Africa from the BOTTOM UP

Africa FROM THE BOTTOM UP

CITIES, ECONOMIC GROWTH, AND PROSPERITY IN SUB-SAHARAN AFRICA Founded in 1983, Monitor is a global ﬁ rm that serves clients through a range of professional services — strategic advisory, capability building and capital services — and integrates these services in a customized way for each client.

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CITIES, ECONOMIC GROWTH, AND PROSPERITY IN SUB-SAHARAN AFRICA

Executive Summary ...... 4

Introduction ...... 16

Cities as Platforms for Growth ...... 22 Pointing the Way: Johannesburg, Lagos, Nairobi, and Dakar ...... 34

Creating City-Clusters I: Infrastructure ...... 52

Creating City-Clusters II: Unlocking Human Potential ...... 74

Creating City-Clusters III: Help from Abroad ...... 88

Conclusion ...... 112

ENDNOTES ...... 122

ACKNOWLEDGEMENTS ...... 126 AppendixExecutive Summary

Photograph by Alf Gillman AFRICA FROM THE BOTTOM UP 5 Executive Summary

DURING THE RECENT GLOBAL FINANCIAL CRISIS, growth rates in sub-Saharan Africa (SSA) declined to less than two percent following an unusu- ally robust period between 1995 and 2007 during which they averaged ﬁ ve percent. Amid signs of incipient recovery, SSA’s long-term development trajectory remains uncertain: will the region resume healthy growth, or will its well known political, economic, and social challenges hold it back yet again?

Most commentary on prospects for SSA has been relentlessly negative, citing political fragmentation, poor governance, rampant corruption, endemic conﬂ ict and disease, and other serious problems that thwart progress. The minority of more hopeful commentators have been disappointed repeatedly in the decades since independence, with hope turning to frustration and despair as dictators overturned democratic regimes, civil conﬂ icts devastated societies, and aid money has been squandered. Meanwhile, poverty and disease remain endemic. For each step forward, it seems, there are often two steps back.

This report takes a different view, acknowledging SSA’s very real problems but also pointing out sustained structural reasons why this time, at last, a better outcome may be in the ofﬁ ng. Drawing on Monitor’s long experience in SSA, as well as its understanding of the sources of global economic prosperity and the drivers of regional economic competitiveness, we argue that SSA’s growth before the downturn was a sign of healthy and increasingly diverse development — growth we expect to resume with the recovery of the global economy. The subcontinent is becoming

LAGOS, NIGERIA Blue water containers dominate a drum market in sub-Saharan Africa’s biggest city.

more prosperous despite its obvious challenges, as cities and competitive urban clusters lead the way. SSA’s fortunes are building from the bottom up.

THE CENTRAL ROLE OF CITIES This pattern of bottom-up development indicates that the economic future of SSA is more connected to the success of its cities, and the competitive clusters based there, than to its nation states. Cities today generate most of the subcontinent’s wealth, with many thriving despite obvious challenges. Rapid urbanization turbocharges economic growth and diversiﬁ cation, enhances productivity, increases employment opportunities, and improves standards of living.

Throughout history, cities have been engines of economic growth. This was true in ancient Athens and Rome, in Renaissance Florence and Venice, in industrializing London, Berlin, New York, and Tokyo, and in Shanghai and Bangalore today. Cities bring people together to transact business and share ideas; they provide enabling infrastructure such as ofﬁ ces, power, transportation, and telecommunications; most importantly, perhaps, they concentrate talent, innovation and entrepreneurship in a single location to create competitive economic clusters. All these are vital for economic development and improving competitiveness.

In this report, we focus on three themes critical to the development and future prosperity of SSA’s cities and competitive urban clusters:

1. The fundamental imperative to upgrade infrastructure. Compared to the regional leader (Mauritius), poor infrastructure in SSA is estimated to reduce economic growth by an average of 4.7 percent. Sufﬁ cient transport networks, a reliable power supply, clean, reliable drinking water and sanitation, and fast, extensive telecommunications services all attract commerce to a city and

facilitate economic growth. Without these, SSA will not fulﬁ ll its economic potential, as local ventures struggle to grow and foreign businesses locate their operations in other regions with better services and lower costs.

2. The vital importance of cultivating human assets. Economic prosperity in a global, knowledge-based economy is not solely derived from natural resources and agricultural commodities, which today account for nearly all of SSA’s wealth. Rather, the source of sustainable economic prosperity is human assets working in productive and value-adding companies and sectors. SSA’s economic future lies with its peoples, who are enhancing their skills and knowledge as entrepreneurs, managers, and workers in existing and emerging competitive clusters.

3. The critical role of foreign direct investment. Achieving economic prosperity of course requires investment, which comes in many forms. Among these, FDI brings with it multiple beneﬁ ts in a globalizing economy: money, ideas, talent, and connections to the wider world. It often is the single most effective source of investment in contributing to economic growth, strengthening companies and sectors, and increasing employment and incomes. In the case of Africa, FDI originates not only outside the continent but also, increasingly, within it as more advanced economies themselves invest in Africa’s future beyond their own borders.

The report highlights numerous ﬁ ndings around these themes based on an examination of ten countries and four cities selected for their contrasting and complementary patterns of economic development and their distinctive geographic and cultural variety.*

* The ten countries are Angola, Botswana, Ethiopia, Ghana, Kenya, Mali, Nigeria, Senegal, South Africa, and Uganda. The four cities are: Johannesburg, South Africa; Lagos, Nigeria; Nairobi, Kenya; and Dakar, Senegal.

The four cities include:

• Johannesburg, South Africa, which has a diverse economic and industrial base, including strong clusters in ﬁ nancial services, telecommunications, manufacturing, education, and other services.

• Lagos, Nigeria, which has competitive clusters in ﬁ nancial services and telecommunications that spur growth in emerging sectors such as entertainment and computer equipment and services. Al- though Nigeria’s economy remains heavily dependent on energy, these other sectors are diversifying the economy and increasing employment opportunities.

• Nairobi, Kenya, which boasts a strong private sector and tradition of entrepreneurship as well as growing clusters in trade, ﬁ nancial services, ICT, tourism, and agribusiness.

• Dakar, Senegal, which occupies a strategic position as the westernmost port on the continent and possesses specialized assets that can provide the foundation for the organic development of competitive clusters in trade and shipping as well as in agribusiness and agricultural processing.

Finally, we outline implications of these ﬁ ndings for the constituencies most involved with and affected by the future economic development of SSA. These include municipal, provincial, and national governments responsible for promoting economic growth; multilateral agencies that provide assistance and advice; public sources of aid; private philanthropists; multinational corporations; and African entrepreneurs and business leaders.

The principal ﬁ ndings include:

THE FUNDAMENTAL IMPERATIVE TO UPGRADE INFRASTRUCTURE

• Infrastructure is crucial for economic competitiveness, providing the underlying structure upon which an economy operates. Adequate transportation networks, power, water, and sanitation utilities, and telecommunications coverage help modernize and provide stability to the business environment, fostering the growth and development of local industries and sectors.

• Currently, too few resources are being channeled into building the infrastructure that will provide the foundations for globally competitive city-clusters in SSA: the infrastructure spending deﬁ cit in the region’s cities has reached $75 billion annually. Moreover, this investment shortfall appears to be widening to the extent that it is undermining sustainable long-term growth.

• This shortfall has largely arisen from the poor state of many SSA countries’ national ﬁ nances. Poor economic management, increasing reliance on international aid, and mounting national deﬁ cits, have all conspired to limit government budgets for development infrastructure, which in some poorer countries needs to reach 20 percent of GDP.

• Governments are thus turning to the private sector ― either to form public-private partnerships, or by privatizing utilities and services ― to develop much-needed infrastructure and spur economic development.

THE VITAL IMPORTANCE OF CULTIVATING HUMAN ASSETS

• Aggregate statistics on human development in SSA make for dismal reading, but they obscure many signs of progress. Strong and emerging sectors are attracting the talent they need to grow.

• Attitudinal and cultural variables are often more important than policy in promoting and ensuring the success of entrepreneurship and prosperity. The peoples of SSA, especially in the cities, appar- ently manifest critically important attitudes and beliefs fundamental to long-term economic growth and competitiveness, regardless of whether they work in the formal or informal economy.

• Patterns of income distribution and consumption clearly demonstrate that many SSA cities are home to an emergent and growing middle class.

• The African diaspora represents a set of potential ﬁ nancial and human assets that has only begun to be tapped.

• Remittances already account for a larger share of gross national income than foreign aid in many countries. Because they ﬂ ow directly to users, remittances are a key source of funds for consumption and investment.

• Ideas and talent are remitted as well as money. In Nigeria and Kenya, for example, “re-pats” (returning emigrants) are seeing new opportunities in their home countries and returning in sig- niﬁ cant numbers as entrepreneurs and social entrepreneurs to contribute to ﬁ nancial services, telecommunications, entertainment, and other sectors.

• The experience of many other nations — India, China, Russia, the Philippines, Mexico, El Salvador, Greece, and Israel, to cite a few examples — shows émigré communities to be valuable assets to the home country. These communities provide signiﬁ cant ﬁ nancial support, advice and assistance, and connections to relevant international networks.

THE CRITICAL ROLE OF FDI

• Although the record of foreign aid helping to spur economic growth is at best mixed, FDI is ﬂ owing into cities and clusters with encouraging prospects, especially into communications and infrastructure that will enhance productivity growth. Africa delivered the best return on equity of any emerging economy — including China and India — in 2006-2007.

• Analysis of a database compiled by Monitor of 612 private-sector investments worth $122.8 billion in our representative SSA countries between 2004 and 2008 reveals the following patterns:

– More than half the total FDI is ﬂ owing into the largest, most urban economies, South Africa and Nigeria.

– By sector, two-thirds of all investment occurs in energy, although mining and minerals, construction, and ICT (especially cellular telephony) are also signiﬁ cant.

– The importance of Chinese investment in SSA has often been exaggerated in the media. Although China has signiﬁ - cantly increased spending on the subcontinent in the last decade, its total in our database is dwarfed by those of the

European Union and United States and, surprisingly, falls below that of India.*

– East Africa is attracting signiﬁ cant investment, with Uganda the destination for more money than the larger nearby economies of Kenya and Ethiopia.

– Local businesses are increasingly investing elsewhere in SSA. The database includes 111 deals worth $7.2 billion originating within the subcontinent, with South Africa, Nigeria, and Kenya the most active investors and Uganda, Ghana, and Nigeria the major destinations. By sector, much of this investment is ﬂ owing into ﬁ nancial services, ICT, and hospitality and tourism.

IMPLICATIONS FOR POLICY AND ACTION It follows from these ﬁ ndings that an opportunity exists for the constituencies most engaged in SSA’s growth and development to work together more productively to encourage the growth of cities and the cultivation of more competitive clusters. The following are our recommendations to each constituency:

Municipal, Provincial and National Governments:

• Promote urban development by upgrading infrastructure and public services. Given limited ﬁ nancial resources, this may entail working with the private sector and outside sources of funding to ﬁ nd innovative solutions.

* Our discussion of Chinese FDI trends pertains only to our select 10 African countries, which includes 9 of sub-Saharan Africa’s 13 largest economies. Consequently, this report does not take into account Chinese FDI to several signiﬁ cant African recipients, including Sudan, Africa’s 4th-largest economy, and Zimba- bwe, the government of which recently announced ﬁ ve Chinese FDI deals worth a reported $8 billion and involve mostly the energy and minerals sectors.

• Complement macroeconomic with effective microeconomic policies to cultivate competitive clusters. This, in turn, may require better data gathering, reporting, and analysis.

• Invest in human assets speciﬁ cally linked to entrepreneurship and the development of competitive clusters.

• Target and recruit relevant foreign investors whose presence will bolster competitive clusters.

Multilateral Institutions:

• Take account of the growth of cities and their competitive clusters in development policy, with an increasing amount of assistance delivered at local levels and to institutions that can reinforce existing economic strengths and build new ones. Multilateral institutions today have a major opportunity to modify their traditional ap- proaches to assistance and make them more effective.

Public Sources of Aid:

• Increase the portion of funding devoted to enabling Africans to help themselves climb the economic ladder. As with multilateral institutions, this constituency has a major opportunity to revisit its traditional approach. In recent years, most aid has been directed at public health and ameliorating the symptoms of poverty, especially in rural areas. These are important causes, but funding sources should increase direct support for generating economic growth, particularly in cities, and creating an environment for growth to prosper — through investments in infrastructure and education, for example.

Private Philanthropists:

• Direct funding toward helping Africans help themselves. As is the case with ofﬁ cial foreign assistance, most philanthropy has been directed at public health and ameliorating the symptoms of poverty. Again, these worthy causes must be complemented with investments to increase economic opportunities for the citizens of SSA.

Multinational Corporations and Foreign Investors:

• Recognize the increasing prosperity of SSA, especially in the cities, and invest to serve the burgeoning middle class.

• Note that the infrastructure shortfall in SSA provides attractive opportunities to develop new roads, railways, power grids and water supplies, particularly as part of public-private partnerships and for infrastructure service companies.

• Identify and understand the local determinants of competitiveness and productivity growth in SSA when making decisions to enter or expand in particular locations.

• Invest directly and indirectly in human assets to upgrade specialized skills and capabilities.

African Entrepreneurs and Business Leaders:

• Pursue strategies to achieve and sustain advantage in an increasingly competitive and globalizing economy.

• Invest in employees to enhance their specialized skills and capabilities as a source of competitive advantage.

• Collaborate with relevant constituencies to build and strengthen competitive clusters.

In sum, a signiﬁ cant opportunity exists for sub-Saharan Africa to emerge from the global economic downturn as a vibrant and growing region — the next development frontier. The subcontinent confronts serious economic, social, and human development challenges, but underlying drivers of long-term prosperity are gathering momentum: the emergence of thriving microeconomies, particularly in cities and their competitive clusters; the upgrading of the skills and knowledge of Africa’s peoples; and the rising ﬂ ow of FDI from outside the continent and from within. A promising economic future of SSA is building from the bottom up.

CONTEMPORARY SUB-SAHARAN AFRICA (SSA) has a terrible image abroad. Coverage of the region and of its prospects has been relentlessly negative, even from acknowledged friends and advocates. The stories that grab headlines around the world — Mugabe’s thuggery in Zimbabwe, state failure in Congo, the tragedy of Darfur, the HIV/AIDS plague across the subcontinent — are variations on themes of despair. When The Economist recently reported favorably on a pro- gressive, popular, results-driven Nigerian state governor and his salutary effects on Lagos, Nigeria’s largest city, readers posting to the article’s “comments” section were incredulous the magazine had something positive to say about the country and state. “A ﬁ rst!” one wrote.1

This report proposes to follow those who have turned the page to a different genre of African story — of hope rather than despair, of promise in place of despon- dency. Knowledgeable observers are asking, plausibly, whether at last “it may be Africa’s turn.”2 They see this in facts — as in the September 2008 UN report that Africa’s rate of return on FDI was the highest of any developing region in the world in 2006-2007 — and in the indefatigable optimism of Africa’s peoples. And they see this in the alacrity with which large emerging countries like India, China, and Brazil are seizing upon African opportunities as developed economies struggle with the global economic meltdown. This report places us among those who perceive in SSA expanses of opportunity, the inverse of all its challenges. Our focus is on market-driven private-sector activity — private enterprise, acting formally or in- formally — as a large part of the answer to SSA’s poverty and other economic woes.

NAIROBI, KENYA The city houses many markets featuring East African goods, including vegetables from its horticulture cluster.

We share the view of many development economists that the best way to alleviate poverty is to create and sustain economic growth. Growth creates jobs, leads to increasing incomes, consumption, and demand, and can produce virtuous and sus- taining circles of continuing growth and rising prosperity.3 In SSA, growth and prosperity are building from the bottom up, with cities and Most SSA countries competitive urban clusters pointing the way. rank near the bottom on measures Africa from the Bottom Up focuses speciﬁ cally on sub-Saharan of prosperity Africa, a very different place from North Africa. The two and economic regions share a continent but are divided by the world’s larg- competitiveness. est desert and in many ways are fundamentally different in terms of culture, race, history, politics, and economics. SSA is home to nearly 50 countries including several island nations. The fortunes of these states vary signiﬁ cantly, with a few large and doing well, a few large and doing poorly, and a lot of smaller and medium-sized ones for the most part doing poorly.

Given the immense challenge of keeping track of all of these places, we’ve chosen to limit our focus to ten countries. In alphabetical order, these areAn- gola, Botswana, Ethiopia, Ghana, Kenya, Mali, Nigeria, Senegal, South Africa, and Uganda. We’ve selected these ten because they represent the larger body based on objective differences of size, natural resource wealth, geographic location, colonial legacy and, more subjectively, by relative attractiveness as investment destinations.

The exhibit below illustrates the economic challenges facing most SSA countries in terms of their level of prosperity (using GDP per capita as a proxy) and “global competitiveness” (an index established by the World Economic Forum to indicate support for business formation, growth, and improvement). These variables are

© MONITOR COMPANY GROUP, L.P. 2009 AFRICA FROM THE BOTTOM UP 19 Introduction AFRICA’S PR CHALLENGE In addition to the very real problems SSA of Somalia, with signifi cant attention paid faces in economic development and mod- also to confl ict in Sudan and social unrest ernization, it has a signifi cant public relations in Nigeria. Media in the United Kingdom challenge to convince foreign audiences it spotlighted elections in South Africa, though is, in fact, making progress. Foreign media this topic garnered little interest in the typically underplay positive news from the United States. region, perhaps because of an incongruous Looking more specifi cally at Africa stories dominant narrative that focuses on confl ict, in late summer from a broader set of inter- crime, and corruption as factors keeping national media (Exhibit 2), coverage appears SSA down. The exhibits below prepared by more balanced and nuanced, with most Media Tenor afford a case in point. attention focused on foreign affairs and busi- The fi rst exhibit summarizes television ness, with incipient recovery of the stock media coverage of Africa originating in the market in South Africa a prominent theme. United Kingdom and United States during The general tone of stories on most African the 8 months of 2009. By far the greatest topics, however, was negative or neutral. topic of interest was piracy off the coast

Exhibit 1: Africa Stories in U.K. and U.S. TV Media, January–August, 2009 U.K. U.S. Piracy Piracy Nigeria & Zim situations Non-policy issues Warfare (Nigeria) Environment Domestic politics Shipping Company SA Elections Warfare Sudan Adoption International politics Accidents Accidents Rugby Productivity International politics Adoption Suitability to govern AIDS prevention 0 30 60 90 120 0 30 60 90 120 Number of Reports Number of Reports

Source: Media Tenor analysis.

Exhibit 2: Africa Topics Covered by International TV Media, July–August, 2009

Foreign Affairs Foreign Affairs Business companies Business companies Crime/Domestic Security Crime/Domestic Security Domestic Policy Domestic Policy Society/Education/Arts Society/Education/Arts Other Topics Other Topics Party Politics Party Politics Economy Public Policy Economy Public Policy Sports Sports Political Values Political Values Einvironment/Transport Einvironment/Transport Human Interest Human Interest Religion/Church Religion/Church NGOs NGOs History History 0 50 100 150 200 0 20 40 60 80 100% Number of Reports Negative No clear rating Positive

Source: Media Tenor analysis.

highly correlated―unsurprisingly, countries with low competitiveness rankings are also impoverished. Most SSA countries rank near the bottom along both dimen- sions. Among the ten focal countries, only Botswana and South Africa are relatively prosperous and competitive. South Africa and Nigeria are by far the largest among the ten SSA countries but are much smaller than the leading emerging markets.

Figure 1: Relationship Between Business Competitiveness and GDP per Capita for Select Sub-Saharan African Countries

8000

Botswana GDP = $1 - $20 Bn USD GDP = $100 Bn USD Brazil

GDP = $1,000 Bn USD 6000 South Africa

Mauritius

2007 GDP per Capita 4000 (USD) Namibia

China 2000 Madagascar Ivory Coast Cameroon Malawi Nigeria Burkina Faso India Chad Mauritania Benin Kenya Uganda Lesotho Senegal Zimbabwe Mozambique Ghana Gambia 0 Burundi Ethiopia Tanzania 2.90.0 3.0 3.1 3.53.43.33.2 3.93.83.73.6 4.64.54.44.34.24.14.0 4.7 2008–2009 Global Competitive Index Score

Note: Countries not in the data set include Angola, Cape Verde, Central African Republic, Comoros, Congo (DRC), Equatorial Guinea, Eritrea, Gabon, Guinea, Guinea Bissau, Liberia, Niger, Republic of Congo, Rwanda, Sao Tome & Principe, Seychelles, Sierra Leone, Somalia, Sudan, Swaziland, Togo Source: The Global Competitiveness Report, 2008 - 2009

This is less a report about ten countries or about any one in particular than it is about cities and competitive clusters that generate most of the economic activity and wealth of these countries— although this is sometimes hard to see amid aggregate national statistics. We look at four cities at the corners of the subcontinent: Lagos, Johannesburg, Nairobi, and Dakar. We look further at the burgeoning infrastructure needs of SSA’s cities and at promising ways to address these through increasing private sector involvement. Next we consider the deployment of human assets in cities and industrial clusters, the activities of small-scale entrepreneurs, and the emergence of a middle class. And ﬁ nally, we scrutinize foreign direct investment in SSA — ﬂ ows from China, India, Europe, and the Americas but also, importantly, from one African country to another — to understand trends more clearly.

Photograph by rogergordon AFRICA FROM THE BOTTOM UP 23 Cities as Platforms for Growth

IN MID-2007, THE WORLD’S POPULATION CROSSED the rural- urban tipping point: today more than half the people on earth live in cities. The current rate of increase puts the globe on a 20-year trajectory to become a world of “megacities” with populations exceeding 10 million, hundreds more big cities of one to ﬁ ve million dwellers, and an urban population of ﬁ ve billion — 60 percent of humanity — by 2030.4

Within this frame, SSA distinguishes itself at both extremes: the subcontinent is urbanizing at the world’s most rapid rate, with its cities growing at 3.3 percent annually over the past decade. Even so, as the last major land mass to experience widespread urbanization, it remains the world’s least urban region, with 39.1 percent of its people living in urban spaces, although demographers expect an urban majority on the subcontinent by 2030.5

And the urban picture in SSA isn’t “bright lights, big city.” It’s one of extreme slum prevalence. With some 62 percent of all urban dwellers residing in slums, the subcontinent has the highest proportional slum residency in the world6 — one measure of which is the lack of access to piped water, a condition that describes 91 percent of Greater Lagos’s millions of residents.7

Yet, for all the seemingly insoluble problems that beset Africa’s crowded, ramshackle cities, they are responsible, directly and indirectly, for nearly 80 percent of the subcontinent’s GDP on a tiny fraction of its land surface.8 The subcon-

JOHANNESBURG, SOUTH AFRICA Johannesburg and the Gauteng Province conurbation together constitute an economic powerhouse, generating 10 percent of the entire continent’s GDP.

tinent’s urban population — and hence its concentrated urban-based economic growth — is highly distributed: from 10.1 percent of Burundi’s population and 12.8 percent of Uganda’s to Gabon’s 84.7 percent and Djibouti’s 87 percent. Africa’s high fertility rates in 2007 — 4.7 percent in comparison to the global average of 2.5 percent — point to an anticipated population increase that, ceteris paribus, will make Africa the second most urban continent, after Asia, in 2030.

