Macro factors present scaling reality checks

Underlying economics influence scaling potential  

Sub-Saharan Africa is expected to lag behind the rest of the world with a cumulative per capita GDP growth substantially lower than in the rest of the world. The Economist recently noted that for the sub-Saharan region overall, the IMF forecasts just a 0.1 percentage point increase in growth to 3.8 percent for 2022, as indicated by Figure 17. This hides deep divergences. South Africa, Nigeria and Angola, which together make up about half of sub-Saharan Africa’s GDP, were in deep trouble before Covid-19. Their sluggishness will continue in 2022. 

Those bouncing back are relatively small economies, such as Rwanda and the Seychelles, which will see well above the 3.8 percent growth projected for the region, and medium-sized economies such as Ivory Coast and Ghana.

The income gap between sub-Saharan Africa and the rest of the world, based on real GDP per capita, is also growing wider, as indicated by Figure 18. These statistics matter because underlying conditions will certainly have some influence over the potential for micro (venture scaling) success in the future.

Developed economies tend to be built on a strong middle class, which drives consumption. In Africa, where consumer purchasing power is generally low, a more nuanced understanding is needed when deciding what scaling strategy to pursue. Targeting non-consumption is tricky, as the absence of a market is a lot more difficult to notice than the presence of a large market. In reality, the African middle class is a chameleon: vulnerable to shocks and prone to shifting in and out of the category as incomes change.

Researchers acknowledge numerous challenges: 

“There are very minimal improvements in the living standards of most Africans despite the promising economic trends and macroeconomic growth. Levels of GDP of most economies within the continent still lag behind compared to other developed nations. This can be attributed to poverty, insecurity, mortality and debility which has become more intense and more widespread. The continent has also incurred debts beyond its means and experienced a drop in its share of trade and investment in the world. Most of the challenges have been brought about by poor governance which has had a direct impact on entrepreneurship.”  

Deep geopolitical and macroeconomic shocks from outside the continent have strong impacts on fragile economies. The UN recently indicated that more than 70 percent of Africa’s economies are at severe risk from Russia’s war in Ukraine, which has supercharged a three-dimensional crisis: food, energy and finance.

Difficult living conditions are exacerbated by relatively high levels of armed conflict. In 2021 alone, there were 34,000 such events in sub-Saharan Africa, leading to more than 45,000 fatalities. Armed conflict fuels migration and internal displacement, and is in turn fuelled by low climate change resiliency and competition over a degraded natural resource base on which much of the rural population is dependent to survive. Conflict and insecurity have significant impacts on African economies, and consequently scaling businesses, with real GDP growth on average 2.5 percent lower where there is conflict.

The World Bank report, Africa in the New Trade Environment: Market Access in Troubled Times, argues that Africa must connect to the global economy in order to “catch up with the rest of the world”. Furthermore, African countries must scale up and diversify their participation in international markets and global value chains. There is no alternative: the continent must link its production and trade to the global economy to take advantage of the unlimited demand and innovation along the supply chain.

Despite generous trade agreements, such as the European Union’s Everything But Arms (EBA) and the United States’ African Growth and Opportunity Act (AGOA), which enable low-or non-tariff trade for select African countries trade with the United States and the European Union, Africa still accounts for just two percent of global production and three percent of global trade.  

Underlying economic factors matter greatly - they help shape (or hinder) the potential of scaling with trade limitations hindering the prospects of a venture being able to reach the global market expansion phase.