Insight August 26, 2010, 8:00AM EST

Booming Africa: An Opportunity for Europe

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growing urbanization, solar energy

There is great potential for Europe to revitalize its old links to Africa and forge new ones. One place to start is by looking beyond Africa's raw materials to a bigger source of future economic growth: the rise of the urban African consumer. Today, 40 percent of Africans live in cities, a proportion that is close to China's and continuing to expand. The continent already has 52 cities with populations greater than 1 million—equal to Western Europe—and is projected to add 32 by 2030. As in other developing economies, urbanization in Africa is creating jobs, boosting productivity, and lifting incomes. The number of households with discretionary income is projected to grow by 50 percent over the next 10 years, reaching 128 million.

Africa's household spending totaled $860 billion in 2008, more than that of India or Russia. The continent's consumer markets are already growing two to three times faster than those in OECD countries and could be worth $1.4 trillion in annual revenue by 2020. With their eyes on this prize, many European companies are already expanding in Africa: Unilever (UL), Standard Chartered (SCBFF), and SABMiller (SBMRY) each operate in a dozen or more of the continent's 50-plus countries.

Urbanization also is increasing demand for investment in new roads, rail systems, clean water, power generation, and other infrastructure in Africa. Some companies see additional opportunities for Africa to become an exporter of clean energy. Consider the Desertec Industrial Initiative, launched by a consortium of European companies including Siemens (SI), which aims to transmit power to Europe from a network of solar plants and wind farms to be built across the deserts of North Africa and the Middle East. The project still faces technical hurdles and will take years to realize, but the effort could yield an estimated $400 billion in local investment.

ripe for a "green revolution?"

Many companies also are finding opportunities to serve European customers from Africa. In North Africa, several countries are using their proximity and linguistic ties to Europe to attract more foreign investment in tourism, offshore business services, and low-cost manufacturing for export.

Africa's new commercial vibrancy also holds many other possibilities. With 60 percent of the world's uncultivated arable land and low crop yields, Africa is ripe for a "green revolution" like those that have increased agricultural production in Asia and Brazil. We estimate that the total value of Africa's resource sectors' production could grow steadily, at from 2 percent to 4 percent a year, over the next decade.

To be sure, there remain serious challenges and risks to growth in any individual country. But if recent trends continue, Africa will play an increasingly important role in the global economy. By 2040, the continent will be home to one in five of the planet's young people and will have the world's largest working-age population. If Africa can give its young people sufficient education and skills, they could be a substantial source of consumption and production in years ahead.

European executives and investors cannot afford to ignore Africa's immense economic potential. Nor can they assume that traditional ties will guarantee them an advantage in the competition. There are many new players, but also many new chances to get in the game and gain some ground.

The authors wish to acknowledge the contributions of Norbert Dörr, Mutsa Chironga, Acha Leke, Amine Tazzi-Riffi, and Arend Van Wamelen in McKinsey & Co.'s Africa offices. The full report discussed above can be downloaded free of charge at www.mckinsey.com/mgi.

Charles Roxburgh is the London-based director of the McKinsey Global Institute (MGI), McKinsey & Co.'s business and economics research arm. Susan Lund is MGI's director of research, based in Washington.