Is Africa’s rise for real this time?

September 18, 2014, 11:25 AM UTC
contract Armin Harris
Graphic by Nicolas Rapp

In the depths of the financial crisis in 2009, Irwin Barkan, a shopping-mall developer, was idling at home in rural Vermont with not a single project on his books when he fired up his computer and found an email from Morley Gordon. Gordon, his best friend’s son, whom he had known since Gordon was an infant, was traveling around Africa as a consultant for U.S. businesses. “Uncle Irwin,” Gordon wrote, “you should look at doing commercial real estate in Africa.” Barkan’s Boston-based company, I.J. Barkan Inc., had been developing shopping centers since 1984. But the deep recession had pummeled his industry and left the business Barkan ran with his wife, Lindsay, “dead in the water,” he says. Still, Africa seemed a stretch. “I’d never been to Africa,” says Barkan, 63, over beers at an outdoor jazz club one steaming tropical night in Accra, the capital city of Ghana in West Africa. “I thought about Africa like a lot of American businessmen: like the jungle.”

Africa remained unfathomable to Barkan until 2011, when—still languishing in forced retirement—he happened to read one morning that his longtime tenant Wal-Mart, whose first New England stores had opened in Barkan’s developments in the 1980s, was paying $2.4 billion for a controlling stake in Africa’s biggest retail giant, Massmart Holdings, and that the No. 1 company in the Fortune 500 was now aiming for a slice of the continent’s exploding consumer market. It was Barkan’s eureka moment. “That was it,” he says. “I said, ‘We gotta go to Africa.’ ” He and Gordon pored over maps, looking for the best place to scout for prospects. They decided to take a two-week trip to Ghana, where the Dallas company Kosmos Energy had announced big offshore oil finds and where the economy was growing and people spoke English. To Barkan’s astonishment, they found several business possibilities within days of landing. “I’d come from four years of depression in the U.S., where everybody was worried and unhappy all the time,” he says. “I came home and knew Africa was where my future was.”

Africa may no longer be “the jungle,” as Barkan puts it, but to many in the business world it still seems as untapped a market as is possible in the 21st century. Its economies have soared since 2000, thanks mostly to the rise in prices for commodities that Africa has in abundance, such as gold, copper, iron ore, zinc, platinum, and oil. That, together with big new oil and gas finds and Western countries’ writing off billions in African debt, has meant high growth rates across the continent, even during the worst recession in decades. The IMF predicts 5.4% average growth this year for Africa’s 48 sub-Saharan countries, where more than 800 million people live. That’s far above the 3.6% global average. Oil-rich Nigeria grew 6.2% last year and in April overtook South Africa as Africa’s biggest economy. Even tiny Sierra Leone grew about 13% last year (though the devastating Ebola epidemic has since walloped its economy). Africa’s population is rocketing too. By mid-century there will be more Nigerians than Americans on the planet. And the United Nations estimates that by 2035 half of all Africans will live in cities. That means millions of people who once subsisted as bare-bones farmers will be earning and spending cash and driving demand for countless consumer items, almost all of which are currently imported. The trend is already evident. Nigeria’s 170 million people are now among the world’s biggest consumers of imported tomato paste and rice, and they drink more champagne than anyone outside France.

Young Nigerian shoppersYoung Nigerian shoppers gather in Lagos for a fashion exhibition. Nigeria recently overtook South Africa as the continent’s largest economy.Photo: Carlos Cazalis—Corbis

In the popular imagination, there have long been two dominant visions of Africa—as a land of dire poverty and conflict, and as a place of sublime wilderness. Now there is a third cliché: “Africa rising.” The phrase describes a continent whose dire limitations—such as the chronic lack of electricity, rail lines, airports, and paved roads—translate into astonishing business opportunities as economies expand. The sense that one can tap into gaping needs, often with few competitors, has not gone unnoticed by U.S. investors.

In August, President Barack Obama hosted the first-ever U.S.-Africa business summit in Washington, with dozens of African leaders in attendance. The focus was not on aiding the poor, as it might once have been, but on making multibillion-dollar deals that eclipsed decades of government handouts to African states. Nigeria’s cement tycoon Aliko Dangote, CEO of the Dangote Group (and Africa’s richest person, with an estimated fortune of $24 billion), announced a $5 billion private equity deal with the Blackstone Group to invest in power infrastructure such as electrical transmission lines and coal refineries. Dangote sealed a second deal with the Carlyle Group for investments in oil refineries, agriculture, and financial services; just months earlier, Carlyle had closed a $698 million Sub-Saharan Africa Fund and made its first investments in a supply-chain company in Tanzania and a logistics company in Mozambique.

