Africa’s Human Capital

Sub-Saharan Africa is booming. Average purchasing power in the region once denigrated as the heart of "the hopeless continent" has risen by a third in the past decade, and foreign investment is gushing in. Yet it’s easy to miss the enormous differences between these 48 countries. Some, like the Democratic Republic of Congo, are still stuck with conflict and poor governance, but others — even countries that investors have neglected, such as Burundi — are laying the groundwork for the next stage of growth by investing in their people.

The problem with Sub-Saharan Africa begins with the term itself, whose meaning has become more than geographic. Increasingly, it signifies a region that does not include South Africa, considered a fairly developed, middle-income country where the average purchasing power is about the same as in Serbia or Peru. By that measure, however, Mauritius should be dropped as well. Some other groupings leave out oil-rich Nigeria, too, despite its continued struggles with poverty.

No single aggregate makes sense in such a diverse area. Yet most global corporations and government agencies inevitably slice and dice the world into regions, thus putting sub-Saharan countries in competition with each other for the attention of the world’s big investors and policymakers. Lately, that competition has become especially stiff.

The leaders in the region are not always the obvious ones. There are, of course, some established darlings that are simple to spot. For the ease of doing business as measured by the World Bank, Rwanda, Botswana, and Ghana all look better than several countries in the European Union. Rwanda and Ghana also score highly for protection of property rights — crucial for attracting foreign investors.

Look below the surface, though, and many other contenders are worthy of investors’ attention. The progress in these countries is not so much about the business climate today, or even the level of security or quality of governance. It’s more about the economic potential being built for tomorrow. This potential is best measured not by the experiences of corporate managers and consultants who respond to global surveys, but rather the development of human capacity in the next generation of workers and consumers.

In terms of human capacity, there are some striking trends for companies looking to get into sub-Saharan markets on the ground floor. For example, in overall human development as judged by the United Nations Development Program (UNDP), Madagascar now sits where the Republic of Korea did in 1980, on the cusp of its export boom. And a closer look at the data reveals many more examples of progress.

In the past three decades, the biggest improvement in education has come in Burundi. In 1980, children under seven there could expect an average of only 1.7 years of schooling, according to UNDP. Today, they will receive 11, and so the next generation of Burundian workers will be unrecognizable compared to the last. Uganda, Mali, Guinea-Bissau, Ethiopia, Guinea, and Burkina Faso have all made jumps of at least five years of expected schooling in the past three decades.

Health is another area where some countries have separated themselves from the pack. In Eritrea, Ethiopia, Guinea, and Niger, life expectancy at birth has risen by at least 15 years since 1980. Much of this change came from reductions in infant mortality. It is all the more impressive given that it came against the tide of the AIDS epidemic. For these countries, higher life expectancy will mean less hardship for families, lower fertility rates, and more investment of resources in each child.

Some of these countries, like Burundi and Eritrea, may be too small to capture investors’ imaginations. But in East Africa, Uganda and Ethiopia offer more than 100 million potential consumers. And in the west, homegrown multinational corporations are already starting to span the mid-sized francophone countries.

As Korea showed starting half a century ago, vast natural resources are not a prerequisite for rapid growth. With better education and health come higher productivity, rising wages, and greater buying power. To plan for this growth, companies will need to use a long time horizon. One way to do it is by laddering the marketing of their products in parallel with increases in living standards.

An excellent example of this kind of long-term planning is Honda’s investment in Vietnam. Honda established a subsidiary there in 1996, and within a few years its stripped-down Dream scooters were ubiquitous in city streets. As Vietnam prospered, the scooters got fancier. Eventually, they got doors, too. In 2006, Honda opened its first auto plant in Vietnam, producing the compact Civic for local consumption. Vietnamese consumers were used to relying on Honda products, but it took a decade for them to be ready for the big-ticket items.

Some investors may still be nervous about Sub-Saharan Africa, given its history of political instability and humanitarian disasters. But things can turn around quickly. Vietnam, a nominally communist country involved in military conflicts until the early 1990s, saw a huge surge in foreign direct investment once it made peace with its neighbors and opened its doors to trade. The resulting economic growth helped to underpin that same stability and openness. More recently, Sri Lanka’s economy has expanded by more than 8 percent annually since the end of its civil war.

In this century as in previous ones, much of the investment boom in Sub-Saharan Africa has come from companies seeking to extract natural resources. Resource booms come and go, though, and commodities are eventually exhausted. What endures is human capacity, the greatest economic engine of all.