By Gumisai Mutum
Economic diversification to guard against unfavourable commodity prices
Just a few decades ago, the African island-nation of Mauritius depended overwhelmingly on growing sugar-cane – and was as poor as much of Africa.
Since then, Mauritius has transformed itself into a diversified manufacturing and tourism centre, able to attract foreign investors and provide its people with incomes far above the continental average.
Across Africa, most countries face the problem that Mauritius once did: they produce and export mainly unprocessed crops or minerals, even though such raw materials are fetching lower and lower prices on world markets.
In response, some are seeking to follow the example of Mauritius, to consciously and more energetically build up their manufacturing industries.
South Africa, a country developed through the revenues of its gold and diamond mines, is drafting new legislation to encourage companies to first process minerals before exporting them.
In neighbouring Botswana, a realization that the economy cannot be sustained indefinitely on a single product, diamonds, has given renewed impetus to that country’s industrialization programme.
The story is much the same in a small but growing number of African countries, including Namibia and Senegal.
Africa is clearly on a new path, says Executive Secretary K.Y. Amoako of the Addis Ababa-based UN Economic Commission for Africa, marked by economic reforms, greater commitment to political pluralism, a decline in conflicts and policies more favourable to private investment. “African countries should aim to be middle-income industrialized nations in the next three decades.” While this is a bold vision, Mr. Amoako says, it can be achieved.
Early hopes – and disappointments
When most African countries gained their independence in the 1960s, the new governments saw industrialization as a logical means of shaking off colonial trade patterns and attain sustainable development.
They employed state-led strategies to develop local industries to produce goods that were previously imported. But the results fell short of expectations.
By the 1980s, many African governments embraced structural adjustment policies promoted by the World Bank and International Monetary Fund which reduced the role of the state in economic activities and encouraged the sale of public enterprises.
While many of these enterprises had been inefficiently run, they often accounted for most industrial production and employment.
As African industries faltered, most economies remained dependent on a narrow range of primary products.
This is a growing concern among development planners, who warn that unless the continent diversifies the range of products it produces and exports, it will be further marginalized in the global economy. According to the World Bank, the African share of global non-oil exports is now less than one-half what it was in the early 1980s.
Diversifying production
Building – or rebuilding – African industry is a major challenge. Across the developing world, countries that have successfully shifted from producing raw materials into manufacturing have done so in stages. They started by moving into the processing of primary commodities, a process known as vertical diversification.
Some African countries, for instance, are now exporting leather instead of just hides, textiles in place of cotton, or paper, plywood or furniture instead of logs. Côte d’Ivoire, now a major fish- and wood- processing country, has managed to do this. So has Senegal, which also shifted from simply selling raw fish into processing and packaging its produce.
“Our entrepreneurs,” says Botswana’s President Festus Mogae, “should look for technology from partners to enable them to process their products and sell value-added goods abroad.” At independence in 1966, his country was one of Africa’s poorest, but it soon discovered diamonds and its economy has been one of the continent’s fastest-growing.
Aware that these diamonds will one day be exhausted, Botswana has used the revenues to invest heavily in human resources.
The government has also invested in infrastructure, to help make the country more attractive to investors outside the mining sector.
At independence Botswana had only 5 kilometres of tarred road. Now, virtually all national roads are surfaced and the country boasts modern, well-equipped hospitals in all major centres.
However, Botswana remains dependent on diamonds, which bring in $2 bn of the country’s $3 bn in annual foreign revenue.
Due to dry weather, the Southern African country has limited options in agriculture, except for cattle ranching.
So in 1997 it launched a major industrialization drive, based partly on value-added industries in the cattle sector such as meat and hide processing and the production of cattle and chicken feed. The country is also promoting a small but rapidly growing industrial sector in textiles, motor-vehicle assembly, electronics, garments and jewellery.
Although South Africa has managed to build up sub-Saharan Africa’s most sophisticated industrial sector, executives there are also concerned about the economy’s continuing reliance on mining.
“We cannot solely depend on the extraction industry and forget about the fact that the resources that we have . . . are finite,” says Mr. Sandile Nogxina, director-general of South Africa’s Ministry of Mines.
South African parliamentarians are currently drafting legislation to make it easier for companies to produce jewellery in South Africa, either on their own or with foreign partners.
