July 22, 2017

Expert urges Africa to reduce overdependence on commodities

Deloitte’s managing director for emerging markets and Africa, Dr Martyn Davies, has called on resource-rich African countries to make the most of the next commodities boom by diversifying and industrialising their economies to minimise over-reliance on the exports of raw materials.

In a statement, Davies urged to seize the opportunities in the next upward demand cycle to diversify, either in their economic structures or their export baskets.

Economic diversification

He said the need for economic diversification on the continent was high, even more so given that the growth cycle was at a low point. Economic history had shown that without diversification into manufacturing and services, and away from simple resource extraction, the long-term development prospects of countries were always bleak, he added.

“Nigeria is the leading example of a resource exporter where the disconnect between previously high headline growth figures and developmental reality has been stark.

“The country has never been as dependent on oil as it has been in recent years, with more than 90% of its export earnings coming from oil,” Davies said.

He said the figures for Africa as a whole were troubling too. Commodity exports, on average, accounted for 80% of total merchandise exports from Africa and commodity exports made up 70% or more of export earnings for three-quarters of African countries.

Exception to the rule

However, a handful of countries, such as Madagascar, Senegal, Morocco and several in East Africa, have avoided over-dependence on a single export, either through good fortune or as a result of strategic policy implementation. Their relatively more diversified export baskets had cushioned them from external shocks, Davies said.

Also, oil-exporting countries with less dependence on the commodity still had a reasonably healthy growth outlook.

Côte d’Ivoire, for example, earned significant foreign exchange revenues from oil exports but its main export earnings stemmed from cocoa.

Lower rate of expansion

Countries that had a high dependence on a single non-oil export commodity were also projected to expand at lower rates, said Davies. “Botswana’s dependence on diamond mining is a point of concern, while Zambia’s over-reliance on copper has also limited the economy’s growth prospects.”

Several East African countries had actively promoted export diversification, he added. The strong growth outlook for East Africa in Ethiopia, Kenya, Rwanda, Tanzania, and Uganda was testament to this.

Davies added that these countries’ growth prospects were supported by political stability and pragmatic pro-business policy.

No simple recipe

Davies said there was no simple recipe for successful economic diversification, but some of the ingredients were: the quality and quantity of physical infrastructure investments in key sectors; effective trade and industrial policies; improving macroeconomic fundamentals through sound fiscal and monetary policies; productivity growth supported by human capital, skills and technology; a broader enabling environment for both local and international investors; and good governance.

Among these, Davies listed talent and skills, and infrastructure development as particularly important.

“Sustained and sizeable investment in people to generate, retain and create opportunities for talent in domestic economies is essential. Sufficient investment in physical infrastructure, including transport, power, communications and technology, is also a necessity,” he said.

Opportunities in shifting value chain

Davies added that the shifting value chain of production in Asia presented an enormous opportunity. He said the rising cost pressures on China’s light industrial manufacturing sector would cause manufacturing capacity to be relocated to lower-cost foreign economies.

“As this shift in production out of China’s south-eastern provinces takes place, forward-looking African countries could emerge as ‘new Vietnams’ – offering low-cost destinations for manufacturing investment from China.”

East Africa was well-positioned to assume this role, Davies added. He mentioned Ethiopia and Kenya as leading candidates.

“Reform-minded and progressive African states could seize this opportunity and generate a nineteenth century-style industrial revolution, creating large amounts of employment and new industries in their own economies,” the statement added.

“Coupling this with the disruptors of the fourth industrial revolution – so-called ‘Industry 4.0’ – Africa could achieve the manufacturing competitiveness of early adopters of smart technologies, machines, factories, products and services.”

Qualified workforce

To take advantage of this potential seismic economic shift, Davies noted, African countries would require suitably qualified workforces.

The emerging markets expert urged African governments to adopt pro-industry policies and build more efficient infrastructure as foundations for economic and export diversification.

“It is not about state intervention, but rather state enablement of business that is the ultimate determinant of development,” Davies concluded.

Source: African News Agency

 

 

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