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Africa: Economic Outlook, Structural Obstacles
AfricaFocus Bulletin
Oct 5, 2008 (081005)
(Reposted from sources cited below)
Editor's Note
"Confining African countries to the production of primary
commodities amounts to condemning them to remain locked in the
commodity trap. Africa needs to create a competitive advantage in
the production of manufactured products, as many other developing
countries have done." - United Nations Conference on Trade and
Development
The international financial crisis, spreading from the United
States to Europe and Asia, is sure to hit Africa as well, most commentators
agree, despite relatively high growth rates that may remain above
five percent and relatively low loan exposure by African banks.
World Bank chief Africa economist Shanta Deverajan noted in his
blog that both cutbacks in recent high capital inflows and possible
falls in commodity prices could serious affect Africa.
Commodity prices, however, have differing effects depending
on the commodity and the country. Most African countries are
negatively affected by high food and fuel prices, while commodity
price volatility affects oil and non-oil producers in different
ways.
Regardless of short-term trends, however, says a new report from
the United Nations Conference on Trade and Development, Africa's
export performance demands a break from earlier policies based
largely on trade liberalization, in favor of concentrating on
building capacity both in the agricultural and manufacturing
sector.
This AfricaFocus Bulletin contains excerpts from the press release
and overview of that report. Complete versions of these documents,
as well as the full report, are available at http://www.unctad.org
Also available, with much relevant data and commentary on Africa,
are recent annual reports from UNCTAD on investment and on trade
and development.
For previous AfricaFocus Bulletins on economic issues, see
http://www.africafocus.org/econexp.php
Of related interest:
International Monetary Fund Survey Online
Interview with Antoinette Sayeh, Director of IMF's Africa
Department (Sept. 23, 2008)
http://www.imf.org/external/pubs/ft/survey/so/2008/INT092308A.htm
World Bank blog by chief economist for Africa region, Shanta
Devarajan, "Financial Turmoil and Africa" (September 29, 2008)
http://tinyurl.com/3n2fex
Third World Network summary of UNCTAD report on trade and
development
http://www.twnside.org.sg/title2/wto.info/twninfo20080903.htm
and
http://www.twnside.org.sg/title2/wto.info/twninfo20080904.htm
++++++++++++++++++++++end editor's note+++++++++++++++++++++++
Report says strengthening supply capacity is essential for Africa
to benefit from trade liberalization
UNCTAD/PRESS/PR/2008/027 15/09/08
[Excerpts. Full press release and entire report available on
http://www.unctad.org Summary overview at:
http://www.unctad.org/en/docs/tdb55d6_en.pdf]
Effective policies are needed for agricultural and industrial
sectors to remove constraints to production and achieve higher
exports for Africa
Geneva, 15 September 2008 - Weak supply capacity -- that is, a
limited ability to produce the quantity and quality of goods
required to respond to global demand for those goods -- is the main
obstacle to improved export performance in Africa, and explains why
the continent has lost market share from 6% of world exports in
1980 to about 3% in 2007, reports Economic Development in Africa
2008.
Subtitled "Export Performance following Trade Liberalization: Some
Patterns and Policy Perspectives," the 2008 edition of UNCTAD s
annual report on Africa says two decades of trade liberalization
have successfully removed many of the barriers that used to limit
trade from the continent -- and there has been a slight increase in
exports as a result. But the progress has been less than expected
and is far below the increases achieved by other developing
regions.
Gaining greater access to world markets opens up vast
opportunities, but many African countries do not yet have
sufficient ingredients in place to take advantage, the report says.
They need such building blocks as well-trained workforces, reliable
electricity supply, research and development skills, flexible
investment and banking services, and efficient transportation to
supply, at competitive prices, large volumes of products for which
there is global demand.
Governments on the continent also need to take effective steps to
reverse several worrisome trends, according to the study. These
include decades of relative neglect of agriculture that have
hindered African countries at a time of climbing commodity prices.
In addition, diversification of their economies -- long recommended
as a way of ensuring more robust and stable growth -- has not
occurred; and the manufacturing sector, where potentially higher
profits and higher living standards can be realized, has been
stagnating while other developing regions have greatly expanded
their industrial outputs.
Africa's export performance after liberalization has been modest
Trade liberalization in Africa was expected to result in increased
production in the tradable sector, which should have increased
export volumes and diversified the array of exported products. As
of the second half of the 1990s, most countries in the region were
liberalized. Their average ratio of exports to Gross Domestic
Product (GDP) increased from 23% before liberalization to 26%
after. This 11% climb is much lower than the 50% increase recorded
in non-African developing countries following trade liberalization.
Relative to other developing regions, the increase in Africa s
export value had been driven primarily by an external factor --
rising export commodity prices -- rather than increasing volumes.