Moreover, contrary to the views of many, urbanization in African countries can help drive development. However deﬁ cient living standards in Africa’s cities may seem to those in developed countries, they are much higher than in the countryside. If urbanization is better managed — admittedly, a sizable “if” — Africans should expect to experience gains in productivity and poverty reduction.9

Cities and Growth

Urbanization and economic development are highly correlated — historically, in- tuitively, and statistically. The evidence is simple but compelling: wages in cities are higher than in rural areas, even taking into account the different types of industries and skill levels in different places.10 Since urban fi rms generally have higher fi xed costs in the form of wages and rents, the only way they can survive against competition from non-urban fi rms is by being more productive. The biggest cities pay the highest wages and have the highest rates of productivity. In short, cities work.

This is as true in SSA as it is in other parts of the world. The World Bank’s World Development Report 2009 notes that faster urbanization following decolonization was associated with higher GDP growth and went hand-in-hand with rapid growth in industries and services.11 Even as urbanization has its critics who justly decry the harsh, unhealthy conditions of the slums, the fact remains that no prosperous state is principally rural: modern economic growth is a correlate of rapid urbanization, not of agricultural predominance.

That said, observations like “Cities are engines of economic growth” and “Cities are nations’ economic muscle” — to quote two UN studies referred to in this report — beg a central question: where does growth come from in the African city?

PRIMATE CITIES

Urban primacy — the concentration in a disproportionate amount of their one city of a signifi cant proportion of country’s productive assets — but also country’s urban population as well as of more positive effects. These include control of fl ows of capital, fi nancial helping developing economies concen- transactions, industrial production, trate and maximize limited fi nancial national revenue, and other similar and human resources more effi ciently. indicators* — is the norm in most Primate cities are generally engines of developing countries. The four cities national and regional economic growth, examined in this report are the primate institution building, and, in some cities of their respective countries, in countries, political integration insofar an African subcontinent where urban as they serve as a national center of primacy is pronounced. Across SSA, governance. the concentration of economic activity * The defi nition provided here is a slightly reworded version of in the relatively confi ned space of the that used by UN-HABITAT over the past several years. See, for example, UN-HABITAT, The State of the World’s Cities 2008/2009. continent’s cities is a source of problems such as economic distortions and imbalances — as primate cities absorb

For our purposes, the urbanization of Africa proceeds from a fundamental reality that cities raise productivity because they physically concentrate all the tangible and intangible elements of economic growth — capital, entrepreneurship, human assets, imagination, and ambition. Cities drive competitiveness because people talk to each other and collaborate.12 Firms learn more easily what their customers want, what their suppliers can offer, and what their competitors are doing. This facilitates knowledge transfer, the ability to learn from and mimic Cities raise productivity market leaders, and innovation. Moreover, savings derived because they physically from dense, information-rich markets generate better indi- concentrate all the vidual and corporate decision-making and better-managed, tangible and intangible more productive companies. As the neoclassical econo- elements of economic mist Alfred Marshall put it: “The mysteries of the trade growth — capital, become no mysteries; but are as it were in the air.”13 Per- entrepreneurship, human haps more importantly, city businesses are close to a assets, imagination, and concentrated labor supply with the necessary skills to staff ambition. their businesses at whatever level. Naturally, these interactions happen in an inﬁ nite number of combinations and settings, but the pluralistic, diverse modern metropolitan region heightens the possibility of striking ﬁ re.

In SSA, the role of cities in bringing people together to create economic growth is even more important in Africa than in other parts of the world. Africa is a vast land- mass: 30 million square kilometers (11.6 million square miles), representing over 20 percent of the earth’s land area. It also has one of the lowest population densities of any region on earth — only 77 people per square kilometer. With the African population spread so thinly over such an enormous area, it is difﬁ cult for people to come together outside urban centers to interact economically. Consequently, cities afford the principal opportunity for extensive human interaction in Africa and thus assume an even more important role in economic growth and development than they do in other regions with higher population densities.

Clusters

In SSA, therefore, the economically vibrant and dynamic environments of cities are the natural breeding grounds for the growth of economic clusters — networks of interdependent, interrelated companies and institutions supported appropriately by government and societal policies and agencies — which drive economic competitiveness from the roots.14 In today’s global economy, the primary instru- ment of competition is not the country but the company.15 Companies occupy the front lines, and when they compete successfully, they produce a host of benefi ts to their constituencies: products and services valued by their customers; profi ts for reinvestment and distribution to owners; rising wages, increasing employment, and increasingly attractive opportunities for employees, partners, and suppliers; tax revenues for government; innovations, philanthropy, volunteerism, and other benefi ts to society.

Companies compete in contexts, and economic competitiveness is ultimately a local phenomenon. In large nations, some regions and communities are more competitive, and hence more prosperous, than others because they have supportive local environments. Competitive companies in such environments operate not as isolated actors, islands unto themselves, but as part of clusters. Competitiveness is thus rooted in communities, and it is important for governments, companies, and other constituencies to work together to build and maintain vibrant, harmonious, and competitive clusters and communities.

The concentration of productive factors in cities and their competitive clusters produces multiple effects on company innovation and growth by:

• Generating increases in productivity and efﬁ ciency by providing smooth access to specialized inputs, facilitating coordination across ﬁ rms, and allowing for the rapid diffusion of best practices.

• Stimulating and enabling innovation by creating business environments in which multiple institutions and suppliers activate information ﬂ ows and knowledge generation, enabling entrepreneurs to perceive innovation opportunities and imaginatively experiment with possibilities.

• Facilitating commercialization via ready access to specialized inputs, talent, information, and knowledge that lower barriers to entry into cluster-related business and enables entrepreneurs to more readily perceive opportunities for new companies and products.

Three of the cities we address in this report — Johannesburg, Lagos, and Nairo- bi — are the largest cities of three of SSA’s largest national economies. Importantly, the most recent Global Competitiveness Report identifi es these national economies as the subcontinent’s most innovative and the ones most characterized by “well- developed and deep clusters.”16 In these economies, clusters tend to amplify the advantages of the urban business environment and, as will be clear from the discussion below, can also help their member fi rms compensate for a wide range of defi ciencies at the local or national level — in government, business environment, infrastructure, higher education, or other areas — that constrain rather than facilitate business.

Innovation and clustering tend to go together, for fairly obvious reasons. In effect, cities and clusters develop and thrive in analogous ways. Cities provide human densities that offer broad spectrums of productive and innovative capacity and possibility. Clusters succeed when they can elevate the diversity and sophistication of their business activities to achieve greater productivity through scale economies and other competitive practices. They typically create greater productivity by:

• Generating and operating cluster-based value chains for supply, production, distribution, or attaining international standards in specialized intermediate products that permit participation in global supply chains.

• Acquiring, disseminating, and adapting knowledge and technology — through inter-ﬁ rm knowledge networks, tapping into foreign knowledge and technology, cluster-member skilling and training resources, and drawing on universities and technical institutes as knowledge and technology bases.

• Pooling a workforce of relatively educated entrepreneurs and workers. One unequivocal ﬁ nding in study after study of African ﬁ rms is that education is positively correlated with earnings.

• Achieving collective efﬁ ciencies through joint action and cooperation — often through organizations, such as industrial and professional associations, that protect or advance common interests, exchange information and ideas, form inter-ﬁ rm links and/or participate in joint supply chains, and increase bargaining power.

• Gaining support from local, provincial, and national governments — de- ﬁ ning and enforcing sectoral policies, regulations, and standards; creating agencies to facilitate cluster development; establishing public institutions to provide support or training in technical or capacity-related areas; providing key infrastructure — roads, water, electricity, ports, warehousing, etc.17

CREATING ARTIFICIAL CLUSTERS: EPZs IN KENYA

In some SSA countries, governments adequate consultation, high production took the lead from developed countries and operation costs, cut-throat market such as Ireland and Italy and looked competition, low labor productivity, and to create clusters in greenﬁ eld export inadequate employment law reform. processing zones (EPZs) or special eco- They are also hampered by the unavail- nomic zones (SEZs) outside cities; more ability of long-term industrial loans to recently, they may look to the similar the exporting sector, undue delays at experience of China, with its thriving ports due to government red tape, poor coastal “new towns” like Shenzhen and local participation in EPZ ownership, a Zhuhai. Kenya has been one of the most lack of capacity-building assistance, and active proponents of EPZs (which will expiration of tax holidays. become SEZs this year). The Kenyan EPZ law was passed in November 1990, Moreover, critics have argued that al- although production activities did not though EPZs initially create a signiﬁ cant take off effectively until 1993. There is number of jobs, these are often poor currently one public functioning EPZ quality and not cost-effective, as EPZs at Athi River, some 15 miles south of incur two types of costs: the direct cost Nairobi, which was funded by the World of establishing EPZ infrastructure and Bank, and 30 privately developed zones subsidized services, and the indirect clustered around Nairobi and the port cost of foregone government revenue of Mombasa. and national income resulting from tax exemption and import and export duties. Although the EPZs have had some suc- It has been widely argued that this money cess in increasing productivity, they have could be better spent and created more failed to achieve the goals for which they jobs by investing in SMEs or job creation were originally established. The relative programs in urban areas. weakness of government and institutions Sources: Jessie Adala, A Case Study of the Performance of Export Processing has prevented them from reaching their Zones Garment Firms in Mauritius and Kenya in the Dawn of Agoa Phase IV, MSc Thesis, Florida State University, 2008; Export Processing Zones full potential. EPZs are constantly ham- Authority of Kenya, Annual Report 2006; Herbert Jauch, “Export Processing Zones and the Quest for Sustainable Development: A pered by frequent changes to policy and Southern African Perspective,” Environment and Urbanization 14(1): 101-109, April. 2002. operational procedures without

The City-Cluster

Throughout history, cities have been engines of economic growth. This was true in ancient Athens and Rome, in Renaissance Florence and Venice, in industrializing London, Berlin, New York, and Tokyo, and in Shanghai and Bangalore today. In SSA, sparse population and a large land area mean that cities are the key to developing clusters and fostering the innovation that will give countries and cities international competitive advantages.

However, if SSA’s cities continue to expand in the chaotic, uncontrolled manner that has been the norm, the advantages they have as platforms for cluster development will be lost. Infrastructure must be developed to anticipate and accommodate economic and population growth, as it provides the foundation of transportation, utilities, and linked services from which an economy operates. In particular, transportation and its related infrastructure lie at the heart of the success of cities; after all, most large cities have their roots in trade and transport hubs on rivers, coasts, or crossroads. Ade- Throughout history, quate transport networks help modernize and provide transportation and its stability to the business environment, fostering the related infrastructure growth and development of local industries and sec- have been at the heart of tors: a huge gridlocked city has diminished market cities’ success. potential. Cities also need good connections to the outside world, by road, rail and air, to facilitate links to globalized markets and increase the proportion of the national and international GDP that is accessible to their businesses. In addition, established and reliable utilities, such as water, sanitation and electricity, are essential both to business operations and to satisfying

qualify-of-life concerns for potential employees. Modern telecommunication is another vital ingredient, multiplying the speed and ﬂ exibility of companies and enabling them to reach customers who would have previously been inaccessible.

After infrastructure, cities also need to develop mechanisms for unlocking the potential of its human assets. Rural-urban migration is the primary driver of SSA’s urbanization; in order to convert the sheer volume of low-skilled migrant workers into the specialized human assets required to drive economic development and competitiveness, cities must invest in education and training. Cities also need to nurture the growing middle class to help drive competitiveness and economic growth and provide them with the facilities to create new businesses and exploit new sectors.

But how do cities go about achieving such ambitious goals? Historically, governments have taken the initiative, kick-starting the process of agglomeration and stimulating a virtuous cycle of cluster interactions. This has been vital, as government investment in public infrastructure can raise the rate of return to private sector investment by “crowding in” rather than “crowding out” entrepreneurial activity and raising economic growth.18 The traditional vehicle for infrastructure ﬁ - nance has been public debt, but stretched SSA ﬁ nances have prevented these needs from being addressed by the government. Increasingly, governments are turning to public-private-partnerships to develop business and infrastructure needs, particularly in cities, much of which comes from abroad in the form of foreign direct investment (FDI).

The following pages will take up these three themes — infrastructure, human assets, and FDI — in detail, assessing how they are and might be used to develop thriving city-clusters in SSA’s sprawling, ramshackle metropolises. First, however, we proﬁ le four cities pointing the way toward development and prosperity in the region.

CRIME, POVERTY, DISEASE, INEQUALITY. This is how most West- ern commentaries view the African city. In the media, it is a hive of poverty and vice, where desperate people are driven to desperate measures―organized crime, prostitution, illicit drugs and violence―while a rich, corrupt elite live in luxurious, gated compounds. And yes, all these things are true. In the four cities we focus on in this report―Johannesburg, Lagos, Nairobi, and Dakar―such conditions are only too evident: central Johannesburg has a severe problem with “building hijacking”; Lagos is the most dangerous city in Africa, if not the world; more than half of all Nairobians live in slums; and in Dakar many impoverished families use uncollected garbage as a surrogate building material.

But destitution, disease and desperation are not the whole story of African cities. Despite all these problems, cities in SSA are also centers of vibrant and dynamic microeconomic activity. They are home to a rich variety of successful and potentially successful industrial clusters. Cities are where Africans working together will drive economic growth to eventually lift the slum-dwellers out of poverty. Given the vastness of the African continent and its sparse population, cities are Africa’s best chance for development.

In this report we’ve chosen four cities from those in our ten sample countries to depict contrasting and complementary patterns of economic development and to represent diverse geographical areas and cultures. Here we aim to highlight some of the color and texture of those cities, demonstrating that, against the odds, Johan-

NAIROBI, KENYA Downtown Nairobi bustles with activity reﬂ ecting encouraging levels of innovation and entrepreneurship, especially in mobile communications and high-tech services.

nesburg, Lagos, Nairobi, and Dakar are centers innovation and entrepreneurship that highlight the process of transformation each is undergoing, and how they are positioned to emerge onto the world stage.

Johannesburg, South Africa

High in the eastern plateau region of South Africa known as the Highveld, Johan- nesburg — Joburg, Jozi, or iGoli, “the city of gold” — is the industrial and ﬁ nancial capital of Africa as well as the capital of Gauteng, the wealthiest of South Africa’s nine provinces. Johannesburg literally is “iGoli” — its founding and rise are directly traceable to the discovery in 1886 of gold in the Witwatersrand, now part of the Greater Johannesburg Metropolitan Area, which has produced Johannesburg accounts for some 16 percent forty percent of the world’s mined gold. of the South African In time, the heavy industry that grew up around the gold economy, Africa’s largest and the 27th mines was joined by other manufacturing and surpassed min- largest in the world. ing itself as the region’s economic engine. Much of this activity was, however, in uncompetitive, high-cost, capital- intensive, inefﬁ cient industries. During much of the twentieth century, South Africa’s reliance on mineral exports, mainly gold, led to a “Dutch disease” effect, which impeded the growth of export manufacturing. Moreover, Apartheid restricted the pool of skilled labor, creating an unskilled black underclass that could not contribute to the manufacturing-sector growth. By the 1970s, South African policies were playing out to bitter effect: GDP growth per capita stagnated between 1975 and 1984, and from 1990 to 1993 the economy suffered negative growth and spun into severe crisis.

After the end of Apartheid in 1994, the Mandela government instituted the Recon- struction and Development Program, which acknowledged explicitly that future growth should be achieved through trade liberalization and increased competition. In accordance with this view, South Africa agreed to liberalize trade according to WTO regulations, leading to accession in 1995.19

Lifting trade barriers forced South African manufacturers to innovate and become more competitive, helping them grow and seek new markets. Manufacturing started to make a greater contribution to economic growth: from 1994 to 1997, GDP increased by 3.2 percent, to which manufacturing contributed more than a ﬁ fth. Exports rose from 12 percent of all manufactured goods in 1990 to 23 percent in 2000. Production rose by 24 percent between 1995 and 2002.20 By 2007, manufacturing had held up well, contributing 17.8 percent of the Johannesburg economy. Parts of the automotive sector in particular have achieved international competitiveness; for example, South Africa produces the world’s supply of right-hand-drive 3-Series BMWs.

Manufacturing has been joined by competitive clusters in fi nancial and business services sectors. Financial services account for 7.2 percent of all Joburg jobs and 14 percent of its contribution to South African GDP.21 South Africa’s four largest banks — Absa, Nedcor, First Rand, and Standard Bank — are headquartered in Johannesburg, as are numerous international commercial and investment banks. In addition to banking, Joburg also hosts the Johannesburg Securities Exchange — the “engine room of the South African economy” — with a total capitalization of R5.38 trillion ($724.7 billion), one of the world’s twenty-largest exchanges.22 The sector now attracts attention from around the world; fi nancial services institutions from countries as diverse as the United States, India, the United Kingdom, Nigeria, and France have set up shop in Sandton, Johannesburg’s fi nancial services district, in the last half-decade, making the city a truly global fi nancial center.

Johannesburg accounts for some 16 percent of the South African economy, Af- rica’s largest and the 27th largest in the world.23 Apart from manufacturing and fi nancial services, the city hosts a massive concentration and diversity of businesses. Nearly 300,000 formal-sector businesses employ about a million people. Three- quarters of national corporate head offi ces are located in the city.24 In addition to the fi nancial and business services clusters, Johannesburg has several manufactur-

ing and service agglomerations that exhibit the collective efﬁ ciencies, labor pooling, and knowledge-sharing associated with competitive clustering.

As a result of its size and strategic signiﬁ cance, Johannesburg is one of three Afri- can cities ranked by Foreign Policy as a “Global City” (Cairo and Lagos the others.) In keeping with this status, it was the host city for the FIFA 2010 World Cup. The month-long, 64-match competition generated about R55 billion ($7.4 billion), half a million jobs, and an abundance of admiration and respect for South Africa, its people, and its accomplishments.

In 2001, the Johannesburg municipal leadership set the lofty goal of making Jo- hannesburg a “world-class city” that provides residents with standards of living equivalent to those “in the foremost cities of the developed world.” A feature of the city’s progress towards this goal is the strength and leadership of its governance, which has sought to stimulate many of Johannesburg’s clusters described in this report. Perceptive governance creates and nurtures business environments hospi- table to enterprising entrepreneurs, who assemble the productive assets necessary to animate ideas with purposeful human agency. This tight coupling of innovation, entrepreneurship, and human assets drives, and will continue to drive, economic growth in Johannesburg.

In the past, underdeveloped infrastructure — and particularly public transport and power generation — has restricted the city’s economic development. Today Johan- nesburg is experiencing an infrastructure boom that includes the Gautrain and transport upgrades for the World Cup, including other railway improvement, a Bus Rapid Transit system, and a major upgrade of the city’s ring highways. The national power supplier, Eskom, has expanded its capacity, building a new power station will make the blackouts of 2007 virtually a thing of the past. Such investments move iGoli incrementally closer to fulﬁ lling its vision of a world-class city leading the way in Africa’s economic advance.

Lagos, Nigeria

Nigeria is the economic powerhouse of West Africa and Lagos the subcontinent’s wealthiest, most populous city. The city’s crowding, decrepit infrastructure, inadequate services, crime rate, and standing as “the Internet scam capital of the world” place a rather unsavory reputation before it. But Lagos is a thrumming, vibrant city and home to many of Nigeria’s most robust economic sectors, including ﬁ nancial services and mobile telecommunications.

Lagos was the British colonial capital of Nigeria from 1914 and remained the capital of independent Nigeria until 1991, when the government moved to the planned city of Abuja, raised on land claimed by neither Christian nor Muslim. Although the move was primarily political, it also relieved the overcrowding and stress on Lagos’s aging infrastructure.

Despite its demotion, Lagos hasn’t missed a beat and remains the commercial capital of Nigeria, attracting new migrants every year. It has somewhere between nine and 16 million residents (about a tenth of the country’s population) and accounts for 90 percent of Nigeria’s Lagos, SSA’s wealthiest, total foreign trade, including 80 percent of the total im- most populous city, appears to be bucking ports and 70 percent of industrial investments. adverse economic trends elsewhere in Nigeria. Lagos appears to be bucking economic trends evident elsewhere in Nigeria. Nationwide, the country isn’t harnessing new technologies for productivity enhancement―ICT and internet pen- etration is low, ranking only 124th on that pillar in the Global Competitive Index in 2008-09 (overall, Nigeria is 94th). Lagos, however, is home to rising clusters in ﬁ nancial services and mobile communications, while the largely informal sector “Nollywood” ﬁ lm industry is thriving, as is, on a smaller scale, an innovative personal computing cluster in the Otigba Computer Village. These receive differing levels of government support.

During the last decade, Abuja has worked on reforming the fi nancial sector, with the aim of making Lagos Africa’s fi nancial hub. In 2004, there was a bank consoli- dation exercise requiring banks to raise their minimum capital by a factor of 25, which encouraged mergers, and weeded out unsound and poorly managed fi rms that had precipitated several bank failures in the 1990s. This transformed Nigeria’s fi nancial system, increasing competition, stimulating innovation, and reducing interest rate spreads and market segmentation.

Since 2007, the Central Bank of Nigeria has launched the “Financial System Strat- egy 2020,” which seeks to enhance Nigeria’s economic growth through ﬁ nancial sector policy reforms, expand the banking sector to the unbanked majority of Nigerians, improve the broken pension system, and reform monetary policy. Concur- rently, regulatory structures have been strengthened; Abuja made the Central Bank fully autonomous and has undertaken the reform of Nigeria’s Securities and Exchange Commission with the intention of promoting better regulation of capital markets.

By contrast, the thriving informal sectors face obstacles from inappropriate regulatory frameworks. Lagos is home to the world’s second-largest ﬁ lm industry by volume: Nollywood. The cluster produces about 900 features a year, most of which are made on shoe-string self-ﬁ nanced budgets. The industry generates an estimated $250 million annually and provides some (often informal and part-time) employment for 200,000 people as producers, actors, distributors and promoters, with a further 800,000 in make-up, props, sets, and printing.25 Nollywood’s growth has occurred with little to no help from the government. Many producers wish Abuja or Lagos State would play a larger role in regulating the industry and protecting it from piracy, as well as providing funding. However, rather than help low-budget Nollywood movies, the government has preferred to encourage a higher standard of movie making by funding a $540 million studio at Tinapa on the Cameroon border in 2008.

Another thriving Lagos commercial concentration is that of the Otigba computer cluster, which in 2005 employed some 10,000 people and has been notorious for its booming trade in counterfeit products, notably software and print inks. But it has worked to clean up its act, with the launch of an umbrella association called Computer and Allied Product Dealers Association of Nigeria (CAPDAN) being one move in this direction. CAPDAN is poised to rebrand Otigba as a market for legitimate computer businesses, which retail and distribute original brands of computer hardware, software and allied products. The government has been keen to eradicate the trade in illegal products, shutting the village down at the end of 2008 on the premise of sanitary and tax violations, and attempting to relocate it to a new site by the end of 2009.

Although Lagos is a growing hub of enterprise, with the exception of high-earning sectors, such as fi nance and telecoms, the Nigerian economy has relatively weak regulation, a diffi cult business environment, and poor infrastructure. Its business climate ranks 119 on the World Bank’s Doing Business Index — about mid-table — and the environment for SMEs is particularly diffi cult, with unreliable power and a lack of government support for new businesses hampering start-ups’ efforts to get off the ground. Financing is also hard to come by―only fi ve percent of SMEs have access to a loan, and 59 percent report diffi culties accessing fi nancial services, primarily because banks, with little understanding of SME needs, have failed to develop fi nancial products appropriate to the SME sector.26

Such an environment needs to be addressed to ensure the future success of La- gos as a commercial hub. Lagosians are defying these challenges, taking advantage of new technologies to develop new sectors to help put the city on the map, but business and government will need to attend to these new industries to harness their potential. In particular, the virtues of Nigeria’s booming mobile phone industry — ﬁ erce competition, close cooperation, and ample foreign investment — must diffuse to other Nigerian sectors.