“If Belgium and Israel have become centres for the international trade in diamonds without having their own resources, why can’t we develop a sector in South Africa where upstream and downstream activities reside side by side?” asks Mr. Nogxina.
Over-reliance on commodities
Earnings from primary commodities represent 40 per cent of Africa’s gross domestic product. For 20 countries, a single commodity accounts for more than 50 per cent of export revenue.
But such dependence on primary products, especially agricultural crops, means the continent is vulnerable to unstable market prices and weather conditions.
The UN Conference on Trade and Development (UNCTAD) reports that between 1997 and 2001, primary commodities lost more than 50 per cent of their purchasing power in relation to manufactured goods. This meant that in order to maintain their 1997 incomes, African exporters would have had to more than double production volumes in 2001.
The biggest declines were in coffee, cocoa, tea and vegetable-seed oils, which comprise about 20 per cent of the continent’s non-fuel commodity exports. Almost all the countries hardest hit by falling commodity prices are among the poorest in the world.
“Africa’s overall economic decline is linked with its economic structure and its trade patterns,” notes the UN Industrial Development Organization (UNIDO) in its Industrial Development Report 2004.
“Africa has not significantly industrialized, it has not reduced its initial dependence on primary commodities for exports … in contrast to the rest of the developing world.” Although other developing regions managed to break into the global market for manufactured goods, notes UNIDO, Africa did not.
Overall, manufactured goods now account for 80 per cent of the exports from developing countries, compared with just 25 per cent in 1980.
Those countries that successfully transformed their economies did so by investing revenue from natural resources into infrastructure, human resources and new technologies. But natural-resource-rich African countries such as Benin, Cameroon, the Democratic Republic of Congo and Nigeria did not make such a transformation, notes UNIDO.
In Nigeria, some oil revenue was channeled into import-substituting industries, which the government gave heavy protection from external competition.
But when oil earnings fell, such subsidies proved too expensive and these industries could not compete externally. More than $200 bn was invested in the non-oil sector in Nigeria, but this sector is now smaller, on a per-capita basis, than it was before the oil boom.
Industry collapses
Nigeria’s story was common across Africa. Seeking economic independence from colonial trading patterns, many countries adopted an industrialization model known as “import substitution,” producing domestic goods in place of imported ones.
But these efforts were thwarted by high transportation costs in landlocked states, small markets and limited skills and technology. Many such industries were themselves dependent on imported inputs, especially oil, and were vulnerable to foreign currency shortages.
On top of this, structural adjustment policies eroded the industrial base in many countries, notes a recent paper by African researchers Samuel Wangwe and Haji Semboja.
They note that the rate of growth in manufacturing value added (which measures the growth of the industrial sector) declined from 3.7 per cent during the early 1990s to 2 per cent by 1994.
“Compared with anywhere else in the developing world, Africa’s was the most serious manufacturing-capacity loss,” the academics note.
This was because structural adjustment drastically curtailed the role of the state in industrial development. There were notable exceptions, they report, including Botswana, Mauritius and Zimbabwe, which attained some success with strong public sector involvement.
Trade liberalization, a component of structural adjustment, also caused havoc. Tariffs on imported goods were reduced, allowing cheaper imports to flood domestic markets and further eroding the remaining small and medium-sized enterprises. Unable to compete, many businesses were forced to close down or were privatized.
Africa now finds itself in a vicious cycle. Its manufacturing industries are largely dominated by a small and weak indigenous private sector at one end of the scale and large, foreign multinational corporations at the other. Medium-sized indigenous firms – vital for developing a strong domestic private manufacturing sector – are largely absent.
International trade policy
Further complicating matters, some global trade practices discriminate against developing countries seeking to export manufactured goods.
One of these practices is “tariff escalation,” in which customs duties may be very low or absent for primary goods but then rise as the product undergoes processing. Because the practice protects domestic markets from imported processed goods, it inhibits international trade in such products.
For example, the US Department of Agriculture reports that in North America the tariff rate is about 25 per cent for raw tobacco, but rises to 112 for tobacco products.
The European Union (EU), another major market for African products, charges average tariffs of 21 per cent for fresh fruit, but raises the rate to about 37 per cent for fruit juice.
