Apr 08 2013

Africa yet to capitalize on commodities' potential

Africa yet to capitalize on commodities' potential Photo Credit:REUTERS/Stringer .
With 54% of the world's platinum production, 78% of diamond and 20% of gold output, why should Africa look elsewhere for growth?

Reams upon reams of studies tend to focus on the continent's "resource course", and the folly of depending on a few commodities, with analysts fretting on the resource sector's inability to raise the standards of living of the wider population.

But the opposite is happening in Africa, and one report seems to suggest Sub-Saharan African should embrace its natural riches and use it as a weapon to fight poverty, unemployment and general economic lethargy.

"While in the past African development plans focused on diversifying from commodities, they now put them at center stage," said United Nations' Economic Commission for Africa (UNECA) in a new report.

There is one very good reason for Africa to pursue its commodity-dependent economic model.

The key markets of China, India and others in the developing world are at early stages of their industrialization and will need Africa's commodity resources to fuel their economies.

Indeed, Africa is at a very crucial juncture of its development. A decade of solid growth in a number of the economies in Sub-Saharan Africa has instilled new confidence in the region. But it could also make them complacent and return to old habits if it does not cement its advances.

And that's where Africa can leverage its commodity-driven growth to devise new strategies for other sector of its economy.

"These plans are tackling issues of investment, labor, the environment as well as trade," the commission said in a new report.

"Resource-rich countries are reforming their tax regimes to benefit from commodity export revenues, and must therefore tap the opportunities to pursue more diversified development paths, including commodity-based industrialization."

Untapped potential

To be fair, the commodity industry has not played its full role in the wider economy. Commodity production has not been strengthened enough to add value and fetch more dollars for the host economies.

In Tanzania, for example, the country has not managed to capitalize on its gold riches. A Mineral Act developed in 2012 (and building on a Mineral Policy drafted as early as 1997), still has no definite goals or incentives to further develop the industry.

"Legislation reserves primary prospecting and mining licensing to wholly-owned Tanzanian companies, which can, however, sell these rights to foreign firms," said the commission. "In this way, it has allowed some national companies to accrue rent from gold mining, but has not fostered value-added activities. In gold exploration, local content is limited to drilling services and logistics, while in gold mining, it is limited to fuel, equipment repair and maintenance, and basic services. Most services and goods are imported."

In Gabon, the timber industry shifted in the past decade from exporting value-added products such as plywood to the European Union, and began exporting raw timber to China. The authorities have banned exports to ensure sustainable farming of timber, which were being wrecked for short-term profits.

Lack of technologies and capital equipment in the African resource industry has also resulted in high costs and lower quality in the industry, making it uncompetitive in the global industry.

Other issues such as lack of power and electricity are hurting industry development. The International Energy Agency notes that if African oil exporters spend a mere 1% of their petroleum earnings, they would be able to resolve their power problem.

In addition, protective regimes elsewhere in the world make it hard for poorer African states to export their produce.

"Consider the case of cotton. A number of poor countries are dependent on cotton exports for their economic development," Pascal Lamy, director-general of World Trade Organization, told a UNCTAD Global Commodities Forum in Geneva on March 18.

"However, the cotton sector remains highly subsidized, especially in some developed countries as well as in some emerging ones. These subsidies depress prices and increase the difficulties faced by countries such as Benin, Burkina Faso, Mali and Chad. Progress has been made in this area, especially on strengthening the development support aspects, or on improving market access for cotton exporters but more remains to be done, in particular to address the trade distorting subsidies that remain."

Commodities' role in economy building

UNECA says soft and hard commodities can be connected to wider economic growth with the right policies. Here are some of its key recommendations:

1. Raising productivity
Investment in technology and research can help improve the standard of soft and hard commodities, such as better irrigation methods for farming, or modern capital equipment for metal extraction.

2. Processing industries
Development of export industries that go beyond raw materials and help build a new international market. While many African countries may be unable to meet stringent exports requirements from developed markets, exporters can start shipping to developing markets and gain experience.

3. FDI or domestic firms
Brazil, India and Malaysia focused on facilitating domestic markets to mobilize capital in key sectors, whereas most African states focus on foreign direct investments from international companies.

The former approach has more immediate effect on the wider economy as it would require development of local labor and purchase of local goods, whereas foreign investors are likely to import their own materials and labor, leaving the local population out of the growth loop.

4. Export restrictions
Banning raw material exports may be a good way to force producers to develop the industry and export only value-added produce. Policies focused on incentivizing certain sectors may also go a long way in developing skills and capital in that sector.

"Each African country must develop its own commodity-based industrialization strategy," the UNECA said. "Indeed, each country is likely to have a multifaceted approach to industrializing and to pursue more than one strategy. What links them all is the necessity for African governments to take action to overcome market failure."

© alifarabia.com 2013

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