The focus of the global economy has shifted towards the emerging and frontier markets of the developing world. By 2012, the cumulative GDPs of advanced and developing economies stood more or less equal at about USD 42 trillion, and the developing world has since left the developed world behind with more than double the average growth rates through 2014. For much of the last 15 years, the developing world has been led by the enormous economic expansion of countries like China, India, and others in developing Asia; yet of late, it is Sub-Saharan Africa that is best positioned to continue this trend of high growth. Economically, at least, the African continent is poised to be the next China over the next 50 years.
Indeed, half of the fastest growing economies in the world are in Sub-Saharan Africa, and the World Bank still forecasts rising growth rates of over 5% of GDP in the coming years. Importantly, Sub-Saharan Africa also boasts six-fold growth in foreign direct investment since 2000 – to over USD 40 billion annually – as well as a market capitalization that has tripled to approximately USD 700 billion during that span.
Along with impressive growth in Sub-Saharan Africa come significant future challenges. The total population of the region currently stands at around 975 million, with a workforce of around 370 million. But 40% of the population is younger than 15 years old, and Africa’s labor force is projected to reach 1.1 billion people by 2040. Economic development and growth to support this population boom will only happen if Sub-Saharan countries can build the necessary infrastructure and services. At a micro level, balanced and sustained growth is needed to overcome the gaps in the economy, ensuring that populations are included in the economy with access to financial services and credit – all of which are critical.
Such challenges are opportunities. The dynamics of the mix of frontier and developing market of Sub-Saharan Africa not only create enormous investment potential, but also present the prospect of significant social impact in terms of improved services and infrastructure, poverty reduction, and rising incomes.
Why should any of this be interesting to Israel? Because Israel’s experience as a developing nation has contributed to it becoming a hub of innovative and relevant technologies for other developing countries. Israel’s expertise in financial technologies, alternative energy, sustainable water, and smart agriculture, are all vital for efficient and large-scale economic development in this century. Further, the many collaborations between Israel and Sub-Saharan Africa already underway – from the construction of the largest on-grid solar field in East Africa by Gigawatt Global, to off-grid home solar installations by Kaenaat, to Israeli venture capital funds specifically oriented to development investments in the region, to affordable housing construction by Vital Capital, to the introduction of drip irrigation to the continent by the Israeli company Netafim – all attest to the natural potential of strategic partnerships.
Despite the natural partnership, Israeli businesses must assemble financing to access the opportunities that Sub-Saharan Africa has to offer. Israeli companies have found that each project is unique, equity is hard to attract, lenders are reluctant, and partners are hard to find. Consequently, Israeli entry to developing markets has been relatively flat, despite the explosive growth potential and Israel’s new status as a creditor nation.
What is needed is a financial infrastructure that creates a capital bridge between Israeli companies and the developing world.
Such a financial bridge created by the Israeli government could serve to leverage public and private funding to enable the participation of Israeli business and capital markets in developing markets. A development facility of the sort could plug into already-existing institutions such as the African Financing Partnership (AFP), a co-financing initiative launched in 2011 between the African Development Bank and eight development finance agencies from around the world. Focusing on private sector project financing in infrastructure, new industries, and financial institutions, AFP significantly eases the process of international investment between international private sector actors and their host countries in Sub-Saharan Africa. To join the partnership, however, Israel needs its own development finance platform.
Of course, any finance initiative must assume essential economic development assets. This includes a capital market that allows companies to gain access to competitive debt and equity. It also assumes a depth of institutions that support higher education, research and development, and business management. We have learned first-hand about many of these foundations for economic development through our direct work with African business and government leadership. Rwandan representatives, for example, participated in our panel at the International Business Conference sponsored by Globes in December, and highlighted examples of leapfrogging infrastructures in tele-banking, tele medicine, and business and ICT education partnership with world-class universities such as Carnegie-Mellon University on a new university campus in Kigali.
In October, based on work we did for the Israel Securities Authority and the Tel Aviv Stock Exchange, we participated in a special Financial Innovations Lab with multiple East African countries about how to build-out the Rwandan Capital Markets Authority. The workshop focused on ways to develop access to capital markets for east African counties, including Kenya, Uganda, Tanzania, Mauritius. Through the use of financial tools and innovations, regulation, and market integration, these countries are looking to develop strategic partnerships with markets, including Israel’s, that can engage in the exchange of human capital, relevant technologies, and new sources of funding.
Now, what can we do tomorrow? Based on what we know now about China and other developing markets over the last two decades, Israel can waste no time in taking the following steps to begin to take leverage its position in Africa:
- Build a competitive capital market — this would leverage the strengths of East African countries and builds on partnerships with established capital markets, such as Israel’s, allowing for sharing of deal flow and capital flows to achieve scale and efficiency.
- Expand human resource development – Israel should introduce a training program for talented graduate students in financial innovation and development. This is being done in Israel and can be expanded with African partners. This training can also include an exchange program between Israeli and African students to gain experience solving real-world problems on actual projects.
- Create a development financing facility – this will provide financing for Israel companies, in project finance, trade finance, and insurance needed to build sustainable business relationships in these growth markets.
Israeli companies are already doing business in Africa. The government would do well to follow suit and build the public financial infrastructure needed for Israeli businesses to expand their engagement and participation in this global opportunity.
This post was co-written with Jacob Udell, a research analyst at the Milken Innovation Center at the Jerusalem Institute for Israel Studies. He holds a B.A. from Middlebury College in Vermont, USA, and an M.Sc in economic history from the University of Oxford.
Glenn Yago is the Senior Director of the Milken Innovation Center at the Jerusalem Institute for Israel Studies and a senior fellow and founder of the Financial Innovations Labs® at the Milken Institute. He is a leading authority on financial innovations, capital markets, emerging markets and environmental finance.