15 Oct 2012

Nigeria and South Africa: Africa's economic powerhouses

Written by  Dawn Nagar and Mark Paterson

No. 230: Nigeria and South Africa: Africa's economic powerhouses / Dawn Nagar and Mark Paterson / Business Day, Nigeria
15 October 2012

The recent focus on the relationship between Nigeria and South Africa highlights the potential for Africa's two largest economies to enhance substantially the continent's development prospects — particularly if they work together more closely. South Africa with an estimated gross domestic product (GDP) of $368 billion in 2011 represents Africa's biggest economy, despite slowing growth that is forecast to drop to under three percent this year. Meanwhile, the continent's most populous nation, oil-rich Nigeria, overtook Egypt last year to become Africa's second biggest economy by GDP, recording $232 billion.

It has been envisaged that, with a growth rate of seven percent, Nigeria could overtake South Africa's economy by 2015. Clearly, mutual benefits could accrue from a relationship that combines South African capital and know-how in creating business models for African marketplaces and within African institutional contexts, with access to Nigeria's burgeoning economy of 140 million consumers — the single largest market on the continent and three times the size of South Africa's. A recent policy seminar organised in Lagos by the Cape Town-based Centre for Conflict Resolution (CCR), and involving key diplomats and business people from South Africa and Nigeria, sought to explore these benefits and to strengthen ties between both countries.

South African and Nigerian business people have recognised the synergies. Trade between the two countries has grown ten-fold since 1999, and they are each others' largest trading partners on the continent. The value of bilateral trade, which totalled only $16.5 million in 1999, increased to over $3.6 billion by 2011. Nigeria now represents a long-term destination for South African investments and home to many of its recent business ventures. Mobile Telephone Networks (MTN) led the way, posting greater profits from its West African operation than it did in South Africa within only four years of entering the Nigerian market in 1999. Other notable South African businesses in Nigeria now include: Standard Bank; Rand Merchant Bank; fast-food chains Chicken Licken and Debonairs Pizza; ABMiller; and retailer Shoprite Checkers. Media house Johncom has opened Nu Metro cinemas and multimedia stores, as well as DVD and CD manufacturing plants. Multichoice boasts 700,000 Nigerian customers in 2012 and has spent $100 million on developing local content.

Two airlines fly seven times a week between the two countries. Many South Africans now live in Nigeria; while an increasing number of Nigerians live in South Africa. In addition, further large-scale South African entries into the Nigerian market are planned. Massmart and Woolworths retailers, Old Mutual insurance company, and Distell beverages are looking to invest in the country.

Notwithstanding the new partnerships, Nigerians have often accused South African companies of insensitivity in their bilateral economic relations. South African business people are sometimes described as "arrogant". The perception is that many South African businesses operate according to the belief that all of Africa beyond their borders is one homogenous entity amenable to the same business models. Business schools in both countries can help to address this issue and the challenges posed by the need to adapt to a wide range of African commercial cultures. In addition, South African companies have been learning from their mistakes. For example, MTN Nigeria made great efforts after it entered the Nigerian market in 2001 to adapt to new employment and cultural demands by recruiting talented Nigerians; training South Africans and Nigerians together; empowering black South African managers; providing cultural sensitivity training to staff; and ending apartheid-style practices in the workplace.

However, South African companies have been criticised on not only a cultural, but also a structural, basis. Their approach to business has often been characterised as predatory and mercantilist. Although the partnerships that are sought by South Africa businesses with their Nigerian counterparts are regarded as less tokenistic and more genuine than in the past, they still often take the form of joint-venture acquisitions or controlling equity ownership rather than investment for growth. Critics have also charged that South African investors often approach Nigeria as a destination for products rather than as an opportunity to invest to add value along the manufacturing chain. In defence of the value of South Africa's economic contribution, the direct employment benefits of its investments continue to outweigh those brought by Nigeria's main contribution to the South African economy, which is oil. The oil trade accounts for over 95 percent of Nigerian exports to South Africa, and this may rise as the present United States-led embargo on Iranian oil bites. Other benefits brought by South African companies to Nigeria have included their introduction of new business models that address all consumers — such as pre-paid telephone airtime in the 1990s, and, more recently, innovative and highly successful online- and cellphone-based services that have brought banking to the previously unbanked. Nigerian companies could learn important lessons from such South African ways of doing business that can often straddle formal and informal economies.

Of course, the success stories have not occurred in isolation. The cooperation of the Nigerian and South African governments has proved vital to the welfare of larger scale business ventures — MTN Nigeria has acknowledged the debt it owes to the government in Abuja for its success in Nigeria. In turn, big private-sector companies and parastatals can provide the important developmental benefits that governments often seek. South Africa has the ability to provide technical competence and finance that are needed to develop Nigeria's transport, power, iron and steel, agriculture, and information and communication technologies sectors. South African businesses could usefully explore the opportunities that can flow from joining one of Nigeria's 20 free trade zones, or even establishing a new one, in order to ease access to the country's high-growth economy, and service its major infrastructural deficit on favourable terms. Given the context of high tariff and non-tariff barriers that can inhibit intra-African trade — estimated at less than ten percent of the continent's total imports and exports — the idea of a Nigeria/South Africa free trade area, which was proposed by the Nigeria-South Africa Bi-National Commission in March 2002, could be worth reviving.

However, the investment opportunities that may flow from Nigeria's infrastructural deficit are inhibited by the relatively poor institutional governance ratings that, to a large extent, have helped to create the self-same deficit. The bigger picture is that, in spite of its relatively impressive growth rates over the past decade, Africa still only accounts for three percent of global trade. Seventy percent of Nigerians live on under a dollar a day, despite the $400 billion in oil revenues that have been generated in the past 50 years. South Africa remains the most unequal society in the world. Strong trade and economic growth can only be realised alongside African leadership that is committed to tackling corruption and building state capacity to provide proper educational opportunities, safeguard national health, tackle unemployment, and pursue inclusive economic policies that raise people out of poverty. Governments in Nigeria and South Africa, as much as their business sectors, need to play their part to help to realise the full benefits of Africa's potentially most strategic bilateral relationship.

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