Africa comes to the end of its commodities boom

The decline in world commodity prices has taken with it African economic growth rates. This shows the need for African nations to pursue industrialisation

 
An aerial view of intensive agriculture in Rwanda. Alongside six other African nations, Rwanda was one of the fastest-growing economies in the world between 2000 and 2015
An aerial view of intensive agriculture in Rwanda. Alongside six other African nations, Rwanda was one of the fastest-growing economies in the world between 2000 and 2015 

In the early 1960s, Egyptian economist Samir Amin was working for the Malian government’s Ministry of Planning in Bamako. In his memoir, A Life Looking Forward, he briefly recounts a story about the state’s failed attempt to foster a local soft drink industry, creating a national drink. The government, he recalls, “came up with the idea of launching bottled ginger juice as a ‘national drink’… but unfortunately they decided to use an old soap works”.

Africa’s change in growth

$400bn

Growth of Africa’s consumer-facing industries by 2020

40%

Urban Africa’s contribution to GDP growth

450m

Workers that are expected to join the Africa workforce between 2010 and 2035h

The tanks acquired by this new patriotic industry, within which the drink was made, were not sufficiently cleaned. The day after a celebratory consumption of the drink by the president, ministers and other notables on a national holiday, the corridors of power were conspicuously quiet: all those who had consumed the drink had fallen ill. Needless to say, Mali’s bottled ginger juice industry did not get off to a flying start. The story is perhaps indicative of the failure made by state planning bureaucrats, with high-minded goals to industrialise their newly independent nations.

Searching for Africa
When performing an online search of the words ‘Africa’ and ‘industrialisation’, the first page of returns is filled with links to articles and essays mulling over the continent’s failure to do so, with references to something called Africa Industrialisation Day. Created by the United Nations, this annual event, which takes place on November 20, is intended to “mobilise the commitment of the international community to the industrialisation of Africa”.

According to the Secretary-General Ban Ki-moon in his message for the International Day for Africa Industrialisation: “Africa needs to invest in training and education for women and youth to industrialise, grow the private sector and achieve sustainable development.”

Since freeing itself from the shakles of colonialism, economic predictions and forecasts for Africa have fluctuated between pessimism and optimism

A Google search for other regions and the term ‘industrialisation’ returns very different types of results. Rather, there are pages of triumphant history, explaining why and how Europe industrialised in the 18th century, and how the Asian Tigers did so in the 20th century.

There is praise of the great strides China has taken in the past few decades, resulting in hundreds of millions of people – historically unprecedented figures – being pulled out of poverty and into modernity. The rest of the world got industrialisation, and Africa got a largely unobserved day in the global calendar of bureaucrats.

Since freeing itself from the shackles of colonialism, economic predictions and forecasts for Africa have fluctuated between pessimism and optimism. With the exploitative relationship with the colonial metropole no longer formally intact, nations of Sub-Saharan Africa were expected to soon bear the fruits of modernity: roads, railways, electricity, up-to-date hospitals and industry.

By the 1980s, however, it became clear that this had not happened. Faced with crippling debt, the IMF and World Bank stepped in. By 2001, former British Prime Minster Tony Blair was calling the continent’s state “a scar on the conscience of the world”, while The Economist was labelling it “hopeless”. Yet by the mid 2000s, Africa was seen as once more on the road to modernity and prosperity. Optimism was back. Perhaps the continent’s time had finally come.

Millions of mobiles
In the past decade and a half, more than a dozen nations in Sub-Saharan Africa have had an economic growth rate of seven percent or more. According to Rick Rowden, a former inter-regional advisor for the United Nations Conference on Trade and Development: “The ‘Africa rising’ narrative really began to take off about 10 years ago.” As Rowden told Mrassociates, optimism about Africa’s economic future stemmed from high commodity prices on the world market, which “contributed to the uptick in GDP growth”.

Rowden added: “People were also starting to notice a significantly bigger level of Chinese trade and investment on the continent, suggesting a new degree of interest in the place.” Alongside this, Rowden continued, there “were other factors… such as the improved macroeconomic situation, increased trade volumes – and with some new trade partners – including increased intra-regional trade, increased FDI inflows – including speculative FDI and real estate asset bubbles – the increased number of African billionaires, and the explosive increase in the use of mobile phones and e-money transfer services – all of these things added to the allure of the ‘Africa rising’ theme”.

Much hype has been made, often devoid of any real context, about the number of mobile phones in use on the continent, the potential size of workforce, or the combined spending power of Africans. One article from The Telegraph in 2013 pointed out: “Africa is home to the world’s fastest-growing population; there are already 500 million mobile phones in Africa, with 850 million expected by 2015; Africa’s workforce is expected to be the world’s largest by 2035, bigger than both China’s and India’s; consumer spending is growing in Africa from around $900bn today to an anticipated $1.4trn by 2020.”

