Africa needs to harness advantages to prosper

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br mauritius INLSA 210613: MAURITIUS LOBBY BAR

Ivory Coast and Ghana produce 53 percent of the world’s cocoa. But the supermarket shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerland and the UK, countries that do not farm cocoa.

This scenario is repeated throughout the continent in different contexts. For example Nigeria, the sixth-largest producer of crude oil, exports more than 80 percent of its oil but cannot refine enough for local consumption. Last year, it spent $6 billion (R64.4bn) subsidising fuel imports, Finance Minister Ngozi Okonjo-Iweala estimated late last year.

In such apparently baffling scenarios lies one of Africa’s greatest challenges – and opportunities. The continent possesses 12 percent of the world’s oil reserves, 40 percent of its gold and between 80 percent and 90 percent of its chromium and platinum, according a report last year from the UN Conference on Trade and Development (Unctad).

It is also home to 60 percent of the world’s under-utilised arable land and has vast timber resources. Yet together, African countries account for just 1 percent of global manufacturing, according to the report.

This dismal state of affairs creates a cycle of perpetual dependency, leaving African countries reliant on the export of raw products and exposed to exogenous shocks, such as falling European demand. Without strong industries in Africa to add value to raw materials, foreign buyers can dictate and manipulate the prices of these materials to the great disadvantage of Africa’s economies and people.

“Industrialisation cannot be considered a luxury, but a necessity for the continent’s development,” Nkosazana Dlamini-Zuma said shortly after she became chairwoman of the AU Commission last year.

This economic transformation can happen by addressing certain priority areas across the continent.

First, African governments, individually and collectively, must develop supportive policy and investment guidelines. Clearly defined rules and regulations in the legal and tax domains, contract transparency, sound communication, predictable policy environments, and currency and macro-economic stability are essential to attract long-term investors.

Moreover, incentives – such as tax rebates to multinational companies that provide skills training alongside their commercial investments – will help local economies grow and diversify. In addition, each industrial policy should be tailored to maximise a country’s comparative sector-specific advantages.

Mauritius, one of Africa’s most prosperous and stable countries, provides important lessons for other African countries. In 1961, this Indian Ocean island nation was reliant on a single crop, sugar, which was subject to weather and price fluctuations. Few job opportunities and yawning income inequality divided the nation. This led to conflict between the Creole and Indian communities, which clashed often at election time, when the rising fortunes of the latter became most apparent.

Then from 1979 on the Mauritian government took practical steps to invest in its people. Realising that it was not blessed with a diversity of natural resources, it prioritised education. Schooling became the critical factor in raising skills and smoothing the lingering religious, ethnic and political fractures remaining since independence from Britain in 1968. Strong governance, a sound legal system, low levels of bureaucracy and regulation, and investor-friendly policies reinforced the country’s institutions.

Under a series of coalition governments, the nation moved from agriculture to manufacturing. It implemented trade policies that boosted exports. When outside shocks hit – such as loss of trade preferences in 2005, and overwhelming competition from Chinese textiles in the last 15 years – it was able to adapt with business-friendly policies.

From being a mono-economy reliant on sugar, the island nation is now diversified through tourism, textiles, financial services and high-end technology, averaging growth rates in excess of 5 percent a year for three decades. Its per capita income rose from $1 920 to $6 496 between 1976 and 2012, according to the World Bank.

While much responsibility lies with African governments, the continent’s private sectors must play their part in improving co-ordination between farmers, growers, processors and exporters to increase competitiveness in the value chain and ensure the price, quality and standards that world markets demand.

Tony Elumelu, the chairman of Nigerian-based investment company Heirs Holdings, and Carlos Lopes, the executive secretary of the UN Economic Commission for Africa, advocate what they call “Africapitalism”, a private sector-led partnership focused on the continent’s development.

“Private-sector business leaders must also do more to tackle poverty and drive social progress by ensuring that long-term value addition – as well as short-term gain – is built into their business model,” they wrote in a joint article for CNN in November last year.

Next, African countries must pursue beneficial economic strategies with their neighbours. Regional integration would help reduce the regulatory burden facing African industries by harmonising policies and restraining unfavourable domestic programmes. It would boost inter- and intra-African trade and accelerate industrialisation. The right recipe for regional integration requires countries to concentrate on commodities in which they have a competitive advantage. For example, Benin and Egypt could concentrate on cotton, Togo on cocoa, Zambia on sugar – each state trading in bigger regional markets.

Agriculture, which employs over 65 percent of the continent’s population, according to the World Bank, could become a springboard towards industrialisation.

Sustained investment and improvements in infrastructure are also needed throughout the continent. Countries everywhere, not just in Africa, cannot establish competitive industrial sectors and promote stronger trade ties if saddled with sub-standard, damaged or non-existent infrastructure.

Public-private partnerships (PPPs) should be developed to stimulate massive investments in infrastructure, which could have a multiplier effect on economic growth. Finally, without education the continent cannot succeed in its drive towards industrialisation. PPPs should be pursued in this arena too, because governments often lack the skills and finances to carry out technical training. Private sector companies would benefit from a skilled and competent workforce.

Africa, the world’s youngest continent, is currently undergoing a powerful demographic transition. Its working-age population, which is currently 54 percent of the continent’s total, will climb to 62 percent by 2050. In contrast, Europe’s 15 to 64 year-olds will shrink from 63 percent in 2010 to 58 percent. During this time, Africa’s labour force will surpass China’s and will potentially play a huge role in global consumption and production. Unlike other regions, Africa will neither face a shortage in domestic labour nor worry about the economic burden of an increasingly ageing population for most of the 21st century.

This “demographic dividend” can be cashed in to stimulate industrial production. Without effective policies, however, African countries risk high youth unemployment, which may spark rising crime rates, riots and political instability.

Africa is ripe for industrialisation. A strong and positive growth trajectory, rapid urbanisation and stable and improving economic and political environments have opened a window of opportunity for Africa to achieve economic transformation.

Ronak Gopaldas works as a sovereign risk analyst at Rand Merchant Bank. This article was first published by Good Governance Africa.


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