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Business News of Friday, 17 May 2013

Source: Frimpong, Charles Yeboah

The first attempt towards liberating African Economies.


According to the Economic Commission for Africa’s Economic Report on Africa (ERA 2013), themed “Making the Most of Africa’s Commodities: Industrializing for Growth, Jobs, and Economic Transformation”, Africa has about 12 percent of the world's oil reserves, 42 percent of its gold, 80 to 90 percent of chromium and platinum group metals, and 60 percent of arable land in addition to vast timber resources.

Although Africa boasts of the production and possession of such great quantities of raw materials and minerals(natural resources), value addition is still very limited, culminating in the paltry receipts for the export of these primary commodities.

Africa has lots of natural resources. But unfortunately and sadly, most of them are exported in their raw form for processing in foreign countries. The challenge has been that, there are no strong industries in the various African countries to add value to raw materials been produced and this result in a greater percentage of the raw materials on the continent being left to the advantage of foreign buyers who come to dictate and manipulate the prices of these materials as they so desire, to the great disadvantage of the African economy

A case in point is the coffee industry where up to 90 per cent of Africa’s total income from the commodity, calculated as the average retail price of a pound of roasted and ground coffee, goes to consuming countries in Europe, North America and Asia. African countries can benefit from their raw materials only by adding value to their raw materials.

The structures of the economies of African countries now are partly as a result of the colonial rule which was extractive in nature and the externally imposed structural adjustment programmes which had enormous negative effects on human capital development, technological accumulation, and the ability to manufacture value added commodities.
The colonial governments in the era of colonization established institutions, structures and infrastructure that were to help them transfer and transport raw materials from the African continent to Europe. The aim for the establishment of those institutions and structures were not to ensure the manufacturing of value added commodities from the resources on the African continent internally so Africans could have what they want through their local production and trade them among themselves. On the contrary, all efforts were geared towards getting raw materials out of the continent to feed European industries. This has led to the existence of the situation today where African countries are good at exporting raw materials than semi-processed and processed goods.

The good part of the story is the fact that the past is gone and that new measures can be put in place to achieve the level of economic development that Africa desires and deserves in the future. New institutions can now be established and new structures can be put in place to create industrialized economies that will create a new economic history for Africa. Unlike it used to be previously, the world has experienced a highly widespread and extensive political and economic changes over the last half century and this has led to the reformation of global power structures, loosened old hegemonies and allowed new ones to emerge, reconfigured international relations, and led to serious rethinking of development paradigms. These changes present a huge opportunity for Africa to emerge as a global economic power—and present a serious challenge too. This advent requires leadership, vision and strategies for long-term development. Africa must define and own its development agenda. At an individual and on a collective level, African countries must take bold economic transformation actions driven by massive industrialization to tackle youth unemployment, poverty, and gender disparities.

The benefits that will be derived from commodity based industrialization cannot be underestimated. The Economic report on Africa 2013 presents that “massive resource-based industrialization through value addition and linkage development will yield employment, income, price, and non price benefits, as well as dynamic benefits of diversified technological capabilities and deeper industrial structure”. This means that not only will industrialization provide employment, income, price and non-price benefits, by adding value to their raw materials locally, African countries could also bring about diversification of technological capabilities, an expanded skills base, and deepening of individual countries’ industrial structures.

African countries have an opportunity to promote economic transformation through a commodity-based industrialization process, taking advantage of the resources that the continent is endowed with, and high commodity prices and the changed organization of the global production process.

It is possible to embark on commodity based industrialization in every country where raw materials are produced or are found - although there is so much criticism that this direction of industrialization is a hard path to thread; that resource-based industries do not match Africa’s factor endowments, and that commodity sectors are unlikely to promote linkages and externalities. That’s quite a reasonable argument but what we see as happening in modern times in countries like Malaysia , Venezuela, Argentina, Thailand, Australia, Norway and Scotland as well as the historical experience of Finland, Sweden and the United States point to the contrary. For African countries, success will require a good understanding of the critical factors that influence linkage development in particular and resource-based industrialization in general—and acknowledgment of the fact that one size does not fit all. Upgrades in commodity processing require a supportive policy environment, domestic firm capabilities, and sector regulatory frameworks. Interventionist state policies will play a critical role and continental policy initiatives will help provide an opportunity to deal with some of the challenges, if not all.

