On a dusty hillside near Rustenberg, South Africa, semi-automatic gunfire crackled under a clear blue sky leaving 34 miners dead and dying, their blood staining the mineral-rich soil a deeper shade of red. For a wage increase of £2.20 a day a group of young men paid the ultimate price, and the five-day industrial dispute at Lonmin's Marikana mine had reached its deadly conclusion.
It is this image of a violent, dysfunctional Africa that means it remains the most underinvested market in the world. When Africa is discussed by the western media, the news is rarely good - only this week, Islamist terrorists murdered seven hostages in Nigeria, a fast-growing country split by religion; and Sudan, Somalia and now Mali are all recent victims of similar fundamentalist-inspired violence.
But attitudes towards Africa as an investment destination are changing, and many supporters argue that such incidents are becoming the exception rather than the rule. More than one in two institutional investors see Africa as the most attractive investment region in the next decade, with one in three expecting to put at least 5 per cent of their portfolios into the continent by 2016, an Economist Intelligence Unit poll revealed. Mark Livingstone of Fidelity is one of the many fund managers singing its praise - he says it's the "ultimate" frontier opportunity. He's in the company of emerging market veterans such as Mark Mobius, a man with an eye for the long game and strong track records of being ahead of the curve in emerging and frontier markets.
There is no doubting Africa's potential - a large and growing population and the gradual reversal of years of neglect and crippling misgovernment mean that seven out of 10 of the fastest-growing economies in the world are African. Its vast resources wealth is finally finding its way into the lives of its people rather than its oppressive rulers. Led by the demands of the resources industry, transportation and communications infrastructure is improving - more than 80 per cent of the population now own mobile phones, while £30bn has been invested in roads, schools and other public services over the past year.
That's prompting Western companies to take a fresh look at the region. Easyjet founder Stelios Haji-Ioannou, for one, is aiming to replicate the success of easyJet with the launch of Fastjet, a low-cost African airline. Rising incomes combined with a paucity of road and rail transportation and a fragmented and often dangerous network of local airlines bodes well for the venture, which is why we've got the Alternative Investment Market (Aim)-traded shares on a buy.
Large consumer goods groups such as Diageo and Unilever are well established in African markets, but continue to generate rapid growth there. Unilever said last year that it aimed to double its African revenues by 2017.
Yet every bullish assessment of Africa comes with a well-flagged caveat – as we warned anyone considering taking a punt on Fastjet: "it's a blue-sky investment and requires a planeload of faith". For Africa to join the investment destination top table alongside Brazil, Russia, India and China, there is still much that needs to change, otherwise it will retain its status as an especially wild frontier market. That could take a very long time and, as continuing upheaval across the continent demonstrates, there is much that could go wrong along the way.
Demographic dividend or ticking time bomb?
Africa's greatest strength is its young and rapidly growing population. If it can harness what has been called the demographic dividend then the future is bright. Africa is due a population explosion. There are over 1bn people in Africa today and by 2050 that is expected to more than double to 2.2bn. That growth is equivalent to an extra 65 United Kingdoms in under 30 years.
The abiding characteristic of this demographic shift will be youth. The average African is only 18 years old, some 16 years younger than the average age in China, and as China and the West gets older that gap will widen. Africa contains the top 10 youngest populations in the world, led by Niger where nearly half are below the age of 14.
Today, across Africa around 180m people fall into the 15-24 age bracket and that is expected to rise to 246m by 2020. That requires 74m jobs to be created over the next decade just to prevent youth unemployment from getting worse. In countries such as Uganda and Zimbabwe youth unemployment is around 80 per cent. The situation is little better in the most advanced economies such as South Africa, where youth unemployment stands at around 51 per cent. Its mining sector is shedding jobs and there are few other industries to replace them - 67m young Nigerians are jobless.
A flood of investment into the region does not appear to be doing much to alleviate this problem. China has become a highly active investor in Africa, but the continent's leaders are also wary of its intentions - Nigeria's central bank governor, Lamido Sanusi, warned in the Financial Times last week that its investment in the continent is reminiscent of colonialism. "They have also built infrastructure. But, with exceptions, they have done so using equipment and labour imported from home, without transferring skills to local communities," he wrote. "Africa is now willingly opening itself up to a new form of imperialism."
