Economic history has shown that, without diversification into manufacturing and services and away from simple resource extraction, the long-term development prospects of countries are always bleak. The need for economic diversification in Africa is high, more so given that the growth cycle is at a low point.
This is according to multinational professional services provider Deloitte Africa emerging markets and Africa MD Dr Martyn Davies.
He says that, for the most part, African governments have not taken advantage of the last decade’s growth spurt to move toward diversification, neither in their economic structures nor in their export baskets.
Instead,. Davies contends that resource-endowed countries are “anything but examples of sustainable or inclusive growth”. Further, he states that wealth is unable to trickle down to broader society from narrow extractive industries, particularly in the face of rent-seeking governments.
“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 over 90% of its export earnings coming from oil,” Davies mentions.
He comments that, for Africa, as a whole, the figures are “troubling”, as commodity exports on average account for 80% of total merchandise exports. Moreover, he notes that, in almost half of Africa’s economies, commodity exports earn 90% or more of merchandise export earnings. “For three-quarters of African countries, commodity exports make up 70% or more of export earnings,” Davies adds.
He affirms that, owing to this lack of diversification, most of Africa’s economies remain dependent on the vagaries of commodity prices in the international market and often on the price of a single resource.
However, Davies points out there are a handful of countries, such as Madagascar, Senegal and Morocco, and several economies in East Africa that have avoided the pitfall of overdependence on revenues generated by a single merchandise export.
He says that they have achieved this either through good fortune or as a result of strategic policy implementation. Davies remarks that these countries’ relatively more diversified export baskets have cushioned them from external shocks, giving rise to a more stable growth record.
He states that, within oil export- ing countries, those with less dependence on the commodity, such as Egypt, Cameroon and Senegal, still have a reasonably healthy growth outlook.
Similarly, Davies says, Côte d’Ivoire earns significant foreign exchange revenues from its oil exports, but the country’s main export earnings stem from cocoa. The country’s economic growth is also benefiting from a degree of catch-up after social unrest ended in 2011. By contrast, Nigeria and Angola’s high dependence on oil exports is set to translate into “very weak” growth till at least 2018.
“To a lesser extent, countries that have a high dependence on a single non-oil export commodity are also projected to expand at lower rates. 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,” states Davies.
Further, he points out that there are several countries in the East Africa region that have actively promoted export diversification. Davies notes that the strong growth outlook for East Africa in Ethiopia, Kenya, Rwanda, Tanzania and Uganda is testament to this. “Their growth prospects are supported by political stability and pragmatic probusiness policy,” he adds.
Davies states that, in order to move from what has been a resource-driven business model for most African economies towards a more diversified and sustainable one, a number of policies need to be put in place.
He says that, although there is no simple recipe for success, some of the ingredients for successful economic diversification include 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, two particularly important elements are talent and skills development, and the basic building blocks of infrastructure development. “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.”
However, Davies remarks that it is ultimately governance that will determine how resource rents are reinvested into the human capital that is needed to make African economies grow sustainably