In the past, business in Africa behaved like a “caterpillar” — uninteresting, slow moving and easy to step on, according to Eric Kacou, managing and regional director for Africa at OTF Group, a U.S.-based consulting firm focused on emerging economies.

“The most blatant fact about Africa is that despite a vast amount of natural resources, we have very little to show for it,” Kacou said at the Wharton Global Alumni Forum in Cape Town, South Africa. Today, however, the continent is poised to enter a “cocoon” phase, he added — a metamorphosis in business that requires a “new mindset” relying less on natural resources and more on innovation and private sector growth.

Kacou was among the speakers on two panels — one taking the investor’s view and the other featuring grass-roots entrepreneurs — that looked at business as a means for improving Africa’s economic and social realities. The first panel, “Business as the Engine of African Economic Development,” was moderated by Wharton finance professor Richard Herring, who noted that “Five years ago, the title of this session would have been thought to be a lot more hopeful than true, but in fact some very interesting things have been happening.”

When investors think of Sub-Saharan Africa, Herring said, they do so “in terms of the high-profile conflicts that take place,” such as the ongoing election disputes in Zimbabwe and recent post-election violence in Kenya. But armed conflicts have declined from 20 in 1999 to only five today, he pointed out, and long-running civil wars in Angola, Mozambique, Sierra Leone and Liberia have all come to an end.

“The sharp increase in Africa’s economic performance” over the past five years “has been largely unnoticed,” Herring added. Between 1997 and 2002, real income per capita rose 1.8%. “[At that rate] it would take nearly 40 years to double income per capita, and the world can’t tolerate that.” Since 2002, real income capita has been growing at a rate of 4.6%. “It’s really heading in the right direction.”

Herring compared Africa’s current state to the development of the ASEAN (Association of Southeast Asian Nations) in the 1980s, “right before they became Asian tigers.” In many African countries, he said, improved policies have “helped to lift the heavy hand of government … stimulating a resurgence of private investment and a flourishing of entrepreneurial activity.”

Angola’s Oil

Kacou, who has advised government and business leaders in Rwanda, Uganda, Nigeria, Sudan and Mali, referred the audience to a chart showing the inverse relationship between various countries’ “wealth” in natural resources and their GDP. (With the exception of certain countries like Dubai, which has been successful at reinvesting its oil wealth, countries with the most natural resources tend to do poorly in terms of income.) With regard to natural resources such as oil, diamonds and beaches, “Africa is wealthy,” he said, “but we need to distinguish between wealth you can see and social forms of wealth,” including human resources, knowledge, functioning institutions and a cultural attitude that is open to innovation and takes into consideration how natural resources are deployed. “Without the second [kind of wealth], you can’t do much with the first.”

Historically, African nations have suffered from what is widely known as the “resource curse” — an inability to capture the value of their abundant natural resources. Stephen Priestly, managing director at JPMorgan and head of investment banking for Sub-Saharan Africa, noted one example — Angola — that has begun to move away from a mindset that allows other countries to come in and extract its resources by “moving up the value curve.” Whereas many African nations like Nigeria, the continent’s largest oil producer, export raw materials and often need to import the refined product for local consumption, Angola has developed its own refining capacity and now produces two million barrels of oil a day as a member of OPEC.

The effects are wide-reaching, from increased employment to capital inflows from investors like the Export-Import Bank of China, which has given Angola a multi-billion-dollar line of credit for infrastructure improvements in exchange for access to the country’s offshore oil fields. (Angola is now China’s largest supplier of oil, with Saudi Arabia in second place.) While the situation “may not be perfect” in everyone’s view — many are critical of China’s dominant role in the country’s oil industry and government corruption is still considered rampant following more than 25 years of civil war — Priestly noted that the country stands apart from many others by “addressing fundamental barriers to growth through its oil proceeds.”

The Angolan government’s relaxing of foreign exchange limits has led to an increase in investments in other sectors, too, including banking and real estate. Despite a more open economy, however, the country still faces “absurd levels of poverty,” Priestly says. Herring noted that Angola is a classic example of “imbalanced growth,” where some sectors are growing much faster than others, but that these imbalances “are creating strong incentives for the private sector to jump in and help [Angola] catch up.”

Indeed, priestly said that the rapid increase in business opportunities in Angola has highlighted some obvious areas for improvement. “Anyone who has tried to do business there knows that it is impossible to get a flight or find a hotel.” Basic support infrastructure — including ports, power stations and even employee housing — is a key area for investment growth as commodity production increases, the panelists agreed.

