Last month, I explored the implications of Africa’s demographic dividend for stock investors.
I don’t want to belabor the topic, but if that series of posts was interesting to you then take a moment to read through “Africa’s Demographic Freight Train,” by Greg Barker of the Mauritius-based asset manager, Sustainable Capital. I found it fascinating.
Population trends are highly predictable. Like a freight train, they are rarely derailed. This makes them a highly useful complement to “bottom-up” stock analysis.
Economic growth tops out when a nation’s population is dominated by young adults and brakes sharply as the overall population ages.
Stock market returns generally reach their peak when the population is dominated by adults in their late-40s. This age group sees retirement on the horizon and prepares for it by saving and investing, thus driving up share prices.
Bond returns hit their max when a population grays. Retired folks begin to shun stocks and replace them with fixed income investments.
African nations are among the youngest in the world, putting them at the very beginning of the above cycle. Their current age distribution resembles that of the US circa 1960.
Infrastructure constraints and instability resulting from high unemployment are the biggest threats to Africa’s economic and capital market growth.
African banks, real estate companies, and consumer goods companies are particularly attractive ways to board the demographic freight train.
There’s loads more to digest in the report, so if you’ve read this far, please do have a look.
We know that, on average, African nations are nearing a demographic sweet spot – where the size of the labor force is twice that of the child and elderly population. But which ones are closest? And when will they get there? Here are five African economies that will hit the demographic sweet spot within the next 30 years.
But Africa is not a country. It is 55 countries – each with its own unique history, demographics, and economy. So, as informed investors, it behooves us to examine their population trends individually.
We know that, on average, African nations are nearing a demographic sweet spot – where the size of the labor force is twice that of the child and elderly population. In other words, a dependency ratio of 50 or below.
Here are five African economies that will hit the demographic sweet spot within the next 30 years, ordered from soonest to latest.
Mauritius is in the midst of a golden age. It entered the demographic sweet spot about 15 years ago. Since then, it has blossomed into an African success story. Its citizens are among the healthiest, best educated, and wealthiest on the continent – and probably among the happiest considering the fact that they inhabit a tropical paradise.
But the clock is ticking for Mauritius. Birth rates have actually dropped well below replacement level. So, not only will the country likely exit the sweet spot in 15 years (marked by the letter “B” on the chart below), its labor force will actually shrink by the year 2050 unless the birth rate rises or the government attracts immigrants to its sandy shores.
The southern African nation famous for its giant sand dunes may have quite a lot of other things to brag about in coming decades. After a steady drop in fertility rates, Namibia’s dependency ratio will likely drop below 50 sometime before 2020.
This positive develop happens to coincide with massive discoveries of offshore oil and gas, and a huge aquifer that could slake the thirst of 40% of the population for hundreds of years.
Fifteen years ago, 112 out of every 1000 babies born in Kenya would die before their fifth birthday. Today, that figure has been reduced to 59. This dramatic improvement prompted in equally dramatic drop in the number of births per woman.
Now, if trends persist, Kenyans between the ages of 15 and 64 will account for two-thirds of the population about 15 years from now. The size of the labor force will more than double by 2050, and low dependency ratios will likely be sustained late into the century.
A tough fight against HIV has helped this Kalahari desert nation reduce infant mortality which set it on a course toward its demographic bonus.
Its labor force has also been bolstered by migrants from neighboring Zimbabwe. The CIA estimates roughly 10,000 migrants entered Botswana in 2011, giving it one of the highest net migration rates in the world.
The growth of South Africa’s labor force has been retarded by a combination of factors, including AIDS and one of the highest net emigration rates in the world. So, the populace of the region’s largest economy remains a young one. Dependency ratios will likely hover in the mid-50s for many years to come.
The demographic sweet spot is rather arbitrary, of course. African economies will receive an incremental benefit for every drop in the dependency ratio. The important thing to take from this analysis is the overall trend.
While the rest of the world grays, Africa’s population grows, setting the stage for the continent to become an economic superpower before the century’s end.
Let’s take a quick poll. Take a look around and ask the colleague, friend, family member, or stranger nearest to you which of the world’s continents will dominate the global economy in the year 2099.
How did they answer?
I’m guessing that many would bet onAsia with its heavy hitters China and India. A large percentage probably also said North America, expecting its hegemony to endure for another 90 years.
