Foreign Policy: Africa On The Rise

Susan Lund is a principal at the McKinsey Global Institute, the business and economics research arm of McKinsey & Co. Arend Van Wamelen is a principal in McKinsey's Johannesburg office.

Africa is no longer the "lost continent" of popular imagination. The region has been growing rapidly for over a decade, the private sector is expanding, and a new class of consumers is wielding considerable spending power. And because of its young and growing population, the sky is the limit for future growth: Between 2010 and 2020, the continent is set to add 122 million people to its labor force. An expansion of this magnitude should set the stage for dynamic growth, but capturing this potential will require a change in economic development strategy. At its current pace, Africa is not generating wage-paying jobs rapidly enough to absorb its massive labor force, which will be the largest in the world by 2035.

Across Africa's diverse mosaic of countries, the challenge is the same: to create the kind of jobs that will ensure continued prosperity and stability for its citizens and enable Africa to become a major player in the world economy. If current trends continue, it will take the continent half a century to reach the same share of its labor force in stable, paying jobs as we see in East Asia today. Africa's most developed economies have a better record in producing wage-based employment, but shortfalls persist even in countries like South Africa, Egypt, and Morocco. Without wage-paying jobs, millions will be forced to turn to subsistence activities to survive, squandering vast potential.

To change this picture, Africa's leaders must move to accelerate job creation in order to entrench economic growth and continue to expand Africa's emerging consuming class. But it won't be easy. To illuminate the opportunities and challenges ahead, here are 10 things you might not know about Africa's economic landscape:

1. Africa is booming.

Africa has been the second-fastest-growing region in the world over the past 10 years. It has posted average annual GDP growth of 5.1 percent over the past decade, driven by greater political stability and economic reforms that have unleashed the private sector in many of the continent's varied mosaic of economies.

Poverty is also on the retreat. A new consuming class has taken its place: Since 2000, 31 million African households have joined the world's consuming class. At this point, when their household incomes exceed $5,000, measured at purchasing power parity, consumers begin to direct more than half their income to things other than food and shelter. The continent now has around 90 million people who fit this definition. That figure is projected to reach 128 million by 2020.

Africa now has considerable discretionary spending power. Indeed, contrary to conventional wisdom, the majority of Africa's growth has come from domestic spending and non-commodity sectors, rather than the resources boom.

2. Africa is poised to have the largest labor force in the world.

By 2035, Africa's labor force will be bigger than that of any individual country in the world — even bigger than economic behemoths like India and China. That offers the continent a chance to reap a demographic dividend, using its young and growing workers to boost economic growth.

The story varies from country to country. Nigeria and Ethiopia, Africa's most populous countries, will together add 30 million workers — an increase in their workforces of about 35 percent by 2020 — while South Africa is expected to add 2 million workers, growth of only 13 percent.

As Africa's workforce grows, the number of children and retired people that each worker supports will fall from the highest level in the world today to a level on a par with the United States and Europe in 2035 — the other part of the demographic dividend. With fewer mouths to feed and fewer dependents to support, African households will begin to enjoy even greater discretionary spending power, furthering driving economic growth.

3. African workers are better educated than ever before.

Today 40 percent of Africans have some secondary or tertiary education — and that share is rising fast. By 2020, the share of workers with some secondary or tertiary education will rise to nearly half.

While education rates are higher than many outside observers might assume, this is still an area where African countries need to make further progress to remain economically competitive. While 33 percent of Africans in the labor force receive some secondary education, 39 percent of Indian workers receive education at this level. In China, the share is an impressive 66 percent.

Today, educational attainment and skills are not perceived as a major obstacle for employers, as a new McKinsey survey of more than 1,300 African employers reveals. However, this is likely to be an increasingly important factor as the continent's economies develop — employers in the survey from South Africa, for example, did cite difficulty in finding workers with the specific skills needed as a barrier to business. Across the continent, the right kind of education and practical training programs can give the next generation of workers the soft skills needed to do any kind of job — not just basic literacy and numeracy, but also punctuality, communication, and dependability.

4. Steady work is still hard to come by in Africa.

But here's the bad news: Only 28 percent of Africans currently have stable, wage-paying jobs. To reap the benefits of its positive demographics and advancements in education, Africa needs to quickly create more jobs. Although Africa has created 37 million "stable" wage-paying jobs over the past decade, 91 million people have been added to its labor force.

As a result, 9 percent of the workforce is officially unemployed, and nearly two-thirds of African workers sustain themselves through subsistence activities and low-wage self-employment — so-called "vulnerable" jobs. Poverty may be decreasing, but it remains stubbornly high.

Youth unemployment is also a major challenge. In Egypt, one of the flash points of the Arab Spring, the adult unemployment rate is moderate — but youth unemployment is sharply higher at 25 percent. For the sake of social and political stability, Africa needs to accelerate its creation of stable jobs that are the route to lasting prosperity and an expanding consuming class.

5. With a few reforms, massive job growth is within Africa's reach.

The experience of other emerging economies shows that Africa could accelerate its creation of stable jobs dramatically. When they were at a similar stage of development as Africa today, Thailand, South Korea, and Brazil generated jobs at double or triple the rate as Africa. If current trends and policies continue, Africa looks set to create around 54 million more stable jobs by 2020, boosting the share of Africans with stable employment to 32 percent of the labor force. But if Africa were to match the efforts of Thailand, South Korea, and Brazil, it could create 72 million new stable jobs — raising the portion of Africans with stable employment to 36 percent.

This would lift millions more Africans out of poverty and vault millions of others into the consuming class. It would also cut the time needed to reach East Asia's percentage of stable employment by more than half — from over 50 years to just 20 years. Africa's most developed economies — such as South Africa, Morocco, and Egypt — are on track to create more wage-paying jobs than new entrants to the workforce, thereby reducing the ranks of the unemployed and vulnerable employed. Three sectors in particular already have a proven capacity to create jobs in Africa and can do so in the future: agriculture, manufacturing, and retail and hospitality.

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