Over the period between 1995 and 2006, both export volumes and
prices grew at about 6% per year. This performance contrasts with
the experience of developing Asia over the same period, where
export volumes grew by 10% per year while the prices increased by
only 1% per year, the report finds.
Analysis of Africa s export composition shows that most African
countries have not diversified their export products. On the
contrary, more than 60% of African countries registered higher
export concentration indexes in 2006 relative to 1995, increasing
these countries vulnerability to falls in prices for a small
number of commodities. Most African countries that increased their
export revenues owed it to unexpected hikes in the prices of fuel
and other minerals, such as copper and gold. Indeed, the ratio of
the value of fuel exports to GDP increased from 5% in 1998 to more
than 15% in 2006. Over the same period, the corresponding ratio for
non-fuel primary commodities and manufactured products remained
constant, each at about 5% of GDP. These statistics suggest that
the current commodity boom should not lure African countries into
a false sense of prosperity. Africa remains vulnerable to the
vagaries of international commodity prices, the report warns.
Agricultural export performance is hampered by structural and
institutional constraints
Despite its importance, the agriculture sector in many African
countries has been deteriorating over the years. In the space of a
generation, Africa s agriculture has so dramatically declined that
Africa has fallen from its status of a net food producer to become
the region most dependent on external food aid. In fact, Africa is
currently, experiencing a food crisis. The main explanation lies in
the negligence in development policies pursued during the last 25
years, which have abandoned previous emphases on research,
agricultural infrastructure, extension services, and the provision
of credit for farmers. The recent policies, including trade
liberalization, failed to recognize the strategic role of
agriculture in African economies and went as far as dismantling the
institutions that had previously supported the sector. Total donor
support to agriculture declined from its peak of US$8 billion in
the early 1980s to $3.4 billion in 2004; the proportion of official
development assistance (ODA) allocated to agriculture declined from
16.9% cent in 1982 to just 3.5% in 2004. Domestic resources
invested in agriculture followed the same trend. It is noteworthy
that those countries that maintained strong agricultural export
sectors were those that pursued sustained and coherent sectoral
policies to increase and diversify their agricultural exports.
Examples include Ghana and C�te d Ivoire.
Africa has not been able to diversify into manufactured exports
The importance of manufactured exports for economic development has
been illustrated by the experience of the East and South East Asia
region where manufacturing products account for about 90% of total
merchandise exports. In Sub-Saharan Africa, exports from the
manufacturing sector account for only 26% of total exports, the
lowest proportion of all regions. According to the report, over the
period 2000-2006, only eight African countries had manufactured
exports worth more than 10% of their GDPs or more: Botswana,
Mauritius, Morocco, Namibia, South Africa, Swaziland, Togo and
Tunisia, according to the report.
The oft-heard argument that Africa s failure to export more
manufactured products is due to the region s comparative advantage
in the production of primary commodities is a simplistic and flawed
argument, the report contends, and there is no fundamental reason
why Africa should not be able to emulate the positive Asian
experience. Arguing that Africa should stick to its traditional
exports of primary commodities and a few labour-intensive
manufactured products is tantamount to condemning the region to
slower development, argues the report.
To achieve increased industrial output and exports, African
governments must take steps to deal with several key problems, the
report says. These include poor infrastructure, high entry costs
for businesses, shortages of qualified labour, low investor
protection, difficulty in accessing credit, and cumbersome tax
systems. Together, these discourage investments that could increase
productivity. Economies of scale also must come into play -- many
African manufacturers are currently too small to benefit from the
efficiencies achieved by larger firms elsewhere, and governments
should enact measures to help them expand so that they are
internationally competitive. Addressing these issues effectively
will require industrial policies tailored to the specific
characteristics of each country, the report says.
,,,
Overview Excerpts
For full overview see http://www.unctad.org/en/docs/tdb55d6_en.pdf
United Nations TD/B/55/6
...
I. Trade liberalization in Africa: timeline
1. In the twentieth century, Africa's trade relations with the rest
of the world went through three principal phases. During the
colonial period, African countries' trade policies were defined
according to the interests of the colonizing countries. In the
decades following independence, many African countries chose
protective trade policies aimed at import-substitution
industrialization. Following the economic crisis of the late 1970s
and early 1980s, most African countries took measures to liberalize
their trade regimes. Trade liberalization was often part of an
extensive package of market-oriented reforms promoted by the
international financial institutions at a time when African
countries were in acute need of their assistance. These
institutions argued that more liberalized trade regimes would
improve the efficiency of the economy by promoting greater
production of tradables and would expand output by increasing the
level of exports.
2. Trade liberalization consists of a number of policy measures
that aim to reduce the misalignment between domestic and
international prices. These include reductions in tariffs, the
conversion of non-tariff measures into tariffs, and a reduction in
the overvaluation of currencies. ... the most comprehensive studies
of liberalization suggest that the process started in the mid- to
late-1980s and was completed in most African countries in the late
1990s. ...
