A dominating economic concern in recent years has been the development of the Asian driver economies. The competitive advantage that these countries have in manufacturing stems from their deep well of cheap labour supported by impressive infrastructure and coordinated government policies aimed at export-orientated growth. Effectively, this international trade dominance has pushed other economies out of the manufacturing sector. This is a challenge that has been felt right across the globe: From the textile industries in Mexico to the electronics industries in Eastern Europe, nobody can compete with East Asia in the manufacturing stage of the value chains.⁽²⁾ This raises the question: If manufacturing is the traditional root through which countries have industrialised and developed in the past, then what opportunities are left for African countries now?

The opportunities available through the commodities sector have been hailed both as a blessing and as the `commodities curse’. Using recent research, this paper shows that with carefully designed government policies and effective implementation, the commodities sectors in African countries can be successfully used as a stepping stone towards broader economic development. In so doing, the paper also provides an up-to-date depiction of the developments in various African countries linked to the commodities sector.

The development agenda in a global economy

The Asian driver economies’ manufacturing dominance does not necessarily spell disaster for Africa’s development.  In this case, as one door closes another opens. East Asia’s dominance in the manufacturing sector has resulted in a commodities price boom, which analysts forecast to last for the foreseeable future.⁽³⁾ This development over the past decade or so has been affected by the recent global financial crisis, but its roots lie in the more long term import needs of countries like China (see figure 1 below). This demand for commodities places a number of African countries in a very advantageous position and reverses the global trend of decreasing terms of trade. With the relative price of commodities doing so well against the majority of manufacturing prices, a back door to development has been opened up.

Figure 1: Changes in global commodities prices ⁽⁴⁾

Researchers at Cape Town University (UCT), South Africa, have analysed the possible role that the commodities sector can play in the development of economies, and results contradict the commodities curse literature. This literature has depicted natural resource endowments as a hindrance to economic development because of the connection to political corruption, lack of economic diversification and the long term global trend of decreasing commodity prices. But a close historical analysis of economies such as that of the early United States of America (USA) shows that the exploitation of natural resources has been one of the key contributing factors in the development of their economies.⁽⁵⁾ In the USA the rapid expansion of resource exploitation provided a huge stimulus to other sectors of the economy, from research and development to manufacturing supplies. Interestingly, in the USA, as this process sped up, the original evaluation of the stock of natural resources was also continuously revised upwards, as a consequence of and as a stimulus to developments in geological surveying and extraction techniques. This process of stimulating the wider economy occurred through a concerted combined public-private sector effort to develop the industries linked to the commodities sector.

In order to understand this process it helps to think of the value chain that a product like diamonds sits in. Diamonds have been chosen as an example because they are situated in a relatively short value chain which is relevant to a number of African countries. The percentage of the final value captured at each link of the vale chain is highly dependent on a wide variety of economic factors.  Most importantly, however, is that it can be manipulated, a prime example of this being a monopoly. The problem that has faced commodity-rich countries in the past has been that only the extraction phase in the value chain was located within their economies. When commodity prices fall these countries capture a diminishing percentage of the overall value.

The literature on value chains and the research undertaken at UCT have identified two options for development for a country in this scenario: forward or backward linkages. In the diamond value chain the typical forward linkage targeted by countries is the cutting and polishing of the stones. A further forward linkage would be the retail of said stones, but as this tends to take place in the destination market (normally advanced Western economies), the retail end of this commodity value chain is already tightly controlled by host-country companies. The second choice is backward linkages, which involve the local production of inputs into the extraction process. This can encompass the labour force involved, the tools used, the extraction methods deployed, surveying, or even something as simple as the leisure facilities available to the work force. What is important for both of these options is that a national economy can use its internationally competitive advantage in natural resources as a platform from which to link to other production processes, ideally ones with higher skills requirements, and thus higher wages.

Vision: Targeting commodity production linkages

There has been a growing awareness of the linked opportunities afforded by commodities in Africa in recent years. This awareness of these opportunities has been the first step in the development of national programmes targeting the various linkages that are possible. The use of more complex economic models has focused a number of governments on the need to absorb production knowledge into the local economy and move away from a ‘rentier state’ use of natural resources. The targeted development of human capital in conjunction with production capabilities has further refined the development strategies of African countries such as Botswana. Countries employing these strategies especially, have a vision of development that seeks to maximise the opportunities available to the local economy, which arise from foreign direct investment in the commodities sector.