World Trade Organization Director-General Supachai Panitchpakdi agrees that despite attempts at the WTO to lower them, tariff rates remain high on some products in which developing countries are competitive. This, he says, prevents them “from moving away from dependence on a few commodities.”
Some trade arrangements designed to assist developing countries also reinforce over-reliance on primary commodities.
By offering preferential duty-free or quota-free access to European and North American markets to primary products, but not manufactured goods, they tend to encourage greater production of raw materials, critics point out.
One such treaty was the Lomé Convention (now known as the Cotonou Convention), a series of international aid and trade arrangements first negotiated in 1975 between the EU and former colonies in Africa, the Caribbean and Pacific (ACP) regions.
While its architects had noble intentions – to guarantee market access to bananas, sugar, beef and other goods produced in ACP countries and foster sustainable development – the agreement’s achievements were modest.
One weakness “was that the design of the ACP countries’ preferential access to the EU market was based on selected, mainly traditional commodities, and this tended to discourage diversification of ACP economies in general and industrialization in particular,” writes Mr. Gerrishon Ikiara in a study for the Netherlands-based European Centre for Development Policy Management.
Moreover, because they faced no direct competition, many countries did not improve efficiency even in the production of these goods.
When the agreements finally end in 2009, many ACP countries will not be able to compete with those that have become more efficient because they did not enjoy such protection.
Mauritius: getting it right
Despite such obstacles, a few African countries have managed to develop a formula for industrial transformation.
Among these is Mauritius. Once a poor, sugar-dependent nation, it now has a diversified economy in which manufacturing and tourism play a growing role. Its per capita income is about $10,000, many times higher than the sub-Saharan average of $300.
The country’s sugar sector is still the third largest export earner, having benefited from preferential access agreements with Europe over the last 50 years.
The arrangements guaranteed Mauritius sugar prices that were 100-200 per cent above world prices. But by 2009 these agreements will be phased out. Mauritius has long prepared for this by developing other sectors.
A key government strategy was to develop export-processing zones, duty-free industrial areas that also provide tax incentives to businesses.
The policy allowed the government to protect existing import-substituting industries while at the same time permitting new export firms to take advantage of duty-free imports.
The authorities strategically encouraged investments in service industries such as finance and information and communication technologies.
Realizing that the labour force was ill-equipped for the transition, the government increased spending on manpower and infrastructure development.
Mauritius, which now boasts world-class telecommunications facilities, is seeking to emulate India’s Bangalore and become the information-technology hub of the region, utilizing a workforce able to operate in both English and French.
Mauritius also invested in a fibre-optic underwater communications cable that connects East Asia and South Africa, and is currently amending its labour laws to attract investors. It recently secured a $100 mn low-interest loan from India to build a “cyber city,” a project which will produce information technology goods and create 5,000 jobs.
In addition, Mauritius has other advantages. UNIDO notes that the country was fortunate in that its industrialization programme coincided with the need of Hong Kong-based firms to relocate their production sites. The government of Mauritius has also succeeded in restraining corruption and other bad practices by its public officials.
In a case study in its Economic Report on Africa 2003, the UN Economic Commission for Africa concluded that the success of Mauritius has much to do with how development strategies are formulated. The policies are “well thought out to address the needs of the economy,” and are not simply formulated in reaction to crises.
Attracting investors
Despite seemingly insurmountable challenges, African leaders remain optimistic that the continent is now turning the corner. In 2001, they adopted a new vision known as the New Partnership for Africa’s Development (NEPAD), which stresses peace, security and good governance.
To accelerate development, the plan targets certain priority areas for investment, including human resources and infrastructure, particularly in energy and transport.
“We believe that without the leadership of the African countries themselves and the multilateral development institutions, the private sector will not come to Africa on the scale that is required,” says Mr. Wiseman Nkuhlu, chairman of the NEPAD Steering Committee.
Through the facilitation of the NEPAD Secretariat, a number of large-scale cross-border infrastructure projects are planned.
Last year, Zambia, Tanzania and Kenya signed an agreement to build a 400-megawatt power line linking the three countries at a cost of $323 mn, partly financed by the World Bank.