If your neighbor said Africa, however, you may be in the presence of real prescience. The stage is set for the continent to be the world’s economic powerhouse before the end of the century.
Africa’s Dropping Dependency Ratio
Last week we looked at the implications of Africa’s declining fertility rates – a hopeful trend triggered by big advances in the fight against child mortality. To summarize that article, African women are increasingly confident that their babies will survive to adulthood, and therefore decide to have fewer children. This allows families to invest more resources into the well-being of each child. The cumulative impact of all these household-level decisions taken over years and decades is an exponential increase in the productive capacity of the continent’s population.
Today, African adults, on average, support more dependents than do adults from any other region. This is measured by the dependency ratio. According to the UN, Africa’s dependency ratio is 79.5. This means that for every 100 African adults, there are roughly 80 children and elderly relying on them for food, shelter, healthcare, and education. In Asia, 100 adults care for just 47 children and elderly.
But thanks to lower fertility rates, Africa’s dependency ratio will decline steadily over the next four decades. Take a look at the chart below.
[easychart type=”vertbar” height=”150″ title=”Dependency Ratio for World Regions” groupnames=”2012, 2050″ groupcolors=”005599,229944″ valuenames=”Africa,Asia,Europe,Latin America,North America,Oceania” group1values=”79.5,47.3,47.1,51.1,50.2,52.2″ group2values=”58.7,54.1,72.7,57.2,65.8,59.0″ ]
Take a look at Europe in the above chart.
It’s pretty clear to see why its economic future looks so cloudy, isn’t it? In a few decades, Africa’s colonial powers will have some of the highest dependency ratios in the world. A hundred French workers will be caring for 71 children and elderly in 2050. Germany’s dependency ratio will be 77.6.
Growing — Not Graying
Granted, Africa’s workers will still shoulder more of a demographic burden than their counterparts in Asia. Asia’s 2050 dependency ratio is projected to be just 54.1 compared to Africa’s 58.1, but the second half of the century looks pretty wrinkly for Asia, as the chart below illustrates.
[table id=88 /]
Roughly 17% of Asia’s population will be age 65 or older in 2050. Meanwhile, over 30% of Africa’s population will be younger than age 15. Which one will be better prepared to compete in the latter half of the century?
Here Comes Everybody!
Finally, it’s important to note the scale of this shift. The following chart illustrates the trend with some real numbers.
[table id=89 /]
Africa will have 808 million more working-age citizens in 2050 than it does today – more than doubling its current pool of labor. This far surpasses any other continent. China will actually have 211 million fewer workers than it does now, while Nigeria alone will add 155 million. India will add an impressive number of workers between now and 2050, but arguably with a greater strain on its resource base.
The wild card to this prediction, of course, is whether African governments can effectively harness this demographic shift to productive ends.
But I’m very bullish. Few observers would have guessed 1912 China, riven as it was by violent internal conflict, would transform into an economic juggernaut within a century.
Africa, by contrast, is a continent of steadily improving stability, infrastructure, and political reform. Combine this with a growing, increasingly capable base of human capital, and the stage is set for the emergence of an African economic superpower.
What Do You Think?
I’d love to hear your feedback. Am I too optimistic? Tell us which countries and continents you think will be the centers of economic power at the end of the century in the comments!
Each of these reasons was a baby that will survive beyond its fifth birthday thanks to the remarkable progress African countries have made in reducing infant and child mortality.
Such a huge number of lives saved is indisputably cause for celebration. It means 15,013,767 mothers were spared the heartache of losing a child, and 15,013,767 children will go on to build futures of their own.
But what are the implications of this huge success for African economies?
Abundance vs. Scarcity
We live in a world of limits, and Africa, with its deficient infrastructure, butts up against them frequently. Resources are finite. Energy provision is inadequate. Food security is not always assured. Jobs can be few and far between.
This raises the question whether 15,013,767 more healthy babies heralds an era of abundance or one of scarcity. After all, that’s 15,013,767 more people to feed, educate, and employ in a continent that already struggles to do all three.
Thankfully, and perhaps counter-intuitively, population studies show that reductions in infant and child mortality also tend to reduce the fertility rate. In other words, healthier babies means fewer babies.
This is starting to play out in Africa right now.
Falling Birth Rates
For decades, the average African mother had six children. But now, women are increasingly confident that their babies will survive to adulthood, and are therefore opting to give birth to fewer children.