If jobs aren't created for this young and energetic population violent social unrest may follow, as seen in Tunisia and Egypt. "Failure to create jobs and opportunities for a growing and increasingly urbanised and educated youth will have grave consequences," warns former United Nations Secretary General Kofi Annan. "Growing inequality and the twin problems of marginalisation and disenfranchisement are threatening the continent’s prospects and undermining the very foundations of its recent success."
Democracy in Africa
Disenfranchisement is further kindled by poor government. True, Africa is making progress in adopting democracy, but elections are often still characterised by fraud and violence. Few trust the results. Defeated in the Kenyan elections last week, Raila Odinga has refused to concede and will challenge the result in court on the basis that there was "rampant illegality" at work. In Africa this has been commonplace. Respected British journalist Michela Wrong wrote in her seminal book on African corruption, It's Our Turn to Eat: "What greater corruption could there be than stealing an election?" The Nigerian elections last year were hailed a success, but still fell short of international standards due to reports of vote rigging and fraud. In South Africa the political landscape has been reduced to a one-party state, with the African National Congress (ANC) controlling around two-thirds of votes. A widening schism within the ANC spells trouble in the run-up to elections in September.
Electoral disputes often lead to shocking violence. The victory of Uhuru Kenyatta, son of Kenya's first president and victor in Kenya's recent election, has re-opened old wounds in the country's political landscape. Mr Kenyatta is currently indicted for crimes against humanity for alleged involvement in a wave of violence and murders that followed the Kenyan elections in 2007 as incumbent president Mwai Kibaki sought to galvanise his tribal powerbase.
Kenya's newly elected President Uhuru Kenyatta speaks to faithfuls after a mass on 10 March 2013 at the Matyrs of Uganda Catholic church.
This is a well-trodden path in African politics, as leaders once in power distribute funds along tribal allegiances. Because corruption often favours ethnic groupings, the stakes in African corruption are often deadly. Along with Omar Al-Bashir of Sudan, Uhuru Kenyatta is one of two African leaders who face prosecution by the Hague.
The Economist Intelligence Unit's annual democracy index in fact ranks only one African country, Mauritius, as a 'full' democracy. Even Ghana, often cited as the model of African democratic development, only classifies as a 'flawed democracy'. If the political system is not working unrest is sure to follow, creating a vicious circle as rulers become fearful of their own populace and tighten their grip. Take Uganda's Yoweri Museveni, for example - in power for 25 years, his rule has been marked by brutal crackdowns on protests, new treason laws and the repeal of laws limiting presidential terms. The results of the most recent election in 2011 were disputed by the EU.
So far the Arab Spring has not gained meaningful momentum in the Sub-Saharan region, though – yet such a turning point is surely needed for Africa’s true potential to be unlocked. If such an event is necessary, it isn’t an entirely enticing prospect for investors.
History suggests it does not take much for Africa to explode into violence. The continent may be made up of 54 individual states with distinct languages and cultural differences, but government control rarely extends to isolated rural areas, borders are porous and local conflict can quickly destabilise neighbouring states. What started as an ethnic crisis in Rwanda in 1994 ended up engulfing the entire central African region, leading to the collapse of postcolonial order in Africa.
Localised ethnic disputes can spread like wildfire, as has been observed in the wake of the Libya conflict, which has de-stabilised Mali.
Mali was feted by western governments as an African state that had successfully transitioned to democratic government. International observers declared elections free and fair, and a free press flourished. All that changed in March this year when a low-ranking officer in military fatigues appeared on state television declaring the constitution suspended and a military junta in its place.
Observers so desperate to see progress in Africa had ignored the warning signs. There was a steady collapse of functioning government as sweeping legislation was pushed through with little or no debate. Corruption flourished as millions in aid was pocketed by corrupt officials. Journalists were imprisoned for writing articles critical of the government and elections were characterised by dwindling turnout. Mali’s warning signs are not isolated.
