Emerging Markets in Sub-Saharan Africa: Challenges and opportunities in the face of the global crisis

Africa seems a perpetual synonym for “underdevelopment” and poverty or as The Economist magazine called it in the year 2000, Africa without Hope. However, the shock of reality has broken these dogmas about the African economy, since the economic emergency processes have begun despite all the factors against them. Despite the pandemic and political setbacks, Sub-Saharan Africa could be facing a process of massive economic-productive transformation. Will sub-Saharan Africa become the new world center of global industry?

Indeed, as the difficulties of supporting Sierra Leone seem intractable and as Sierra Leone seems to embody so much the rest of Africa, it begins to look as though the world may have given up on the entire continent.

The Economist, Hopeless Africa, 2000.

Broadly speaking, emerging markets or economies refer to developing countries that present characteristics of development or growth above other economies with a similar income level. However, there is no consensus on the meaning and implications of an emerging market. The definitions of the term have an important weight since they determine which countries access this category and which do not meet the conditions to be considered as such.

While most emerging economies are centered in Asia Pacific, a number of African economies could join this group as they have been exceptional performers in the developing world. The International Monetary Fund has declared that, despite the structural problems of Sub-Saharan Africa, this will be the region with the highest growth, at the same time that it is where the highest levels of urban development are concentrated. The volume of international trade and investment (both incoming and outgoing) is on the rise, so its insertion into global value chains is increasing. There have been significant improvements in human development indicators, where education and cooperation in health issues translate into a better quality of life[1].

Africa also began a renewed continental integration process that was intended to address the continent's structural development problems. The 1980s and 1990s presented complex years for the region, as the violence derived from the Cold War intensified and after a series of long and violent civil wars, peace processes, economic and political unification remained off the political agenda. . With the wave of globalization of the 1990s, African diplomacy took the initiative to upgrade the Organization for African Unity towards a broader integration mechanism, emulating the spirit of the European Union. Despite the fact that the 1990s also presented strong crises to the African project in the sub-Saharan region (genocide in Rwanda or the Second War in the Congo), some events such as the end of Apartheid in South Africa and the leadership of Nelson Mandela and Muammar at -Gaddafi, helped to finally consolidate political efforts in 2001, with the formation of the bloc in Addis Ababa.

It was thanks to the integration process of the African Union that some of the economies consolidated their economic processes and strengthened their markets thanks to the integration with other countries of the subregions. The smallest nations were the most benefited, since integration allowed them to have access to basic goods and elemental natural resources to activate the sectors with the greatest competitive potential. Globalization and integration facilitated the processes of trade and foreign investment, allowing some countries to join the club of Emerging Countries or Emerging Markets.

South Africa and Egypt were the first to take off thanks to their geographical location and their more advanced industrialization than the rest of the continent. Thanks to the boom of raw materials, countries with great energy potential such as Nigeria and Angola (oil) or Gabon (uranium) managed to establish themselves in international chains. But elements such as political instability, the increase in violence and the lack of legality prevented them from establishing themselves at the level of other emerging economies.

In January 2021, the African Continental Free Trade Area (AfCFTA) came into force, after its start was postponed in mid-2019 due to the global pandemic. The AfCFTA will be the largest free trade union in the world, with 54 countries of the AU's 55 members (Eritrea has not ratified the agreement), creating a common market that boosts intra-regional trade (16.6% of African exports) that it is surpassed by trade with Europe (68%) and with Asia (59.4%)[2].

Despite this, there is a growing literature focused on determining that some economies deserve the denomination of emerging to access financing and investment for development based on merit[3]. The basis for this is to create coordination in economic policies based on the variables that promote investment.

Table 1: Emerging and Nearly Emerging Markets in Africa (Kehl, 2007)

Regional integration and emerging economies

African Union Executive Council in Egypt 2020 Source: [https://see.news/egypts-fm-chairs-36th-ordinary-session-of-au-executive-council/](https://see.news/ egypts-fm-chairs-36th-ordinary-session-of-au-executive-council/)

The project of the African Union (AU) has as its main objective the integration of the continent, prioritizing the economic and commercial issue has an extremely important weight. The AU's efforts have focused on facilitating economic processes and addressing development challenges focused on poverty and unemployment, which are made particularly complicated by massive population growth.

Although the African Union integration process covers the entire continent and is not limited to sub-Saharan African countries, the sub-regional integration mechanisms known as Regional Economic Communities (RECs) have had a greater impact on trade, simplifying the processes customs, reducing non-tariff barriers and lifting tariff measures on most products. These communities include: Economic Community of West African States (ECOWAS), East African Community and Intergovernmental Authority on Development (IGAD), Economic Community of Central African States (ECCAS), Community of Sajelo States -Saharans and the South African Development Community (SADC), among others[4]. The CERs propose different mechanisms such as a common market and, in some cases, monetary and customs unions that allow small economies to access a broader destination market, the creation of scale industries, as well as some macroeconomic and monetary stability.

Unlike other regions of the world, integration in sub-Saharan Africa has had positive linkage and spillover effects between large and small economies[5]. The leverage effect is concentrated in intraregional trade that allows access to cheaper products, as well as facilitates the mobilization of domestic and international capital, with a greater amount of labor and human capital.