FILLING IN THE GAPS: SANITATION AND SOCIAL ENTERPRISE IN SSA CITIES

For the majority of inhabitants in SSA’s cit- and services a network of portable public ies, poor sanitation is a fact of life. As most toilet facilities in Lagos. When DMT slum dwellings are without running water was founded by colorful entrepreneur or toilet facilities and little investment in Isaac Durojaiye, Nigeria had as few as public sanitation (it has been more than 500 functional public toilets. DMT has 30 years since the Kenyan government provided 920 public toilets in Lagos in last invested in Nairobi public sanitation a pay-per-use business model in which facilities), inhabitants are forced to relieve underprivileged “area boys” or widows themselves on the streets or in pit latrines. manage the toilets and thus have an op- This situation is not only undignifi ed and portunity to earn an income and gain damaging to the urban environment but meaningful work experience. also spreads diseases such as cholera and dysentery by polluting urban water sup- DMT manufactures its own plastic mobile plies. Where public facilities are available, toilets, which include innovations such as a they are in uniformly poor condition and solar-powered lighting. The company has have become magnets for drug traffi cking expanded its business to cover the entire and muggings. lifecycle of toilets, from selling, renting, leasing, transportation, maintenance of Although government and large fi rms mobile toilets to the evacuation and trans- have failed the sanitation challenge, port of waste. Its public-toilet services small social enterprises are beginning account for about 55 percent of its gross to fi ll the gap, making a profi t from the revenues; the remaining revenue comes cheap provision of clean facilities for the from selling the toilets to NGOs, renting people of SSA’s cities. Here we profi le to events, and other occasional jobs. The two examples, one from Lagos, the other public pays about U.S. $0.25 cents per use. from Nairobi. This allows the average toilet franchisee to collect $50 daily from two public toilets Dignifi ed Mobile Toilets (DMT) is a suc- visited by 100 customers per toilet per day. cessful Nigerian company that provides

In Nairobi, a similar model — “Iko facilities for a certain number of years Toilets”―is being used by Ecotact, a and to charge user fees. The company company founded by Kenyan entre- hires staff to operate and clean the units preneur David Kuria to improve urban and complements the sanitation offerings environment through investment in with other revenue-generating products environmentally responsive projects. The such as shoeshine services, soft drink company builds and operates high-qual- sales and newspaper sales. The public ity, public, pay-per-use toilet and shower pays three Kenyan Shillings (about three facilities on public land in urban centers, U.S. cents) per use. Currently, there are using a build-operate-transfer model of about a dozen Iko Toilets in Nairobi, public-private partnership, entering into but with the success of the “toilet malls” long-term contracts with municipalities with their shoeshiners and convenience to secure use of public lands. stores, Kuria is aiming to expand to up to 200 facilities across Kenya over the next In exchange for use of public land, the ﬁ ve years. company agrees to bear all facility con- Sources: Monitor Research; DMT website http://www.dmttoilet. struction costs but relinquishes ultimate com/about.htm (accessed September 29, 2009); Isaac Durojaiye a.k.a “Otunba Gaddaﬁ ,” Schwab Entrepreneurs http://www.dmttoilet.com/ ownership of the facilities to the mu- schwab1.htm (accessed September 29, 2009) ); Acumen Fund website, http://www.acumenfund.org/investment/ecotact-limited.html, (ac- nicipalities. The contracts give Ecotact cessed September 25, 2009); .Ruud Elmendorp, “Iko Toilets in Kenya,” youtube.com, http://www.youtube.com/watch?v=FB_yLS1WwMY, the right to operate the toilet and shower (accessed September 25, 2009).

Nairobi, Kenya

Kenya has the most vibrant economy in East Africa, but East Africa is the subcontinent’s poorest region, and the Kenyan economy’s size at about $60 billion27 pales in comparison with that of South Africa — more than eight times larger — and Nigeria — ﬁ ve times the size. Regardless of the statistics used, Kenya winds up in the bottom quadrant of every per-capita global income ranking. Kenya has a very small formal sector as most Kenyans are farmers―about three-quarters of the workforce is rural, producing less than 25 percent of the country’s GDP.

Established as a railway depot in 1899, Nairobi, or “place of the cool waters” in Maasai, was chosen as capital of Kenya in 1905 due to its central position between Mombasa and Kampala, good access to clean water, and a temperate climate too cool for malarial mosquitoes to survive. Today, it’s East Africa’s most populous city, with some three million residents, and it generates some 60 percent of Kenya’s GDP. And despite its well-known slums and urban woes, the city is a living, pulsing justiﬁ cation for rural-to-urban migration: it enjoys a higher standard of living than any other place in Kenya. Kenyans understand opportunity is a city phenomenon.

Nairobi’s key strength lies in innovation: the World Economic Forum’s Global Com- petitiveness Report notes Kenyans exhibit a high capacity for innovation, ranking it 48 out of 134 for this pillar (Kenya’s overall rating is 98), the second highest in SSA, after South Africa. Kenya was the ﬁ rst African country to adopt mobile banking — Safaricom’s M-Pesa service — in March 2007, and the popular response has been enthusiastic, with 62.7 million transactions recorded in 2008.28 Advances in mobile telephony have driven down cell phone prices, raised the number of Kenyan subscribers — from ﬁ ve million in 2003-2004 to 24 million in 2007-2008 — and made mobile banking possible.29

The recent arrival of Seacom — a ﬁ ber-optic underwater internet cable intended to bring low-cost high-speed internet to Africa and link Nairobi directly with Europe

and India — is spurring further progress. Seacom will speed up existing internet connections by up to 10 times and reduce the cost by two thirds.30

In the mobile technology space, a wealth of well-educated entrepreneurial young people seek to develop mobile applications tailored to the local market, deliver- ing services that locals want to use and can afford. These have included mobile applications for local social networking, tracking the Nairobi stock exchange, and following local current affairs, gossip, and sports. More is needed, however, from the private sector, non-proﬁ ts, and the government to incubate new companies and help them take advantage of founders’ skills and the new internet technology coming to Nairobi to grow the high-tech cluster. Financing is hard to come by for

CHANNELING TECHNOLOGICAL INNOVATION AS A SOCIAL ENTERPRISE

Some mobile applications have been developed to the media, allowing important information in Kenya for social good and are primarily writ- to ﬂ ow regardless of media involvement and ten and tested by volunteers who work in the bringing narratives to light that would other- industry. The open-source website Ushahidi, wise have never been told. Ushahidi has been which means “testimony” in Swahili, was de- a global success, deployed, for example, by veloped in the midst of media blackouts during United for Africa to report on incidents of xe- the violence that swept Kenya in the wake of nophobia in South Africa and by Al-Jazeera to the 2007 presidential election. Created over the cover Gaza Strip developments after the Janu- course of a couple of days in a time of need, ary 2009 Israeli incursions. Success has allowed Ushahidi allowed Kenyans to keep in touch with the Ushahidi team to step back and become a events regardless of whether they had a text- non-proﬁ t platform creation group rather than enabled cell phone or access to the internet. a simple deployer of tools.

Sources: Monitor research; Ushahidi website http://www.ushahidi.com/; United Ushahidi’s innovation was to highlight individu- for Africa “South Africa incident” webpage http://www.UnitedForAfrica.co.za; Al-Jazeera “War on Gaza” webpage http://labs.aljazeera.net/warongaza/ (all al stories originating in places inaccessible accessed September 29, 2009)

small businesses, but Kenyans are seeking to innovate to build businesses despite poor access to seed capital.

The burgeoning technology cluster in Nairobi, however, has to take care to learn the lessons of its predecessors, such as the Kamukunji metalwork cluster, which has been making artisan metal products such as wheelbarrows, sewing machine stands, chaff cutters, boxes, and aluminum cooking pans for 40 years. Despite collaboration and skill-sharing, the cluster has changed little since its establishment and has little hope of progressing in the future. A major obstacle appears to be ﬂ awed government investment strategies. Although the government encouraged entrepreneurship to establish micro businesses in Kamukunji, it failed to develop appropriate cluster infrastructure, promote the development of specialized human assets, or encourage innovation.

LEFT BEHIND? NAIROBI’S KAMUKUNJI METALWORK CLUSTER

One of Nairobi’s oldest clusters pro- perceived opportunities and attracts suf- duces metal products in Kamukunji, an ﬁ cient talent to sustain its operations. area just east of the city’s central district. Here some 5,000 artisanal metal work- But this is precisely its main problem: ers use basic tools and techniques to Kamukunji has changed little over the bang out traditional products such as past 40 years and manufactures es- wheelbarrows, boxes, and cooking pans. sentially the same lines of goods, using Kamukunji shares some attributes of its many of the same techniques. Neither high-tech cluster counterpart, yet it has is it obvious that it will look or operate failed to demonstrate the collective efﬁ - any differently in 40 years time. Where ciency, product and technology upgrades, are the sources of growth amid this ag- and transformation needed to put it on gregation of productive factors? What the regional — much less global — com- place do traditional clusters like Kamu- petitiveness map. kunji — where artisans toil long hours to create a product that a plant in Shenzhen The Kamukunji cluster is essentially can stamp out in seconds — occupy in an agglomeration of hundreds of a developing economy? Where is the micro-businesses. As in contemporary interaction between Kamukunji and its competitive clusters, the enterprises act larger metropolis, the broader East Africa collaboratively. Social networks are used region, or the world? for sharing or generating and developing new techniques and ideas; peer learning A major issue appears to be the govern- networks function freely. Kamukunji also ment’s investment strategy. Although relies on relatively well-educated talent. Nairobi encouraged entrepreneurs to In a survey of shop owners and work- establish micro businesses in Kamu- ers, 70 percent had completed secondary kunji, it failed to develop appropriate school, and 35 percent had post-second- infrastructure for the cluster, to promote ary education. The cluster clearly offers the development of specialized human assets, or to encourage innovation. Con-

sequently, the cluster has been unable to techniques, create new business mod- evolve from the artisan stage into micro- els that aggregate small producers into manufacturing ﬁ rms. In the scathing artisanal supply chains and create the assessment of a Nairobi-based trade and possibility of operations at scale, and en- development consultant, “Over 20 years courage imaginative means of connecting since the Government started showing to the regional and global marketplaces. interest in the sector, there is still not And while globalization opens the door enough power at the model jua kali (“hot to imports of cheaper, better substitutes sun” meaning “open air”) center at Ka- for local products, it can also provide mukunji. The sheds are falling literally on astute entrepreneurs and thoughtful gov- the heads of the artisans. There is still no ernment policymakers with opportunities mechanization…The scene of muscled to invest in adopting new technologies, men hammering tin and metal into crude processes, and business models that have shapes is sad.” catapulted other developing economies onto the world competitiveness stage. To make their way in a 21st century Sources: Njeri Kinyanjui, “The Kamukunji Metalwork Cluster in economy, Kamukunji and other places Kenya,” in Douglas Zhihua Zeng, ed., Knowledge, Technology, and Cluster-based Growth in Africa. Washington, DC: The World Bank, like it need liberal applications of in- 2008; Patrick Mbataru, “Kenya State Bureaucracy and Graft Stiﬂ e Lo- cal Innovation,” Daily Nation, Nairobi, Kenya, 14 September 2008. vestment — to develop supporting infrastructure, modernize production

That said, our interlocutors believed Nairobi to have one of the most highly-educated young workforces in Africa, a fact borne out by Kenya’s high scores in the Global Competitiveness Report for quality of the education system, quality of management schools, availability of research and training services, and staff training. The hope is that, Kenya’s political problems aside, Nairobi will develop deep clusters, particularly in the technology space, leveraging its competitive advantages to drive economic growth and provide lucrative opportunities for international and domestic investors.

Dakar, Senegal

The position of the Senegalese capital, Dakar, as the capital of former French West Africa and the continent’s westernmost port, made Senegal one of the most developed states in the region at independence in 1960. In the following two decades, however, there was heavy state intervention and an inward-looking economic strategy. Since the early 1980s, Senegal has embarked on a series of adjustment programs, with had mixed re- Since 1994, Senegal sults. Since 1994, Senegal has undertaken a bold and has made substantial ambitious economic reform program with the sup- progress towards economic development. port of the international donor community. The country has made substantial progress, and between 2002 and 2007 Senegal averaged annual growth of about ﬁ ve percent. There have also been far-reaching reforms in the external, commercial and public sectors, although the economy is still fragile.

The reform agenda centers on the government’s ambitions to reduce poverty by half, double per capita income, and by 2015 attain the status of an “emerging economy.” These objectives call for an annual growth of seven or eight percent. Senegal’s Stratégie de Croissance Accélérée (Accelerated Growth Strategy, SCA) contains Dakar’s

offi cial plan for getting there. SCA identifi ed fi ve promising industry clusters to provide the bedrock for faster, broader-based economic growth: agribusiness and food-processing; fi shing and associated sectors; tourism, artisanal arts and crafts; cotton, textiles and clothing; and information and communications technologies.31

The SCA recognizes Dakar as the heart of Senegal’s economy and an archetypal primate city: seat of government, center of industry, home to a large proportion of the population. In 2007, the IMF estimated the city’s greater Senegal’s development metropolitan area was home to a ﬁ fth of Senegal’s 12.4 million initiative is one people.32 Much like the other cities in this report it is a hive of Africa’s most of entrepreneurial activity, with a large, vibrant informal sector, advanced, establishing which is the main provider of employment in Dakar, centered priorities in areas on Sandaga, a sprawling unregulated market in the heart of where many countries the city. Many of these small and micro enterprises remain in have faltered. the informal sector due to crippling capital requirements to establish a formal business, as well limited access to resources, information and ﬁ nance.33 It is this entrepreneurial spirit that the SCA seeks to tap, building on extant proto-clusters to stimulate the formal sector.

Apart from seeking to stimulate cluster development, the SCA has focused on providing Dakar with the infrastructure that will allow the city to increase its market potential. Improving road infrastructure is vital for Dakar, located on a thin peninsula, to allow the free ﬂ ow of goods and services in and out of Dakar’s life- blood: trade through its port and airport. By creating strong foundations for the development of Dakar’s clusters, the government through an innovative use of public-private partnerships is setting Dakar ﬁ rmly in the right direction.

Despite the SCA’s progress, Dakar’s economic development lags the other cities featured in this report and cannot be compared to the Johannesburg or Lagos conurbations. But Dakar has a long list of positives: Senegal is a leading light of

Francophone West Africa; the SCA is one of Africa’s most advanced development initiatives, prioritizing areas where many countries have faltered―infrastructure development and private sector strengthening, particularly for SMEs―and seeking to develop targeted clusters. By diversifying its investment streams, Senegal has spread its network of partners to help achieve its ambitions of seven percent annual growth. Nevertheless, Dakar’s prospects will hinge largely upon Senegal’s ability to harness its natural resources efﬁ ciently through agribusiness. By so doing, Dakar will be able to develop its food processing and other value-added industries as well as take advantage of its geographical position as a natural trade hub to stimulate growth creation and perpetuate the virtuous cycle.

ALTHOUGH SUB-SAHARAN AFRICAN CITIES have grown out of control, with most having extensive slum areas lacking basic utilities and infrastructure, they nevertheless remain the driving force of the subcontinent’s economies. Lagos, for example, constitutes less than one percent of Nigeria’s land area but is home to 13.7 percent of the nation’s urban population and hosts 70 percent of all Nigerian industry. Likewise, the Gauteng Urban Region (GUR), with Johannesburg at its center, has 14 percent of South Africa’s land area, 19.7 percent of its population, but generates nearly 40 percent of the country’s GDP.34

If SSA’s cities are to increase their level of productivity and maximize their potential as platforms for competitive economic clusters, an efﬁ cient enabling environment must be created for businesses to thrive and interact. Although many observers focus on improving regulation, reducing corruption, promoting equality and protecting the environment to enhance the “business enabling environment,”35 ultimately this comes to naught if companies and individuals are unable to connect, either physically or digitally. International markets and capital will also be inaccessible if poor utility provision―unpredictable power supply, poor sanitation, lack of drinking water―deters foreign investors.

Building effective and appropriate infrastructure is thus paramount to establishing SSA’s city-clusters ﬁ rmly. Currently, however, resources channeled into infrastructure in SSA are insufﬁ cient to provide the foundations for globally competitive city-clusters. Research conducted across 24 countries estimated that Africa’s annual

THE MOMBASA HIGHWAY The most important highway in East Africa starts at the Indian Ocean port of Mombasa. Tens of thousands of trucks every year carry food, fuel, and other goods to 100 million people in Kenya, Uganda, and other countries in the region.

cost of redressing Africa’s infrastructure deﬁ cit is $38 billion of investment and $37 billion in operations and maintenance: a total of $75 billion. This translates into approximately 12 percent of the region’s annual GDP (currently government spending hovers around six to eight percent), but this varies by country. Middle- income countries such as South Africa could meet their needs with less than 10 percent of GDP, but low-income countries need to invest as much as 20 percent. Over half the required total investment is in the power sector (see Table 1)―the entire subcontinent generates about the same amount of power as Spain, which has barely six percent of SSA’s population.36 Such shortcomings undermine sustainable long-term growth: one study estimated that if all SSA countries matched Mauri- tius’s level of infrastructure development, their average growth rate would increase by 4.7 percent.37

Table 1: Infrastructure Spending Needs for Sub-Saharan Africa

US$ BILLION PER YEAR CAPITAL OPERATIONS AND TOTAL EXPENDITURE MAINTENANCE SPENDING

ICT 0.8 1.1 1.9 IRRIGATION 0.7 - 0.7 POWER 23.2 19.4 42.6 TRANSPORT 10.7 9.6 20.3 WATER & SANITATION 2.7 7.3 10 TOTAL 38.1 37.4 75.5 Source: Vivien Foster, “Africa Infrastructure Country Diagnostic,” Executive Summary Note: Figures refer to investment (except public sector) and include recurrent spending. Public sector covers general government and nonﬁ nancial enterprises.

KEEPING SOUTH AFRICA COMPETITIVE: INFRASTRUCTURE INVESTMENT NEEDS

The infrastructure needs of South Africa, available and affordable, mainline and the most afﬂ uent and well established internet infrastructure is limited and economy in SSA, are much like other expensive. countries in the region. South Africa needs more investment across almost Overall, the Development Bank of South every infrastructure sector. Africa estimates that there will be an infrastructure spending shortfall of R122.5 • Some 34 percent of South Africa’s billion ($14 billion) over the next three population has no access to electricity years, despite budgeted infrastructure (the global standard for upper-middle spending of R787 billion ($88 billion). income countries is 13 percent) and South Africa’s 2009 infrastructure budget countrywide power shortages are fre- is R95 billion ($11 billion), or 14 percent quent as a result of underinvestment higher, than the budget announced in in capacity expansion. 2008. However, as this budgeted expenditure is still signiﬁ cantly lower than • The country needs to improve its the required expenditure, South Africa public transport infrastructure and appears to be unable to meet spending its network of railways and paved requirements, which may undermine the roads: 31 percent of South Africa’s sustainability of the high GDP growth roads are paved compared to the rates achieved over recent years. global standard of 57 percent for Sources: Vivien Foster, “Africa Infrastructure Country Diagnostic,” upper middle income countries and Overhauling the Engine of Growth: Infrastructure in Africa, Executive Summary, (World Bank, Washington D.C.: 2008), http://siteresources. 82 percent for OECD countries. worldbank.org/INTAFRICA/Resources/AICD_exec_summ_9-30- 08a.pdf, (accessed September 2009); World Bank, Private Participation in Infrastructure Database http://ppi.worldbank.org/index.aspx • South Africa also falls behind the (accessed September 30, 2009). standards set in upper-middle income and OECD countries for access to improved water sources and sanitation in both urban and rural areas. While cellular telephony is widely

Public-Private Partnerships

Public fi nance remains the dominant source of funds for water, energy, and transport infrastructure development, but in Africa stretched government balance sheets have contributed to an overall annual funding gap of $35 billion, about 80 percent of which is needed in the power sector, with the remainder split across transport and water.38 Such daunting fi gures are encouraging governments to seek private sector help across all of the phases of a typical infrastructure project — design, build, fi nance, and operate. In SSA, private sector involvement is particularly imperative given the overwhelming need for infrastructure expenditure combined with the poor fi nancial situation in which many governments fi nd themselves.

Public-private partnerships (PPPs) are now one of the most important models for governments struggling to close the infrastructure funding gap and improve productivity and service. SSA countries are learning the lessons of countries such as the United Kingdom, Australia, and Ireland that have well established PPP frameworks. This enables them to avoid mistakes typically made in the earlier stages of infrastructure projects and framework development and to leapfrog the PPP learning curve, allowing for the rapid deployment of SSA governments funds sourced from the private sector.39 are seeking private sector help to build The “leapfrog effect” is particularly relevant in SSA, as only and maintain critical a few countries like South Africa and Nigeria have a rea- infrastructure. sonably well developed market for PPPs. In South Africa, a speciﬁ c unit was created in the National Treasury to act as a regulatory and consulting body for PPPs. This agency advises and consults line departments (such as municipalities and functional areas like the transport authority) that have PPP projects in mind. The unit is then able to ensure PPPs meet three key criteria for effective and efﬁ cient use: affordability, appropriate risk transfer from the government to the private sector, and value for money. Since its creation

a decade ago, the unit has closed 20 PPP deals worth $5.5 billion (excluding the Gautrain Rapid Rail Link, which closed in 2007 — see below). In 2008, this resulted in PPP projects accounting for ﬁ ve to six percent of national public infrastructure and service delivery programs.

Nigeria has SSA’s second-most developed PPP market. It is currently improving PPP regulation and planning to boost private spending in its transport and energy sectors. For instance, PPPs are expected to facilitate about $10 billion of investments in railways with strong private participation. In the energy sector, the Federal Government plans that all power generation and distribution aspects will be handed over to a private company within three years. Other countries that have closed a number of large deals in the energy, transport, and telecom sectors include Kenya, South Africa and Nigeria Uganda, Mozambique and Ghana. In addition to boast SSAs most developed PPP markets. these countries, Cameroon, Côte d’Ivoire, Tanzania, and Senegal have emerging PPP markets with uncertain regulatory frameworks that have each received more than $1 billion in private investment. These investments were primarily restricted to small one-off deals based on divestitures and operating concessions in the telecom sector. The remaining 38 SSA countries have each received less than $1 billion in private investment in infrastructure and have little to no PPP regulatory framework.40

In addition to the creation of strong regulatory frameworks, SSA countries might also focus on developing the human capital required to effectively implement and run these programs. South Africa’s PPP unit has recruited sufﬁ cient expertise to serve as an internal government “consulting house” that public bodies can approach for advice on infrastructure projects. Without this focus on developing human capital, any implementation of PPP frameworks is likely to fail: experts on

the ground frequently comment on the ﬂ ood of PPP frameworks that consultants draw up but that aren’t tailored to local conditions or are too complex for local government staffs to implement.

