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The Africa Competitiveness Report 2007 Part 4/6

The Africa Competitiveness Report 2007 Part 4/6

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Measures competitiveness of countries and economies in Africa.
Chapter 1.3: Competitiveness and Investment Climate in SANE Economies.
Measures competitiveness of countries and economies in Africa.
Chapter 1.3: Competitiveness and Investment Climate in SANE Economies.

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Published by: World Economic Forum on Sep 30, 2008
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CHAPTER 1.3
Competitiveness andInvestment Climate inSANE Economies
LOUIS A. KASEKENDETEMITOPE W. OSHIKOYAPETER O. ONDIEGEBERNARD Z. DASAH
at the African Development Bank
This chapter analyzes the four largest economies inAfrica (South Africa,Algeria,Nigeria,and Egypt—calledthe SANE).It explores the structure,performance,andcompetitiveness of the SANE economies.The chapter also examines the major investment constraints facingfirms in these countries and discusses the policy impli-cations of the findings.In addition,this chapter makessome comparisons of competitiveness and investmentclimate in the SANE economies and the BRICeconomies (Brazil,Russia,India,and China).
The SANE economies in context
Africa is a vast continent with 53 countries.However,the SANE group of four countries represents almost afifth and a third of the continent’s land mass and popu-lation,respectively,and accounts for slightly more thanhalf of Africa’s total GDP in both nominal and purchasingpower parity terms.The remaining 49 countries,withtwo-thirds of the region’s population,have 45 percent of Africa’s GDP.Remarkably,the SANE group also shareshalf or more of Africa’s exports,total trade,foreigndirect investment,and foreign reserves (Tables 1 and 2and Figure 1).The relative economic size and importance of theSANE is even more pronounced at the subregionallevels.South Africa accounts for four-fifths of the totaloutput in Southern Africa.Within its immediate subre-gion,Nigeria is one of 15 countries in West Africa thatmake up the Economic Community of West AfricanStates (ECOWAS) but it accounts for half of its popula-tion and more than two-thirds of the subregionaloutput.Algeria and Egypt also account for more thanhalf of the total output in North Africa.As a group,SANE compares relatively well withglobal emerging economies that make up BRIC.Theaverage per capita income in 2005 was higher in theSANE economies (US$1,841) than in the BRICeconomies (US$1,669).Although the population of theSANE is about 26 percent of India’s population,thenominal GDP of the SANE represents 70 percent of India’s GDP.The SANE’s population and GDP are 22percent and 24 percent of China’s population and nomi-nal GDP,respectively.In 2005 SANE attracted US$16.2billion worth of foreign direct investment (FDI),whichwas two and half times the FDI to India (Table 2).FDIto the SANE as a group were also higher than FDI toBrazil or Russia.
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The authors would like to acknowledge the service provided by SanaHarrabi and Lobna Bousrih, research assistants at the AfDB. The chap-ter reflects the views of the authors, and not necessarily of the AfDB.Bernard Z. Dasah is a consultant at the AfDB.
 
