East African countries are integrating into a robust regional market as energy exporters on the other side of the continent struggle to find growth.
Lower commodities prices have had some far-reaching effects on African economies.
For exporters, weaker revenue has damped growth. Consider Nigeria, Africa’s largest economy and biggest oil producer. The country’s gross domestic product contracted 2.1 percent in the second quarter, following a 0.4 percent slump in the first. Adjusting to this new reality will take time for energy exporters.
Most African economies, though, aren’t in the oil business. For them, lower fuel costs support growth and living standards. So fortunes are set to diverge across the continent. In fact, the narrative could change from “Africa Rising” to “Africa Tilting” as commodity exporters in West, Central, and Southern Africa struggle to find new sources of growth, while East African economies develop and integrate into a more robust—and potentially huge—regional market.
From 2010 to 2014, economic growth in sub-Saharan Africa averaged 5.2 percent. After oil prices plunged in 2014, growth slowed to 3.4 percent in 2015. It’s likely to be weaker still in 2016, but the decline in aggregate terms largely reflects slowdowns in Nigeria, fellow oil exporter Angola, and South Africa. The three countries accounted for about 60 percent of sub-Saharan GDP in 2015 but less than 30 percent of its population.
Deeper integration, better-functioning markets, and improved infrastructure could all bear fruit as the continent pursues other sources of growth.
East Africa is leading the way. The African Development Bank, in its inaugural Africa Regional Integration Index Report, rated the East African Community—Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda—as the top-performing regional economic community on the continent. The report finds that the EAC has advanced furthest in reducing cross-border barriers to trade and other economic activity and is ahead of its peers in the categories of trade and productive integration.
Deeper integration should create larger markets, enabling companies to specialize more and reap economies of scale. That could support an expansion of manufacturing, which is needed to boost growth and macroeconomic stability.
Economies in East Africa are generally small. Incomes are low, with most people earning the equivalent of only a few U.S. dollars per day. As a result, foreign investors have focused instead on larger economies, such as those of Angola, Nigeria, and South Africa, and on companies like banks, brewers, and cement makers that are located close to market.
Some global manufacturers have lately been looking at opportunities in Kenya: Volkswagen plans to assemble cars at a plant north of Nairobi, the government announced in September. Kenya’s economy is doing well in its own right, with GDP growing 6.2 percent in the second quarter. Also helping to attract interest is the East African Common Market, launched in 2010 to enable the free movement of goods, people, capital, and services across the region.
Transport links, such as the Standard Gauge Railway, are also encouraging investors. Kenya’s state-owned rail company, with financing from China, is developing the first phase, which will connect the port city of Mombasa to Nairobi. The 472-kilometer section is slated to open in July 2017. Eventually, the railway will run to Kampala in Uganda, Kigali in Rwanda, and Bujumbura in Burundi. Once complete, the network will expand from serving 44 million Kenyans to more than 160 million people in EAC countries.
Additional links have the potential to create an enormous market. Further investments in transportation over the medium term, such as the planned Lamu Port South Sudan Ethiopian Transport corridor and an extension of the single-gauge railway, could broaden the reach of the East African Common Market to the vast Democratic Republic of Congo and fast-growing Ethiopia. While improving links to the western parts of the DRC will take considerable time, connections there and to Ethiopia would bring in 180 million potential customers. This would create a market with more people than the U.S. and—in time, given the difference in population growth—the European Union.
Once the adjustment to lower commodity prices is over, Africa’s economic center of gravity may shift eastward as these countries grow.