Nigeria’s oil supply industry and Ethiopia’s leather industry provide good examples of linkages that are not only developing, but also deepening into high value added activities. Egypt’s textile industry and South Africa’s input suppliers industry are also examples of cases where there are well-developed linkages to and from the commodity sectors, which are struggling to remain competitive. Ghana and Zambia are in the middle of the range of linkage development. In these two countries, the mining sector has been making a long and intrinsic contribution to socioeconomic growth. Ghana has experienced investment boom since the 1980s, and Zambia since the 2000s.The major challenge to African countries today is how to design and implement effective industrial policies that will promote industrialization and economic transformation. China together with other emerging economies like Malaysia and Singapore exist today as examples of countries that have achieved rapid economic transformation through industrialization in recent years.

Another factor that makes commodity based industrialization a necessity on the African continent is the unpredictable and increased volatile nature of international commodity prices. Research by UNCTAD shows that such volatility was amplified during the 2003–2008 commodity boom. These new developments were mainly due to the growing linkages between commodity and financial markets, with commodities increasingly traded as financial assets.

As a result, excessive reliance on commodities increases countries’ exposure to external shocks thus lessening their ability to conduct economic planning in a predictable manner. Moving away from a growth path that is dependent on the export of raw commodities is therefore a necessary condition for African countries' ability to allocate resources for policy implementation regardless of the vagaries of international commodity/financial markets.

A major way to create commodity based industries to accelerate the rate of economic development in African economies is to “design industrial policy within the national development planning framework and create appropriate institutional policy mechanisms to increase effectiveness and competitiveness” as the Economic report on Africa 2013 suggests. There is the need for African governments to strategically create realistic, clear-cut policies and establish the needed institutions for industrialization whiles putting measures in place to implement those policies to help establish the needed industries that will change raw materials to semi-processed and processed goods before they are exported.

Because African countries are not able to add value to raw materials in order to get finished goods for supply to the local markets, there is always the need to spend huge sums of money and foreign exchange to import goods from the Western world in order to keep the economic system running. There is therefore a high level of reliance on the west for supply of food and other basic goods that are needed to keep the system running. Africa needs to quit exporting raw materials and importing processed goods outside the continent since it is inhibiting employment in the continent.

The likelihood of Africa’s future economic success rests on the realistic and effective industrial policies that African countries will design and implement today. Designing and implementing industrial policies that will establish the needed industries to add value to commodities will promote sustained growth create jobs, help retain foreign exchange and result in massive economic transformation. It is therefore necessary that all bottlenecks and blockages to the development of the commodity sector be removed and linkages created.

There should be coordination in the private sector, and between farmers, growers, processors, and exporters, to promote systemic competitiveness along the entire local value chain and enable firms to meet the end-markets requirements of price, quality, and standards. Africa needs to frame specific policy for commodity-based industrialization for each country to ensure initiatives that foster linkage development and accelerate that process, through leveraging Africa’s abundant resources and high commodity prices and the changing global production process. There is also the need to invest in people on the African continent so they can acquire the skills and the technical & managerial know-how to be able to use sophisticated equipments and adopt feasible industrial strategies to spearhead industrialization and economic transformation on the African continent.

It is time for Africa to wake up. Japan can be a good example for Africa. After the World War II, Japan has used all its resources and has managed to be the second economically powerful country in the World. We need to love our continent, and then we can use our potentials to bring about real industrialization on the continent. Africans must think and act as Africans. Then and then alone can we can use our gold, diamonds, metals, cocoa and above all our human resources to ensure large scale commodity-based industrialization in Africa.

Charles Yeboah Frimpong
University of Ghana
Member, The Institute of Chartered Accountants (Ghana)
Tel: +233 -246 542 642

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