Africa’s great demographic challenge — the 4 factors blocking its economic dynamism

When does a demographic dividend turn into a curse? Africa might be about to find out. Recent UN data shows that Africa is in the throes of the greatest demographic transformation of the 21st century.

How Africa manages the transition from a young population with low life expectancy to the world’s fastest-growing labour force will in no small part shape the global economy for decades.

The numbers are staggering. Africa’s population has doubled in 30 years, reaching roughly 1.5 billion. By 2100 it may swell to four billion – or nearly 40% of humanity. This surge will be driven by plunging infant mortality, better access to healthcare and high fertility rates. About 60% of sub-Saharan Africans are under 25, compared with less than a third of Americans. In demographic terms what the continent is about to experience is nothing short of an earthquake.

What matters most for economic growth is the ratio of workers to dependents. At present, sub-Saharan Africa’s ratio is about 1.3 to 1. As this rises, with more workers to support every child or retiree, the continent could enjoy the fabled “demographic dividend”; a boost to growth that derives from greater numbers of productive and economically active people entering the labour force.

Whether that promise can be delivered depends on two things. First, fertility needs to fall, so that ever-growing cohorts of infants do not overwhelm the gains from rising life expectancy. Second, and more critically, the economy needs to generate enough jobs to absorb the millions of new entrants into the labour force, so that unemployment rates do not skyrocket. Failure would mean deeper poverty, fuel social instability and accelerate the exodus of migrants seeking better fortunes in Europe and North America.

The task is immense. Between now and 2100, roughly one billion Africans will join the labour force, according to United Nations data. Annual job demand will peak at about 18 million in 2048. According to their analysis, success will hinge disproportionately on the economic fortunes of six countries; Nigeria, the Democratic Republic of Congo (DRC), Tanzania, Ethiopia, Egypt and South Africa. 

A market too small for its own good

Four factors are likely to play a pivotal role in whether these job hunters will find employment or whether they will be forced to seek a better life abroad. 

First is market size. Africa’s political map – 54 countries with limited economic integration – remains a drag on growth. Fragmented markets, barriers to trade and weak cross-border flows of labour, capital, goods and services all conspire to keep productivity low and rates of investment insufficient.

The African Continental Free Trade Area (AfCFTA) is widely touted as the solution. Yet, progress has been slow, even when taking into account the low expectations of most experts. Of the 47 countries that have ratified the agreement, 31 joined the so-called guided trade initiative last year, up from seven in 2023.

If fully implemented, AfCFTA would create a market of 1.3 billion people with a combined GDP of $3.4-trillion. The World Bank believes it could boost intra-African trade by 80% by 2035. Whether it can move from an ambitious blueprint to a functioning marketplace is one of the defining questions for the continent’s economic future.

Low savings, low investment

A second constraint is investment, or lack thereof. Africa invests too little. Gross fixed capital formation averages about 11% of GDP. In Asia, excluding its rich economies, the figure is an impressive 30% to 40%. This yawning gap explains why Africa has so few factories, roads, ports and power plants, all of which are the assets needed for productivity and job creation.

Savings are part of the explanation. Africa’s average savings rate is roughly 20% of GDP, about half of Asia’s. This is not for lack of wealth; African households and firms hold considerable assets. The problem is that too little of it is deployed at home. Limited investment opportunities, small and fragmented markets and high domestic financing costs push capital abroad.

The continent’s capital markets remain shallow, expensive and Balkanised. Reforming them – modernising and integrating exchanges, deepening bond markets, harmonising rules across borders – would be transformational. Regional heavyweights in southern, west and east Africa need to lead the charge.

A chronic power shortage

Third is the lack of affordable power. Industrialisation, the engine of every historical growth miracle from the Industrial Revolution to the Asian Tigers, cannot happen without abundant, affordable electricity. Africa has neither. The continent is the least electrified in the world. Ageing grids, insolvent utilities and inadequate financing for large energy projects have left countries unable to support even basic industrial activity. 

Some governments are trying. Ethiopia’s controversial Grand Ethiopian Renaissance Dam promises nearly 6GW of capacity. South Africa is opening its grid to private investment. Senegal is pursuing gas power and the DRC is working on cross-border hydropower links. These efforts are welcome but still fall short of what the continent needs.

The numbers are grim. South Africa, the continent’s most industrialised economy, consumes less electricity per person than the global average, the result of years of Eskom’s woes. Nigeria, with 230 million people, has a grid comparable to that of a small European state; its factories rely on expensive private generators. In the DRC, miners run diesel plants that undermine production of the very minerals the world needs for its green transition. Utilities everywhere are stuck in a death spiral; rising electricity tariffs hurt demand, lower demand worsens finances, worsening finances curtail investment.

The challenge is even greater given that China, once Africa’s main financier, has pulled back. For two decades China loaned African countries billions of dollars to build power and energy infrastructure through its Belt and Road Initiative. But as China’s domestic economy has stalled it has scaled back its lending significantly. Minimal foreign funding has replaced it; public and development finance funding for African energy fell about a third in the past 10 years to $20-billion in 2024, led by an 85% drop from China, according to the International Energy Agency. It remains to be seen where the capital will come from to plug the gap.

Structural problems need structural solutions

The obstacles are daunting, but not insurmountable. The continent’s demographic surge could propel decades of economic dynamism, if structural reforms accompany it. Europe’s postwar integration offers a lesson; deeper markets, shared infrastructure, a common market for energy and free movement of capital, goods and labour can turn small, fragmented economies into engines of growth.

Africa will need a similar shift towards more integration, interdependence and investment. Domestic markets are too small for countries to grow alone; at the same time, as more countries around the world turn inwards, the opportunities at home will begin to outweigh those abroad.

If foreign investors remain indifferent, Africa’s own capital – and its own reformers – will have to drive progress themselves. The world’s insouciance, paradoxically, could be the catalyst that helps Africa save itself. DM