This week, President Obama will welcome African leaders to Washington for the first US-Africa Leaders Summit. Although a broad range of topics will be discussed -- from investing in healthcare to improving security - the central theme of the conference will be on unlocking Africa's economic opportunities and investing in the continent's next generation.
The African continent has made giant strides in recent years. In the past decade, many African countries have implemented difficult political and structural reforms that are now bearing fruit. The size of the African economy has more than tripled since 2000; and, today, Africa is one of the fastest growing regions in the world, second only to South East Asia. The fiscal outlook for most African economies has greatly improved, and most macroeconomic indicators are trending the desired direction. The continent has a rapidly expanding middle class, roughly equal in size to that of India. The region is also on the cusp of a demographic transition, and by 2035, Africa will have a combined labor force larger than that of China. The African continent is undoubtedly on the rise and ripe with opportunities for investment across multiple sectors.
While the "Africa rising" narrative is no longer news, some parts of the world -- particularly the West -- have been slow to seize the continent's emerging opportunities. Although Western Europe still accounts for the highest FDI flows to Africa due to historical ties, investments into Africa from other emerging markets are rising much faster. For example, over the past decade, the share of FDI projects in Africa from Western Europe and North America declined by 9 percent and 52 percent respectively. At the same time, the corresponding shares from Asia Pacific and the Middle East rose by 19 percent and 27 percent respectively. While the total number of new project investments from emerging markets grew by 157 percent between 2007 and 2012, new projects from developed countries grew by only 50 percent during the same period. India has now overtaken the UK and France as the largest single source of foreign firms investing in Africa's manufacturing industries.
Africa's trade with the rest of the world has followed a similar pattern. The developed countries' share of trade with Africa has declined as trade with other markets, particularly in the developing world, has picked up. Africa's total trade with the BRICS reached US$340 billion in 2012 representing a more than tenfold increase over the course of a decade. Not surprisingly, China has been Africa's largest trading partner since 2009.
While investors from emerging markets in Latin America and Asia are already seizing the window of opportunity to invest in Africa, their Western counterparts have been slower to act. It would seem that the West remains stuck in Africa's lingering perception gap and has continued to prioritize aid in its engagements with Africa. While aid is undoubtedly important for the region's development -- and still constitutes a significant portion of budgets in some African countries -- it is simply not enough to cover Africa's significant investment needs. For example, the World Bank estimates that $93 billion per year is needed over the next decade to tackle Africa's infrastructural challenges. However, current spending is only $45 billion, leaving considerable gaps which cannot be met solely from aid budgets. Aid can however be catalytic in leveraging additional infrastructure and other investments. Many donors realize this and are now using aid in a more catalytic fashion.
With the high rates of return realized by investors across the African continent, investments provide a win-win option for both Africa and the West. Western investors must overcome their perception gaps and get on board before the window of opportunity narrows. This is the song that African leaders have been singing for almost a decade now. Obama's US-Africa Leaders Summit is evidence that this tune is finally catching on!