The Gautrain Rapid Rail Project — Africa’s Largest PPP Like other cities mentioned in this report, Johannesburg is part of a broader conurbation. The Gauteng Urban Region (GUR) spreads over a wide area between the municipality of the City of Tshwane (Pretoria), Johannesburg, and Emfuleni (Ver- eeniging). So-called “mega urban regions” are common in Africa, as the sprawling growth of “informal settlements” around city centers characterizes African urbanization and pushes more exclusive suburban areas further from the urban center. A lack of public transport compounds the sprawl, encourag- The Gautrain Regional ing reliance on cars and further dispersing settlement and Rail will signiﬁ cantly economic activity, which are rarely collocated.41 increase the market and cluster potential of The development of the Gautrain rapid railway link and Johannesburg and its its feeder bus networks between Tshwane to Johannesburg surrounding region. and the O.R. Tambo International Airport is designed to increase the market and cluster potential of Johannesburg by reducing travel times across the GUR. It is the largest PPP in Africa, with an estimated investment of R25.5 billion ($3.3 billion) for which the government is responsible for funding R21.9 billion, with extra inﬂ ationary costs accruing to government.42 The Gauteng Provincial Government granted the 20-year concession to build and operate Gautrain to Bombela, a private-sector consortium including Bombardier Transportation (leader), Bouygues Travaux Publics, Murray & Rob- erts, the Strategic Partners Group (SPG), RATP, the J&J Group, and Absa Group. Construction started in 2006 and will be completed in 2011, with phase one of the project, linking the suburb of Sandton and the airport, aiming to be completed in time for the FIFA 2010 World Cup.43

Roles and responsibilities of players in the Gautrain project were clearly deﬁ ned between the private and public sector players. Bouygues and Murray & Roberts are responsible for the civil infrastructure work, Bombardier for the design, manufacture, installation and maintenance of railway components, and RATP for operation of the system. The government evaluates the service provided by the concession- aire and guarantees part of the returns from the envisaged trafﬁ c volumes.

This is a model PPP in which collaborative investment by the public and private sectors can address the density and distance issues, key barriers to economic growth in SSA, by developing the infrastructure to spur the creation of efﬁ cient city clusters.

LEARNING FROM THE PRIVATE SECTOR: GOVERNMENT DEVELOPMENT

Johannesburg and the GUR are the Blue IQ cut the ASP ribbon in March centerpieces of South Africa’s manu- 2004, inaugurating the fi rst supply facturing renaissance. The Automotive park structure in Africa, providing Supplier Park (ASP) in Rosslyn is a tenants with core services such as case in point, located in the heart of offi ce and manufacturing space, ICT the country’s automotive industry, connections, conference facilities, and amid BMW, Nissan and Nissan logistics services. The park covers 60 Diesel, Renault, and Tata manufactur- hectares and cost R380 million ($52 ing plants. million) to develop; it directly created 10,000 short-term jobs during Gauteng’s development arm, Blue IQ, construction, supports 4,400 jobs in developed the ASP. Blue IQ was the tenant operations, and employs a park result of a Gauteng Province De- workforce of 1,600. partment of Finance and Economic Affairs initiative to develop the re- ASP was a success from the outset. By gion’s infrastructure. To ensure that 2005, global companies such as Lear the projects could benefi t from pri- Corporation and SAS Automotive vate-sector know-how, the department Systems were working next to small- transformed its public infrastructure er, and some micro, South African program into a limited private com- enterprises, manufacturing compo- pany, which would be independently nents — from muffl ers, shocks, and managed but under the ownership exhaust systems to dashboards, car of the provincial government. This seats and safety belts. This proximity enabled Gauteng to attract more of local and international businesses development funding and private sec- produced remarkable results as small tor investment into Blue IQ projects, entrepreneurs learned from the larger which then become subsidiaries of foreign fi rms. Blue IQ.

ASP has also given a major boost to government gave R50 million ($6.7 the local economy. In its ﬁ rst two million) towards kick-starting the de- years of operation, it had contrib- velopment of an automotive supplier uted R3.8 billion ($513 million) to park in Silverton, adjacent to the Ford Gauteng’s annual GDP, 75 percent of Motor Company of Southern Africa’s which was earned through exports. vehicle assembly plant. The new park is a satellite of Rosslyn’s ASP and will To enhance ASP’s cluster effect, be built over two hectares owned by the park in 2007 launched the Small Ford and the local council. Enterprise Development Agency Au- tomotive Technology Centre (Satec) in Although ASP is suffering in the partnership with the Small Enterprise economic downturn — 2009 volumes Development Agency, the Automotive are down by about 35 percent and Industry Development Centre, CSIR about 2,000 jobs have been cut — the Enterprise Development Centre, and competitiveness of the cluster seems the Tshwane University of Technol- likely to insulate it from the worst ogy, to act as an incubator for the of the downturn and help promote automotive technology sector. ASP a quick recovery. has also become a hub for training. In Sources: “Supplier park brings value to auto industry,” Creamer 2005, Deloitte established a focused Media’s Engineering News, March 11, 2005; Supplier Park Devel- opment Company (Pty) Ltd, Annual Report 2007 http://www. training facility―the Shared Services supplierpark.co.za/UploadedFiles/Report/2007%20 Annual%20 Report%20Print.pdf (accessed September 30, 2009);“SEDA Training Centre―to train workers in Automotive Technology Center (SATeC),” Small Enterprise Development Agency Technology Program http://www.stp.org. skills ranging from the supervisory- to za/centers/auto.html (accessed September 30, 2009);“Initiative seeks to integrate small BEE ﬁ rms into auto supply network,” Creamer Media’s Engineering News, June 22, 2007; New training managerial- and executive-level. center opened in auto hub,” Creamer Media’s Engineering News, July 29, 2005; Roy Cokayne, “Automotive park gets R50m,” Business Report, January 31, 2008; Faranaaz Parker, Qudsiya Karrim, and ASP proved itself in a very short Percy Mabandu, “Nobody lives in Rosslyn...,” Mail and Guardian, 23 March, 2009. period, and in 2008, the provincial

Connecting Dakar: The Dakar Diamniadio Toll Highway and Blaise Diagne International Airport Senegal, West Africa’s most industrialized country, averaged annual growth of about fi ve percent from 2002 to 2007, which according to the World Bank ranks near the top of the African table. However solid, this rate of growth is insuffi cient to achieve the government’s desire to reduce poverty by The toll road will half, double per capita income, and attain for Senegal the facilitate the relocation status of “emerging economy” by 2015 — ambitious objec- of businesses away tives that require annual growth of seven or eight percent. from central Dakar, reversing the fl ow of Dakar’s offi cial plan for achieving these aims, Stratégie de economic development Croissance Accélérée (Accelerated Growth Strategy, SCA), is towards the city’s a far-reaching program of large private-sector-led invest- outskirts. ment projects, which is overseen by the Agence National Chargée de la Promotion de l’Investment et des Grands Travaux (APIX, the National Agency for the Promotion of Investment and Public Works).44 These projects look to enhance Dakar’s position as the driver of national growth through a combination of expanded port and airport capacity and the development of a special economic zone (SEZ) in Diamniadio, connected through an expanded highway network.45

The Dakar-Diamniadio Toll Highway (DDTH) project is an SCA centerpiece and a foundation for other development projects.46 DDTH should decongest Dakar’s trafﬁ c bottlenecks, which impede business development and deter private investors. Dakar sits on a thin peninsula and is notoriously gridlocked: a decade ago, the World Bank estimated that the cost of congestion in Dakar was $200 million — then 4.6 percent of GDP.47 The toll road will also facilitate the relocation of businesses away from central Dakar, reversing the ﬂ ow of economic development towards the city’s outskirts, and foster urban and rural synergies by facilitating cheaper access from rural areas to Dakar center. The DDTH will cost an estimated $530 million. The

private sector will contribute about $110 million under a PPP, construct the ﬁ nal half of the project, and upon completion maintain three quarters of it for a period of 25 years to recoup investment and operating costs.48

Transport infrastructure outside Dakar is also poor: according to the World Bank, the cost per kilometer of transport between Dakar and Bamako, the Malian capital, is more than double that between Maputo in Mozambique and Johannesburg. Even today there are rural areas in Senegal where reliable truck transport simply cannot be secured by potential shippers, just as passenger services cannot be secured by potential transit customers in peri-urban areas within the Dakar agglomeration. However, Senegal’s Independent Agency for Roadworks is planning a major program to extend and improve the roads, which with the toll road project will be a long step on the road to opening up the markets of the Sahel to Senegal and, through Dakar, to the world.

The DDTH will also link a new international airport in Diass, 47 kilometers south- east of Dakar. The new Blaise Diagne International Airport will replace the current congested Leopold Sédar Sénghor International Airport in Yoff, just north of Da- kar on the peninsula. In 2007, 1.8 million passengers passed through the airport, which has an ofﬁ cial annual capacity of only 600,000 and has no room to expand. The new airport will thus also help relieve trafﬁ c congestion in the Dakar area by diverting vehicles from the city center and enabling better land settlement in conjunction with the creation of Diamniadio’s complementary economic development and SEZ.

A PPP will also build the airport. In March 2006 APIX established a new company, Aéroport International Blaise Diagne, with 55 percent private ownership and an initial capital of $200,000, to implement the project. Project costs will be funded through a new airport tax, effective since April 2005, of €30 per passenger on international ﬂ ights, €12 of which will be used to secure capital market loans to ﬁ nance

the project. The International Air Travel Association will collect the tax, transfer the revenues to an escrow account in an international commercial bank, and apply the moneys exclusively to repay a loan obtained by Aéroport International Blaise Diagne. The annual revenue, which will remain outside the budget, is estimated at about 0.4 percent of GDP, or $54 million (based on 2008 nominal GDP).49

Saudi Arabia’s Bin Laden Group won the construction contract. The German airport operator Fraport will run Blaise Diagne upon its completion in 2010. The new airport will occupy 4,100-hectare area located close to the main local networks (RN1 road, water, electricity, telecommunications) and will provide Dakar with an initial annual capacity of three million passengers. It will include a 42,000-square- meter terminal, a track for Boeing 747-400s, a technical block/control tower, and a park for 30 airplanes. The estimated cost for the ﬁ rst phase is €350 million (about $510 million).50

The combination of the DDTH and Blaise Diagne will help improve urban mobil- ity within Dakar and facilitate city access in the face of fast-growing urbanization, as well as open up the interior of Senegal, which is still largely isolated due to poor transport links. Overall, the developments have the potential to make signiﬁ cant contributions to growth, foreign investment, employment, tourism, reduced costs of transport, and a full range of collateral beneﬁ ts.

RURAL-URBAN SYNERGIES: KENYA’S FLORICULTURE CLUSTER

Good infrastructure plays a vital role off in the 1980s with commercial rose in increasing the market potential of cultivation. Initially the industry was cities — that is, raising the propor- limited in the quality, variety, and vol- tion of national or international GDP ume of its output, as the fl owers were that is accessible to any given cluster. grown in open fi elds. In the 1990s, Cities generally score highly here, not increased foreign investment, mostly only because people and companies from Israel and the Netherlands, saw are collocated within the urban area, the development of new greenhouses but because they are well-connected and irrigation, more advanced fl ower to other cities. This enables residents breeding techniques and better fer- to reach or communicate with people tilizers. This enabled the industry and companies in other cities quickly, to expand into higher-value export- whether by road, rail, or air or via quality blooms. Production boomed; phone, email, or video-link. during the 1990s the planting area increased by 250 percent and output And yet. Roads connecting cities pass grew by a factor of ten. Floriculture through rural areas; airports are built is now Kenya’s fourth largest industry on the outskirts of cities; mobile and fastest growing sector, providing telecommunication repeaters cover employment for over 500,000 workers. larger areas than just individual cities. Between 1999 and 2006, exports of Rural areas thus have the opportunity cut fl owers increased by 3.6 percent to to piggyback onto the infrastructure 38,200 tons, with a value of over agglomerations of cities, leveraging $100 million. those unique competitive advantages to become market leaders in certain Kenya’s cut fl ower industry has four industries and sectors. main centers: Lake Naivasha (the largest, and responsible for nearly half In SSA, one of the best examples of of all cut fl owers grown in Kenya); a rural cluster piggybacking on urban Thika; Limuru; and the Athi River and infrastructure networks is the Kenyan Kitengela area. These clusters have fl oriculture industry. Kenya’s fl ower fl ourished as they have several natural sector emerged in the 1970s and took advantages — abundant freshwater

resources for irrigation, large tracts of land from farm to the airport, pre-cooling for cultivation, soil and climate conducive facilities at airports, and land allocated to to year-round growing. They have also private operators near the airport. From benefi tted from large volumes of FDI, an there, more than 90 percent of Kenyan cut enabling policy environment, and favorable fl owers are transported by four specialized international trade agreements. However, air freight forwarders into the European a major reason they have been able to markets that account for most of Kenya’s compete internationally―Kenyan fl owers fl ower exports. dominate the European fl ower import market: in 2008, nearly 40 percent of foreign These major growing areas are also served blooms sold at Dutch fl ower auctions were by major intercity road networks. Lake Kenyan―is their proximity to quality inter- Naivasha and Limuru are served by the city transport infrastructure. Nairobi-Nakuru highway (A104), Thika by the Thika Road (A2―the southern stretch Floriculture clusters in Kenya of the road connecting Nairobi to Addis Abbaba); and the Athi River and Kiten- gela areas are served by the Mombasa road (A109), the main route to the port city from the capital.

The Kenyan fl oriculture industry has thus been able to take advantage of agglomera- tive infrastructure surrounding Nairobi, to increase its market potential internationally and become a world leader in its fi eld. This Source: Google Maps, 2009 success is further evidence of the key role As the map shows, each of these areas is played by cities in SSA not just for gener- within 100 kilometers (an hour’s travel) ating economic growth and development of the Jomo Kenyatta International Air- within urban areas but also for facilitating port and the capital city of Nairobi, which the vital development of rural economic is served by major airlines and charter growth in SSA. operators. This has minimized ground Sources: Kusi Hornberger, Nick Ndiritu, Lao :Ponce-Brito, Melesse Tashu, Tijan Watt, and Michael E. Porter, “Kenya’s Cut-Flower Cluster,” transportation costs, which are hugely ex- Microeconomics of Competitiveness, Harvard Business School, 2007; Maurice Ochieng Bolo, “The Lake Naivasha Cut Flower Cluster in Kenya,” pensive. Cut fl owers require a sophisticated in Douglas Zhihua Zeng, ed. Knowledge, Technology, and Cluster-based Growth in Africa (Washington, DC: The World Bank, 2008); and Meri Whitaker cold-supply chain infrastructure, includ- and Shashi Kolavalli, “Floriculture in Kenya,” in Vandana Chandra, ed. Technology, Adaptation, and Exports: How Some Developing Countries Got It Right ing refrigerated trucks for moving product (Washington, DC: The World Bank, 2006).

Private Infrastructure Development

Private investment in infrastructure in SSA has been increasing at a compound annual growth rate of 24 percent since 1995 and reached a total of approximately $11 billion in 2007. The majority of this investment (86 percent in 2007) has been the expansion of telecommunications infrastructure by private companies, which is amenable to private delivery. However, in power, roads, and rail, it has proved harder to attract private ﬁ nance. The returns are very long term, and political and economic uncertainties in poor countries mean that private investors demand a very high return to compensate risks.

The current increase in private infrastructure spending is expected to be temporary, with a shift likely to result from growing competition in telecommunications, and private investors taking advantage of the readily available opportunities in other sectors.51 Continued growth in investment by the private sector is absolutely critical to any hope of achieving sustainable long-term economic growth in SSA, as governments are unable to keep up with the investment requirements. However, given the momentum that has already begun to build in countries such as South Africa, it appears the private sector has begun to recognize the attractive opportunities for strong returns on infrastructure projects. Industry observers anticipate that, as these opportunities increase, so too will private-sector investment.

Nigerian Mobile Telecommunications: Serving “the World’s Fastest Growing Market” In contrast to the stimulus provided by government-initiated PPPs, the liberalization of Nigeria’s telecommunications sector in 2000 ignited the industry. Abuja opened NITEL, the state monopoly, to competition in all telecom markets (ﬁ xed line, mobile, digital, internet) by auctioning off four GSM licenses, the ﬁ rst three for $285 million each and a fourth, to Glo, for $200 million. Privatization succeeded after the government placed operators under the regulatory oversight of

the Nigerian Communications Commission (NCC), which imposed a level playing ﬁ eld and ensured the sector’s efﬁ cacy and stability. The government also eased or eliminated barriers to cross-border movements to help stimulate the industry by allowing tariff-free import of infrastructure components.

Privatization has made the Nigerian industry intensely competitive, particularly in the mobile space. Five companies provide mobile services., and three dominate the market: MTN (41 percent), Zain (30 percent), and Glo (28 percent). Competition is so ﬁ erce that rivals failing to keep up will quickly fall by the wayside. The mobile arm of NITEL, M-Tel, has largely been pushed out and now accounts for less than one percent of the market. New entrant EMTS, backed by Competition in Etisalat, the UAE-based operator, joined the fray in 2008. Nigeria’s mobile It currently accounts for one percent of subscribers but is telephony sector is expanding aggressively.52 so ﬁ erce that large competitors including Developments in mobile telephony have seen the cost of NITEL, the former connection and handsets plummet to within reach of low- state monopoly, have er-income groups, with a dramatic increase in demand. In fallen by the wayside. 2000, 120 million Nigerians were served by about 400,000 telephone lines, with another 400,000 subscribers to mobile services. By mid-2009, there were 70 million subscribers. The competition for customers has prompted service providers to innovate both in terms of their offerings and to extending their reach to very low-income segments. For example, in December 2008, South Africa’s MTN announced plans to introduce handsets priced at about $12 with capability to handle both voice and data.53

Mobile companies have grown rapidly, posting proﬁ ts of hundreds of millions of dollars. Meanwhile, the fast-growing telecom sector attracts the best local management talent, often in cutthroat competition. The head of one ITC consultancy told us he lost “12 technical staff to MTN in 2002 or 2003…because they offered double or triple their salaries.” Growth in jobs and income has swelled the size of the emerging middle class in Lagos while also generating skilled jobs for young people with technical backgrounds.

Skyrocketing service expansion is driving private investment in infrastructure and services, which has been growing by nearly 200 percent a year. In 2007, for example, Zain contracted Motorola for $120 million to further expand and enhance the operator’s GSM coverage and increase its subscriber capacity. Meanwhile, Gateway Communications, Africa’s leading provider of telecom services to mobile operators, won a $6 million contract in May 2009 to provide Etisalat with infrastructure that will connect three major cities in Nigeria.54

However, investment is struggling to keep up with the surge in demand. Compa- nies are hamstrung by the lack of infrastructure — such as base transceiver stations (BTS) and switches — and operators are turning to infrastructure sharing as the wave of the future. For example, MTN shares 350 BTS despite having built 1,560 in 2008, which brought their total in Nigeria to 4,776.55 The Nigerian Communica- tions Commission is touting a bill now making its way through the legislature that would permit infrastructure sharing more widely, thereby distributing outlays for high ﬁ xed-cost assets among several operators, cutting costs to consumers, and facilitating continued rapid market expansion.56

Nigeria’s mobile telecommunication cluster is clearly a huge success. Although the sector is highly competitive, providing customers with lower prices and newer technology, operators are nevertheless starting to understand the benefi ts of collaboration, particularly in the high-fi xed-cost aspects of creating infrastructure. Ensuring adequate mobile coverage is vital for the development of city-clusters in the context of the developing world where mobile communications have leapfrogged the fi xed line, and cell phones are now the primary form of communication in many developing countries, including Nigeria. Thus the mobile telecommunications cluster (centered in Lagos) is not only a functioning competitive cluster in its own right, attracting worldwide investment, but it is also playing a vital role in providing an enabling environment for more sectors, such as fi nancial services and ICT, to increase their market potential and compete on a national and international level.

HOW TO PAY FOR IT ALL? FINANCIAL SERVICES IN SSA

Developing fi nancial services is vital to banking services that enable companies to continuing investment in infrastructure in borrow and invest locally. SSA. Without deep, liquid capital markets and safe, well-regulated banking sectors, Johannesburg has the most advanced fi nan- cash-strapped African governments and cial services cluster in the region. The city is private companies cannot raise the money home to Africa’s four largest banks — Absa, needed for large capital-intensive projects. Nedcor, First Rand, and Standard Financing also needs to be found regionally; Bank — as well as numerous international fi nanciers with specialist local knowledge commercial and investment banks. Joburg are best-placed to assess risk in a market also hosts the Johannesburg Securities outsiders look upon with caution, while the Exchange, the so-called “engine room of development of deep local fi nancial mar- the South African economy,” representing kets makes the region more attractive to about 90 percent of the combined market foreign investors and helps underwrite the capitalization of the entire continent. growth of local companies. Coexisting with Johannesburg’s fi nancial However, most stock markets in SSA are cluster are components of other signifi - small and illiquid, with infrastructural cant clusters, such as telecommunications, bottlenecks and weak regulatory institu- information technology, business support tions. To increase their impact they need to services, as well as smaller sectors and increase automation, demutualize, promote cluster-associated businesses whose op- institutional investors, undertake regulatory erations are integral to the functioning of and supervisory improvements, increase fi nancial services: information (educational the involvement of foreigner investors, and institutions, business schools, and research expand educational programs. Although organizations), real estate, physical security, this long list of challenges amounts to brokers and actuaries, and the interrelated rather discouraging picture of SSA’s fi nan- collection of upstream suppliers and down- cial markets, both Johannesburg and Lagos stream customers. Such symbiosis creates a are thriving fi nancial-services hubs, serving competitive skilled labor market, and banks businesses and providing the fi nancing and are hard pressed to obtain talent in numbers suffi cient to its needs.

Lagos’s fi nancial services cluster leads the is also benefi tting from reforms undertaken largest non-energy sector in the Nigerian in 2005, which instituted minimum capital economy. Banking is the strongest and requirements and privatized the state- most structured component of the clus- owned NICON Insurance Corporation. ter, accounting for over 90 percent of the fi nancial system’s assets. Lagosian banks Surrounding and interacting with the Lagos are relatively strong due to a clamp-down fi nancial cluster are components of related on poorly-managed and under-capitalized clusters: business and legal services, ac- banks in the early 2000s, which intensi- counting, ICT, and specialized education, fi ed competition and allowed the sector to which are at various levels of development. expand its product base. This has prompted Accounting and tax practices are strong, banks to expand their operations, both and specialized education is emerging to cross-sector and cross-border, and develop provide the industry with the trained untapped retail markets. Consequently, human assets it needs to be competitive. credit to the private sector and banking deposits doubled in nominal terms between These clusters serve as examples for coun- December 2005 and September 2007. tries such as Uganda, where Kampala’s fi nancial services industry has attracted Although the country’s stock exchange lags considerable inward investment in recent South Africa’s, Nigeria also has a largely years: Uganda currently has nine foreign- profi table futures and derivatives market, based and 11 indigenous commercial banks, credit swap markets, and, in Abuja, a com- 25 insurance companies, one re-insurance modity exchange. The bond market is still company, seven credit institutions, fi ve comparatively underdeveloped, due largely other non-banking fi nance institutions and to a lack of appropriate regulation, which 72 forex bureaux. With Ghana, it leads the the government is seeking to remedy to way in the next wave of fi nancial service facilitate bond issues for investment in elec- clusters in SSA. tricity, transport, and telecom infrastructure. Sources: Monitor Research; Lars Becker, Matthias Boyer Chammard, Zeinab W Hussein, Yosuke Kotsuji, Nana Quagraine, and Michael Porter, “Nigeria Financial Services Cluster Analysis and Recommendations,” Mi- Nigerian asset management is growing due croeconomics of Competitiveness, Harvard Business School, 2008 http:// www.isc.hbs.edu/pdf/Student_Projects/Nigeria_Financial_Services_2008. to increased demand through recent pen- pdf (accessed September 30, 2009); and Jennifer Isern, Amaka Agbakoba, Mark Flaming, Jose Mantilla, Giulia Pellegrini, Michael Tarazi, “Access to sion reforms. An emerging insurance sector Finance in Nigeria: Microfi nance, Branchless Banking, and SME Finance,” CGAP and World Bank 2009 http://www.cgap.org/p/site/c/template. rc/1.26.10102/ (accessed September 30, 2009).