Botswana’s vision is an excellent example of a clearly articulated government strategy targeting the forward linkages emanating from the diamond sector. The Botswana Government plans, released in 2006 and 2009, made use of the end of DeBeers’ 25-year diamond mining lease. In the renegotiation of the contract the Botswana Government included a number of specific measures aimed at developing the local diamond cutting and polishing industries, such as  a number of strict penalties if DeBeers were to veer from their commitments to the joint public-private initiative target of 80% of cutting and polishing occurring domestically. They then supported these industries with a coordinated tax and infrastructural support programme.⁽⁶⁾

The Botswana case does not stand alone; there are numerous examples of African countries rich in natural resources that are developing a national strategy to take advantage of the linkages from the commodities sector. In Angola there has been a concerted effort to take advantage of the oil industry. The Angolan Government has approached this in two ways; firstly with the ’Angolification’ of the work force. Secondly, the government constructed a three-tiered system to develop the local supply of the inputs to the oil extraction process. The first tier relates to inputs with a low technology and capital intensity. It is required that these inputs be supplied by national companies. The second tier deals with average capital and technology intensity inputs, and requires that these be supplied by joint venture companies. The third tier has no restrictions and covers all highly capital and technology intensive inputs. In order not to support local companies that are unlikely to ever be able to compete internationally, the Angolan Government has placed a 10% premium on the value which a domestic company can charge above the international price. If this is exceeded by the national companies, the oil company may source the inputs internationally.⁽⁷⁾

Tanzania, Zambia, Ghana and Gabon all have at least some form of government vision for developing the linkages with other sectors from the commodities sector, but one example that really stands out is Nigeria. Nigeria has a long history of government policy on this issue, stretching back as far as 1960. In recent years this policy focus has been sustained and fine tuned. In 2005 a government policy on the local content of the inputs into the oil sector was released. This policy contained 23 explicit directives. In 2009 the local content target was 45%, and in 2010 it was raised to 70% for all low technology intensive goods.⁽⁸⁾  By 2011 the Nigerian Local Content Act was enacted, which tied together a coherent government plan to develop the backward linkages from the oil sector.

A country which is a slightly deviant case is South Africa (SA). The industries and skills development related to the mining industry have attracted continued government attention in SA up until quite recently.⁽⁹⁾ Now, however, contrary to the increased attention that many of its neighbours are giving this issue, SA policy has moved away from developing innovation and production connected to the commodities sector. The reasons behind this are complex. Morris, Kaplinsky and Kaplan (2012) suggest that uncertainty over property rights and the threat of nationalisation of the country’s mines have impeded the private sector vision for developing the commodities sector, and a reorientation of government policy away from traditional sectors has almost completely ended any government vision of enhancing the importance of the commodities sector within the domestic economy.⁽¹⁰⁾

South Africa still retains quite a strong industrial sector connected to commodities, and in that regard it is still effectively taking advantage of the commodity price boom in recent years, and is capturing a considerable share of the value in its respective value chains. However, the lack of any mention of the commodities sector in the Department of Science and Technology’s 2010 plan for developing innovation does raise some questions about opportunities being lost, as SA might not be reaching its full potential, and the commodity price boom will not last forever.

Implementation of government policy

The vision required from governments to see the opportunities available from the linkages in the commodities sector is only one aspect contributing to the success of the linked industries. Morris et al. have identified a number of other crucial factors, namely ownership, capabilities and infrastructure, which need to be developed in conjunction with government policy, and include a concerted public and private effort, in order to create effective and competitive industries.⁽¹¹⁾ As might be expected with so many variables involved in determining success, the desired outcomes can often be elusive.