Check out the table below. It shows the average number of children per woman in 1997 and 2012 for the countries that we regularly discuss on this blog.
As you can see, almost all of the countries listed have reduced their fertility rates in excess of 10%. And Namibia almost halved it! Others, like Mauritius and South Africa, now have fertility rates below or near the developed world’s replacement rate — 2.1.
Africa’s Demographic Dividend
With this data, it’s not difficult to see the implications of such a shift for African economies. Fifteen years ago, the average Ghanaian household supported five children. Now it supports four. Even if incomes remained constant, that means Ghanaians can now invest 25% more into the health and education of their children than they did back in 1997.
And they are.
Consider this, according to UNESCO, a child born in sub-Saharan Africa in 1995 could expect to attend school for 6.6 years. An African child born today can expect 9.2 years. Life expectancy has improved, too, increasing from 49.2 years to 54.4 years over the same period.
Moreover, with few dependents households increasingly have the option to save and invest. They open bank accounts, start businesses, and even buy stocks. The success of companies like Kenya’s Equity Bank (EQBNK:KN), Botswana’s Letshego (LETSHEGO:BG), and South Africa’s Capitec Bank (CPI:SJ) are testament to this dynamic.
The final spin-off relates to increased demand for goods and services. Quite simply, households with less children tend to spend more, which stimulates GDP growth and creates jobs. Look no further than the rapid growth of South Africa’s Shoprite (SHP:SJ), Ghana’s Unilever (UNIL:GN), and Nigeria’s Dangote Group (DANGSUGA:NL) for proof of an emerging African consumer class.
All three of the above factors combine to form a virtuous cycle that looks set to propel African growth into the distant future. Birth rates decline which leads to a lower number of dependents per family, which leads to increased investment in human and physical capital, which leads to increased health and wealth and a further drop in birth rates.
This is why 15,013,767 more babies surviving to their fifth birthday looks set to transform a continent. They have triggered a demographic dividend, perhaps cementing Africa’s claim to the 21st century.
I’ve got over 15,013,767 reasons to believe in the African success story.
The list spans the entire continent — from the banks of the Nile to the Niger Delta and from the Kenyan savanna to the Namibian desert.
And each one will power the continent’s growth deep into this century, and, perhaps, even the next.
It’s exactly 15 years since I first boarded a plane to Lesotho. I was 22 then and had seldom strayed far from my Pennsylvania home. So, the next three years in the Mountain Kingdom left a life-long impression.
After returning to the US, I resolved to stay abreast of news from that corner of the world. It wasn’t easy, but I succeeded to some degree with the help of new friends, an Africa-focused job, and the globe-shrinking Internet.
But as time passed, headlines from Lesotho did less and less to satisfy my nostalgia – and tinged my memories with melancholy instead.
The news just never seemed to change. The country struggles with the same problems today that it did 15 years ago. Unemployment, political strife, and AIDS. All seem as intractable as ever.
But this article from the Economist lifted the gloom. It reminded me that all nations are a work in progress, and modern Africa’s record of progress is nothing less than extraordinary.
Living Proof of Progress
How might we gauge this progress?
I suggest we consider 15,013,767 uniquely special babies.
They come from across the continent — from the banks of the Nile to the Niger Delta and from the Kenyan savanna to the Namibian desert. But they share a common bond. All are living testament to Africa’s advancement.
You see, 15 years ago, the UN estimates that 156 out of every 1000 African babies died before their fifth birthday. Today, thanks to improved pre-natal care, vaccine delivery, better nutrition, fewer wars, and the humble mosquito net, that heart-breaking mortality rate has dropped by nearly 33%.
Take a look at this chart to see just how large an impact this has made.
What’s the difference between the hypothetical scenario and the actual one?
If the continent’s development had stalled in 1997, none of them would have lived beyond age five.
Now, thanks to the tireless and skilled effort of countless doctors, nurses, educators, civil servants, scientists, and peacebuilders, these babies survive to participate in Africa’s success story deep into this century and perhaps into the next.
Granted, the work is far from finished. Child mortality rates on the continent remain tragically high. But 15,013,767 children are progress’s living proof.
Oh, and guess what — 5,317 of these babies hail from a small, mountain kingdom named Lesotho.
Next week, I’ll delve into the implications of these falling mortality rates for African economies, so if you’re of a Malthusian bent, please hold your fire until then!