Five years ago, while in a cab from the airport in Lagos, Nigeria, I spied an enormous billboard towering out of a teeming, trash-strewn slum. It advertised not some foodstuff or vehicle, but the upcoming initial public offering of a hot Nigerian bank. With the nation of 160 million in the midst of stock market mania, you kept hearing the boast (!) that more Lagosians had brokerage accounts than checking accounts. Never mind that the mega-city’s power grid and sewage treatment capabilities were notoriously substandard, or how Lagos was sinking under the weight of runaway overpopulation. The emergence of an eager Nigerian middle class was all that mattered. Cart-before-horse thinking was fine—de rigueur, even—if you were an intrepid investor who wanted in.
You heard much of the same about South Africa, the continent’s largest economy. With apartheid behind it, the nation had so prospered from its mineral riches that it now ranked alongside Brazil and China in the standard-bearing MSCI Emerging Markets Index.
The Nigerian stock bubble ended badly—its exchange fell 46 percent in 2008. Still, the years of ignoring Africa as a serious investment option were over. Indeed, Africa, as economically dominated by South Africa and Nigeria, is poised to triple its contribution to world gross domestic product by 2050, according to Citigroup (C). Which is a big reason why foreign direct investment in the continent has surged from $9 billion in 2000 to $62 billion in 2008, while its stock markets have largely thrived during the past decade. Ernst & Young waxed breathless (PDF) about the place, while a report by the World Bank said Africa “could be on the brink of an economic takeoff” comparable to China’s 30 years ago and India’s two decades ago.
Now, Nigeria and South Africa, the two centers of continental economic gravity, are simultaneously being destabilized by internal strife. South Africa has had two months of strikes in the wake of the killing of at least 45 platinum miners by police in August. Last week, Anglo American (AMS), the world’s No. 1 platinum producer, dismissed 12,000 workers at its Rustenberg mine, while truckers and autoworkers exacerbated local gasoline and food shortages with their own strikes. South Africa’s currency, the rand, has fallen 10 percent against the dollar in less than a month and 20 percent since March, while a Sept. 27 credit downgrade by Moody’s (MCO) has turned off bond investors.
Nigeria, for its part, has been dealing with an escalation of attacks by an Islamist sect bent on carving out its own state in the country’s north; at least 1,000 people have been killed since the insurgency amped up in 2010. The Christian president has the unenviable task of keeping Nigeria’s Muslim and especially impoverished north attached to its oil-producing, predominantly Christian south. Meanwhile, insurgents in its oil-producing Niger Delta, angry at having seen so little of the nation’s petro-riches, have the region’s officials and workers constantly fearing kidnap and sabotage.
What if things fall apart at the same time for sub-Sahara’s two biggest economies? The stakes are huge for the region. Already the World Bank projects that South Africa’s lackluster economic growth rate of 2.5 percent this year will shave a full 1.2 percentage points off the subcontinent’s 6 percent growth rate. “My worry is,” remarked David Kotok of Cumberland Advisors, “the northern piece of Nigeria is embroiled in civil war with Islamic extremists. … Geopolitical risk in Nigeria rises every day. Everyone is ignoring it.” Wall Street nevertheless has high hopes for Nigeria: Goldman Sachs (GS) included the nation in its Next 11 (PDF) portfolio, and Citigroup designated it a “3G” Global Growth Generator.
The recent flareups of unrest demonstrate how the futures of these two disparate but continentally central economies boil down to how they handle their legions of restless, unemployed youth, says Larry Seruma, chief investment officer of Nile Capital Management, an investor in sub-Saharan Africa. The militants in Nigeria, he says, “tap into the country’s wide income disparity and inconsistent job creation,” while South Africa needs to be growing at triple its current rate to truly cut into unemployment. “You get the feeling,” he says, “that investors feel the situations are more combustible now.”
According to an August study by the McKinsey Global Institute:
Despite the creation of 37 million new and stable wage-paying jobs over the past decade, only 28 percent of Africa’s labor force holds such positions. Instead, some 63 percent of the total labor force engages in some form of self-employment or “vulnerable” employment, such as subsistence farming or urban street hawking. If the trends of the past decade continue, Africa will create 54 million new, stable wage-paying jobs over the next ten years—but this will not be enough to absorb the 122 million new entrants into the labor force expected over the same period.
The report calls those 122 million new entrants a potential “demographic dividend.”
Richard Dowden, director of the Royal African Society, wonders if “the so-called dividend looks more like a disaster” in the making. “So technically Africa—were it one country—has a 72 percent unemployment rate,” he writes. “And where will new jobs come from?”
He writes that without work, “millions of poor and poorly educated young Africans … linked to each other by the Internet and global social media” will become angry.
“How long,” he asks, “before an explosion of that anger blows away investors for another generation?”
Farzad is a Bloomberg Businessweek contributor.