The creation of a unified market facilitates investment projects with broader effects, which allow economies to diversify and not depend on external flows of Foreign Direct Investment (FDI) and the export of raw materials, whose international price instability generates uncertainty in the income of state and private companies. FDI projects in services and manufacturing increasingly have a greater relative weight with respect to the continent's gross domestic product (GDP), with growth of 5% per year in the period 2011-2015[6]. Despite this progress, the mining and extraction sectors remain the largest, mainly due to global demand (especially from China) and reserve volumes.

The main contemporary challenge of the integration of sub-Saharan Africa will be the creation of mechanisms that limit the negative effects of the attacks of the international economy. The free flow of labor, the increase in education levels, the improvement and expansion of health services, the creation of broader food systems and the reduction of levels of violence have allowed African societies to develop, without However, the challenges of poverty and inequality of a rapidly growing population are hard to ignore for long.

The effect of China on Africa

The insertion of Africa in global value chains is relatively modern, since its commercial relations were limited with the countries of the bloc to which it had aligned itself during the Cold War, focused on the export of products from the primary sector and coexisted with international aid. given by the Soviet Union and the Western bloc, while the countries identified as non-aligned received South-South cooperation from the People's Republic of China. This Sino-African rapprochement cemented and planted the seeds of the future economic relationship.

         The relationship between Africa and the People's Republic was strengthened during the period of economic takeoff, but investment and trade relations were strengthened at the beginning of the 21st century. The beginning of the relationship was marked by the need for raw materials that covered the needs of industrialization, at prices low enough for Chinese manufacturing exports to remain competitive. Gradually, investments and exports focused on developing the domestic market and when development in China led to an increase in industrial wages, they began to set up factories in sub-Saharan Africa, seeking lower wages. FDI has grown continuously, even in times of economic crisis and slowdown, so it is expected that even in the face of the international economic crisis, investment volumes will continue to grow.

         The effect that China has had on the continent is undeniable, which is why large research projects have been undertaken in this regard, since the relationship is not strictly economic. There is a diverse mix in the portfolio of private investment and investment by Chinese public enterprises, while both are accompanied by the invigoration of diplomatic relations. The rapprochement through the China-Africa Forums has been crucial to establish investment projects in infrastructure such as the coastal railway in Nigeria, the Addis Ababa-Djibouti railway and the mega port and economic zone in Bagamoyo (Tanzania)\[7\] . This economic impulse, through investment in infrastructure, is what has allowed rapid urbanization, since it generates concentrated employment centers, attracting rural immigration.

The relationship between China and the emerging economies in Sub-Saharan Africa also presents adverse effects. Although Beijing's position indicates that they do not seek to establish relations of neocolonial domination (exemplified in the Policy of the 5 No: Do not interfere in local development, Do not interfere in internal affairs, Do not impose the benefit of China, Do not impose conditionalities on cooperation , Do not impose political benefits), many countries have acquired high levels of long-term debt that, if they do not grow at projected levels, will be impossible to sustain. Some research indicates that this debt trap can stop any progress made, however, the management of foreign debt is one of the strongest political instruments between China and its creditors.

Debt forgiveness is one of the tools used by the Chinese government as a measure of international cooperation, thus resolving the issue of the debt trap, but it has controversial implications, as it provides lines of credit to undemocratic regimes with histories of violations of human rights. A highly publicized case is that of the Hambantota Port in Sri Lanka, which was financed with Chinese money and placed on a 99-year lease with China Merchants Port Holdings, to balance the balance of payments with China, stemming from the growing debt with Beijing[8]. However, the international image was that this happened in retaliation for non-payment.

However, at the international level, the growing Chinese presence in Africa is not perceived favorably, especially by the former colonizers, who see their influence in their former colonies at risk. Among them, France is the spearhead since it has an overwhelming presence in West and Central Africa, but it is concentrated in the military spheres, where it has undertaken military actions against terrorism in the Sahel. Furthermore, French political control is entrenched through monetary control of currency unions. The West African franc and the East African franc are tied to changes in the euro, therefore currency issuance is controlled from Paris. Even during the decolonialization process, the French government ensured political control over these regions that it considered strategic[9].

During the Macron administration, it has sought to strengthen ties between the former colonial areas and the French metropolis, arguing that the rise of Chinese influence in Africa represents a threat to the sovereignty of sub-Saharan nations, however, France would thus perpetuate its relations neocolonialists through political, military and monopoly control of strategic sectors such as infrastructure, energy and telecommunications (exercised by the companies Balloré, Total and Orange)[10].

The diverse effects of the insertion of Africa in the global economy, whether thanks to China, Europe or the United States, generates conflicting opinions. While there is broad support for job creation and large infrastructure projects sponsored by Beijing, there is also strong opposition to the exacerbated exploitation of natural resources and damage to the environment. In the same way, there is a feeling of seeking and promoting economic autonomy as a mechanism that generates a counterweight and ensures local development.