Pursuing growth through exporting commodities alone can also result in losing sight of the real tast of economic development: industrialisation

According to two academics writing in The Guardian last year: “The ‘Africa rising’ story of booming economies and growing middle classes is important in correcting the global perception of Africa.” The tide, they argued, had turned in the 21st century, after decades of disappointing economic performance – for which colonialism and its pernicious legacy was blamed.

“Six of the 10 fastest-growing economies in the world were in Sub-Saharan Africa,” the article pointed out, listing Mozambique, Rwanda, Angola, Nigeria, Chad and Ethiopia. Together, Sub-Saharan African economies grew by an average of five percent between 2000 and 2015.

Counting on commodities
On paper, such GDP figures may have seemed impressive. GDP figures are generally a helpful, albeit imperfect, measure of economic performance. However, when it comes to assessing Africa’s economic development, they do not tell the whole story. Much of Africa’s economic growth in the past few years has been based on the export of raw commodities.

According to Christopher Cramer, Economics Professor at the School of African and Oriental Studies: “Angola, Nigeria and Chad in particular are commodity driven.” Mozambique and Ethiopia, he continued, “were on an IMF list two years ago or so of African countries growing fast but not resource-dependent”. However, in Cramer’s view, this is “to misread Mozambique, whose growth has been driven by a big aluminium smelter plus land deals and recent natural gas finds with prospecting”.

Rowden also agrees that much of the advance in economic growth in these figures is based on exporting commodities. Many of the fastest-growing African economies have “relied on commodity exports, and continue to do so way too much, in my opinion, for them to be seriously considered as successfully ‘developing’”. Nigeria, he says, despite making some advance in manufacturing, has also been “overly dependent on oil exports”.

Of course, exporting raw commodities makes sense for economies trying to develop. They bring in foreign currency reserves, provide jobs and employment, and fill up state coffers for use in national budgets. As Cramer said in an interview with Mrassociates, African economies “still have plenty of opportunity to exploit commodity exports and should invest in them – especially in those with proven high value and high demand”.

However, it should be noted that relying on commodity exports has a number of downsides. It leaves an economy more vulnerable to external shocks, when the market takes a downturn and prices decline. Of course all economies are subject to external shocks – however, more advanced economies with a diverse industrial service sector are able to absorb such shocks better. Africa is not yet in that position.

The reliance upon commodity exports is being felt by the end of the commodity supercycle, which itself was once the source of Africa’s much coveted rise. The supercycle – which started in the 2000s – came to an end with the slowdown of growth in emerging markets. As a result of this lowered demand, the price of commodities also started to decline in 2014.

China has been the most significant part of this trend. The world’s second largest economy increasingly looked to Africa for commodities such as oil and minerals in recent years, but as its growth has slowed, so too has its demand, leading to a fall in prices. As the World Bank economic outlook report for Sub-Saharan Africa noted (see Fig. 1): “Low commodity prices reflected weak global demand for raw materials, including from large developing countries where growth has continued to slow.”

As a result, the World Bank said, “economic activity in Sub-Saharan Africa decelerated from 4.6 percent in 2014 to 3.4 percent in 2015, the weakest performance since 2009”. As the report continued, commodity prices on the world market, having declined rapidly in 2014, “weakened further in 2015. The prices of oil and metals, such as iron ore, copper, and platinum, declined substantially. Those of some agricultural commodities, such as coffee, fell moderately, although the prices of cocoa and tea showed small gains”.

Fig.-1

The World Bank clearly underlines the problem of Africa depending too much upon exporting commodities to acquire its much-needed economic growth. “The region’s pattern of exports,” the World Bank said, “makes it particularly vulnerable to commodity price shocks. Fuels, ores, and metals accounted for more than 60 percent of the region’s total exports in 2010 to 2014 compared with 16 percent for manufactured goods.”

The World Bank cites a number of examples of the impact of deteriorating commodity prices. “Angola and Nigeria are heavily dependent on oil for fiscal revenues and reserves – oil accounts for more than 60 percent of their fiscal revenues and more than 80 percent of exports”, it noted. Following the drop in oil prices since 2014, “governments in the two countries reduced expenditures sharply, which adversely impacted other areas of their economies”.

At the same time, “the decline in metal prices hit Mauritania and Zambia hard, as low prices of copper and iron ore prompted mining companies to reduce production and to delay planned investments; exports, employment, and domestic spending fell”.

“We can see what drove the growth in Africa when demand goes away,” said Greg Mills, Director of the Brenthurst Foundation, a Johannesburg-based economic research group, in a recent New York Times article. “Well, demand has gone away, and it’s not pretty.” The New York Times also noted: “Credit rating agencies have downgraded or lowered their outlook on commodity exporters like Angola, Ghana, Mozambique and Zambia, which were the darlings of international investors until just over a year ago.”