U.S. investments go far beyond infrastructure, however. The New York hedge fund Tiger Global Management has invested millions in the online entertainment network Iroko Partners, which has its headquarters in Nigerian mega-city Lagos and which began as a YouTube channel just four years ago. Procter & Gamble is set to open a $250 million factory nearby next year to produce diapers and other baby products.

Even without manufacturing, some U.S. giants now see Africa as a kind of blank slate on which to create products virtually off the grid. Both IBM and Philips opened multimillion-dollar research centers in Kenya’s capital city of Nairobi this past year, seizing on the opportunity in the region to design everything from solar-powered devices to medical equipment. In February the Kenyan company M-Kopa began distributing solar power to homes, with investment from the Shell Foundation and the Gates Foundation, and with consumers paying bills over their mobile phones. Indeed, with minuscule access to credit in Africa, mobile-phone banking has exploded throughout the continent. Kenya’s M-Pesa cellphone payment system, developed by Kenya’s telecom company Safaricom and Britain’s Vodacom, now accounts for about one-quarter of the country’s GDP.

The continent’s lack of transportation infrastructure has spawned other creations. The New York–based PanAfrican Investment, which former Time Warner CEO Richard Parsons and Estée Lauder executive Ronald Lauder started in 2011, is backing a company called Mobius Motors, which will produce cheap off-road vehicles built in Kenya. And a Swiss consortium is developing a transportation drone in Kenya called the Flying Donkey that’s capable of carrying about 45 pounds over 30 miles in less than a hour, a journey that could normally take hours over rutted dirt—that is, if you can find a working car and enough gas. The group plans to start selling the drones in May for about $2,500 each and envisions owners’ renting them out by the hour, like taxicabs. “Nobody thought that the mobile phone would be affordable, and now every person in Africa owns one,” says Simon Johnson, director of the Flying Donkey project, who previously was a sales director for Hewlett-­Packard in Europe, the Middle East, and Africa. “Mobile phones showed you can do amazing things in Africa.”

As investment dollars have flooded in, there has been another influx too: Hundreds of Africans have returned after years of working in the West, including in banking and finance on Wall Street and in the City of London. Alex Okosi, 39, a senior vice president in Africa for Viacom International, says he moved back to his native Nigeria in 2005 after a long stint at MTV in the U.S. because he finally persuaded his bosses that there was money to be made by expanding the network into Africa. Okosi says it “took some convincing” but he finally opened offices in Johannesburg and Lagos. Nearly a decade later, it has proved a good investment for Viacom. “We’re doing well,” he says.

AFR_03Graphic Source: United Nations
Across Africa, a rapidly expanding and increasingly urbanized population is helping drive economic growth. By mid-century, the UN estimates, there will be more Nigerians than Americans on the planet.

The stampede back to Africa began in earnest after the financial crisis hit in 2008, when countless Africans lost their jobs abroad or simply calculated that their prospects were better back home. “This generation is coming back in their mid-thirties. We are coming early, and we are coming in mass,” says GE’s West Africa managing director, Leslie Aruna Nelson. A Ghanaian raised in London, Nelson, 40, got his MBA at New York University and worked at GE Capital in Manhattan before moving back to Accra in 2009 and launching the company’s regional operation. For returnees like him, the prospect of landing a top job quickly has been a powerful draw, and, he says, Africans with experience abroad are in hot demand as U.S. companies search for people who understand both Western markets and how to operate in Africa. When he opened GE’s West Africa office, Nelson says, he discovered huge untapped markets for things in which GE had particular expertise, like power plants, medical equipment, and water treatment. “It is pure white space with pure opportunities,” he says.

Travel around the continent, and the breathless tone people use to describe Africa’s business potential becomes quickly familiar, if at times almost cloying. Many have a rags-to-riches tale (or at least a rags-to-riches business plan) and are certain that Africa is a hugely promising environment. And yet, for all the talk of boundless possibility, there is plenty to instill sober second thoughts—including unexpected developments such as the Ebola pandemic that surfaced earlier this year in Guinea with little notice. Ebola now threatens to engulf the economies of Guinea, Sierra Leone, and Liberia. In September the IMF sharply cut its growth predictions for all three countries and warned that the disease could spread to other West African nations. Economists and analysts also caution that by focusing on fast growth and profits, investors might obscure deeper questions, like whether the big money flows will actually benefit the many millions of poor Africans or simply a thin slice of locals and foreign companies. The answer could drastically affect the prospects for consumer markets. In a newsletter in late August, the Eurasia Group consultancy in New York warned its clients that Africa’s power sector, which is attracting billions in U.S. investments, is “often riddled with corruption, vested political interests, long delays, and inefficient parastatals.”