The new emerging markets: challenges and structural challenges

The first political, social and economic challenge facing the African economies as a whole is that of political instability and violence. In the Africa Foreign Investment Survey it was determined that the greatest concern for investors is violence, in many cases generated by political instability or institutional fragility[11]. In the cases proposed by Kehl as potential emerging markets, there is a favorable perception of the political situation, however, in recent years there has been a decline in the consensus between society and government in some of the largest economies on the continent.

Political stability implies not only the imposition of political control, but also the existence of democratic processes and institutions that safeguard human rights. Authoritarianism and police violence go beyond international investments, since they constitute attacks against the development of the populations that should benefit. Popular demands for fairer economic systems, more and better employment opportunities, and broader social protection become crucial elements for long-term sustained development, which is why state repression undermines development efforts understood in an integral way. The rise of gender violence, violence against youth and few opportunities, coupled with insufficient systems show the structural deficiencies ignored by political elites.

Mass protests in South Africa demanding the reduction of education costs Source: Al -Jazeera

Nigeria, Africa's largest economy, managed to flourish thanks to its oil reserves and which during the first decade of the 21st century benefited from the raw materials boom has faced serious political conflicts. With the Boko Haram insurgency, the regional stability of West Africa was called into question and the advances in reducing violence collapsed. The increase in authoritarianism in response to terrorist insurgencies caused discontent among the civilian population, which has presented strong resistance to police impositions that demand the dissolution of state forces responsible for crimes against humanity. The government chose to increase police repression in October 2020, alleging the imposition of curfews as a quarantine coercion measure in response to the SARS-CoV-2 pandemic[12].

Corruption cases are closely linked to political instability. Bribery, preferential agreements for government contracts, embezzlement of public funds and impunity are constants between parties and administrations throughout the continent. The case of President Jacob Zuma in South Africa is a clear example of this. After a long administration, it was not until 2019 that the courts charged him with 783 charges of corruption and proceeded with his dismissal, in a controversial fight between the African National Congress (ANC, Zuma's party) and the opponents \ [13 ] . Billionaire businessman and ANC militant Cyril Ramaphosa assumed the presidency, failing to meet civil demands amid growing social tension.

Despite the legal end of Apartheid in South Africa in 1994, the economic structures of racial segregation continued to exist, without a political will to radically transform the productive system[14]. The social tension derived from the increase in inequalities has called for more radical measures. South Africa entered a middle-income trap, and was overtaken in 2011 by Nigeria. Despite sustained economic growth, inequality has increased with an increase in the Gini index from 0.61 in 1996 to 0.63 in 2015. The level of unemployment has reached an unprecedented level in the first quarter of 2019, with 27.6%, while that youth unemployment is around 55.2%[15].

Another country that has managed to make significant progress has been Ethiopia, which during the 1990s faced brutal famine and war with neighboring Eritrea after the fall of the communist regime. For 18 years, it had above-average growth rates, as well as having received a considerable volume of Chinese FDI, accompanied by stability and peace between the different ethnic groups. However, in 2018 a military assault on the rebel province of Tigray, who accuse the government of Abiy Ahmed of attacking the multi-ethnic federation established in 1991[16].

As in other African conflicts, the violence is not limited to the interior of Ethiopia, as massive numbers of Ethiopians have fled the violence to Sudan, seeking refuge in United Nations camps. The revolutionaries accused the Eritrean government of collaborating with Addis Ababa, leading attacks on the capital Asmara. Ethiopia has moved its forces stationed in the Ogaden Desert on the disputed border with Somalia, replacing them with special forces. This weakens the mission of the African Union that is fighting with al-Shabaab, a military operation that is perceived as interventionist by the Somali people.

The escalation of tensions in the Horn of Africa jeopardizes the stability built in recent decades and jeopardizes peace and development throughout the continent. The complex ethnic relations and complex interdependence in regional integration cause the forums of the Regional Economic Communities to have greater importance. In recent years, ECOWAS has been responsible for maintaining peace, stability and democracy in West Africa. Despite the significant progress in Africa in the peace processes, many ethnic conflicts remain latent and represent a danger to the sub-Saharan region if they are not addressed.

The growing role of the Communities, which have increasingly integrated markets, implies that the processes of combating poverty and inequality, as well as unemployment (especially in the young population) become joint challenges and require concerted decisions. The lack of job opportunities leads the younger population to be pushed to migrate outside the continent, in a risky and uncertain process. The need to create jobs with a greater requirement of human capital responds to the growing educational level of African youth.

The onslaught of the international crisis has already had an effect on the emerging sub-Saharan economies, as global value chains have gone through a process of disruption. The international prices of raw materials have reached even lower levels prior to the current crisis, but these obey a downward trend since the financial crisis of 2008, so the slowdown was already expected in international projections, especially in oil-exporting countries. Since the Chinese economy did post a significant growth rate, FDI flows are expected to remain constant or even increase, in an effort to take countercyclical measures. Emerging economies in Sub-Saharan Africa present opportunities to become more attractive internationally, with greater competitiveness and better living conditions, but for this it will be necessary for structural deficiencies to be addressed to generate inclusive and sustainable economic development.