3. Tariffs on imports were one of the main instruments used to
protect domestic industries in Africa. Trade liberalization sought
to simplify tariff structures, reduce the number of tariff bands
and reduce tariff levels. Overall, tariff levels in Africa were
nearly halved between 1995 and 2006, from 22 per cent to 13 per
cent. ...
II. Export performance trends following trade liberalization in
Africa
7. Improvements in export performance following trade
liberalization have been limited in most African countries. Indeed,
as a proportion of gross domestic product (GDP), exports in Africa
increased by only 10 per cent following liberalization. In
comparison, non-African developing countries saw their exports as
a share of GDP increase by 62 per cent. The increase in exports was
also smaller than the increase in imports, leaving the trade
balance in Africa in a worse situation after liberalization. ...
10. The trade structure of African countries did not undergo
significant changes in the years following trade liberalization.
Most countries in the region remain essentially primary commodity
exporters, with only a handful of countries drawing a significant
part of their export revenue from manufactured products. In
comparative terms, sub-Saharan Africa remains the region with the
highest dependence on primary commodity exports. It also appears
that export concentration has increased in the years following
trade liberalization, strengthening Africa's standing as the region
with the highest concentration of exports.
11. There are several trends in the destination of African exports.
However, these appear to have been generally unaffected by the
process of trade liberalization. European countries continue to
represent the largest market for African exports, although their
share has been decreasing steadily over time as the influence of
historical ties on African trade patterns diminishes. North
America's share in Africa's export markets has increased in recent
years, mainly as a result of increased oil exports and new
preferential market access initiatives such as the African Growth
and Opportunity Act. The importance of Asia to African exporters
has increased considerably since the 1990s. This is mainly due to
sustained high rates of economic growth in Asia and the associated
need for primary products produced in Africa.
...
III. Trade liberalization and agricultural exports
12. Agriculture remains the bedrock of African economies. It
contributes around a fifth of total GDP and employs nearly two
thirds of the population in sub-Saharan Africa. Agricultural
exports also represent the bulk of total merchandise exports in
most African countries.
13. Though the value of African agricultural exports has increased
by 74 per cent since 2001, this rise has mainly been proportionate
to the increase in GDP and has been considerably lower than the
rise in agricultural export values seen in East and South-East Asia
or Latin America. As a result, the contribution of agricultural
exports to GDP has not increased noticeably since trade
liberalization and the African share in global agricultural exports
has actually decreased. Moreover, the proportion of agricultural
production that is traded fell steadily in sub-Saharan Africa
between 1995 and 2006.
14. Looking at individual country experiences, it appears that the
countries that have been most successful in exporting agricultural
products are those in which a deliberate export orientation of
agriculture and product diversification was pursued by Governments.
Overall, however, most sub-Saharan African countries continue to
export traditional bulk agricultural commodities. Only a few
countries have started to export new market-dynamic horticultural
products.
15. Much of the explanation for the lack of agricultural export
response to the new incentives created by trade liberalization is
rooted in the constraints that limit agricultural production in
general in African countries.
16. First, African agricultural producers tend to face severe
credit constraints. This situation is partly due to the insecurity
of land titles in many African countries and the poor performance
of the financial sector in rural areas. In addition, marketoriented
reforms, of which trade liberalization measures were a
part, dismantled many of the institutions designed to provide
credit and other inputs, including extension services, to small
agricultural producers. As a result, agricultural producers lack
access to capital and other inputs which would allow them to
intensify or extend their production for exports.
17. Second, public investment in the agricultural sector and the
rural economy in general has diminished over time. This has
aggravated the difficulties facing agricultural producers, mainly
owing to poor infrastructure provision and agricultural research
services that do not address the main priorities of African
countries. Indeed, the poor quality and lack of maintenance of
infrastructure in rural areas impose high costs on production and
commercialization. It appears that the fall in public investment in
the agricultural sector is related to the decline in official
development assistance targeted at this sector. Indeed, public
investment in agriculture was previously strongly supported by
external funding in many African countries.
18. The result of these constraints on the agricultural sector is
that cereal yields in Africa have not significantly improved since
the 1960s and are now several times lower than those of other
developing regions.
...
... Countries exporting mainly agricultural commodities that
compete with developed-country production - such as wheat, meat or
cotton - face very high tariffs and non-tariff measures as well as
competition from highly subsidized production.
20. Furthermore, agricultural commodities are increasingly traded
within global marketing and distribution channels in which only a
small share of the final sale price goes to the producer. Africa's
share in global agricultural exports has been reduced by a
combination of the way in which African producers are integrated in
global value chains and increased competition from other developing
regions that have improved their agricultural productivity.
