Whither Africa's "Frontier Markets"?
Zimbabwe's election appears, once again, to confirm a truism: Africa only seems to make international headlines when disasters strike—a drought, a coup, a war, a genocide, or, as in the case of Robert Mugabe, grossly incompetent government. But, over the past several years, a number of sub-Saharan countries have attracted unprecedented inflows of foreign capital. Recent global financial turmoil has only added to Africa's allure, because its frontier markets are less vulnerable to international volatility than are most of the world's more familiar emerging economies.
There are three main reasons why many sub-Saharan countries are performing well. First, high commodity prices yield windfall profits for the region's leading producers of raw materials. Growing demand for energy, metals, and minerals—particularly in China—has driven unprecedented levels of foreign investment. Even large pension funds are beginning to take notice. Moreover, a large number of Africa's poorest countries have benefited from exponential growth in (primarily United States–based) philanthropy.
But, while both of these positive trends are likely to continue, a third positive factor may not prove as durable. Every year, Africans living outside the continent send roughly $30 billion to family and friends back home. These remittances are vitally important for economic stability in several African countries. An economic slowdown in the United States and Europe could substantially slow this infusion of cash, because immigrants are often the first to lose their jobs when recession fears take hold.
At the same time, though Africa's frontier economies are less vulnerable than other emerging markets to global financial turbulence, they are highly vulnerable to political turmoil closer to home. The three countries that served as pillars of regional stability for the past several years—Nigeria, Kenya, and South Africa—are now too preoccupied with political troubles of their own to provide the peacekeepers, reconstruction funds, and political pressure that often limit the damage from conflicts elsewhere in the region.
Most of Nigeria's problems are well known. Militants in the oil-rich Niger Delta region have at times shut down as much as 30 percent of the country's oil exports, a vital source of state revenue. President Umaru Yar'Adua has taken concrete steps to tackle elite-level corruption in Nigeria, and appears to have made progress toward a comprehensive peace agreement with the Delta rebels.
But Yar'Adua might soon confront a big short-term problem. The country's National Election Tribunal, having overturned the outcomes of several provincial elections, may well annul the results of last year's presidential race, forcing him to run for president all over again. While Yar'Adua could use the goodwill that he has built up over the past year to win by an even larger margin, the 90-day election campaign would almost certainly trigger civil unrest, and Nigeria's leadership would be too busy navigating domestic political rivalries to help stabilize conflicts elsewhere in Africa.
Kenya's troubles run deeper. Solid economic expansion and one of the world's fastest-growing stock markets have not helped the country avert a deepening political crisis and mounting ethnic violence since disputed presidential election results in December. President Mwai Kibaki, whom international observers accuse of rigging the vote, has hinted at a plan to share power in a unity government, but opposition leader Raila Odinga has heard these promises before. Odinga worked hard to help elect Kibaki in 2002, only to see Kibaki renege on a similar pledge.
Despite the alarming escalation in violence, fears of civil war in Kenya are probably exaggerated. The country's Orange opposition movement has recently won key posts in parliament and, for the moment, is heeding calls for calm from former United Nations Secretary-General Kofi Annan and representatives of the African Union. But no one should expect Kenya to play a stabilizing regional role again anytime soon.
The continent's third pillar, South Africa, will spend 2008 mired in an escalating political feud between Thabo Mbeki, the lame-duck president, and Jacob Zuma, a former deputy who is the newly elected leader of the ruling African National Congress and the leading candidate to succeed Mbeki, his bitter rival, next year.
South Africa's courts have become a political battleground, as Mbeki and his allies use corruption charges to try to cripple Zuma's candidacy. The resulting political firestorm may well force Zuma to rely on core support from key allies within the country's trade union movement and Communist Party, challenging the political elite's pro-market consensus and provoking debate over the future of South Africa's economic policy.
No countries in sub-Saharan Africa will have the economic heft and political self-confidence to replace Nigeria, Kenya, and South Africa as pillars of stability anytime soon. Regional blocs like the Economic Community of West African States (ECOWAS), the Southern African Customs Union (SACU), and the East African Community (EAC) will eventually assume larger roles in helping resolve the continent's most intractable diplomatic and economic problems. But that won't happen this year.
There remain many good reasons for investors to take a chance on Africa's frontier markets. But it will not necessarily take a drought, a coup, a war, or a genocide to make them think twice.
© 2008 Project Syndicate. Republished with kind permission.
"Gang violence threatens fragile peace in Kenya," AP, April 14, 2008.
"Zimbabwe court rejects demand for immediate release of presidential election results," AP, April 14, 2008.