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Table 1: The relative importance of SANE economies
2006 or most recent year (unless otherwise specified)
SANE ECONOMIESREST OF AFRICA
LandlockedCoastalTotalIndicatorsSouth AfricaAlgeriaNigeriaEgyptSANEcountriescountriesAfrica
1.Area (thousand km
2
)1,2212,3829241,0015,52810,32414,45530,3072. Population (millions)483313475291284349924Share of Africa (percent)541583231381003. Nominal GDP (US$ billions)262128120104613953851,093Share of Africa (percent)24121110569351004. GDP (US$ billions PPP)6052561863271,3733269052,605Share of Africa (percent)23107135313351005. Annual GDP growth rate 19972006 (percent)344543546. Investment ratio (gross capital formation, percent of GDP)19312018212120217. Gross national savings (percent of GDP)13563620281726238. Foreign reserves (US$ billions)2382492317615122314Share of Africa (percent)726167565391009. Trade balance (US$ billions)4403311572177210. Current account balance (US$ billions)1431192383243511. Share of African exports (percent)16161655264210012. Share of African imports (percent)23810105094110013. Export growth 19972006 (percent)45310456514. Import growth 19972006 (percent)71267657915. FDI (US$ millions)6,3791,0813,4035,37616,2393,45910,97130,669Share of Africa (percent)2141118531136100
Source: Oshikoya, 2007.
Table 2: Economic indicators for the SANE and BRICeconomies (2005)
NominalGDP perPopulationGDP (US$capitaFDI (US$Economies(millions)billions)(US$)millions)
SANE ECONOMIES
South Africa482405,1006,379Algeria331023,0861,081Nigeria134996783,403Egypt75931,3155,376
SANE total29053410,17816,239SANE average per capita income1,841
BRIC ECONOMIES
Brazil1847924,31515,066Russia1437635,34814,600India1,0947757146,598China1,3082,2251,70372,406
BRIC total2,7294,55512,080108,270BRIC average per capita income1,669
Source: FDI data are from
UNCTAD Database 
, http://stats.unctad.org/FDI. Therest of the data are from IMF
World Outlook Database 
, September 2006.
The indicators that have often been found to bepositively correlated with FDI in Africa are economicopenness,especially to international trade;the quality of institutions and physical infrastructure in the host econ-omy;and economic growth and macroeconomic stabili-ty.Although the SANE economies have a competitiveadvantage over the other African countries in theseindicators,natural resources—especially hydrocarbonand minerals—have influenced the flow of FDI intotheir economies.In the case of South Africa,an addedmotivation for FDI is the size of its local economy (it isthe largest in Africa),which is seen by many investors tobe pivotal for regional production and trade.The creationof a functioning free trade area is likely to provide theeconomies of scale needed for profitable production,andthus should encourage more direct investment in theregion.Another key location-specific determinant of FDI in South Africa is its superior infrastructure,bothphysical and financial.Africa’s competitiveness could be enhanced by theproductivity of the SANE economies,which in turn isdetermined by the productivity of their firms.Morethan two-thirds of the largest 1,000 African companiesare in the SANE economies.Thirty of the largest 50African banks are in the SANE economies.A few of these companies are beginning to tap into the muchlarger African markets.Therefore SANE economies have
 
the potential to serve as essential “growth poles”for other African countries.The concept of growth poles suggests that econom-ic development is not uniform over an entire region,but instead takes place around a specific pole such as akey industry or country.Both directly and indirectly,industries or countries that are linked then developaround this pole.SANE has four distinct comparativeadvantages that could facilitate these countries tappinginto an integrated global economy and becomingpotential regional growth poles for Africa:geography,resource endowments,market size,and an active privatesector.First,they are resource-rich countries,with natu-ral resource rents accruing from relatively diversifiednatural endowments in both agriculture and mining.Recent and projected commodity booms have enabledthe SANE economies collectively to amass foreignreserves of US$175 billion.Algeria and Nigeria havereserves of US$130 billion,equivalent to half of their GDP and about the same as those of the remaining 49countries;on a per capita basis this is equal to China’s.Algeria and Nigeria have also learned some lessonsabout managing commodity booms and busts as macro-economic volatility has dampened.The second potential factor in favor of SANE isphysical geography.The SANE economies are strategi-cally located on the continent.Egypt is a country innortheastern Africa and southwestern Asia.Most of itlies in Africa,but its easternmost part,the SinaiPeninsula,is traditionally regarded as part of Asia.Through this peninsula,Egypt forms the only landbridge that connects Africa to Asia.Nigeria is well posi-tioned in the hub ofWest Africa and borders CentralAfrica.South Africa too is expediently situated in thesouthernmost part of the continent,where it plays animportant and effective role in both the MaputoCorridor 
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and the Southern African Power Pool.
2
Algeria stands at the entrance to northwestern Africa.The SANE economies could take advantage of their immediate regional surroundings to enhance their com-petitiveness and broaden their influence in Africa.The SANE economies are all coastal states.This factcould generate positive externalities by providing accessto external markets,allowing landlocked neighboringcountries to reduce the cost of exporting.Although theSANE economies together account for about 20 per-cent of Africa’s land area,their access to the sea couldact as a natural advantage that could foster openness toboth intra-African trade and global trade.SANE’s coastalstructure could lend itself to the future development of industrial concentration and an agglomeration of citiessimilar to that in the eastern seaboard of the UnitedStates and the southeastern seaboard of China.The third possible factor in favor of SANE is marketsize,which could provide opportunities for firms to reapincreasing returns of scale and network effects.Per capitaincome is three times higher in the SANE economiesthan in the rest of Africa,and the growing middle classin these countries could provide a market size on whichto capitalize.Africa’s population is roughly divided
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0510152025303534.117.010.36.25.95.65.02.52.42.2
South AfricaEgyptNigeriaAlgeriaMauritiusMoroccoAngolaGabonEquatorial GuineaTunisia
Figure 1: The 10 largest recipients of FDI from DAC donors, as percent of net total to Africa (1998–2005)
Source: AfDB, Statistics Department.Note: Total FDI to Africa from DAC donors was US58.7 billion for 1998–2005.

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