In England, 'graft' means hard work - in Africa it means corruption on a scale that is sometimes difficult to comprehend. Corruption is still a problem endemic to Africa. And the situation appears to be worsening. According to Transparency International's Corruption Perception Index, South African corruption has increased every year since 2007. Other African economies including Nigeria, Angola and Kenya are measured as being even more corrupt.
Corrupt oil deals in Nigeria are estimated to have cost the country $29bn (£19.50bn) in the past decade. To put that into perspective, it exceeds the $15bn sub-Saharan Africa received in development aid last year and dwarves BP's $4.5bn Deepwater Horizon settlement. A former senior World Banker, Oby Ezekwesili, reckons that $400bn of Nigeria’s oil revenue has been stolen or misspent since the country's independence in 1960, the Economist reports.
Corruption and inequality also distort measures of progress. Take Nigeria, for example, where GDP per capita has progressed from $400 per person to around $1,600 per person in the past decade. That is if it would have been spread equally. It is difficult to reach that conclusion when Lagos is home to an Armani suited Mercedes driving few, surrounded by the slum dwelling masses.
Inequality is growing as well - the gini co-efficient (a measure for income distribution in a country where 0 is perfect equality and 1 perfect inequality) makes for unpleasant reading for anyone considering investing in Africa. Even in South Africa, one of the continent's most developed economies, the gini co-efficient shows that inequality gradually worsened in South Africa between 1993 and 2008 - despite the end of apartheid.
In other African economies signs of progress in tackling income inequality are scant. While Africa bulls often point to huge growth in the service and consumer sector to cater for a middle class that has tripled in the past 30 years and is set to reach 1.1bn by 2060, the bar has been set very low. African Development Bank figures classify anyone spending $2 a day as middle class, the same level as the poverty line for the developed world. The proliferation of fried chicken shops and, at the other end of the wealth spectrum, designer goods should not be taken at face value as a sign of economic progress.
Corruption Perceptions Index 2012 - gini co-efficient
|Source: Transparency International World Bank|
Growth but little structural change
To investors plagued by low interest rates and recession in the west, Africa's apparently unstoppable economic growth is nevertheless a great attraction. In the latest International Monetary Fund outlook for sub-Saharan Africa growth is projected at 5.25 per cent a year for the next two years. That is impressive given anaemic advanced economy growth rates and fears over an Asian slowdown. The last time Africa was in recession was back in 2000.
But this growth hasn't led to significant changes in the structure of the economy, leaving it fragile and volatile. Almost half of Africans still live on less than 80p per day and resource-rich African economies are still overly reliant on volatile commodity revenues and foreign currency flows - the likes of which have funded Nigeria's consumer boom. In Sub-Saharan Africa, agriculture still provides employment for over half of the working population and generates one-fifth of GDP.
This is a crucial point in Africa's economic development - if Africa is to grow it needs to harness technology and improve its agriculture to free its workforce. Take a look at the Asian economic miracle, which coincided with rapid agricultural productivity gains between 1965 and 1990, underpinning a huge shift in labour to manufacturing.
A similar agricultural revolution is yet to take place in Africa - beyond rare examples of well organised western farming methods such as at Aim-traded Zambeef, farming in Africa is undertaken on a smaller scale than elsewhere. That means it is more labour intensive and uses fewer agrochemicals than farming in developed economies. As a result, the growth rate in agricultural productivity is virtually unchanged since the 1990s.
That also means African farming is acutely sensitive to the weather. A World Wildlife Fund report highlights 14 countries in Africa already experiencing water stress, with another 11 set to join them by 2025. Poorly developed irrigation means it is also unable to cope when the rains don't arrive. Droughts in West Africa's Sahel region and across East Africa are recent examples of this.
Without investment, the situation is set to get worse, as climate change creates a shift in global weather patterns, with reports estimating that rain-fed agricultural yields could fall by up to 50 per cent by 2020. If these gloomy forecasts come to pass, growing numbers will face famine, further undermining hopes of economic recovery, and creating destabilising stress points throughout the continent.