The need for a coordinated interdepartmental programme to develop the linkages between the commodities sector and the wider economy is something which countries such as Botswana and Nigeria seem to be well aware of. These countries have been quite successful in achieving results.   Botswana exported US$ 518 million worth of polished diamonds in the first three quarters of 2012, which is a 4% increase compared to the same period in 2011.⁽¹²⁾  While still only a small fraction of total diamond exports, it is the country’s largest manufactured export.⁽¹³⁾ With exports of rough diamonds in the first 10 months of 2012 valued at US$ 2.5 billion,⁽¹⁴⁾ there is much potential for growth in the cutting and polishing industry. Nigeria may have had slightly unrealistic targets for domestic content, but its failure to reach them should not cloud the success that it has achieved. While exact figures are not available, there is significant evidence to suggest that Nigerian backward linkages are growing, and that the local content of the oil industry inputs is increasing at a very satisfactory speed.⁽¹⁵⁾

Unfortunately the story is not as positive for countries such as Ghana, Tanzania and Zambia. Poor inter-governmental coordination, corruption and limited private sector cooperation have resulted in poor development of the targeted industries.⁽¹⁶⁾ Gabon has experienced some success in implementing the government’s target of processing the country’s timber exports domestically, but unfortunately this has been undermined in recent years. New companies involved in exporting Gabon’s timber have resisted and circumvented the government’s regulations on timber processing to the extent that between 2004 and 2007 plywood exports (as opposed to raw timber exports) fell by over 40%.⁽¹⁷⁾ In reaction to this the Gabon Government placed a wholesale ban on timber exports in 2010.⁽¹⁸⁾ Whether this will provide them with the space needed to develop effective tax sanctions and enforcement measures for non compliant companies remains to be seen.

Conclusion

The challenges posed by the East Asian economies to industrialisation in Africa have brought with them some opportunities as well. As this paper has shown, this is something which a growing number of African countries are becoming aware of. The development of coherent government policies aimed at both encouraging local enterprise and using foreign direct investment constructively is the first step in the learning curve that will allow these countries to use their natural endowments as a platform from which to spread industrialisation and development in the rest of their economies.

The growth rates of resource-rich African countries over the past half decade have compared very favourably with the world average, and this has been largely due to the commodities boom and, at least partly, due to the concerted effort to orientate these economies towards backward and forward linkages with the commodities sector. There is reason to be optimistic about the potential development that we may see over the next decade or so, especially as there is a growing awareness of the required vision, and greater impetus to act on this vision.

Written by Gerald Flanagan ⁽¹⁾

NOTES:

(1) Contact Gerald Flanagan through Consultancy Africa Intelligence’s Africa Watch Unit ( africa.watch@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Clair Furphy and was edited by Nicky Berg.
(2) Fu, X., Kaplinsky, R. and Zhang, J., ‘The impact of China's exports on global manufacture prices’, Sanjaya Lall Programme for Technology and Management for Development  Working paper 32, 2009,http://oro.open.ac.uk.
(3) Morris, M.,  Kaplinsky, R. and Kaplan, D., 2012. One thing leads to another: Promoting industrialization by making the most of the commodity boom in Sub-Sharan Africa. MMCP: Cape Town.
(4) Ibid.
(5) Chenery, H.B., (1960). Patterns of industrial growth. American Economic Review. 50(4), p. 624-654.
(6) Morris, M.,  Kaplinsky, R. and Kaplan, D., 2012. One thing leads to another: Promoting industrialization by making the most of the commodity boom in Sub-Sharan Africa. MMCP: Cape Town.
(7) Ibid.
(8) Ibid.
(9) Ibid.
(10)  Ibid.
(11) Ibid.
(12) Golan, E., ‘Botswana rough diamond exports $263 million in October’, International Diamond Exchange, 19 December 2012, http://www.idexonline.com.
(13) Grynberg, R., ‘Botswana polishes its prospects’, Mail & Guardian, 24 August 2012, http://mg.co.za.
(14) Golan, E., ‘Botswana rough diamond exports $263 million in October’, International Diamond Exchange, 19 December 2012, http://www.idexonline.com.
(15) Morris, M.,  Kaplinsky, R. and Kaplan, D., 2012. One thing leads to another: Promoting industrialization by making the most of the commodity boom in Sub-Sharan Africa. MMCP: Cape Town.
(16) Ibid.
(17) Ibid.
(18) Ibid.