Infrastructure, City Clusters, and the Future

Infrastructure development is the necessary key to unlocking SSA’s growth potential and value. Infrastructure in the form of basic utilities creates the enabling environment for essential business operations and in the form of ICT and transportation networking increases an enterprise’s market potential by providing links to local, regional, and international customers and businesses. Although infrastructure alone will not make businesses more competitive―reducing red tape, improving human capital, and attracting investment are all vital―without appropriate infrastructure, city clusters cannot reach their full potential. As such, Africa’s infrastructure gap is a key constraint on the region’s economic growth potential and efforts to reduce poverty.

To address the shortfalls in infrastructure spending, governments have turned to the private sector for funding, often through the creation of PPP frameworks. The development of PPP structures is likely to result in an abundance of attractive opportunities for private sector participants in infrastructure. However, in the near future it is likely that most of these opportunities will be conﬁ ned to the major sectors of telecommunications, energy, transport and water and sanitation. Es- tablishing a reliable infrastructure base in these major sectors, enabled by private investment, should begin to address a number of the key challenges facing the future of economic growth in SSA.

These can be framed using two spatial considerations, density and distance, that currently pose barriers to growth in SSA. First, the challenge posed by SSA’s low population density can be addressed in the context of urbanization and the establishment of strong city-clusters or economic hubs. Even though SSA still has one of the world’s lowest levels of urbanization, the rapid growth of cities in the past few decades has dramatically outpaced infrastructure development. This has created an excess demand for infrastructure, which private sector investment in the form of PPPs can help to address. Second, the issue of distance can be addressed

with PPPs or pure private sector investment through projects like the Gautrain in South Africa and the Dakar-Diamniadio Toll Highway. The development of transport networks linking these city clusters across SSA would have the ability to unlock the growth potential of SSA, by overcoming geographic barriers to domestic and international trade.

Infrastructure development in SSA, regardless of sector, has beneﬁ cial ancillary effects. Infrastructure projects are labor intensive and have the potential to address employment issues in the immediate vicinity of the projects. Continent-wide, this has the potential to create Africa’s infrastructure gap hundreds of thousands of jobs on a rolling basis as SSA is a key constraint on the countries address their infrastructure deﬁ ciencies. Fur- region’s economic growth thermore, infrastructure assets require maintenance and potential and efforts to a broad range of services during their operational life- reduce poverty. time, which will generate additional long-term employment opportunities. Finally, infrastructure development provides opportunities for human capital development, as locals employed on the project have the opportunity to gain work experience and on the job training. This applies to laborers, foremen, site managers, engineers and a variety of the other skilled workers required on infrastructure projects.

This initial phase of infrastructure development is only the ﬁ rst step to unlocking and driving the potential economic growth currently residing in SSA’s “bottom billion.” Once these foundations are established, opportunities for private players in other sectors will begin to emerge. In the future, infrastructure development will become a tool to enable governments, corporations, and private players to control the abundant resources of the African continent and to drive sustainable long term growth. That said, all this depends on the ability of governments to create attractive frameworks for private investment, in conjunction with the development of human capital, and the willingness of the private sector to commit funds to infrastructure in SSA.

Photograph by S. Remeika AFRICA FROM THE BOTTOM UP 75 Creating City-Clusters II: Unlocking Human Potential

AFRICA’S MOST VALUABLE RESOURCE is not oil or diamonds or minerals, as valuable as these may be. Rather, its people will determine Africa’s long- term future. “Africans created many of the challenges they face,” a South African entrepreneur told us. “It’s up to Africans to solve them — and they’re doing it.”

At ﬁ rst glance, based on commonly-cited human development statistics, such optimism may seem unwarranted (see Table 2). SSA includes many countries that score near the bottom among the 179 nations ranked in the UN’s Human Development Index, which factors in life expectancy, adult literacy, educational attainment, and GDP per capita. Among the ten SSA countries in our sample, only South Africa (125) and Botswana (126) are listed in the “Medium Human Development” category. The other eight are situated in the “Low Human Development” category, with Mali (168) and Ethiopia (169) bringing up the rear.57

SSA, meanwhile, faces a well known and formidable demographic challenge, with about two-thirds of its total population at age 30 or below, and with most of these people younger than 20. At present, local economies do not generate nearly enough opportunities to employ the majority of this cohort productively.

Mortality rates are extraordinarily high in South Africa and Nigeria (16.9 deaths per thousand) and at nearly catastrophic levels in Angola (24.4) —dismal totals reﬂ ecting the scourge of HIV/AIDS. Life expectancy at birth in our SSA countries ranges from 44.4 years in Angola to 57.1 years in Ghana. Adult literacy runs between 23

LAGOS, NIGERIA Young professionals staff the Nigerian Stock Exchange, which today lists and tracks 262 securities using sophisticated ICT.

percent in Mali and 88 percent in South Africa, with the average of our sample at about 60 percent. Public school systems are overwhelmed if not broken, and tertiary education is essentially nonexistent except in a few large cities where it serves a tiny fraction of the population. Infectious diseases sorely strain public health systems. Corruption and crime are rampant. The nations of SSA lack clean water, sanitation, adequate housing, electricity, public services, economic opportunity, and sufﬁ cient good governance to do much of anything about these deﬁ ciencies.

Table 2: Human Asset Indicators for Selected SSA Countries, 2007

SOUTH INDICATOR ANGOLA BOTSWANA ETHIOPIA GHANA KENYA MALI NIGERIA SENEGAL UGANDA AFRICA

POPULATION (MILLIONS) 17 1.9* 83.1 23.5 37.5 12.3 149.5* 12.4 48.8* 30.9

PCT. POPULATION BELOW AGE 30 71 65.3 73.5 67.3 72.2 75.7 69.8 70.8 61 78

GDP/CAPITA (PPP, US$, 2007) 4,270 12,880 780 1,320 1,550 1,040 1,760 1,650 9,450 1,040 GINI COEFFICIENT NA 60.5 30 40.8 42.5 40.1 43.7 41.3 57.8 45.7

INFANT MORTALITY (DEATHS PER 1,000 116 33 75 73 80 117 97 59 46 82 BIRTHS) LIFE EXPECTANCY AT 42 50 53 60 53 54 47 63 50 51 BIRTH MORTALITY RATE(PER 24.4 8.5 11.8 9.4 10.3 16.2 16.9 9.9 16.9 12.3 1,000 POPULATION) ADULT LITERACY 67 83 36 65 74 23 72 43 88 74 GROSS SECONDARY ENROLLMENT RATIO 27.4 45.9 50 28.3 35 23.8 16 (PCT. OF ELIGIBLE NA 75 (2004) 90 (2003) SCHOOL AGE CHIL- (2006) (2006) (2006) (2006) (2004) (2006) (2005) DREN IN SECONDARY SCHOOL) HDI RANK 157 126 169 142 144 168 154 153 125 144 (OF 179 COUNTRIES)* WEF COMPETITIVE- NESS RANK 125 50 121 102 93 117 56 93 45 128 (OF 134 COUNTRIES)* Sources: United Nations, World Bank, African Development Bank, World Economic Forum. *2008 ﬁ gure

On the face of it, this doesn’t seem very much like a foundation for economic growth or a basis for optimism. Still, when considering these dismal statistics, bear two points in mind: ﬁ rst, national statistics are aggregates that conceal promising pockets of economic activity and obscure signiﬁ cant trends and patterns; second, things on the ground are changing and improving rapidly, as any visitor to Lagos, Nairobi, or other SSA cities a decade or more ago and returning today may plainly see. More people, yes, but also better infrastructure, more commercial activity, and more services, much of it addressed to the needs both of a globalizing business community and growing numbers of inhabitants rising above poverty. Indeed, the percentage of people in SSA living at or below the poverty line declined from 46.7 percent in 1990 to 41.1 percent by 2005.58

Hopeful signs start with the growth of cities. Although large numbers of new arrivals into cities are refugees or displaced persons ﬂ eeing conﬂ ict or deprivation elsewhere, these people evidently believe that cities offer at least some prospects for a better life. Once there, they are likely to enter the informal economy, which accounts for more than two-thirds of nonagricultural employment in most SSA countries.59

By defi nition, it is diffi cult to see what happens in the informal economy — it leaves few offi cial traces. But it evokes terrible images: hustlers and scam artists, exploited workers and sweatshops, desperate girls and young women forced into prostitution, and all sorts of criminal activity. Looking beneath the surface, however, a different, more complex picture begins to form. There is a growing consensus among experts on urban poverty in emerging markets that the informal economy, for all its well known problems — those cited, plus lack of legal protections and regulatory oversight, ineffi ciency and low productivity, and restricted access to capital, credit, and product markets — “is growing; is a permanent, not a short-term, phenomenon; and is a feature of modern capitalist development, not just traditional economies, associated with both growth and global integration.”60

As producer, service provider, distribution channel, and trader, the informal economy is closely linked to the formal economy. Further, the informal economy “is made up of a wide range of informal occupations” — casual day laborers, street peddlers, small-scale entrepreneurs, gardeners, cleaners, temporary and part-time workers, and many varieties of home-based jobs, especially for women, that support growing sectors in the formal economy. By far the largest segment of the informal economy is not, as widely believed, criminal activity but legal sales and services, “albeit through irregular and unregulated means.” The informal economy includes self employment and wage labor, not only survival activities but also stable enterprises and dynamic growing businesses. In short, for better or worse, for the foreseeable future, the informal economy represents the only available path to a better life for billions of people around the world. And it has been ever thus, as the informal economy dominated industrializing London, Paris, New York, Tokyo, and every other city in the advanced economies on its way up the development ladder.

Employment in the informal economy needs to be understood as a range of possibilities, most of them preferable to begging and destitution and some, perhaps many, relatively attractive and promising. In fact the SSA informal economy churns with millions of people making progress. These people manifest attitudes and beliefs conducive to economic growth, including, for example, understanding the connection between effort and reward; willingness to take risks (even if only from necessity); understanding the value of education and training to advancement; and appreciating the beneﬁ ts of living in a modernizing economy that opens access to new technologies, products, and services.

TEACHING YOUNG PEOPLE TO FISH

In 1999, former Monitor consultant Tad- supported by donors and the private dy Blecher helped to found CIDA City sector and a curriculum focused on help- Campus in Johannesburg. Affi liated with ing entrepreneurs and small businesses Community and Individual Development to thrive and help lift individuals out of Association, an established multinational poverty. A key part of the plan was a re- NGO, City Campus provides very low- quirement that students give back to their cost tertiary education, offering a degree communities by teaching, coaching, and in business administration. Most stu- assisting others. That way, says Blecher, dents enter on scholarships, but fees for the school would have a multiplier effect, tuition, registration, and books in the fi rst serving not only its graduates but many year are minuscule: R350 (less than $50), others with whom they came in contact. while continuing education costs about R150 per month — affordable because “We felt an urgent need to do some- most students by then are earning in- thing about youth unemployment and come on work-study programs. To keep the hopelessness that many unemployed costs down, students perform a variety youth feel. In fact, you can take street of tasks in running the school, ranging kids from the shacks, give them the right from managing admissions to providing kind of education — one that focuses janitorial services. entrepreneurship and human development — and in return get people who The school is the brainchild of Blecher can earn hundreds of thousands of rand and his friend Richard Peycke, who in per year after not very much time. CIDA the 1990s were working with secondary City Campus and its associated education schools in South African townships to and training organizations have educated upgrade education and increase gradua- about 5,000 kids and 4,500 of them have tion rates. They noted that dropout rates productive jobs. Collectively, they’re earn- were high because there were few oppor- ing R200 million per year and when you tunities for promising jobs or to acquire calculate the net present value of that further education. With fi nancial and over 30 or 40 years, you’re talking about analytical support from Monitor Group, contributing R6.5 billion to the econo- the concept of City Campus began to my. And remember, each one of these take shape: an essentially free education people has an effect on others. They

send their brothers and sisters to school. “CIDA embodies a new economic The money goes back to help other poor paradigm. Our university focuses on people. It’s a virtuous cycle. There’s a big providing world-class business education. difference between giving someone a fi sh Why business? Because business is one to eat and teaching a person how to fi sh. of the dominant wealth-creating institu- We’re teaching them how to fi sh.” tions in society. So we are developing entrepreneurs, people who can start new The school initially was housed in a initiatives, be it in banking, in trading, in rundown building in downtown Johan- education of their own communities or nesburg, and the fi rst class was 250 whatever. I believe that CIDA can play an students. Within a year, fortunes im- important role in the transformation of proved when Investec, a South African South African society and economy by bank, donated its former head offi ce. developing top students who can reach Other companies donated used comput- out all over the country, teaching people ers and other equipment and furniture. things like: how to manage their busi- The school proved an immediate suc- nesses, how to fi nance an investment, cess, and today has 1,500 students and how to do accounting, etc. By doing this a campus of four buildings. In 2005, Sir we have already reached by now over a Richard Branson donated funding to million people in the country. And this launch a Branson School of Entrepre- is really kind of a revolution we initiated neurship at CIDA, one of many gifts that with CIDA.” help sustain the operation. Sources: Taddy Blecher interview, May 20, 2009; Barbara Nussbaum and Alexander Schieffer, “Dr. Taddy Blecher. A South African Social Entrepreneur Turns a New Economic Vision into Practice,” World Blecher, who is now engaged in other Business Academy, Merchants of Vision, Vol. 19, issue 1, available at http://www.c-cell.com/PDF/Schieffer_SouthAfricanSocialEn- social enterprise work in South Africa, trepreneur.pdf, accessed October 4, 2009. This is the source for the quotation that concludes this sidebar. See also the video of summarized the school’s aspirations in an Blecher and CIDA City Campus, at http://www.youtube.com/ watch?v=1WmjFAqEYWI, accessed October 4, 2009. interview in 2005:

In Johannesburg, business students at CIDA City Campus are sent out to investi- gate entrepreneurs in the informal economy. They tag along with people who rise early to set up push carts, noting what they buy, where they get it, where they locate, and how their business models work. The results can surprise: some vendors realize revenues of tens of thousands of rand per month, with excellent proﬁ t margins. “The sheer numbers of these operations there and the amount of turnover they achieve is stunning,” says Taddy Blecher, co-founder of CIDA City Campus. “The local economy is brimming with entrepreneurial activity. And it’s happening not just here but also in Lagos, Nairobi, and other cities.”

While it would be misleading to make too much of anecdotes about highly successful entrepreneurs in the informal economy, evidence abounds that life is improving for the urban poor in SSA. For example, says an IMF ofﬁ cial, “even extremely poor people now have access to cell phones.” This technology breaks down isola- tion, connects individuals with information and opportunities, saves them time, and enables them not only to communicate but also to manage money and conduct business. In addition, airtime has become a form of currency, with owners able to exchange it for goods in local stores and other businesses. Because phones and airtime can be shared a thriving business has sprung up in rental kiosks, which employ growing numbers of people.

Although the formal banking sector is beyond the reach of many low-income people — only about 20 percent of Africans possess standard bank accounts — microfi nance institutions (MFIs), often in concert with major banks, are stepping into the breach. While microfi nancing in Africa is not as developed as in India, it none- theless is prevalent and growing rapidly — at least 25 percent per year before the economic downturn. The industry is well established in West Africa and is prosper- ing in eastern and southern portions of the continent, with hundreds of providers in place. Money lent by MFIs helps fi nance entrepreneurs and small enterprises, as well as boosts liquidity and credit in particular regions and neighborhoods.

“Africa Two”

Moving up the economic pyramid, signs of a growing middle class are evident throughout SSA. Vijay Mahajan, a professor of marketing who has studied opportunities in emerging markets, sorts the approximately one billion people on the continent (including North Africa) into in three major segments: the top tier of wealthy and middle class people comprises 5–15 percent of the population — between 50 and 150 million people. At the other end, the base of the pyramid, 50–60 percent of people (500–600 million) live at or below the poverty line. In between is a segment he calls “Africa Two,” consisting of 35–45 percent of the population (350 to 450 million people).

Africa Two is similar to counterpart segments in India and China, an emergent middle class, upwardly mobile and aspiring to acquire.61 Its members own (or real- istically expect to) televisions, refrigerators, and other appliances, as well as a modest wardrobe of clothes. They own cell phones with more than barebones functional- ity. They buy branded consumer goods and beverages and occasionally patronize restaurants. They purchase music and buy DVDs. They move about on bicycles, motorbikes, cars, and minivans. They may even travel Signs of a growing abroad. They may send their children to private schools. middle class—as many Some have accounts in the formal banking system. Some as 350–450 million own fl ats, small houses, and other property. people—are evident throughout SSA. Increasingly, businesses are targeting Mahajan’s Africa Two. Supermarkets and retail outlets are spreading in the cities, while manufacturers are customizing personal care products, clothing, and appliances specifi cally for the segment. MNCs such as Coca-Cola, Procter & Gamble, Unilever, Heineken, Sony, LG, and many others view the emerging middle class in SSA as a signifi cant growth opportunity.

THE OTIGBA COMPUTER VILLAGE: THRIVING IN ADVERSITY

The organic, mushrooming growth by strong, but then underserved, of the Otigba Computer Village in business and academic markets — the the Ikeja district of Lagos illustrates neighborhood began to change: an important point about the role within a short time, most of the of human assets in the formation of residential buildings were replaced by competitive urban clusters. When a high-rise shopping complexes. The critical mass of motivated entrepre- Village rapidly assumed the character neurs and specialized human assets of a knowledge-based cluster that forms, vibrant growth may follow. generates employment for gradu- Since its beginnings in the early 1990s, ates as well as lower-skilled labor. the Computer Village has made its Indeed, Otigba distinguishes itself way in a Nigerian institutional envi- by the fact that about 60 percent ronment that tends to multiply the of its entrepreneurs are university challenges of business in a develop- graduates. By the end of 2005, the ing economy. It has prospered with cluster had some 5,000 medium, little state support and in the virtual small, and micro-enterprises, employ- absence of infrastructure and public ing about 10,000 people, working in goods to become the largest computer computer sales and repairs, imports market in Africa. and clone building. The cluster has also given birth to a tokunbo market* At the outset, the Otigba was a for second-hand electronic goods, handful of shops along two resi- components, and parts. dentially zoned streets. The nascent cluster began with a few sales and High levels of inter-fi rm collabora- repair shops specializing in statio- tion between the technology-savvy nery, printers, branded computers, young university graduates has ampli- and other offi ce equipment. As defi ed the cluster’s innovative powers mand for computers grew — spurred and competitiveness, resulting in the

production of Nigeria’s fi rst branded The vibrant Otigba cluster is making laptop, from Zinox Computers. Col- its way, however, in an inhospitable laborative action in the Village takes regulatory environment. Otigba entre- four main forms: inter-fi rm credit preneurs face all the challenges most facilities that enable shops to quickly Nigerian SMEs face — an often tough obtain needed parts or equipment on business climate, generally unsup- a mutual-trust basis from other cluster portive government, and diffi culty shops; technical support from cluster gaining fi nancing. But these may be experts who make themselves available compounded by the logistical challenge for easy consultation; joint warehous- of relocating from Otigba’s residential ing of goods; and participation in the neighborhood to a new, more com- Computer and Allied Products Dealers modious site. In March, Lagos State Association (CAPDAN), the cluster’s announced the village must move at association, founded by fi rms to clean the end of the year, in compliance with up neighborhood public security prob- the government’s “policy to remove all lems that government inaction had markets from residential areas to more let fester. spacious and conducive sites.” In Sep- tember 2009, Lagos state government It isn’t just technological innovation identifi ed the new site, which is a capa- that the cluster has fostered: through cious 26 hectares (65 acres) and some sharing experiences, young entre- ten minutes drive from the current preneurs have been able to develop Otigba location. The move is scheduled their own tailored business skills and to take place in December. acumen. Entrepreneurs learn to know * Tokunbo is a Yoruba word for “imported” and in Nigeria signifi es when to buy, sell, clear inventories, the importation of second-hand electronics, components, motor vehicles, and parts. Second-hand consumer and production identify gaps in the market to exploit, goods are a multibillion dollar market.

and ﬁ nd an appropriate price point. Sources: Boladale Oluyomi Abiola, “The Otigba Computer Vil- lage Cluster in Nigeria.” In Douglas Zhihua Zeng, ed., Knowledge, And recently the Village has begun Technology, and Cluster-based Growth in Africa. (Washington, DC: The World Bank, 2008), and Banji Oyelaran-Oyeyinka, “Learning in to serve the West African region local systems and global links: The Otigba computer hardware cluster in Nigeria,” In Banji Oyelaran-Oyeyinka and Doro- and beyond, drawing in traders from thy McCormick, eds. Industrial Clusters and Innovation Systems in Africa: Institutions, Markets and Policy. (New York: United Nations neighboring countries who ﬁ lled the University Press, 2007). “Falosha to Relocate Computer Village in December,” Business Day, Lagos, Nigeria, Mar 16, 2009; Femi Village’s computer shopping malls. Akinola, “Nigeria: Lagos Approves Computer Village Relocation,” Daily Trust (September 16, 2009) posted to allAfrica.com http:// allafrica.com/stories/200909160490.html (accessed September 27, 2009).

Investing in the Future

MNCs, including some based in SSA, also are investing behind growth, building new plants and facilities and committing to a range of programs to provide training and development for African managers and workers and to cultivate local suppliers. They are doing this on their own and in collaboration with NGOs and local and national governments. A sample of newspaper articles in our ten SSA countries early in 2009 turned up more than 120 recent announcements of new projects and programs. In Kenya, cellular telecom providers Safaricom and Zain separately launched initiatives to upgrade ICT training in schools. In Nigeria, LG established a commercial air-conditioner academy to train young Nigerians to service LG equipment. An Exxon-Mobil afﬁ liate set up a scholarship program for students specializing in energy technology. In Uganda, Microsoft and the Ministry of Education collaborated on a ﬁ ve-year program to train 200,000 teachers in ICT and state-of-the-art use in schools. In Ghana, MTN Foundation announced plans to build ten Information and ICT centers across the country, including at least one in each region devoted to “deprived communities.” Barclays and Junior Achievement launched a three-year initiative to develop entrepreneurship and work-readiness among students in 11 countries, including Botswana, Ghana, and Uganda. In Angola, the Chinese government is supporting the construction and equipment of 21 new technical schools across the country. And on and on. Only a few of these programs individually reach large numbers of people, but collectively they promise to help many thousands, even millions over time.

SSA needs to create a thicker density of links to the regional and global economies, and many young African companies are doing just that. A growing number come from banking, ICT, entertainment, and consumer goods. African-owned companies that did not exist twenty years ago now employ many thousands of people. Five of the top ten banks in Lagos are African. In cellular telephony, MTN and Safaricom are major forces across SSA. Some older companies — SABMiller,

Kenya Airways — rejuvenated themselves and grew rapidly in the decade before the economic downturn. When good times return, these companies and many others should be well positioned to resume their upward climbs and add to their bases of employment.

