Why we must think differently about the diversification of African economies

The shocks follow one another, the Covid-19 pandemic, the war in Ukraine and the climate crisis

Why we must think differently about the diversification of African economies

The shocks follow one another, the Covid-19 pandemic, the war in Ukraine and the climate crisis. Particularly exposed, African countries must diversify their exports advocates the latest annual report of the United Nations Conference on Trade and Development (Unctad) on development in Africa. This quest for diversification is not new. "Despite decades of diversification efforts, 45 of the continent's 54 countries remain dependent on primary commodity exports in the agricultural, mining and extractive sectors," notes the institution's report, aptly titled "Rethinking the Foundations of export diversification in Africa”.

This reliance on commodity exports leaves countries vulnerable to global shocks. The very nature of these "commodity" markets characterized by cycles of sharp rises and dizzying falls directly impacts African countries. In recent years, a long cycle of rising commodity prices has supported growth in many African countries. However, "the high concentration of exports around a few commodities can be a source of macroeconomic instability, especially in periods of high commodity price volatility and global shocks" , explain the authors of the report. When prices fall, export earnings dry up, unemployment and poverty rise. This report also presents an analysis that assesses "the global economic cost of the war in Ukraine and indicates that Africa, and in particular sub-Saharan Africa, is now one of the regions of the world most exposed to the current crisis" , underlines Rebeca Grynspan, the secretary general of Cnuced.

UNCTAD considers a country to be commodity-dependent when these account for more than 60% of its total merchandise exports. According to the calculations of the UN organization, 12 African countries depend mainly on their exports of fossil fuels, 16 others on their mining products and 17 on their exports of agricultural products (coffee, cocoa, cotton). Too often on the continent, exported products are not or only slightly processed, and therefore without added value. “It is important for Africa to go beyond raw materials and mining and the key is to add value to all these products,” comments Paul Akiwumi, Director Africa Division at UNCTAD.

Among the few African countries which are not dependent on raw materials and which rely on a relatively large economy, they can be counted on the fingers of one hand, Egypt, Mauritius, Morocco, Africa of the South and Tunisia. On the other hand, the dependence on raw materials is extreme for countries such as Guinea-Bissau (99.8%), South Sudan (99%), Libya (98.7%), Chad (98.4% ), Mauritania (97.3%), Sudan (97%), Angola (96.4%) and Nigeria (95.7%).

"While some countries have added new products to their export basket in recent years, the shift of the industrial sector towards high value-added manufactured items has not progressed at a sufficient pace," the report finds. The case of Uganda is instructive. In the 2000s, the country pursued a policy of economic diversification, in the agrifood, minerals, chemical products and small manufactured goods industries, which was accompanied by strong economic growth and a reduction in poverty. Its dependence on commodities has declined from 95% in 1998-2000 to 70.6% in 2008-2010. Despite these efforts, diversification lost momentum in the aftermath of the 2008-2009 financial crisis. "According to a study by the Government of Uganda and the United Nations Development Programme, some of the new non-traditional exports, including agro-processing industries, are adding to export diversification, but they have limited scope for structural transformation,” the report comments.

Many economists believe that services play a central role in this process of diversification. However, the volume of trade in services in Africa remains low and mainly focused on traditional services: transport and travel. "Between 2005 and 2019, services accounted for 17% of Africa's total exports and around two-thirds of exported services were travel or transport services," the report comments.

It is knowledge-intensive services that could add more value to exports, foster innovation and stimulate growth. “Today is a very good time thanks to technologies,” said Paul Akiwumi, citing the emergence of fintech, healthtech, agritech, e-mobility in African countries. “Modern technologies and services such as blockchain can also improve access to diverse and competitive markets, both inside and outside the continent. Increasing trade in services also helps reduce environmental degradation caused by the exploitation of natural resources.

Services are essential. “Business services, financial services, and information and communication technology services facilitate access to new markets and the design of new products,” explain the authors. This diversification through services must be accompanied by economic policies in order to create complementarities between this sector and the other sectors of the economy but also to overcome market failures (accessibility, quality, competition, high costs of trade in services, etc. ).

To build this diversification, UNCTAD recommends relying on SMEs which constitute the backbone of the economy of African countries. They represent 90% of businesses in Africa and 60% of the workforce. Unfortunately, they receive very little financial support. The future depends on lifting these constraints on access to financing so that SMEs can develop, contribute to growth and diversification. According to the International Finance Corporation (IFC), SMEs face a financing gap estimated at $416 billion each year. UNCTAD therefore urges “African policymakers to help businesses access specialized financial and non-financial products and services, such as government loan guarantees, which are a better long-term answer to the financial needs of SMEs. The recent growth of financial technology (fintech) companies may also improve traditional credit channels.”

The UN organization remains optimistic and believes that the continent has "enormous potential to break its dependence on raw materials" and ensure a "strong integration of its economies into high-end global value chains". “By addressing barriers to trade in services, building relevant skills and improving access to alternative and innovative financing, the continent's manufacturing productivity can be improved, driving economic growth and structural transformation of the continent. Africa for many years,” Ms. Grynspan added. UNCTAD details 9 recommendations for African governments and the private sector, including the last, and certainly the most important: "put them into practice".

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