What Can the African Continent Learn from Europe’s Anticipated Competitive Restructuring?
Africa has a lot of things to learn from Europe. As a disclaimer, Europe has not yet committed to competitive restructuring, but that is inevitable. A restructuring is necessary if it has to compete with the United States and the rising Asia. So, this is a peek into what the restructuring might look like and what lessons Africa can pick.
According to a report published by McKinsey, Europe is doing well in terms of sustainability and inclusion save for growth. This is evident in the disparity of per capita GDP comparison to that of the United States ( Europe’s was 27% less compared to the US’s).
For a long time, Europe had been the centre of iconic companies churning out exemplary industrial products and running efficient and effective supply chains. I remember back then, even today, many of us knew that the best quality industrial machinery was from Europe. If a person in Africa or other parts of the world needed a machine, Germany and the UK, for instance, would be one of the first choices to list.
But of late, the odds have been shifting. If anything, the US continues to do better than Europe and Asia which was once a diminutive giant has been rising to challenge the substantive giants that have been there for ages; Europe being the supremo. By 2022, the total market capitalization in Europe was 2.5 times less compared to the US at 12.5 and 31.4 trillion dollars for Europe and the US respectively.
Investments in European markets within the same period were 1.6 times less compared to the US markets. In the same comparison, revenue growth was also 1.5 times less. One of the pointers to this lower performance for Europe can be seen in their R&D expenditure.
Between 2015 and 2022, the R&D spending relative to the revenue generated for the top 2500 companies in Europe was 1.8 times lower compared to their US counterparts. And this becomes one key issue that needs restructuring in Europe for increased competitiveness. To do this, more focus needs to go into STEM.
According to the report by McKinsey, the EU had 20% and 40% fewer STEM graduates per a thousand inhabitants compared to US and South Korea respectively. With the changing demographics in the EU markets regarding ageing populations, coupled with an increasing shift of students away from STEM subjects, drastic changes are needed to boost talent for increased innovation.
For instance, Europe needs to employ a paradigm shift but yet maintain a balance between the historical industrial model and the current technological developments. The better performance by the US would easily be credited to the swift adaptation to changing times. The greatest tech giants are from the US, and as can be seen of technology as an enabler, most other industries are slowly catching up. Asia has seen this and is quickly fitting the robes.
Whereas some African countries have an understanding of the need to focus on developing the STEM disciplines, there is little infrastructure and capability to boost global competitive innovations. Perhaps, the first thing African countries and companies need to adjust is their increased spending on research and development. Reduced public expenditure on recurrent expenditure which currently is more than half of most governments’ budgets, and increased expenditure on building capability for scientific and technological advancement is a must if these economies have to begin becoming globally competitive.
They also need to shift their focus from agriculture-based economies and embrace accelerated technological intake and development as a tool for increased exports. The business of training her best people and willingly giving them away shows a lack of or poor understanding of the need to diversify and adapt to changing times.
The second pointer to the dismal performance of the EU is about rising cost of capital. UK for instance has seen rising interest rates which has had a dire impact on reduced capital for investment. Large companies’ CAPEX (capital expenditures) were reduced in Europe while those of their counterparts in the US grew in the 2015-2022 period. Greenfield foreign investments (FDI) were 90 billion and 300 billion for Europe and the US respectively.
This calls for the EU to restructure its capital funds and rates to ensure increased corporate returns which would in turn attract more investment. There is a need for increased funds consolidation which needs to be invested for the long run. This is to be done in the context of reduced political disruptions which have threatened regional stability.
For Africa, the cost of capital has skyrocketed over the roofs. This is partly due to the amplified effects of unfavourable fiscal policies imposed by world lenders on Africa. The worst part is that the continent ends up spending the borrowed money on trivia and a lot is siphoned into corrupt deals leaving citizens to grapple with unsustainable debts and often lend at very high interest rates in the first instance.
Added to this misfortune is the regional instability and fights among the countries. The DRC has been fighting since I was born, Somalia is ever in chaos, Sudan, Mali and the like are in a state of jeopardy, and other countries are simply ‘land mines.’ There is a lot to be done in terms of capital management as a whole – fiscal policies, interest rates, central bank reserves, currency strengths- if Africa becomes competitive. The politics need serious sorting as well.
Europe needs to work on energy solutions. UK energy has seen rising costs in the last couple of years which has had a ripple effect on the operational costs of firms and a subsequent rising cost of living. This cuts on disposable money for investment and alternative expenditures. Europe also needs to increase its resilience in its supply chains and perhaps refine its policies to level the operational ground for the region as a whole rather than the national levels.
Africa needs to work on its energy issues also. For countries like Kenya, Nigeria and South Africa struggling with managing energy – these are among the celebrated big economies in the continent-, a rethink is a must. Some of the issues are more about corruption in the energy sector rather than operational. Politics needs to be managed well and stronger systems put in place to ensure increased regional and continental cooperation.
As the EU is thinking of strengthening its global position, Africa must work to ensure its presence is felt globally in terms of economic growth, sustainable development and inclusion. There is no other way around this. A good start is to learn from Europe and objectively benchmark with the US as well as emerging Asia.
Very insightful article. R&D needs to be prioritized more and STEM disciplines and careers encouraged among students (Gen Z especially) who are more inclined towards art related vocations such as being influencers. Good work Ndege for bringing this to focus.