A Supportive Diaspora

As the long-term economic prospects of Africans in Africa improve, Africans can also tap extensive networks of family and friends living abroad. The African diaspora, including descendents among African Americans in the United States, may number as many as 100 million people. A signifi cant fraction routinely sends money back home, a transfer offi cially reported as “remittances.” (See Table 3, which reports data for 2005, the most recent year with rea- Remittances of money sonably complete data available for the ten SSA countries.) and ideas constitute Tracked offi cially by the United Nations, remittances to SSA a signifi cant boon to surpassed $10 billion in 2006, a third of them originating SSA, with the former from the Nigerian diaspora.62 Among smaller and poorer accounting for as much countries — Mali and Senegal, for example — remittances as 5 to 10 percent of constitute between 5 and 10 percent of GDP. And this is GDP in some countries. just the offi cial total, as informal ways of returning money can multiply the reported numbers by factors of two to fi ve, depending on the country and different ways of estimating. Some ex-pats, for example, establish foreign bank accounts on which their relatives in the home country can draw via ATM cards or other means.

Table 3: Emigration and Remittances from Selected SSA Countries, 2005

SOUTH INDICATOR ANGOLA BOTSWANA ETHIOPIA GHANA KENYA MALI NIGERIA SENEGAL AFRICA UGANDA

ANNUAL EMIGRATION 522.9 37.8 445.9 906.7 427.3 1,213 836.8 463.4 713.1 154.7 (THOUSANDS)

REMITTANCES (US$M) NA 125 174 99 805 177 3,329 633 658 423

Source: World Bank, Migration and Remittances Factbook, 2008, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/ EXTDECPROSPECTS/0,,contentMDK:21352016~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883~isCURL:Y,00.html.

Although remittances declined during the global economic downturn,63 they remain a huge boon to destination countries. A large percentage goes to food, clothing, and other household expenses, enabling low-income families to subsist while pumping money into local economies. Beyond that, a substantial amount goes to business and investment purposes, a form of microlending to entrepreneurs, as well as a source of mortgage ﬁ nancing.64 Banks, MFIs, wire transfer companies, and cellular providers have lined up to help facilitate and channel this ﬁ nancing.

As an astute observer puts it, “the diaspora may be one of Africa’s most valuable natural resources and drivers of wealth.”65 Yet the worth of the expatriate network extends far beyond money remitted back home. Many ex-pats return as visitors, adding to the growth of tourism as one of the continent’s biggest sectors. A growing number of ex-pats become “re-pats”: having gone to Europe or North America to acquire an education and perhaps to launch a career, they repatriate and start businesses. A signiﬁ cant number of formal-economy entrepreneurs in Lagos and Nairobi, for example, are re-pats, especially in ﬁ nancial services and ICT. They return with capital, ideas, skill, and capabilities that help build companies. Others return as philanthropists and social entrepreneurs, helping to build communities. As for the ex-pats who remain abroad, they extend and strengthen networks that link developed and emerging markets.

In sum, Africans are succeeding in business and the professions in large numbers, in Africa and abroad. Of course, for Africa’s peoples to reach their full potential, many barriers must yet be overcome. Government regulation and administration must encourage entrepreneurs and SMEs. The formal economy must extend its reach into the poorest neighborhoods. More people must gain access to education and training. Promising small initiatives must scale up to achieve signiﬁ cant impact. As these barriers are surmounted, human capital will strengthen the foundation on which a new Africa is being built.

PRIMATE CITIES HAVE BEEN THE TRADITIONAL RECIPIENTS of the vast majority foreign direct investment (FDI) and offi cial development assistance (ODA) fl owing into Africa. Cities are both resource aggregation and resource disbursement centers; in Africa, primate cities are both national capitals and national or regional fi nancial centers and thus the principal sources of public and private resource allocation. The rise of fi nancial clusters in Johannesburg, Lagos, Nairobi, and elsewhere on the subcontinent attests to this fact.

Of the two main worldwide repositories of foreign capital available to African host countries, private-sector investment has grown remarkably over the past decade. ODA, on the other hand, has remained fairly static. Since the 1980s and the rise of Reaganism and Thatcherism, governments and NGOs have paid greater attention to the role of the private sector and markets in development. The ensuing consensus on the private sector as an engine of employment and the main means of translating GDP growth into increased income has helped stimulate dramatic increases in private capital ﬂ ows to developing economies.

Indeed, in the fi rst decade of the new millennium, private sources of investment have swamped ODA and concessional and non-concessional lending as a source of foreign funding. In 2007, global private funds fl owing to emerging markets out- stripped offi cial aid by a ratio of 7:1. Such observations shouldn’t be construed as arguments against ODA or other forms of foreign funding (see sidebar), but foreign direct investment has a strong record of creating sustainable solutions to

DAKAR PORT, SENEGAL Dakar is the westernmost port for goods and services on the African continent, a strategic position for growing trade.

problems of employment and livelihoods. As one development expert, Xiaolun Sun of the World Bank, summarizes the views of many specialists, “FDI has shown its ability to contribute signiﬁ cantly to all three components of growth: FDI increases capital stock, boosts human capital accumulation…and speeds up technological advances in host countries.”66 Particularly notable is the role of FDI in generating employment and in helping develop internationally competitive, highly skilled professionals to capitalize on transferred technologies.

Figure 2: Private Capital Dominates Global Capital Flows

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CONTINUING CONTROVERSY OVER OFFICIAL AID

For as long as we’ve had offi cial development are often cited, including the Asian Dragons assistance, we’ve had controversy over its use and — more recently in Africa — Botswana, and effi cacy. ODA’s critics are currently hold- Mozambique, and Ghana. ing the fi eld against development orthodoxy, but development-policy “truth” surely lies As aid critics make clear, however, the picture somewhere between the poles of “foreign is occluded by the consistently dismal perfor- aid does more harm than good” and “mas- mance of recipient governments, an almost sive injections of aid will end global poverty.” complete lack of accountability, failed projects Powerful, persuasive voices lead the contend- like a $6 billion steel mill in Nigeria begun in ing camps — William Easterly, a former World 1979 that still hasn’t produced an ingot, hun- Bank analyst turned scourge of ODA-planners, dreds of miles of paved Tanzanian roads that and Jeffrey Sachs of Columbia University, per- quickly disintegrated for want of routine main- haps the person most responsible for raising tenance, years of support and money thrown global poverty to the top of the West’s interna- at venal dictators, and self-deluded planners tional agenda. of grandiose aid programs who perpetually see the problem of global poverty as one “Big Few deny that some varieties of ODA — par- Push” away from being resolved. The fact re- ticularly those that serve humanitarian and mains that trillions of dollars have been spent health objectives — remain indispensable. over the last half century with too little actually And even critics acknowledge ODA’s suc- reaching the poor for whom they were in- cesses, many of which are indeed large-scale tended — and all too often leaving the putative health interventions that have resulted, as a recipients poorer than before. Indeed, although recent title observes, in “millions saved”* in aid has produced great good, the most telling the elimination of smallpox, the near eradica- criticism of ODA and related lending pro- tion of polio, and great inroads against river grams may be their failure to create sustainable blindness, guinea worm, and diarrheal disor- solutions to the challenges of poverty.†

ders. To this might be added the agricultural * Ruth Levine, Millions Saved: Proven Successes in Global Health, 2nd Edition. (Wash- “Green Revolution” in Asia and the raising of ington DC: Center for Global Development, 2007). † Most of these criticisms — and others — may be found in William Easterly, life expectancy throughout Africa. Controversy The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: Penguin, 2006). For a lively written exchange nevertheless continues over whether ODA between Easterly and Steven Radelet, senior fellow at the Center for Global Development and former United States Department of the Treasury Deputy stimulates economic growth, with both sides Assistant Secretary of the for Africa, the Middle East, and Asia, on the pros and cons of ODA programs, see “Online Debate: The Effectiveness of Foreign producing volumes of evidence but little that Aid,” Council on Foreign Relations, http://www.cfr.org/publication/12077/ (accessed September 30, 2009). shows causality. And several large development aid recipients have done well and

FDI produces important effects on the development and maturation of competitive urban clusters. Not only do FDI-related foreign affi liates and host-country enterprises create new jobs for domestic operations, but so do local and regional pools of suppliers, subcontractors, and service suppliers grow — through back- ward, forward, and lateral linkages, often in novel specialty export-oriented intermediate-goods niches that participate in the supply chains of partnering foreign and domestic fi nal-product manufacturers. And the Investors are waking expansion of FDI-related industries and clusters results in up to the possibility jobs, often in sectors and activities at two and three re- that Africa is “the last moves from the original investments. Golden Land,” a place of sizable opportunity Moreover, given the predominance of primate cities in where strong returns SSA, inbound fl ows of capital stream directly into those might be had. places where the factors of production and innovation are most concentrated, the national capitals — or in the case of Nigeria, the fi nancial capital, Lagos — for onward allocation. As one Monitor inter- locutor, an urban planner living and working in a primate SSA city, commented, “In the cities, a foreign investor will fi nd lots of potential partners, professional advice, help in navigating the system, getting things done, obtaining property, setting up an offi ce.”

Figure 3: Between 2004 and 2007 Inward FDI More than Tripled, with Most Flowing to Nigeria and South Africa

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An Overview of FDI Inﬂ ows

Investors are waking up to the possibility that Africa is “the last Golden Land,” a place of sizable opportunity where strong returns might be had. Indeed, the past ﬁ ve years have proven out both sides of the equation: FDI in Africa has shot up, from $18 billion in 2004 to $53 billion in 2007. And in 2006–2007, Africa as a whole offered, at around 12 percent, the best rate of return on inward foreign investment of any developing host region.67

SSA took 58 percent — or $30.6 billion — of Africa’s FDI in 2007, and last year, South Africa, was for the ﬁ rst time named one of the top 25 destinations for FDI in a widely cited FDI country survey.68 Although global FDI declined in 2008, ﬂ ows to Africa remained resilient, hitting a record level of $88 billion, 73 percent ($64

billion) of which went to sub-Saharan Africa.69 Indeed, pages of evidence might be assembled to demonstrate that Africa is a truly promising opportunity, both for creating wealth and for creating social beneﬁ ts in helping the continent fulﬁ ll its promise.

But none of the arguments and supporting data changes the fact that only ten percent of the world’s developing-country FDI ﬁ nds its way to Africa. Compare that to China alone, which attracted 18 percent, or $83.5 billion, in 2007. And the worldwide economic crisis has lodged an additional element of caution in the minds of investors seeking deals with lower perceived risks, heightening the disposition of Western investors to seek opportunity elsewhere. For example, according to a survey of American corporate executives released earlier this year, board rooms see little competitive advantage in seizing African opportunities — “with no competitive traction, there is no sense of an opportunity being missed.”70 The report goes on to cite ﬁ ve questions US executives ask that determine whether or not to invest in Africa:

• Does the rule of law prevail to a great extent in the target country?

• Are the African country’s attractions — for example, the size of the middle class, record of economic growth, tax structure, natural resources — sufﬁ ciently numerous to warrant interest?

• Given a steep perceived “Africa risk,” are the rewards (calculated as risk-adjusted ROI) sufﬁ ciently high?

• Is the country’s business framework — transportation and communications infrastructure, educated or educable human assets, trade and employment practices — supportive of business in general and of a potential investment in particular?

• Will it be easy for a business to set up its operation, obtain its licenses, rights, and permissions, employ, train, and beneﬁ t locals, repatriate proﬁ ts, and enjoy a reasonable business environment?

To each of these questions, surveyed U.S. executives were disposed to answer, “no.”

Add to potential investor reluctance reservations among potential African recipients. In some cases a lingering African skepticism exists toward foreign capital, fi nding expression in a number of business environment attributes — economic nationalism and policies of Africanization, de jure barriers to foreign participation, ambiguous regulatory approval, delays in customs clearance, and the like — that constrain greater fi nancial fl ows.71

But both African skepticism of FDI and Western reluctance to take the plunge into Africa are addressable challenges. African leaders might take prompt, relatively easy steps that improve the business climates in their countries, lower the perceived “Af- rica risk,” reduce procedural hurdles to starting a business, and the like. Some African governments are se- Only ten percent of the riously addressing issues identifi ed in surveys like the world’s developing-country World Economic Forum’s Global Competitiveness Report FDI fi nds its way to Africa. and the World Bank’s Doing Business, often with surpris- ing results. Botswana showed the largest improvement in the WEF survey, leaping ahead 20 places in a single year. Rwandan President Paul Kagame recently boasted in The Washington Post that his country’s ranking as “the top global reformer” in the World Bank report demonstrates “what can be achieved with vision and engagement.”72 Conversely, entrepreneurs, SSA publicists, and others who perceive opportunity in Africa need to do the research and explication to correct mispercep- tions and assess both the up- and the down-sides of prospective opportunities. The examples of Africa’s thriving clusters and hot economic sectors like fi nancial services and telecommunications as well as of relatively well-governed countries like Botswana and Rwanda should be weighed against all the traditional misgivings about doing business in Africa.

SOVEREIGN INVESTMENT IN SSA

In April 2008, World Bank Group ment Authority responsible for seven President Robert B. Zoellick called on relatively small deals principally in the in- sovereign wealth funds (SWFs) to as- dustrial sector. No single country became sist SSA’s development. At the time, he a destination for more than one invest- was concerned about an incipient fi nan- ment, with the range of host countries cial crisis and mindful of the particular spanning the continent and island na- hardship it would bring to low-income tions. The biggest deals occurred in 2007, countries. Yet he also considered Africa when Abu Dhabi’s Mubadala Develop- “a continent with opportunities and the ment Company invested $3 billion in potential to become an alternative pole a joint venture to develop and operate of growth as China, India and other the Sangaredi Aluminum Refi nery in countries are today.” SWFs, which then Guinea. boasted as much as $3 trillion in assets, could do much to help, he believed, and Although SWFs seem to be only he called for a “One Percent Solution” in modestly interested in SSA — at least which the funds would invest at least that publicly — other state-owned investors share of their portfolios in SSA — $30 in MENA countries are notably active. billion for “African growth, development, As happened with Dakar Port, (see be- and opportunity.” low), sovereign investment vehicles from Arabian Gulf states are doing deals in SWFs ignored Zoellick’s call and soon West Africa and other areas of SSA enough had troubles of their own with while Chinese state-owned enterprises the worsening of the global fi nancial have made a number of investments crisis. In fact, just 11 transactions oc- in the region. It remains to be seen, curred in SSA, all between 2001 and however, whether Zoellick’s notion of 2007, according to the Monitor-FEEM a “One Percent Solution” will catch on SWF Transaction Database, the most when the global economy recovers. complete source of publicly-reported SWF investment activity between Janu- Sources: Monitor-FEEM SWF Transaction Database, Monitor analysis, and “Sovereign Wealth Funds should invest in Africa, Zoellick says,” ary 1, 1981 and December 31, 2008. World Bank press release 2008/255/EXC (accessed June 16, 2009) http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/ Ten of these originated with funds 0,,contentMDK:21711325~pagePK:64257043~piPK:437376~theSite PK:4607,00.html (accessed September 30, 2009). based in the Middle East and North Africa (MENA), with the Libyan Invest-

Mining the Data

Aggregate statistics for foreign private investments in Africa conceal signiﬁ cant patterns — for example, where the money comes from and where it goes — by country and by sector. For our sample of ten SSA countries, we compiled and analyzed 612 foreign private-sector greenﬁ eld investments between 2004 and 2008, with a cumulative value of $122.8 billion. (See Figures 4 and 5) A closer review of our dataset reveals several striking observations.

Energy Remains in Command. Within our representative data set, the obvious but essential fact about FDI infl ows to Africa remains: energy is king. Investment in SSA’s energy clusters accounts for two-thirds of the total, with capital directed toward the Nigerian and Angolan energy sectors alone taking up 56 percent of the value of all transactions studied. (See Figures 6 and 7.) No other sector accounts for as much as ten percent, with construction and ICT (information and communications technology) — and in particular cellular telephony — the largest among the remainder. Surprisingly, mining and mineral extraction were insignifi cant in this country grouping for the duration examined. The $41 billion and $27.5 billion Nigeria and Angola took in respectively for their energy sectors in 2004-2008 amounted to 86 percent of the greenfi eld investments in Nigeria and 84 percent in Angola.

Figure 4: Number and Cumulative Value of Foreign Private-Sector Investments in Selected SSA Countries (2004–2008)

280 Number of Investments Cumulative Value of Investments (USD Bn) 210 210

Number and Value (USD Bn) of 140 128 Investments 113 77 84 70 41 21.6 25.1 21.5 13.7 0 Year 2004 2005 2006 2007 2008

Note: Selected SSA countries include Angola, Botswana, Ethiopia, Ghana, Kenya, Mali, Nigeria, Senegal, South Africa and Uganda Source: fDi Markets, Monitor Analysis

Figure 5: Number and Cumulative Value of Foreign Private-Sector Investments by Destination Country (2004–2008) 280 255 Number of Investments Cumulative Value of Investments (USD Bn)

210

Number and Value 140 (USD Bn) of 110 Investments

70 65 47.5 46 45 44 32.6 20.2 16 14 13 4.5 10.8 4 0 1.2 1.5 2.6 1.2 0.7 South Uganda Ghana Botswana Senegal Africa Nigeria Angola Kenya Ethiopia Mali Destination Country

Source: fDi Markets, Monitor Analysis

Figure 6: Number of Foreign Private-Sector Investments by Industry Sector and Destination Country (2004–2008)

300 Other Food, Beverages & Tobacco 255 Retail Trade 240 Industrial Life sciences 180 Energy Number of Investments Mining and Minerals 120 110 Financial Services ICT & Electronics 65 Transport Equipment 60 46 45 44 16 14 13 4 0 South Uganda Ghana Botswana Senegal Africa Nigeria Angola Kenya Ethiopia Mali Destination Country

Note: Other includes Construction, Consumer Goods, Creative Industries, Environmental Technology, Professional Services, Tourism, Transportation, Warehousing & Storage and Wood, Apparel & Related Products Source: fDi Markets, Monitor Analysis

Figure 7: Cumulative Value of Foreign Private-Sector Investments by Industry Sector and Destination Country (2004–2008)

Other 50 47.5 Food, Beverages & Tobacco Retail Trade 40 Industrial 32.6 Life sciences 30 Energy USD Mining and Minerals (Bn) 20.2 20 Financial Services ICT & Electronics 10.8 Transport Equipment 10 4.5 2.6 1.2 1.5 1.2 0.7 0 South Uganda Ghana Botswana Senegal Africa Nigeria Angola Kenya Ethiopia Mali Destination Country

Big Countries Take the Lion’s Share. Unsurprisingly, SSA’s two largest economies, South Africa and Nigeria, together received more than half the investments we studied. (See Figures 5–7.) South Africa is in effect the subcontinent’s “primate country” — in relative terms, Africa’s ﬁ nancial and industrial giant, with an economy roughly as large as SSA’s four next largest — Nigeria, Angola, Sudan, and Kenya — combined. And South Africa enjoys an impressive reach into continental and international markets — for example, MTN is SSA’s leading mobile operator and South Africa’s generic drug manufacturer Aspen Pharmaceuticals is the world’s 16th-largest — and the largest on the continent — and is driving growth through acquisitions in Tanzania, Uganda, and Kenya.

What is striking, however, is the fact that the quantity of FDI fl owing into South Africa is so scanty given the country’s standing as SSA’s most mature — and thus presumably its most attractive — economy.73 For the number of investments South Africa has attracted, 255, the average value is small, at just under $8 million per deal over the fi ve years. The sectors fi guring most prominently are, predictably, mining and energy.

Figure 8: Number of Foreign Private-Sector Investments by Industry Sector and Source Country (2004–2008)

180 Other 168 160 Financial Services ICT & Electronics 140 Energy 120 Transport Equipment 106 Mining and Minerals 100 100 Number of Food, Beverage & Tobacco Investments 80 Retail Trade 60 59 Life Sciences 41 Industrial 40 32 30 26 18 20 14 11 7 0 U.S. Africa Germany France Russia Brazil

U.K. India China Japan Italy South Korea

Source Country

Figure 9: Cumulative Value of Foreign Private-Sector Investments by Industry Sector and Source Country (2004–2008)

45 43.4 Other 40 Financial Services ICT & Electronics 35 Energy 30 Transport Equipment Mining and Minerals 25 USD Food, Beverage & Tobacco (Bn) 20 Retail Trade 17.6 Life Sciences 15 13.9 13.3 Industrial 10 10.1 5.6 5.1 5 4.9 2.8 1.9 2.5 1.8 0 U.S. Africa Germany France Russia Brazil

U.K. India China Japan Italy South Korea

Source Country

Chinese Investment is Growing Rapidly but Remains Comparatively Small.* In recent years the world has taken note of China’s rising investment in Africa. The interest of Chinese ﬁ rms in expanded economic interaction is sincere and abiding; in the words of one Chinese foreign policy ofﬁ cial, “China needs Africa” — and not just for its resources but also its markets, the political support African countries can provide in international forums, and its ability to help cement China’s place as the putative leader of the developing world.

Even so, China’s inward FDI totals are still small relative to Africa’s historical primary investors. From 2004 to 2008, China invested $13.3 billion in our selected countries, just under 11 percent of their total FDI. Chinese activity is this period was dwarfed by that of the United States as well as by Great Britain, India, and Germany. Interestingly, the 32 Chinese transactions in our data set are relatively nondescript; of Chinese FDI fl owing into these countries since 2004, just over a third went into the Nigerian and Angolan energy sectors, with another third under- writing Chinese-outfi tted construction in the same countries. (See Figures 8 and 9) These rather unremarkable investments stand in contrast to Chinese notorious investments in Sudan and Congo, which might fairly be said to have tarnished China’s international reputation and raised alarms in national security warrens. Taken together, however, China’s activities as represented in our data conform to its broader Africa profi le of investment in extraction and construction services

In 2007, a year in which Chinese activity in Africa garnered considerable international attention, the total Chinese FDI infl ow to SSA was $1.6 billion. In the global context, this represented just over fi ve percent of the world’s FDI fl ow of $30 billion to the subcontinent.74 Thus the subcontinent’s share of global FDI and China’s percentage thereof are both small, particularly as total worldwide FDI for 2007 was a record $1.8 trillion. The ten countries we studied captured nearly two-thirds of the all FDI directed to the subcontinent in 2007 — $19.8 billion. Of this, Chinese

entities invested $986 million, with infl ows to resource-rich Nigeria, South Africa, and Angola accounting for all but a small portion. The only country in our dataset completely left out of China’s 2007 picture was Senegal, which received no Chinese FDI during the fi ve years we examined — for the simple reason that Senegal had diplomatic relations with Taiwan until 2005 (and thus no diplomatic ties with Chi- na). That year, Dakar “fl ipped” to recognize China75 and, happily for the Senegalese, the Chinese are now investing in Senegal. Of the countries “China needs Africa,” that account for the remaining $600 million of China’s said a senior Chinese overall 2007 inward $1.6 billion, Sudan, Mozambique, and foreign ministry Zambia were the primary benefi ciaries.76 offi cial — for r esources, markets, and One of China’s construction deals in Africa — the third political support. largest investment recorded in the database — is particularly noteworthy: a $3.5 billion project in the greater metropolitan area of Luanda, Angola, one of the world’s fastest growing urban conurbations. Scheduled for completion by 2011, the project will transform the predominantly rural Kilamba Kiaxi suburb into a satellite town of some 200,000 inhabitants. The new housing, which is already under construction, includes 710 apartment buildings with 20,000 fl ats, 246 shops, schools, and water supply stations. It is believed the project will create some 10,000 new jobs.

