Insight August 26, 2010, 8:00AM EST

Booming Africa: An Opportunity for Europe

Africa is one of the world's fastest-growing economic regions. European executives and investors shouldn't ignore its immense business potential

By Charles Roxburgh and Susan Lund

Story Tools

With the 2010 FIFA World Cup well over, the international sports spotlight has moved on, from South Africa to other tournaments in other lands. Still, European companies and investors should keep their eyes on Africa because competition in commerce is heating up across the continent.

A new report from the McKinsey Global Institute shows that Africa is now among the fastest-growing economic regions in the world, creating significant business opportunities in a wide range of industries. Early entrants onto the field can seize the advantage.

Africa's collective gross domestic product rose at a 4.9 percent annual rate from 2000 through 2008, twice the pace of the preceding two decades. In our report, Lions on the Move: The Progress and Potential of African Economies, we show that this growth surge was broadly based, with roots extending far beyond the global commodities boom.

Looking ahead, we project that at least four groups of industries on the continent could together generate as much as $2.6 trillion in annual revenue by 2020, or $1 trillion more than today, measured in 2010 dollars. The biggest business opportunity of the four lies in consumer goods and services, followed by natural resources, agriculture, and infrastructure.

These projections reflect Africa's recent economic advances and strong long-term prospects. The continent's combined economic output, valued at $1.6 trillion in 2008, is now roughly equal to Brazil's or Russia's. Several factors suggest that this economic momentum can be sustained.

a surge of peace and economic reform

To start, Africa's growth acceleration was widespread, with GDP rising more rapidly in 27 of its 30 largest economies—both in countries with significant resource exports and those without. Rising revenues from oil, minerals, and other natural resources accounted for just 24 percent of growth from 2000 through 2008. All the other sectors contributed as well, including finance, retail, agriculture, and telecommunications.

Key to the growth surge were government reforms that created greater political stability, improved the macroeconomic environment, and energized the business environment. For example, several countries halted their deadly conflicts. Policymakers also reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, such as banking.

As a result, a dynamic African business sector is emerging. The continent now has more than 1,400 publicly listed companies. It boasts more than 100 companies with revenue greater than $1 billion. Telecom firms have signed up more than 316 million new mobile-phone subscribers in Africa since 2000—more than the total U.S. population. Banking and retail are flourishing as household incomes climb. Construction is booming as new cities rise.

Africa's future economic growth likely will be supported by several long-term trends. Among these is the rising global demand for oil, gold, diamonds, and other commodities. This demand is growing fastest in the world's emerging economies, particularly in Asia and the Middle East. Despite historic ties with Europe, Africa now conducts half its total trade with developing economic regions—so-called south-south exchanges. Asia's economies altogether accounted for 28 percent of Africa's total trade in 2008, more than double their share in 1990. Western Europe's share shrank during the same period, from 51 percent to 28 percent.