Speaking to Mrassociates, Rowden further underlined the problem with this reliance on commodity export driven growth. The recent downturn in commodity prices has, “as the IMF has reported”, resulted in worrisome spin-off effects “as companies and banks start to not [get] paid on time”, which “can create cascading effects into the national finance systems that spread[s] the damage far beyond just the commodity exporting sectors”.

Benefits of industry
At the same time, pursuing growth through exporting commodities alone can also result in losing sight of the real task of economic development: industrialisation. To be sure, exporting raw commodities and industrialisation are not necessarily at odds with one another – the two can work in tandem.

However, by constructing narratives around the rise of Africa in the 2000s and early 2010s, the fundamental question of how African nations should pursue the building up of a manufacturing base, becoming modern industrialised economies, has fallen by the wayside.

According to Rowden, the key is what percentage of GDP growth is in manufacturing: “For me, as a development economist, I’m looking for if manufacturing as a percent of GDP is going up over time or not, or if the manufacturing value-added of exports is going up or not, if wages as percent of GDP are going up or not – these are real indicators of development.”

As a percentage of GDP contribution, manufacturing in Africa has fallen. The Economist recently noted: “The UN’s Economic Commission for Africa… reckons that from 1980 to 2013 the African manufacturing sector’s contribution to the continent’s total economy actually declined from 12 percent to 11 percent,” the lowest portion of any economically developing region. In the majority of countries in Sub-Saharan Africa, manufacturing’s share of output has fallen in the past two decades. While commodities were booming, “Africa’s manufacturing industry has largely missed out on the boom”.

Growth in Nigeria’s non-oil sectors, percentage change

1

Transport and storage

-1.3

Agriculture

-2

Trade

-3.5

Finance and insurance

-3.8

Manufacturing

-4.4

Construction

As far as promoting economic development and prosperity goes, manufacturing is vital. As Cramer told Mrassociates: “Manufacturing (which, by the way, now extends to the industrialisation of agriculture in many cases) matters hugely – economic history suggests it always has; there are dynamic economic effects within manufacturing that typically don’t exist on the same scale in other activities (scope for economies of scale and scope) and there are important linkages between manufacturing and other sectors that make it critical.”

Historically, no country has attained modern levels of prosperity without building a manufacturing base. As Rowden noted: “Unless you’re an off-shore financial centre or a tiny oil sheikdom, most rich countries relied on a manufacturing sector and related services sectors to complement and supplement their agriculture and extractives sectors as part of their long-term national development strategies.”

The impacts of industrialisation are cumulative, leading to the ability of nations to achieve other hallmarks of development. Rowden added that with higher paying jobs, “manufacturing and higher-end services, employers and workers generated higher levels of taxes, which enabled governments to increase public investment as a percent of GDP over time in public health, education, infrastructure, transportation and social protection systems, thereby reducing poverty. So what we see in most African economies today – a near absence of manufacturing – is really worrisome”.

Now that the commodities boom is over, African economies must confront the fundamental weakness affecting their efforts to pursue development. While African leaders should of course pursue the export of commodities, it should be done with an eye on the real path to economic prosperity: industrialisation.

Some nations have started to buck the trend. Angola, which is largely dependent on oil exports, opened a steel mill in 2015 that can produce up to 500 tonnes of steel rebars per year. Rather than merely export the raw material that steel is composed of, Angola will be manufacturing rebars on its own shores.

Vital, however, to fostering industry is an industrial policy to cultivate infant sectors through protectionism. Such policy is often scoffed at, following the failures of such policies in India and Argentina in the 20th century. Yet for other economies, a state-led industrial policy has paid dividends.

While industrial policies have had many stories of failure, they also have their success stories – which include nearly every rich industrial nation today. As the development economist Ha-Joon Chang has previously noted: “Almost all rich countries got wealthy by protecting infant industries.” The rapid rise of the Asian Tigers of South Korea and Taiwan are among the most recent and notable examples. The problem lies in how the policy is implemented.

Knowing how long to foster an industry and protect it from foreign competition is key. Speaking to the Financial Times, Chang recounted a metaphor that he draws out in his development economic book, Bad Samaritans: “I have this chapter called ‘My Six-Year Old Son Should Get a Job’. I’m trying to explain that the reason I don’t send this little guy to the labour market is because I believe that it pays, in the long run, for him to have an education rather than shining shoes and selling chewing gum.”

Industrial policy may have failed in the past on the continent, but it has succeeded elsewhere. Implemented in the correct way, African economies could one day join the ranks of Asia’s newly prosperous nations.

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