The African Development Bank has committed $95 mn to an Algeria-Morocco-Spain electricity interconnection project, $20 mn to a Nigeria-Togo-Benin power project and $100 mn to a Mali-Burkina Faso-Ghana road project.
Many such development projects remain underfunded, however. If Africa is to attain its goals, notes World Bank Chief Economist François Bourguignon, the international community needs to play a role, “investing more in education, trade promotion and the development of infrastructure.”
For their part, African governments urgently need to focus on the “supply side,” notes UNIDO. This would entail training workers to operate plants at competitive levels, raising quality, introducing new products and encouraging higher value-added activities.
While this depends on adequate financial investment, reports UNIDO, it primarily requires “a set of resources more precious than money: skills, organization, knowledge, effort and institutions.”
On the way to recovery
While African governments and their development partners continue to grapple with the factors responsible for sub-Saharan Africa’s weak performance, there is a growing consensus that, at least in a number of countries, the policy environment for recovery now exists.
The World Bank forecasts that in the medium term, manufacturing value added will grow at about 4 per cent annually.
A turning point out of the decline of African industry came in the mid-1990s, reports UNIDO, as 36 countries attained industrial growth rates higher than during the first half of the decade.
Among the factors that contributed to this shift, the agency states, was a new focus by African governments on competitiveness.
In the past, policy-makers believed competitiveness largely related to wage levels, exchange rates and macro-economic policies. Today, UNIDO identifies infrastructure, governance, skills and technology as the four elements influencing competitiveness.
Moreover, adds UNIDO, all four elements are dependent to varying degrees on state policies and capacities.
Competitiveness will be undermined if governments fail either to maintain law and order, to guarantee the security of individuals and investments, to protect intellectual property rights or to provide an efficient infrastructure, adequate training, education and health systems, notes the agency’s Industrial Development Report.
An earlier African Competitiveness Report issued in 1998 by the World Economic Forum and the Harvard Institute for International Development found that small, dynamic economies with solid export bases perform the best.
In sub-Saharan Africa, the top performers were Mauritius, Botswana and Namibia. Other countries that managed to avoid high levels of economic and political turmoil also made it into the top half of the ratings.
The survey is now issued periodically. And as with other international ratings, African governments prefer to climb rather than descend the ranks.
Polishing Africa’s diamonds in Africa
In mid-September, a Belgian-based diamond company broke ground in Gaborone, Botswana, for the construction of a new diamond cutting and polishing factory.
The operation, which is being built by Eurostar Diamond Traders, will eventually be the biggest such factory in Africa, employing more than 1,000 workers.
Up to now, almost all of Botswana’s rough diamonds have been sent abroad for polishing by the South African De Beers company, which dominates the world diamond trade and jointly owns, with the Botswana government, the local diamond mining enterprise.
Although the Eurostar factory will change this pattern, De Beers supports the initiative. Said De Beers Managing Director Gary Ralfe at a news conference following the groundbreaking ceremony: “De Beers increasingly realizes how important it is to respect the entirely reasonable and justified demands by the governments of Botswana and Namibia to create … jobs.” A similar Israeli-owned diamond polishing factory was recently opened in Namibia, and employs 550 workers.
Africa’s declining share in global trade
Over the last few decades Africa’s share of world trade has progressively declined. During the 1950s, sub-Saharan Africa accounted for about 3 per cent of world exports, but by the 1990s this had fallen to 1 per cent.
“Even in the area where Africa is supposed to have a competitive advantage [such as agriculture], it has been losing market share,” says Mr. Kamran Kousari of the UN Conference on Trade and Development.
In a study, Trade Performance and Commodity Dependence, released in February, the agency attributes the failure to increase agricultural productivity in Africa to a number of factors.
These include reliance on an ill-supported small-scale farming sector, rudimentary technology, donor-driven policies that have reduced the role of state institutions in the sector and domestic subsidies in industrial countries that have eroded the competitiveness of African farmers.
Over the years, Africa has lost its advantage in growing cocoa, tea and coffee more competitively than Latin American and Asian producers, and is losing markets to countries in these regions.
According to a World Bank assessment, had the continent maintained its 1950s share of world trade, the value of its annual exports today would be $65 bn, a figure that far surpasses the $13 bn in aid the continent received in 2000.