With widespread unemployment across the continent, 48% of Africans scrape by on $1.25 or less a day, a situation that African leaders say desperately needs to change—and swiftly—for their countries to remain stable. “We have seen that in the Arab Spring,” says the president of Ghana, John Dramani Mahama, sitting in his grand office overlooking Accra. “African leaders need to respond quickly to avoid getting caught in some sort of social explosion as a result of a youth bulge that does not have meaningful employment.” Across town, economist K.Y. Amoako, who heads the African Council of Economic Transformation, says that unless the huge influx of foreign investment can transform most Africans’ lives, the continent’s economic boom might not last. “The big story about ‘Africa rising’ is this: The growth figures are extraordinarily high, but whether it’s sustainable and going to create jobs is questionable,” he says. “Why aren’t people opening factories here? In Southeast Asia, yes. In China, yes. But it’s not happening in Africa.”

This was not the message African governments wanted to push publicly when leaders met last May with hundreds of business executives from the U.S., Asia, and Europe in Nigeria’s capital, Abuja, for the World Economic Forum on Africa. There the big news was of the flood of new money pouring into the continent, best expressed by the African Development Bank (owned and funded by African governments), which estimates that foreign investment will hit an all-time high of $84.3 billion this year. Sitting in a small meeting of investors and officials at the Abuja forum, Stephen Olabisi Onasanya, the CEO of First Bank Nigeria, said his team was “amazed by the opportunities. If you don’t take these opportunities to invest now in Africa, it might be too late.”

Aiko Dangote and Steve SchwarzmanDangote Group founder and CEO Aliko Dangote (right) with Blackstone Group CEO Steve Schwarzman. Africa’s richest person, Dangote has signed investment deals with Blackstone and the Carlyle Group.Photo: Drew Angerer—Bloomberg via Getty Images

The disjuncture between the optimists in the halls and conference rooms at the Abuja meeting and the reality on the ground was glaringly evident. Nigeria’s government had expected to showcase its new status as Africa’s biggest economy, announced just a month earlier. Instead, the hard-line Islamist terror group Boko Haram set off two massive car bombs in the capital just days before the forum opened, killing about 100 civilians. And there was global outrage over the group’s kidnapping of 300 schoolgirls the month before in northern Nigeria—as well as over the government’s bungling of the crisis, which worked its way into almost every discussion at the forum. When I stepped off the plane in Abuja on the opening day of the forum, heavily armed Nigerian soldiers stood ready to escort delegates arriving in the city. The streets bristled with thousands more soldiers throughout the three-day forum, leading several delegates to wonder out loud whether the military should be hunting for the missing schoolgirls rather than protecting executives.

Though the crisis was bad timing for the hosts of the World Economic Forum, it was also a reality check for investors, reminding them that Africa had both big promise and big problems. The local currency in Nigeria, the naira, has slumped against the dollar this year because of mass violence and corruption scandals. Conflict is also raging in Central African Republic and South Sudan. “There’s nowhere in the world you get the returns you get in Africa today,” bank executive Onasanya told a panel at the forum. “But you also get African risks.”

“This is Asia 30 years ago,” says one U.S. businessman. “American investors have been the last to acknowledge that Africa is where the action will be for the next 30 years.”

Other limitations to doing business in Africa become starkly obvious once you are on the ground. In order to buy an airplane ticket from Nigeria to Ghana (on the region’s sole airline), I spent hours walking the blisteringly hot streets of Lagos looking for enough local currency—only some ATMs work and not all take foreign bank cards—and then bringing the pile of banknotes to the airline’s office. Companies in Lagos, a city of 21 million people, say their staffs spend hours on menial tasks like delivering documents (because there is no mail service) or waiting in gas lines. As in many African cities, diesel generators roar outside every building on every street in Lagos because the power grid generates a fraction of the electricity needed. The chronic electricity shortage limits any plans for manufacturing—one sure way to create jobs—by pushing operating expenses above those in Asia, for example, even after factoring in Africa’s lower wages. That problem extends to every level of business. “We have big ambitions for KFC in Nigeria,” says Aditya Chellaram, a Nigerian businessman whose family conglomerate owns 25 of the fried-chicken restaurants in the country. “The real problem is we have high costs because we have to generate all our own electricity.”

