Economic Development in Africa

Africa is one of the poorest regions in the world. But with the fastest growing population in the world, and the availability of natural resources African nations can capitalize on this opportunity for growth.

Learn in this post how Africa’s economies can profit from demographic change.

According to United Nations projections, Africa’s population will grow from around 1.2 billion in 2015 to over 2.5 billion in 2050. In percentage terms, this is the largest increase of any region in the world (see Figure 1).

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Since about 2005, Africa has been just behind Asia with the second highest number of people of working age (15-64) (see Figure 2). This clearly is a good development for economic value creation.

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And this growth in working age population should continue for some time, as Africa’s population is very young by global standards. According to United Nations projections, by 2050 only about six percent of the total African population will be 65 years and older. In Europe and North America, this share reached eight percent in 1950!

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Dependency ratio plays a role in Economic Development in Africa

However, Africa’s population growth is completely different from that of most other regions of the world. Even in 2040, the proportion of the population of working age will still be below 60 percent. This is significantly less than in most other regions as seen in Figure 4.

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This growing economically active population must share the goods and services they produce not only with the elderly who are no longer able to work, but also with children and young people who are not yet available to contribute to the production process. This “dependency ratio” working age versus non-working age ratio (see Figure 5) will play a significant role in African leaders ability create economic prosperity in the region and foster economic development in Africa.

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In principle, despite the high dependency ratio, a larger GDP should be able to be produced with a larger working age population. However, this presupposes adequate capital resources, without which the labour force cannot produce anything. Even extremely labor-intensive production processes cannot do without tools, machines, energy, a functioning road network, etc.

Two Ways to Import Physical Goods

As a rule, though there is a shortage of capital in Africa. There are hardly enough productive resources available to produce adequate capital goods and infrastructure facilities. So, it is not certain that the growing labour force can be equipped to be productive making it necessary to import physical capital from abroad. There are two ways for Africa’s developing countries to do this:

• If the developing country has natural resources at its disposal, it can export them and use the export proceeds to purchase capital goods.
• If the country does not have natural resources (or if commodity export earnings are too low), the developing country is dependent on credit financing from abroad.

If capital goods are imported, African economies can integrate themselves into the world economy and export labor-intensive products. Without this import, however, there is a risk of further decoupling from the international division of labor and global economic development. In this case, the pressure of migration, i.e. the incentive to leave one’s own country, increases.

What is important for people’s living situation is not the absolute level of GDP, but GDP per capita. Fortunately, this is slowly rising. Investments in capital, both physical and human are expediting growth with the IMF forecasting above-average GDP growth for Africa in the coming years (see Figure 6).

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Did you enjoy reading this post on the economic development in Africa? Then you might also be interested in our Focus Paper on boosting Intra-African Trade.

Literature

United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, DVD Edition: https://esa.un.org/unpd/wpp/Publications/Files/WPP2017_KeyFindings.pdf.

Jan Hofmeyr (2015): Inclusive Development is needed to Sustain “Africa Rising”: https://blog.bti-project.org/2015/05/21/inclusive-development-is-needed-to-sustain-africa-rising/.

OECD (2018): Africa’s Development Dynamics 2018 – Growth, Jobs and Inequalities: https://www.oecd-ilibrary.org/development/africa-s-development-dynamics-2018_9789264302501-en.