Fairless, T. 2009. Is Africa the new Asia? Financial News, 27 April 2009.

Freemantle, S and Stevens, J. 2010. The rise of the Chinese consumer: Opportunities for Africa presented by the next phase of China’s economic growth. Standard Bank Research, 7 April 2010.

Moultrie, T. 2007. The demographic dividend – possible policy or meaningless mirage? University of Cape Town Centre for Actuarial Research.

Rutherford, R; Minja, KC; Jiajian, C; Li, X; and Cui, H. 2005. How Far Has Fertility in China Really Declined?

Population and Development Review. March, 31(1), as quoted in Wolfe (2010).

Schneider, F. 2005. Size and Measurement of the Informal Economy in 110 Countries around the World.

Working Paper 2005-13, Centre for Research in Economics, Management and the Arts, Johannes Kepler University of Linz.

The Economist. 2009a. Falling Fertility: Astonishing falls in the fertility rates are bringing with them big benefits. Economist Print Edition. October 31, 2009.

The Economist. 2009b. The baby bonanza: Is Africa an exception to the rule that countries reap a “demographic dividend” as they grow richer. Economist Print Edition. August 27, 2009.

The Economist. 2011. The most surprising demographic crisis. The Economist Print Edition, May 7, 2011.

UNDP. 2010. Human Development Report 2010. The 14

Africa Macro

Real Wealth of Nations: Pathways to Human Development. 2010.

Wang, X. 2010. Analysing China’s Grey Income.

Credit Suisse. 6 August, 2010. As quoted in Wolfe, 2010.

Wolfe, A. 2010. What Happens When China’s Demographic Dividend Stops Paying Out? Roubini Global Economics, 9 September, 2010.

World Resources Institute. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Co-publication of the World Resources Institute and International Finance Corporation.

Zhang, G. 2004. Very low fertility in China in the 1990s: An illusion of birth underreporting? Paper presented at the Annual Meeting of the Population Association of America. April 2004. As quoted in Wolfe, 2010.

Insight & Strategy — xx Month 2011

Disclaimer Certification The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst‘s(s‘) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.

Conflict of Interest It is the policy of The Standard Bank Group Limited and its worldwide affiliates and subsidiaries (together the ―Standard Bank Group‖) that research analysts may not be involved in activities in a way that suggests that he or she is representing the interests of any member of the Standard Bank Group or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research.

In addition research analysts‘ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in the Standard Bank Group‘s investment banking or sales and trading departments.

However, such sales and trading departments may trade, as principal, on the basis of the research analyst‘s published research. Therefore, the proprietary interests of those sales and trading departments may conflict with your interests.

Legal Entities To U. S. Residents Standard New York Securities, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is also a member of the FINRA and SIPC. Standard Americas, Inc is registered as a commodity trading advisor and a commodity pool operator with the CFTC and is also a member of the NFA. Both are affiliates of Standard Bank Plc and Standard Bank of South Africa. Standard New York Securities, Inc is responsible for the dissemination of this research report in the United States. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Standard New York Securities, Inc. To South African Residents The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is an Authorised Financial Services Provider.

To U.K. Residents Standard Bank Plc is authorised and regulated by the Financial Services Authority (register number 124823) and is an affiliate of Standard Bank of South Africa. The information contained herein does not apply to, and should not be relied upon by, retail customers.

To Turkey Residents Standard Unlu Menkul Degerler A.S. and Standard Unlu Portfoy Yonetimi A.S. are regulated by the Turkish Capital Markets Board (―CMB‖).

Under the CMB‘s legislation, the information, comments and recommendations contained in this report fall outside of the definition of investment advisory services. Investment advisory services are provided under an investment advisory agreement between a client and a brokerage house, a portfolio management company, a bank that does not accept deposits or other capital markets professionals. The comments and recommendations contained in this report are based on the personal opinions of the authors. These opinions might not be appropriate for your financial situation and risk and return preferences. For that reason, investment decisions that rely solely on the information contained in this presentation might not meet your expectations. You should pay necessary discernment, attention and care in order not to experience losses.

To Singapore Residents Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

Important Regional Disclosures The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company(ies) within the past 12 months.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts (denoted by an asterisk*) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts (denoted by an asterisk*) may not be associated persons of Standard New York Securities Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an asterisk*) is a Non-U.S. Analyst. The analyst is a research analyst employed by The Standard Bank Group Limited.

General This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst‘s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value.

Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicita15 Africa Macro

Insight & Strategy â&#x20AC;&#x201D; 12 September 2011

tion for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of members of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2011 Standard Bank Group. All rights reserved.

AG/AFMAC/00111

16

Africa Macro