‘Smart’ Capital

James Eric Wright, founder and CEO of African Venture Partners, a pan-African company focusing on telecommunications and technology, noted that a major consideration for all investors regardless of industry is management expertise. Wright, whose firm started a broadband company in Nigeria that was subsequently sold to Dimension Data, one of South Africa’s largest data companies, said that although there are a lot of talented entrepreneurs in Africa, “they lack management depth.” His firm’s solution was to recruit Africans who had gone to school in the U.S. or Europe, so that they could bring both familiarity with Africa and a high skill level to bear on projects.

Priestly agreed, saying that finding entrepreneurs with the requisite management skills is the “biggest constraint to business development on the continent,” and that often these skills need to be imported.

Richard Okello, principal at U.S.-based Makena Capital Management, which oversees $12 billion in assets, said that management skill is one way to distinguish between ordinary capital and what he calls “smart” capital, which takes into account global competitiveness and addresses risk on all levels, from widespread government red tape to the kinds of high-profile risks that Herring alluded to in his introduction. “We need to bridge the communication gap between those who provide capital and those in Africa who desperately need capital to grow,” he said.

That process includes setting realistic expectations for risk-adjusted returns but also redefining risk. “What is risk in Africa?” Okello asked. “For most investors, it’s what’s happening in the newspapers.” Those interested in finding a place for capital in Africa need to look “several layers beneath” these stories to determine whether a problem is really an opportunity, he said. “A political conflict in one country may be bad for hotels, but it could be great for shipping because those companies can raise their fees by 20% to 30%.” As an example, he cited one fund manager in Thailand who would present potential investors with a page of reasons why they shouldn’t invest — followed by a list of specific measures the fund would take to counteract those risks. “Let’s not give foreign capital an excuse not to invest in Africa.”

Looking for Problems to Solve

For many investors and entrepreneurs, Africa’s outsized problems themselves are the attraction. On a panel called “Societal Entrepreneurship,” James Thompson, director of Wharton’s Societal Wealth Program, described a project aimed at malnutrition in Zambia, which focused on improving the availability of animal feed.

At the time, Zambia was facing an unemployment rate higher than 50%, and HIV was rampant.

“It was not a particularly attractive market,” Thompson said. Still, the program’s goal was to take a “seemingly intractable problem … and launch a business that alleviates it while simultaneously making money.” Working in cooperation with the Veterinary School at the University of Pennsylvania, Thompson and his colleagues were able to increase the quality of feed while lowering the price by 20%, which put the group in direct competition with large agricultural conglomerates that tried repeatedly to shut the project down.

Ian MacMillan, professor of management at Wharton and the panel’s moderator, noted that traditional aid programs have failed to address such issues in a sustainable way. Societal entrepreneurship — both through existing organizations and independent start-ups — is a more viable path to economic development. “In the last 50 years, $3 trillion has been spent on aid in Africa, but we’re worse off than before…. We’ve wasted a lot of money.”

Dawn Hines, co-founder and partner at Aventura Investment Partners, also sees opportunity in feeding Africa’s poor. Based in Senegal, Aventura invests “in the rural food system value chain” by providing farm equipment, supplies and — perhaps most importantly — irrigation. According to Hines, the climate in the Sahel — the area just below the Sahara and north of the fertile Sudan region — is ideal for farming with the exception of limited rainfall. “Sunlight is 90% responsible for the health of crops, and the Sahel has some of the best sunlight in the world. I was just sitting under it a week ago, wishing I had air conditioning.”

With sufficient irrigation and equipment, a farmer who would ordinarily use a quarter or one hectare of land can utilize 20 hectares. Hines noted that investing in agriculture is usually seen as very risky because most of the companies needed to fill out the value chain are missing. “The entrepreneur who received the investment is often running around, trying to fill in those missing pieces.” For that reason, Aventura invests in outfits that provide packing services, package making “or anything needed to stabilize the supply chain.”

The goal is not only to provide more food for Africa’s poor. (According to Hines, African agriculture meets only 50% of its food needs; 25% is met by importing food and 25% of the population goes hungry.) In fact, with Aventura’s involvement, Senegal has become a large exporter of green beans and has surpassed Israel as the leading exporter of tomatoes to Europe.

As farming improves, workers will migrate to the various support industries surrounding it, says Hines. “The ultimate goal is to move people out of farming…. This isn’t about just giving them shovels.”