ANOTHER, VERY DIFFERENT, CHINA-IN-AFRICA STORY

The conventional wisdom on China-in- footwear, fi shing, pharmaceuticals, and Africa involves canny Chinese dealing to farming and service industries. corral hoards of natural resources, liber- ally trading with pariah states like Sudan The Chinese presence will surely grow, and Zimbabwe, dumping mountains given Chinese efforts to stimulate busi- of Chinese manufactures on countries ness in Africa. In November 2006, at the struggling to build their own manufac- Beijing “Forum on China-Africa Coop- turing sectors, and winning friends and eration,” Chinese President Hu Jintao infl uence with concessional loans and announced a $5 billion development fund strategically placed dollops of foreign to promote Chinese investment in Africa. assistance. The fi rst projects were announced in January 2008 — a glass factory in Ethio- But there is another story, one told far pia that began operations in May 2009 less often and known mostly to local and a hydroelectric plant in Ghana that African populations. It begins with a little will power up in late 2011. known fact: as many as a million — and quite possibly more — Chinese are now Press accounts of Chinese commercial living and working in SSA’s cities and activity in SSA point to competitive jolt surrounding areas, which for more than a to local economies across the subcon- century have been destinations for a por- tinent and the springing up of African tion of China’s “economic diaspora.”* “Chinatowns”:

SSA is home to at least 2,000 Chinese • In Dakar, along General de Gaulle companies, mostly small and medium Boulevard, more than 200 Chinese enterprises. According to Jing Gu, a po- shops ply their trade. Eight years litical economist at Brighton University ago, a lone Chinese woman peddled (U.K.) who studies Chinese SMEs in Af- spring rolls under a tree. Some Dakar rica, the companies are involved mostly shopkeepers complain the Chinese in retailing and such industries as textiles, competition is putting them out of furniture manufacture, food processing, business.

• Chinese companies are building and A Swedish expert who studied Chinese renovating hotels and restaurants in retailers in a Namibian town observed that Sierra Leone, investing in soybean 24 shops in 2004 had grown to 100 by processing and prawn farming in 2008. Chinese fi rst movers earned profi ts Mozambique, and “taking over” the as high as 50 percent in the late 1990s but, wholesale and retail business in Kam- due to “fi erce” Chinese competition, they pala, Uganda, say disgruntled locals. today typically clear about 10 percent.

• In Malawi, a young Fujianese migrated Although Africans are in general favorably to Africa thinking it was “all one big disposed to the growing Chinese presence, desert” and planned to build an ice some raise concerns. Most appreciate the cream factory with money from rela- range of goods and services not otherwise tives and friends. He was wrong about available, and at prices people with little African geography but now owns the income can afford. But from wherever Malawi’s largest ice cream plant. Chinese businesses are concentrated, local voices claim Chinese are “fl ooding the • In Chad, with its deepening oil ties to market” with shoddy, low price wares are China, locals are bracing for “a large putting local merchants out of business. infl ux of at least 40,000 Chinese in the coming years,” said the director of the Regardless, credit Chinese with writing an Chamber of Commerce, who wonders interesting, salutary story — and posing whether the arrivals will stimulate the both a challenge and an opportunity for local economy with jobs and pur- Africans and others — at both the macro chases or remit their incomes back to and micro levels. families in China. * We should point out that all numbers cited in connection with the Chi- nese diaspora in Africa are shaky: no source — neither the Chinese Min- istry of Commerce nor China’s African embassies or resident economic offi cials — appears to have an authoritative, well-founded head count. Sources: Howard French and Lydia Polgreen, “Chinese Entrepreneurs in Africa Flourish Where Others Faltered,” New York Times, August 18, 2007; Lydia Polgreen, “Chinese Take a Turn at Turning a Sub-Saharan Profi t,” New York Times August 18, 2009; Institute for Development Studies, “Where Western businesses see ‘risk,’ Chinese entrepreneurs see opportunity,” Brighton University, UK, IDS website May 22, 2009. http://www.ids.ac.uk/go/news/where-western-business-sees-risk- chinese-entrepreneurs-see-opportunity (accessed October 1, 2009); Tom Miller, “$5USb fund to make fi rst forays in Africa.” South China Morning Post, Hong Kong. January 8, 2008; New Vision, “Uganda: How Chinese are Taking Over Kampala’s Business Hub,” May 2, 2007, via Africa News/Nexis.; Catherine Sasman, “China in Africa — Mercantilist Preda- tor, Development Partner, or Both?” New Era, Windhoek, Namibia. June 20, 2008, via allAfrica.com http://allafrica.com/stories/ 200806200738.html (accessed October 1, 2009).

East Africa is Climbing Aboard. East Africa, the least developed region of SSA, is well represented in this database with 123 foreign investments fl owing to Uganda (65), Kenya (44), and Ethiopia (14). The most substantial of Uganda’s foreign investment deals is with the U.K. fi rm Heritage Oil, which claims to have found in Uganda “the largest onshore oil fi eld discovered in SSA in the last 20 years.” Heri- tage has sunk more than $1 billion into its Ugandan exploration and recently reported a “100 percent drilling success rate” for exploratory wells in several promising Uganda fi elds. According to the company’s website, plans are under way to drill the offshore prospects in Lake Albert next year. African businesses are South-to-South (1): South Africa is the Leader in increasingly investing Intra-Africa Investment. African businesses are in- elsewhere in SSA in creasingly investing elsewhere in SSA. The database fi nancial services, ICT, and includes 111 deals worth $7.2 billion originating with- hospitality and tourism. in the subcontinent, with South Africa, Nigeria, and Kenya the most active investors and Uganda, Ghana, and Nigeria the major destinations. By sector, much of this investment is fl owing into fi nancial services, ICT, and hospitality and tourism. In commenting on the fact that South Africa, the continent’s most mature economy, directs by far the most outward investment to African markets of any of our 10 countries, Eric Werker, a business professor who has studied South Africa closely, cites the natural advantages of the country’s companies. They’re “used to innovating to serve poorer clients within South Africa, and the poorer members of the South African population would resemble many of the citizens of other countries in Africa in terms of products that they would desire and their purchasing ability.”77 This ability to serve lower income segments has helped move South Africa’s MTN into a dominant position on the continent.

Moreover, Johannesburg’s mature banking, retailing, and ICT clusters are aggressively reaching into SSA markets, which is captured in the pattern South African investment in our database: of the 39 outward deals, 24 (62 percent) involve these

three thriving sectors. South Africa’s largest supermarkets have been particularly animated in seeking expansion opportunities. As a knowledgeable observer of the country’s competitive clusters told us, “our big supermarket chains — especially Shoprite-Checkers — are aggressively seeking markets across SSA. You can see them in every country in Southern Africa.”

Figure 10: Number of Intra-Africa Private-Sector Investments by Industry and Destination Country (2004–2008)

45 Creative Industries Transportation, Warehousing & Storage 40 Mining & Minerals Tourism 38 Telecom Food, Beverages & Tobacco 35 Wood, Apparel & Related Products Retail Trade 30 Energy ICT & Electronics Construction Financial Services 25 Number of Industrial Investments 20 20 17 15

10 10 8 7 6 5 4 1 0 0 Uganda Nigeria Botswana South Africa Mali

Ghana Kenya Angola Senegal Ethiopia

Destination Country

Note: Source countries include Benin, Botswana, Congo (DRC), Egypt, Ivory Coast, Kenya, Libya, Malawi, Mauritius, Morocco, Namibia, Nigeria, South Africa, Sudan, Togo, Tunisia, Uganda and Zimbabwe; Top 5 source countries include South Africa (44 Investments), Nigeria (22 investments), and Kenya (19 investments), Zimbabwe (6 investments) and Egypt (3 investments) Source: Financial Times and Thomson One Banker, Monitor Analysis

Figure 11: Cumulative Value of Intra-Africa Private-Sector Investments by Industry and Destination Country (2004–2008)

Transportation, 1800 Creative Industries Warehousing & Storage 1600 Mining & Minerals Tourism 1,423 Telecom Food, Beverages & Tobacco 1400 1,308 Wood, Apparel & Retail Trade Related Products 1200 Energy ICT & Electronics Construction Financial Services 1000 1,006 Industrial $USD (MM) 814 800

600

400 311 327 251 200 208 00 0 Uganda Nigeria Angola South Africa Ethiopia

Ghana Kenya Botswana Senegal Mali

Destination Country

Note: Source countries include Benin, Botswana, Congo, Egypt, Ivory Coast, Kenya, Libya, Malawi, Mauritius, Morocco, Namibia, South Africa, Sudan, Togo, Tunisia, Uganda and Zimbabwe; the top 5 source countries by investment value include South Africa ($1,661MM), Nigeria ($1,477MM), Kenya ($791MM), Zimbabwe ($639MM), and Egypt ($622MM) Source: Financial Times

South-to-South (2): Uganda’s (and the Subcontinent’s) Financial Services Sector is Growing. Public- and private-sector leaders of countries included in our sample clearly recognize that getting their fi nancial services in order is a key to growth. Among our countries, Uganda was the leading the destination of intra- African investment. Overall, three of every fi ve investments fl owing into Uganda were of African origin. And of the total 65 investments for which Uganda was the destination, 43 percent, or 28, were in the fi nancial services sector, accounting for a greater number of fi nancial sector inward investments than South Africa,

the continent’s leading banking center. Moreover, 23 of these were of African origin — further evidence of a ﬂ ourishing banking sector in Uganda and SSA. As a US citizen with long experience in Africa and who has sat on the boards of African banks observed to us, “In Uganda, bank governance is very staid, very solid, very British. Extremely sound capital requirements. Very, very conservative.”

Of the 23 ﬁ nancial sector investments in Uganda, most were from neighboring Kenya, whose bank branches are proliferating in Uganda, and from Nigeria, which also has a robust and expanding banking sector. Meanwhile, our data suggests Gha- na is modestly replicating the Ugandan banking sector story. Of 45 foreign private investments, 12 are in the ﬁ nancial services sector, with eight involving banks (and one insurer) from nearby Nigeria opening up branch operations.

SENEGAL’S “PORT OF THE FUTURE”

An ambitious “south-to-south” invest- With an initial investment of €100 million ment package promises over the next ($145 million), the world’s third largest three years to bring Senegal’s maritime container port operator will completely trade infrastructure into the twenty-ﬁ rst renovate the existing Container Terminal century. When projects now under way facility, more than doubling its capacity to are completed, Dakar will have the West 550,000 containers annually and upgrading Africa’s biggest, most modern port, its road, electricity, water, and sanitation with the potential to handle 1.5 million infrastructure. Next year DP World will containers per annum and with connec- begin constructing a new terminal, Port du tions to new rail links from the port to Futur, which is expected to be operational landlocked Bamako, Mali. by early 2012 and will require an overall investment of more than €335 million In 2007, Senegal turned over its Dakar ($490 million). port operations to Dubai Ports World, which committed to undertake a massive Senegal granted DP World a 25-year overhaul of Port of Dakar, the heart of concession that began in 2008 and is Senegal’s maritime transportation cluster. bringing in a host of Dubai developers

to create a complete export process- to the interior. The declining reliability ing, trade, and transport platform, with of the Dakar-Bamako rail link in the late expect cluster effects, synergies, and 1990s and early 2000s had caused some economies. Meanwhile, Jafza Interna- traffi c from Mali, Niger, and Burkina tional, a subsidiary of DP World’s parent Faso to be diverted to Abidjan, Côte company, Dubai World Group, signed d’Ivoire’s main port and the largest in an $800 million deal to build and run West Africa — leaving Dakar in 2002 with a Dakar Integrated Special Economic only two-thirds of the Ivoirian port’s Zone (DISEZ) based on Dubai’s Jebel traffi c. Then, with a 2002 rebellion that Ali Free Zone. The project’s fi rst phase, divided Côte d’Ivoire into rival camps, covering 650 acres next to the planned Lome, Togo — with its deep harbor and Blaise Diagne International Airport, is interstate roads — took up Abidjan’s tran- slated to open next year with offi ces, shipment business to landlocked inland warehouses, and light industrial facili- countries. ties. “Clearly there will be effi ciencies for all if the two (the port and DISEZ) As Africa’s westernmost port, Dakar is are developed in tandem,” observed a the fi rst major port-of-call from Europe senior DP World offi cial. Dubai Customs and the Americas and is well placed World (DC World) will be helping Sen- for shipping goods to the landlocked egal streamline its customs management, Western Sahel. With a world-class port stock control systems, and data manage- facility to complement its natural advan- ment. Meanwhile, other Persian Gulf tages — a deep-draft structure and wide partners are coming in — Saudi loans are channel access permitting around-the- helping rebuild roads in Dakar, Kuwaitis clock port use — the Port du Futur might are investing in luxury hotels, and Iran is have a chance of fulfi lling octogenarian planning to underwrite construction of President Abdoulaye Wade’s vision of an oil refi nery and a car plant. transforming Dakar into “the trade hub of Africa.” A steady stream of new road and rail Sources: Oxford Business Group, The Report: Senegal 2008 (London: infrastructure investment from home and Oxford Business Group, 2008); Christopher Thompson, “Dakar port project: Grand scheme to bolster capital’s bullish new image,” Financial abroad will help remedy a glaring defi - Times Special Report: Senegal (November 25, 2008); Mike King, “Dakar Rallies,” portstrategy Online Edition (March 4, 2009) http:// ciency, Senegal’s lack of well-maintained www.portstrategy.com/archive101/2009/march/port_profi le_dakar/ dakar?SQ_DESIGN_NAME=pf (accessed September 23, 2009); rail and road connections from Dakar Economist Intelligence Unit, Senegal Country Profi le; Gordon Feller, “Dakar’s ambitious plans,” African Business, April 1, 2004.

FDI as the Critical Input

The connections between FDI, cities, competitive clusters, and economic growth are indisputable. As every policy maker in an emerging-economy country knows, FDI comes with capital, technology, jobs, and links to the global economy. Despite this recognition, however, the neediest economies have acute difﬁ culty attracting FDI in sufﬁ cient quantities, and for reasons that are well known and relate mostly to perceived investment risk and opportunities elsewhere.

Thus SSA takes in a paltry ﬁ ve percent of global inbound FDI. And it’s not as though the region’s leaders are oblivious to, or have opted out of, the competition for a greater portion of the world’s FDI. At least two-thirds of SSA countries have set up investment promotion agencies to attract FDI: the World Bank’s FDI.net website lists 42 such agencies serving 33 countries, another two serving regions, and seven that each serves a single South African province. The work of such agencies generally begins with image building and ends with after-investment services.78 The experience the Malaysia Industrial Development Agency (MIDA), one of the world’s most successful investment promotion organizations, offers three general lessons to emerging economies in their quest to attract FDI:

• Promotion matters a great deal. It’s not simply a strong business environment that attracts FDI in but also thoughtful, imaginative devising and implementing of speciﬁ c promotional tools — tax holidays, infrastructure grants, tax, duty, or fee drawbacks, and many other possibilities.

• Winning streams of FDI requires direct, aggressive campaigning. Countries need to act with competitive urgency, recognizing that other emerging economies are just as eager to sweep up loose global capital.

• A country’s specifi c promotion tools are best determined as a function of the targeted sector, its relative state of development, and the host geography, which will dictate specifi c transport, climate, and other challenges that may need to be overcome. “There is, in short, a world of difference between attracting a labor-intensive apparel fi rm…and a software design company.” One needs tax holidays and low-cost labor, the other low-cost telecommunications and partnership with local universities.79

The usual suspects among promising sectors in emerging economies are raw materials, resource-based manufactures, tourism, labor-intensive manufacturing, and low-end services. One common denominator, however, links them all: infrastructure. As Rwandan President Kagame noted in The Washington Post, “Our (African) markets need to be connected by better roads, by canals and ports, and through new technologies. Yet few U.S. companies are competing for large-scale and regional projects.”80

The same might be said for most of the developed world’s potential investors. And in truth, both sides of the FDI equation — investors and would-be recipients — might do more in considering Africa as an FDI destination, as the “last golden land” of mega-opportunity.

MOST COMMENTARY ON PROSPECTS for sub-Saharan Africa re- ﬂ ects a reading of the political map of the continent. There are too many countries, it is claimed, particularly small ones that cannot operate efﬁ ciently at scale. There is too little cooperation among states, and within states, bureaucracies are too often incompetent and corrupt. Too much foreign aid is dissipated in administration; too little of it reaches the people and institutions it was intended to help. Bluntly put, SSA has been mismanaged.

An alternative view of the region, however, forms when observers start with a different map. A microeconomic map of the subcontinent reveals the most productive parts, where most GDP is generated, in competitive clusters in cities. This shows the future of SSA as it is being built from the bottom up.

It is true that SSA is well-endowed with natural resources, oil and gas, diamonds and other minerals, and that there is ample land for producing agricultural commodities. But the wealth represented in these assets, even if well managed — and the record on that point is clearly not encouraging — offers only partial hope for the future of SSA’s peoples. Too much of the value that is added to Africa’s natural resources and commodities occurs offshore, and too much of the labor at home is essentially untrained and poorly rewarded.

SOCCER CITY STADIUM, SOWETO, JOHANNESBURG A generation ago, Soweto was an international symbol of poverty and in- justice. Today, it is integrated into Johannesburg and increasingly prosperous. Among the signs of change: four new shopping malls and a striking new stadium that hosted matches for the FIFA World Cup in 2010.

The most encouraging economic stories in SSA are not those of mineral or energy wealth but rather of the healthy and growing clusters in cities that are gaining competitive advantage in the regional and global economy. These are human stories, of entrepreneurship, innovation, and capitalizing on the development of specialized skills and capabilities. This happens millions of times a day in small ways in the informal economy and far less often, but with disproportionately large effects, when new networks of transportation and services infrastructure integrate competitive clusters and draw concentrations of skilled human assets to thriving commercial sectors, when a few banks become centerpieces in an increasingly sophisticated ﬁ - nancial services cluster, or when telecom entrepreneurs The ultimate promise feed the frenzied demand for mobile telephony. of SSA is that Lagos, Johannesburg, It would be naïve to forecast that SSA is poised for an eco- and other primate nomic take-off, following the paths of China and India. cities will accomplish That is extremely unlikely. Here is where a view of the po- what Bangalore and litical map of the subcontinent clearly reveals obstacles to Pune achieved. economic progress. China had centralized decision mak- ers and a relatively efﬁ cient bureaucracy. At the time of its take-off, India possessed a much bigger pool of well educated and resourceful citizens who found ways to connect to the global economy―as employees of foreign companies, as suppliers, and as entrepreneurs. Yet the India example also affords hope to SSA. The most vibrant cities and clusters in India succeeded by building from the bottom up. That, ultimately, is the promise of SSA―that Lagos, Johannes- burg, and other primate cities will accomplish what Bangalore and Pune achieved.

For that to happen, urbanization must continue but be better managed, through the provision of appropriate infrastructure with the capacity to serve increasing numbers of people in the future. Existing competitive clusters must be strengthened, even as new ones are cultivated. SSA’s peoples must also receive more investment to give them the skills that will equip them to compete in the global economy. The key

constituencies that will determine SSA’s future must focus their efforts, separately and collectively, on helping its cities and clusters to grow and to ﬂ ourish.

Here are some steps for these constituencies to consider:

Municipal, Provincial, and National Governments. The determinants of economic competitiveness are local. Therefore, government at all levels must work together to create local conditions that promote competitiveness. If SSA is to follow the examples of other major economies further up the development curve, its leaders must invest behind the growth of cities and competitive clusters.

A place to start is with signifi cant improvements to infrastructure. Although many governments are beginning to pledge higher infrastructure spending, they will still not be able to fund expansion while maintaining and upgrading what they already have without outside help. Apart from telecommunications, privatization has not brought the benefi ts or investment that might have been expected, and the quality and quantity of all forms of hard and soft infrastructure still lag other emerging regions, such as Asia and Latin America. SSA’s governments are beginning to expand new infrastructure construction by circumventing their fi nancial constraints through the use of public-private partnerships. However, these only exist in a few countries in the region. Strong PPP frameworks and the public policies and supports that make them effective need to be adopted throughout SSA. This will create the foundations for establishing and nurturing the city-clusters that can make the region economically competitive in the interconnected and increasingly knowledge- based global economy of the twenty-fi rst century.

Another priority for government at all levels is to upgrade the education and skills of its citizens. In the past decade, SSA has witnessed signiﬁ cant increases in primary- and secondary-school enrollment. This trend must continue, and curricula and degree programs should be tied to the needs of growing clusters and sectors

to help ensure that young people ﬁ nishing school ﬁ nd productive and meaningful work. Curricula can highlight business and economic successes, foster entrepreneurial skills and mindset, and provide practical training in disciplines and areas important to individual advancement.

Finally, SSA governments must welcome FDI and support it with policies and actions to help it ﬂ ourish. This is a valuable source of money, ideas, and talent that can multiply in the right conditions, when the investment is linked to promising avenues of economic growth, and when the rewards of success are appropriately distributed among investors, employees, and communities.

Multilateral Institutions. The World Bank recently has become more active in promoting programs for urban areas, altering its almost exclusive traditional focus on combating rural poverty. Other multilateral institutions need to take account of the evolving microeconomic map of SSA and encourage the development of competitive city-clusters. These institutions may wish to consider joining with public and private actors in supporting infrastructure projects. Another approach could involve linking assistance and advice to reforms and policies to increase the competitiveness of existing clusters while also cultivating promising new ones.

Donors and Philanthropists. Although the effi cacy of traditional aid and philanthropy is sometimes questioned, there can be little doubt that it has helped signifi cantly in the fi ght against HIV/AIDS, malaria, and other diseases, as well as in initiatives to upgrade education and increase literacy. The record of these constituencies in helping lift people out of poverty is much less convincing. The best solution to the problem of persistent poverty is economic growth, which creates and then multiplies opportunities to raise standards of living. Donors and philanthropists, therefore, may wish to consider increasing funding to enable Africans to help themselves climb the economic ladder. This may entail supporting entrepreneurs and social entrepreneurs with ideas and actionable plans to create jobs, upgrade skills, and increase incomes, especially if they can operate at scale. The

majority of the most promising business ideas, at least initially, are likely to be found in or linked with cities and competitive clusters.

Multinational Corporations and Foreign Investors. Many Chinese investors and business people believe Africa is the last frontier of mega-investment opportunity. The rising prosperity of SSA, especially in the cities, should be inviting to this constituency. MNCs are beginning to serve the emerging urban middle class, which shows patterns of consumption similar to counterparts in other emerging markets — a potentially massive business opportunity for companies with goods and services targeted at this segment.

It is not only the emerging middle class that provide lucrative opportunities for foreign investors. The infrastructure shortfall in SSA offers attractive opportunities to develop new roads, The best solution to the railways, power grids and water supplies, particularly problem of persistent as part of PPP frameworks. Although such invest- poverty is economic ments are long-term, they will open up the SSA growth, which creates market for goods and services and to further de- and then multiplies velopment opportunities in construction and other opportunities to raise sectors, which might also be of interest both to those standards of living. companies playing a role in infrastructure development, and to other international ﬁ rms.

Nevertheless, before embarking into the markets of SSA companies and foreign investors must do their homework diligently. They should identify and seek to understand the local determinants of competitiveness and productivity growth before making decisions to enter or expand in particular locations. This means identifying attractive clusters and investigating the quality of existing infrastructure, the dynamics of local labor markets, the availability of qualiﬁ ed suppliers, the presence of related and supporting institutions, and the strengths and weak- nesses of incumbent rivals.