21. Overall then, it appears that the expectations of the advocates
of trade liberalization policies have not been met in most African
countries. ...
IV. Trade liberalization and manufactured exports
22. Manufacturing exports represent a negligible proportion of GDP
in most African countries. Indeed, in the period 2000�2006, only
eight African countries had manufacturing exports worth 10 per cent
of GDP or more. As a result, Africa is the region in which
manufacturing represents the lowest share of total merchandise
exports. Furthermore, a handful of middle-income African countries
account for the quasi-totality of African manufacturing exports. In
global terms, Africa plays a minor role in manufactured exports.
23. Above all, the low level of manufacturing exports reflects the
small size of the manufacturing sector in most African economies.
The level of manufacturing in the economy has not increased
noticeably in Africa since trade liberalization. If anything, there
has been a slightly downward trend in the ratio of manufacturing
value-added to GDP in the years following liberalization.
V. African manufacturing and comparative advantage
29. Many analysts have attributed Africa's limited success in
exporting manufactured products to the continent's comparative
advantage. This influential position holds that, given the
continent's endowments of natural resources, labour and capital, it
should focus on exporting unprocessed primary commodities and use
the revenue gained to purchase manufactured goods from abroad.
30. The comparative advantage argument is, however, flawed on many
accounts. First, the assumptions underlying the argument are
empirically untenable, especially in Africa. Full employment of
resources, perfect competition and immobile factors of production
cannot be considered close approximations of the reality in most
African countries. Second, the comparative advantage hypothesis
sees all products as being equivalent, when in fact there are
important differences between primary agricultural product exports
and manufactured exports. Indeed, primary commodity exports have
faced declining terms of trade when compared to manufactures during
the twentieth century and their prices tend to be considerably more
volatile than those of manufactures. Additionally, the global
commodity chains through which these products are marketed
typically leave only a small proportion of the final selling price
for producers. It appears, therefore, that confining African
countries to the production of primary commodities amounts to
condemning them to remain locked in the commodity trap. Africa
needs to create a competitive advantage in the production of
manufactured products, as many other developing countries have
done. The products that a country specializes in by developing its
competitive advantage have a strong influence on that country's
development.
31. Manufactured goods, and especially technology-intensive
products, are characterized by improving secular terms of trade and
more positive externalities for the domestic economy than
agricultural products. Additionally, specialization in higher
value-added products carries higher dynamic gains over the long
term. In other words, countries acquire new comparative advantages
over time depending on which products they specialized in at the
outset. Comparative advantage, therefore, needs to be seen as a
dynamic attribute that needs to be actively cultivated rather than
a static constraint imposed by countries' natural resource
endowments.
VI. Strengthening Africa's export performance: some policy
perspectives
32. Export performance in Africa has not improved much in the years
following trade liberalization. This lack of response points to the
need to identify the constraints that continue to limit export
performance. Indeed, trade liberalization measures have
comprehensively addressed macroeconomic policies such as overvalued
exchange rates and restrictive trade policies that constrained
export performance. The lack of a supply response to the removal of
these constraints suggests that there are deeper problems related
to the production and marketing of exports in both the agricultural
and manufacturing sectors. There is therefore a need for policies
specifically targeting the constraints that continue to dampen
export performance in African countries.
33. More specifically, Governments in Africa should focus on
promoting and enabling horizontal and vertical diversification
towards higher value-added products. ...
34. In the medium to long term, Governments should also review the
opportunities to tackle such issues as land tenure systems and the
gender division of labour in rural areas in order to improve the
productivity of agriculture.
35. Steps can also be taken at the global level to improve
agricultural export performance in Africa. First, there should be
effective liberalization of agricultural trade in developed-country
markets. Second, it may be desirable to revisit options that have
been explored in the past, such as international commodity
agreements and diversification funds, in order to improve the terms
on which African agricultural exporters interact with the market.
Finally, Aid for Trade and other technical assistance programmes
should be directed at upgrading Africa's trade infrastructure. This
would enable African countries to strengthen their capacity to
trade more efficiently and attain quality and consistency in their
exports, including by meeting the health and safety requirements
for food in their export markets.
36. In manufacturing as in agriculture, more attention needs to be
paid to production and marketing aspects in order to facilitate a
substantial increase in exports. In particular, manufacturing
firms' competitiveness needs to be addressed as a priority; it is
arguably the most important determinant of participation in export
markets. Competitiveness needs to be tackled at the level of both
the economy and the firm. At the level of the economy, weaknesses
in basic productive infrastructure need to be remedied. Key sectors
such as power generation, water supply, telecommunications and
transport need to be improved in order to build a competitive
export sector. At the level of the firm, labour productivity must
be increased through such measures as vocational and on-the-job
training, the sharing of best practices and other capacity-building
measures. Efficient export promotion agencies can also help firms
to identify and seize opportunities in export markets.
...
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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