By the time Irwin Barkan, the mall developer, locked up his Vermont house and moved to Ghana in early 2012, he’d heard both the hype and the horror stories. He says most friends thought he was nuts when he said he was pulling up stakes for Africa. Yet he trusted the hard data, which showed that West Africa, and Ghana in particular, held some of the world’s fastest-growing markets—“and the rest of the world was in the crapper,” Barkan says. With New York property developer Daniel Rose as the key investor and nonexecutive chairman, Barkan established a new company, BGI, for his Africa developments. The potential seemed obvious. Ghana, a country of 23 million people, had just one shopping mall. But the headaches were obvious too.

There were daunting challenges in planning his malls. Barkan was forced to toss out assumptions he had learned through decades in the real estate business, such as how to sign property deals. In Ghana, tribal chiefs own most of the land, and there are few title deeds. After Barkan identified 90 acres of open wetlands in Accra’s emerging middle-class suburbs as the ideal spot for a mall, he paid a deposit of about $325 to a local chief for its use, then discovered eight months later that the man had no claim to the land. The mall, called Mallam Junction, is set to open in 2016 with about 100 stores and a three-star hotel. It will be far bigger than any shopping center Ghana has now. Barkan is developing another mall in Kumasi, Ghana’s biggest city, in partnership with the King of the Ashanti people, a centuries-old monarchy that once presided over a large swath of West Africa and that is now situated at the heart of the world’s second-biggest gold-producing area.

Irwin BarkanIn 2012, U.S. mall developer Irwin Barkan moved to Ghana, where he is now building the country’s largest shopping center.Photo: Courtesy of Irwin Barkan

For all that, Barkan’s business plans hold real risks, most beyond his control. Western governments still highly praise Ghana for its stable democratic elections, lack of violence, and, thriving businesses. President Obama made Accra his first Africa stop as President in 2009, telling Parliament that Ghana was “the Africa too often overlooked.” Yet 10% inflation and a fiscal deficit of about 10.5% have rocked Ghana’s economy during the past year, and the currency, the cedi, has slid more than 20% against the dollar in 2014. That puts imported goods—the things Barkan’s malls will offer—out of reach for millions of Ghanaians. And Ghana’s President Mahama, who unveiled new economic reforms in June, faces stiff political opposition and is trying to cut the bloated public sector. “New measures do not amount to a coherent strategy,” warned Eurasia Group’s senior Africa analyst Philippe de Pontet in a note to investors in June. “Ad hoc tactics will not lift Ghana’s economic crisis anytime soon.”

Sitting in his vast office, Mahama says people need to be patient as Ghana recovers. “It takes multiple years to deal with the deficit,” he says, explaining that even Ireland took four years before exiting its crisis. Despite the current squeeze, he says, U.S. businesses would be smart to invest in Ghana as well as in many other African countries. When I ask Mahama how he would best market Africa to American investors, he responds quickly: “Money. What’s business about if not making a profit? Africa has the fastest-growing middle class in the world, and so disposable incomes are increasing, there’s demand for housing, demand for lifestyle products.”

Barkan is patient. He brushes off Ghana’s current problems as a “glitch” on a steadily upward graph. He is certain his Africa move was the best decision of his career. “Do I expect to make money? Absolutely,” says Barkan. He says that he can’t understand why more American executives don’t set up Africa operations, much as Chinese and European companies have done for several years. “This is Asia 30 years ago,” he says. “For whatever reason, American investors have been the last to acknowledge with their checkbooks that Africa is where the action will be for the next 30 years.”

Sitting in his office in a converted villa in Accra one morning, Barkan shows me photos of himself and his chairman, Rose, in traditional Ghanaian garb during ceremonies declaring each man “development chiefs” of tribes. Voluble and gregarious, Barkan has thrown himself into his new life, getting to know diplomats and meeting with the President. “I lived my whole life in the U.S. until I was 60,” he says. “If you told me five years ago I’d be living in Africa, I’d have said, ‘What are you smoking?’ I couldn’t be happier—or more surprised.” If Africa finally lives up to its promise, he may soon have a lot of company.

This story is from the October 6, 2014 issue of Fortune.

An earlier version of this article stated incorrectly that BP is an investor in M-Kopa Solar. This post has been updated.