BUILDING THE FUTURE TOGETHER: and leaders from all sectors of society THE DINOKENG SCENARIOS* actively work with the state to improve Since democracy and the end of apart- delivery. As citizens, South Africans also heid in 1994, South Africans have faced need to insist that all spheres of govern- a far more challenging task in creating a ment, from national to local, account for new nation than anticipated. Recently, a their performance”. diverse group of 35 leading citizens rep- The initiative began with an analysis resenting civil society and government, that concluded that while South Africa political parties, business, public admin- had many assets, such as a world- istration, trade unions, religious groups, renowned constitution, strong and academia and the media came together to independent institutions supporting the probe the country’s present situation and democracy, and an established social se- to consider possible futures under an ini- curity network, the country also needed tiative known as the Dinokeng Scenarios. to confront stark realities. Participants recognized that South Africa • If the pressing challenges of falter- is at a crossroads: while the country has ing education and healthcare, of made great strides since 1994, its overall unacceptably high crime levels, and progress has been halting and less than of unemployment and poverty were hoped for. Explanations seemed clear not ﬁ xed, the accomplishments made and widely shared: the government lacks since 1994 could unravel. expertise and capacity in certain critical areas, while other major actors in the • At the heart of the country’s chal- economy and society have not focused lenges was a failure of leadership and sufﬁ ciently on improving the country as accountability. This was due primar- a whole. As a result, participants believed ily to government actions rewarding that “South Africans can address their political supporters with jobs in the critical challenges if and only if citizens public service rather than appoint- ments based on competence. * “The Dinokeng Scenarios – 3 Futures for South Africa”, www. dinokengscenarios.co.za

• The efﬁ cient public service largely disengaged and increasingly promised by the constitution is not dependent on the government to being delivered. provide everything.

• Business, labor, and civic leadership Based on this analysis, the Dinokeng team focus more on their own interests mapped out three scenarios to help South than on the interests of the nation as Africans understand clearly the risks and a whole. opportunities they are facing. The scenarios were founded on two criss-crossing • Leaders across all sectors need to ac- axes: 1) the capacity of leadership in cept responsibility for South Africa’s government and society as a whole— problems―and the same seems true effective or ineffective; and 2) the quality for all citizens. of the relationship between citizens and the government—will citizens engage in • Finally, the public spirit and activism shaping their future or not? that was strong before 1994 needs to be revived, as citizens today are

THE DINOKENG SCENARIOS Engaged

WALK TOGETHER

2020 CHARACTER OF CIVIL SOCIETY

Collaborative and enabling state. Engaged and active citizenry. CAPACITY OF THE STATE

Ineffective Effective Corrupt and Interventionist and ineffective state. directive state. Dependent Distrusting and 2009 and compliant citizenry. self-protective citizenry. 2020

2020 WALK BEHIND WALK APART

Disengaged

In the ﬁ rst scenario, Walk Apart, The Dinokeng team recognizes South Africans continue on the that the seeds for all three of these same path they are on today. scenarios exist in the current en- Pressing problems such as un- vironment and pose the question, employment, poverty, safety and “Which of these seeds will grow to security, and poor public health dominate our future?” As of 2009, and education delivery, worsen. no one knows the answer to this The South African social fabric question, and South Africa’s future unravels as civil society disengages will probably include elements of and public trust in institutions all three scenarios in 2020. diminishes. Protests and unrest escalate and provoke an authoritar- Initiatives like this are promising ian response from the state. for the future of SSA, as they offer evidence that all layers and com- In the second scenario, Walk ponents of society can sit down Behind, the state leads and man- together to take a hard and un- ages the process of addressing the compromising look at the current challenges. Citizens either support state of affairs and assess critically strong state intervention or are what needs to be done in response. acquiescent in the face of a more This effort also highlights how powerful state. much of Africa’s future will de- pend not on state or transnational In the third scenario, Walk Together, leadership but on developments active citizen engagement, a cata- from “the bottom up.” lytic state, and strong leadership across all sectors address South Africa’s challenges.

Finally, the peoples of SSA hunger for means of advance, and most recognize that advancement will be tied to competitive success in the global economy. By all accounts, they are willing to work hard and are eager to learn. They require investment to build their skills and capabilities, and this investment is likely to yield a signiﬁ cant return. At the same time, companies and investors should look for opportunities to cultivate local suppliers, link the formal and informal economies, and cooperate with other constituencies to strengthen the clusters in which they operate. Some MNCs present in SSA already understand this and appear to be going about it in the right way. Other companies need to follow.

African Entrepreneurs and Business Leaders. This constituency needs to keep doing what it is already doing — pursuing commercial opportunity, investing to cultivate markets, increasing employee skills and expertise, and rewarding owners and investors. Balance sheets and income statements ultimately do not lie. When all is said and done, the winners will be the most competitive companies, those with a strong sense of moral purpose behind what they are doing and that establish a differentiated presence in the marketplace by offering superior products and services. Yet an important ingredient of competitive advantage also is contextual. That means entrepreneurs and business leaders must help to cultivate local suppliers and business partners and work with governments and NGOs and other constituencies in the development of healthy and competitive clusters.

Endnotes

1 “Lagos: The Big Yam,” The Economist, March 12, 2009 http://www.economist.com/world/mideast-africa/displaystory. cfm?story_id=13278795 (accessed September 29, 2009). 2 Edward Miguel, Africa’s Turn? (Cambridge, MA: MIT Press, 2009); Vijay Mahajan, Africa Rising: How 900 Million African Consumers Offer More Than You Think (Upper Saddle River, NJ: Wharton Business Publishing, 2008). 3 For a useful explication of this virtuous circle, see John Kay, Culture and Prosperity (New York: HarperBusiness, 2004) and, in a development context, Paul Collier, The Bottom Billion (Oxford and New York: Oxford University Press, 2007). 4 UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge. (Geneva: United Na- tions, 2008) http:/www.unctad.org/en/docs/wir2008_en.pdf(accessed September 29, 2009). 5 UN HABITAT, State of the World’s Cities 2008/2009: Harmonious Cities (London; Sterling Va.: Earthscan, 2008). 6 The United Nations deﬁ nes a slum population as one that suffers from one or more urban deprivation — that is, lack of (1) improved water, (2) improved sanitation, (3) sufﬁ cient living area (more than three persons per room), or (4) durable housing. UN Habitat, State of the World’s Cities 2008. 7 UN HABITAT, The State of African Cities 2008: A Framework for Addressing Urban Challenges in Africa (Nairobi: UN HABITAT, 2008). 8 Christine Kessides, The Urban Transition in Sub-Saharan Africa: Implications for Economic Growth and Poverty Reduction Africa Region, Working Paper No. 97 (Washington, DC: World Bank, 2005) http://www.worldbank.org/afr/wps/wp97.pdf (accessed September 28, 2009). 9 World Bank, World Development Report 2009: Reshaping Economic Geography (Washington, DC: World Bank, 2009). 10 E.L. Glaeser, “Urban Colossus: Why is New York America’s largest city?” Harvard Institute of Economic Research Discussion Paper No 2073, 2005; E.L Glaeser and Mare D C, “Cities and Skills,” Journal of Labor Economics, 19(2) 2001. 11 World Bank, World Development Report 2009. 12 M. Storper and A.J. Venables, “Buzz: Face-to-face contact and the urban economy,” Journal of Economic Geography, 4(4) 2004. 13 Marshall A, Principles of Economics, 8th edition, 1920, p. 271. 14 Michael E. Porter, “Clusters and Competition,” in Michael E. Porter, On Competition. (Cambridge, Ma.: Harvard Busi- ness Press, 1998). 15 Michael E. Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990). 16 Klaus Schwab and Michael E. Porter, The Global Competitiveness Report 2008-2009 (Geneva: World Economic Forum, 2008). Although all three countries receive a mixed review in the GCR, the report counts “capacity for innovation” and “state of cluster development” as a “competitive advantage” for each. 17 Douglas Zhihua Zeng, ed., Knowledge, Technology, and Cluster-based Growth in Africa (Washington, DC: The World Bank, 2008), and Banji Oyelaran-Oyeyinka and Dorothy McCormick, eds., Industrial Clusters and Innovation Systems in Africa: Institutions, Markets and Policy (New York: United Nations University Press, 2007). 18 J. Baro and X. Sala-I-Marin, “Technological Diffusion, Convergence and Growth,” NBER Working Paper, No 5131, 1997. 19 Michiel van Dijk “South African Manufacturing Performance in International Perspective, 1970-1999,” University of Groningen Growth and Development Center, Research Memorandum GD-58 (2002), http://ggdc.eldoc.ub.rug.nl/ FILES/root/WorkPap/2002/200258/GD-58.pdf (accessed September 29, 2009) 20 Ibid. 21 As of August 31, 2009. 22 “About Us,” The Banking Association South Africa http://www.banking.org.za/about_us/overview/overview.aspx (accessed September 29, 2009).

23 Klaus Segbers, ed., The Making of Global City Regions: Johannesburg, Mumbai/Bombay, Sao Paolo, and Shanghai (Baltimore: Johns Hopkins University Press, 2007). See pp. 32-63 contains an excellent introduction to Joburg. 24 “An Unlikely Global City,” Urban Age. July 2006, http://www.urban-age.net/10_cities/04_johannesburg/johannes- burg_LM+WP.html (accessed September 29, 2009). 25 Alex Hannaford, “Nollywood dreams: Nigeria’s fi lm industry aims for world stage,” The Independent, March 9, 2007; “Nollywood dreams.” The Economist, July 27, 2006. 26 Jennifer Isern, Amaka Agbakoba, Mark Flaming, Jose Mantilla, Giulia Pellegrini, Michael Tarazi, Access to Finance in Ni- geria: Microfi nance, Branchless Banking, and SME Finance (CGAP and World Bank, Washington D.C.: 2009), http://www. cgap.org/gm/document-1.1.1706/Access_to_fi nance_in_Nigeria_25_feb_09.pdf, (accessed September 29, 2009). 27 All specifi c GDP fi gures cited in this report are 2008 IMF purchasing power parity unless otherwise specifi ed. 28 Xan Rice, “Kenya sets world fi rst with money transfers by mobile,” The Guardian, March 20, 2007; Erik Hersman, “Volume vs Value in Mobile Payment Systems,” White African, May 25, 2009. Figures from Stephen Mwaura Nduat, head of Payment Systems at the Central Bank of Kenya. 29 Communications Commission of Kenya, Annual Report 2007-2008 http://www.cck.go.ke/annual_reports/CCK_An- nual_Report07-08.pdf (accessed September 30, 2009). 30 Joseph Mwamunyange, “Faster, cheaper Internet coming in June, says Seacom,” The East African, April 19, 2009. 31 “Sénégal: à la recherche d’une stratégie de croissance accélérée,” World Bank Website, http://tinyurl.com/nxjo28 (accessed September 19, 2009). 32 Economist Intelligence Unit, Senegal Country Profi le 2008. 33 Sigrid Colnerud Granström, The Informal Sector and Formal Competitiveness in Senegal, Department of Economics at the University of Lund, (Lund, Sweden: 2009), http://www.nek.lu.se/Publ/mfs/194.pdf, (accessed September 29, 2009); World Bank, Doing Business 2009 (World Bank, Washington D.C. 2009). 34 Nations Human Settlements Program, The State of African Cities 2008: A framework for addressing urban challenges in Africa (United Nations Human Settlements Program [UN-HABITAT], Nairobi, Kenya: 2008), p. 78, 162. 35 See the International Finance Corporation and World Bank’s “Improving the Business Enabling Environment initiative” http://www.ifc.org/bee (accessed September 29, 2009). 36 Vivien Foster, “Africa Infrastructure Country Diagnostic,” Overhauling the Engine of Growth: Infrastructure in Africa, Execu- tive Summary, (World Bank, Washington D.C.: 2008) http://siteresources.worldbank.org/INTAFRICA/Resources/ AICD_exec_summ_9-30-08a.pdf (accessed September 30, 2009). 37 César Calderón, “Infrastructure and Growth in Africa,” World Bank Policy Research Working Paper 4914 (World Bank, Washington D.C.: April 2009). 38 Foster, “Africa Infrastructure Country Diagnostic.” 39 World Bank, Private Participation in Infrastructure Database http://ppi.worldbank.org/index.aspx (accessed Sep- tember 29, 2009); Christine Farrugia, Tim Reynolds, and Ryan J. Orr, “Public-Private Partnership Agencies: A Global Perspective;” Working Paper #39, Collaboratory for Research on Global Projects, Stanford University (August 2008) http://crgp.stanford.edu/publications/working_papers/Farrugia_etal_PPPAgencies_WP0039.pdf (accessed Septem- ber 29, 2009). 40 World Bank, Private Participation in Infrastructure Database. 41 United Nations Human Settlements Program, The State of African Cities 2008: A Framework for Addressing the Urban Chal- lenges in Africa (UNHABITAT, Nairobi: 2008). 42 Irma Venter, “Gautrain mulls cash injection to ensure phase one’s readiness for World Cup,” Creamer Media’s Engineering News, July 17, 2009, http://www.engineeringnews.co.za/article/gautrain-2009-07-17-1, (accessed October 1, 2009). 43 Ibid; Gautrain Website, http://www.gautrain.co.za/index.php?ct=1&pid=1249&fi d=2&click=5, (accessed October 1, 2009).

44 The World Bank considers APIX to be one of the most competent agencies in government. In 2008, Senegal was ranked as the best performer in Africa in Doing Business in large part due to APIX’s track record of attracting large investors to Senegal and to negotiating increasingly sophisticated deals has been a major contributing factor to the private sector’s interest in PPPs. 45 World Bank, Project Appraisal Document on a Proposed Credit in the amount of Sdr71.2 million (US$105 million equivalent) to the Republic Of Senegal for a Dakar-Diamniadio Toll Highway Project, May 6,2009. 46 For further details, see the Autoroute Dakar-Diamniadio website http://www.autoroutedakardiamniadio.com/en/ (accessed September 30, 2009) 47 World Bank, Project Appraisal Document. 48 The selection of the private operator is at its ﬁ nal phase and operations contract signed in the near future. http:// www.autoroutedakardiamniadio.com/en/content/selection-operator (accessed September 30, 2009). 49 International Monetary Fund, Senegal: Selected Issues, IMF Country Report No. 07/336 September 2007 https://www.imf. org/external/pubs/ft/scr/2007/cr07336.pdf (accessed September 30, 2009). 50 eStandards Forum, Financial Standards Foundation, “Country Brief: Senegal,” June 25, 2009 http://www.estandards- forum.org/secure_content/country_proﬁ les/cp_154.pdf (accessed September 30, 2009). 51 World Bank, Private Participation in Infrastructure Database; Farrugia et al., “Public-Private Partnership Agencies.” 52 Economist Intelligence Unit, Nigeria Telecommunications Report, February 20, 2009. 53 “MTN aims to introduce low price mobile handsets in Africa,” International Telecommunication Union, December 2, 2008 http://www.itu.int/ITU-D/ict/newslog/MTN+Aims+To+Introduce+Low+Price+Mobile+Handsets+In+Afri ca.aspx(accessed September 29, 2009. 54 Gateway Communications Website, “Gateway Communications Selected to Expand Footprint of Nigeria’s Newest Mobile Operator,” May 12, 2009 http://www.gatewaycomms.com/news_2009_gateway_etisalat_cell.html (accessed Septebmer 30, 2009). 55 MTN corporate website, “West and Central Africa –MTN Nigeria”http://www.mtn.com/AboutMTNGroup/Group- Footprint/WestAndCentralAfrica/WestAndCentralAfrica_Nigeria.aspx (accessed September 29, 2009). 56 “Collocation would help our Mega City dream — Lagos Science & Tech commissioner,” Vanguard September 21, 2009 http://www.vanguardngr.com/2009/09/21/collocation-would-help-our-mega-city-dream%E2%80%94-lagos- sciencetech-commissioner/ (accessed October 1, 2009). 57 “Human Development Reports,” United National Development Program http://hdr.undp.org/en/statistics/ (accessed October 1, 2009). 58 Africa Progress Panel, Annual Report 2008. Another account pegs the decline from 55.7 percent to 50.3 percent based on the World Bank’s international poverty line of $1.25 per day. See “Sub-Saharan Africa’s progress towards anti- poverty goals is encouraging but needs to be accelerated to meet 2015 targets.” Press Release, UN Department of Public Information — DPI/2517 T — September 2008. 59 International Labor Organization, Men and Women in the Informal Economy: A Statistical Picture (Geneva: ILO, 2002) http://www.ilo.org/public/english/employment/gems/download/women.pdf (accessed May 10, 2009). 60 This and the quotations in the following paragraph are drawn from Martha Alter Chen, “Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment,” United Nations, DESA Work- ing Paper 46, June 2007 http://www.un.org/esa/desa/papers/2007/wp46_2007.pdf (accessed September 30, 2009). 61 Mahajan, Africa Rising, especially chapters 2 and 3. 62 “Sub-Saharan Africa: Remittances Fact Sheet,” World Bank http://siteresources.worldbank.org/INTPROSPECTS/ Resources/334934-1199807908806/SSA.pdf (accessed September 30, 2009). Five of our ten SSA nations are ranked in the top 10 SSA countries for remittances: Kenya, Mali, Nigeria, Senegal, and Uganda. 63 Dilip Ratha, “Remittances expected to fall by 5 to 8 percent in 2009,” People Move: A Blog about Migration, Remittances, and Development. http://peoplemove.worldbank.org/en/content/remittances-expected-to-fall-by-5-to-8-percent-in-2009 (accessed September 30, 2009). 64 Mahajan, Africa Rising.

65 Mahajan, Africa Rising, p. 172, citing Charlene Smith, “Beating Poverty through the Black Market,” Business in Africa, May 2006, pp. 59-61. 66 Sun is addressing a particular model that explains economic growth as “the combination of growth in its sources” — that is, increases in factor inputs (capital and labor) and in total factor productivity. Xiaolun Sun, “Foreign Direct Investment and Economic Development: What Do the States Need to Do?” Prepared by the Foreign Investment Advisory Service, International Finance Corporation, World Bank Group, for the Capacity Development Workshops and Global Forum on Reinventing Government on Globalization, Role of the State and Enabling Environment, spon- sored by the United Nations, Marrakech, Morocco, December 10-13, 2002, http://unpan1.un.org/intradoc/groups/ public/documents/un/unpan006348.pdf, (accessed September 30, 2009). 67 UNCTAD, World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge (Geneva: United Nations, 2008) http:/www.unctad.org/en/docs/wir2008_en.pdf (accessed September 30, 2009). 68 A.T Kearney, New Concerns in an Uncertain World: The 2007 A.T. Kearney FDI Confi dence Index® http://www.atkearney. com/images/global/pdf/FDICI_2007.pdf, (accessed September 30, 2009). The Kearney survey “tracks the impact of likely political, economic and regulatory changes on the foreign direct investment intentions and preferences of the leaders of top companies around the world.” 69 UNCTAD, World Investment Report 2009: Transnational Corporations, Agricultural Production, and Development (New York and Geneva: United Nations, 2009) http://www.unctad.org/en/docs/wir2009_en.pdf (accessed September 30, 2009). 70 U.S. Chamber of Commerce, The Conversation Behind Closed Doors: How Corporate America Really Views Africa. Executive Summary. 2009, http://www.usafricainvestment.com/pdf_fi les/14930_Inside-2.pdf, (accessed September 30, 2009). 71 Todd Moss, Vijaya Ramachandran, and Manju Kedia Shah, “Is Africa’s Skepticism of Foreign Capital Justifi ed? Evi- dence from East African Firm Survey Data,” Working Paper Number 41, Center for Global Development, June 2004. 72 Paul Kagame, “Why the U.S. Needs Africa,” Washington Post, (September 21, 2009). 73 Eric D. Werker studied South Africa’s FDI picture, concluding that South Africa, because of its relatively mature economy and other related reasons, is a less likely recipient of Greenfi elds investments than of portfolio investment, which is not represented in our database. See “How South Africa Challenges our Thinking on FDI: Q&A with Eric D. Werker.” HBS Working Knowledge website. http://hbswk.hbs.edu/item/5528.html (accessed May 25, 2009). 74 UNCTAD, World Investment Report 2008/2009. 75 Senegal has had an on again, off again relationship with China. From 1971 to 1996, Senegal and China had diplomatic relations. In 1996, Dakar broke off ties to Beijing and established offi cial relations with Taiwan; such transactions are generally accompanied by generous Taipei payouts in aid, concessionary trade credits, and sometimes personal gratu- ities. In 2005, again presumably in response to material incentives, this time proffered by Beijing, Senegal broke ties to Taiwan and resumed relations with China. 76 UNCTAD, World Investment Report 2008/2009. 77 “How South Africa Challenges Our Thinking.” 78 Karl P. Sauvant, “Africa: FDI Opportunities are Local,” International Trade Forum Issue 1, 2007 http://www.tradeforum. org/news/fullstory.php/aid/1129, (accessed September 27, 2009). 79 Jeffrey D. Sachs, “The Importance of Investment Promotion in the Poorest Countries,” Word Investment Prospects to 2010: Boom or Backlash, Special Edition (London: The Economist Intelligence Unit, 2006), http://graphics.eiu.com/fi les/ ad_pdfs/wip_2006.pdf (accessed September 27, 2009). 80 Paul Kagame, “Why the U.S. Needs Africa.”

ACKNOWLEDGEMENTS

We wish ﬁ rst of all to thank Monitor Group Chairman Mark Fuller for his support of this project and help with the thematics and structure of the report. Our senior colleagues and partners Christoph Andrykowsky, Bernard Chidzero, Jr., Harald Harvey (now at SABMiller), Assaad Jabre, Jonathan Joffe, Jamil Kassum, Jan Schwier, Jim Sintros, and Jude Uzonwanne provided valuable advice and inputs and facilitated interviews with many people listed below. We are grateful also for help from David Storey and Lindsay Falkov at Resolve in Johannesburg, from Victor Ndiaye and Aïssata Sow Thiam at Performances Management Consulting in Dakar, and from Roland Schatz at Media Tenor in Zurich.

The report was drafted by a team including Victoria Barbary, Davis Dyer, Rolf Endres, Paul Frandano, Grant Howarth, and Melissa Quinn. Sarah Khan, Sara N-Marandi, and Josh Hessan helped with research and preparation of exhibits, and Lindsay Faith Weinhold provided outstanding administrative support and signiﬁ - cant help with the interviews. At Grail Research, a team led by NH Krishnan and overseen by Kurian Thomas furnished background research and helped build the database of foreign direct investments. The report was designed by Alyson Lee and her colleagues Julia Frenkle, Lily Robles, and Jade Jump.

Many people gave generously of their time in interviews and otherwise assisted the work in numerous ways. In addition to those already named, we wish particularly to thank Frank Aigbogun, Andrew Alli, Ladi Balogun, Hakeem Belo-Osagie, Lael Bethlehem, Taddy Blecher, Vandana Chandra, Yolanda Duhem, Tani Fafunwa, Matt Glasser, Ketso Gordhan, Sumila Gulyani, Erik Hersmann, Roland Hunter, Ben Moholwa, Aminata Niane, Ory Okolloh, Jean-Phillippe Prosper, Bismarck Re- wane, Rashid Seedat, Deepali Tewari, and Pat Utomi.

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