Structural Change

Skeptics Should Rethink Africa’s Potential

(140530) -- NGEZI (Zimbabwe), May 30 () -- A mine worker gets out of an underground mine at Zimplats in Ngezi, Zimbabwe, May 30, 2014. Zimbabwe's biggest platinum producer Zimplats announced Friday that it will invest 100 million U.S. dollars to set up a refinery and boost output to 270,000 ounces per year. (/Stringer) [ Rechtehinweis: Keine Verwendung in China, Taiwan, Macao und Hongkong, No usage in China, Taiwan, Macao and Hongkong ]
A mine worker at Zimplats in Ngezi, Zimbabwe.
  • Why it matters

    Why it matters

    Assumptions about Africa’s dependence on raw materials and China are wrong and could be blinding many to the great opportunities that exist there as structural economic changes lead to what could be a sustainable upturn on the continent.

  • Facts

    Facts

    • The GDP across Africa has increased by 3.7 percent according to the latest African Economic Outlook, published by the OECD and the African Development Bank.
    • An economic restructuring is taking place in many African countries. The share of manufactured goods in total exports from Africa increased from 2000 to 2010 from 10 percent to 23 percent.
    • A World Bank analysis shows that a significant slowdown in the Chinese economy would hit Africa less hard than the world economy as a whole.
  • Audio

    Audio

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The fall in commodity prices between mid-2014 and early 2016 hit the economies of many countries hard. The HWWI commodity price index plummeted by more than half during this period. The associated decrease in export revenues didn’t just push relatively small countries like Azerbaijan and Venezuela into a recession, but also BRIC countries like Russia and Brazil. But a look at the latest African Economic Outlook shows that the gross domestic product of the supposedly commodity-dependent Africa has increased by 3.7 percent, despite this drop in prices in the past year.

The OECD and the African Development Bank, which publish the Outlook, expect this growth rate to repeat itself in 2016 and then to increase to 4.5 percent in 2017. This would put it back close to the average annual growth rate since the beginning of the new millennium, which had been 5 percent.

Although the continent of Africa, with its 54 countries, is a much more heterogeneous place than India or China, one thing emerges: The skeptics who gave the commodity price boom all the credit in Africa’s upturn were obviously wrong.

It’s questionable whether mass production based on cheap labor still has a future in this age of increasing digitization and the automation of production processes.

A deeper look into the continent’s economy shows that raw materials were not the main driver of the high growth rates over the past 15 years. Rather a structural change away from the small-scale traditional agriculture towards medium-sized service and industrial companies in expanding cities had a bigger impact on the development in many countries. This is supported by a current study by the Kiel Institute for the World Economy for Germany’s development ministry.

The researchers in Kiel ranked the African countries according to the strength of their growth and determined, “that resource wealth alone does not explain differences in growth.” Botswana, for example, has strong growth, despite the fact that the mining sector’s contribution to the GDP has halved since 2000.

Growth champions like Ethiopia and Rwanda depend little on raw materials. On the other hand, resource-rich countries like the Democratic Republic of Congo, Guinea and Sudan are developing weakly economically.

Strong growth was not seen in African countries on the Mediterranean, nor was it seen in South Africa, but rather in the Sub-Saharan countries that for many years were the problem children of the world economy. Many of these countries are deep into a process of sustainable structural change. The percentage of people employed in agriculture decreased, those in mining has remained at the same level and there were increases in the service and industrial sectors. This is also reflected in the export structure: The share of manufactured goods in total exports from Africa increased from 10 percent to 23 percent between 2000 and 2010.

This does not mean that Africa is following the Chinese model and will generate prosperity primarily by building up an export industry. Unlike in China and other Asian countries, agricultural workers are not switching from farm work to large-scale export-oriented industrial companies, but rather to a variety of small and medium service providers that mainly serve the domestic markets. These are construction, logistics and service providers as well as industrial companies. Africa’s development path has so far been different than Asia’s.

Whether that is good or bad for sustainable economic vitality remains to be seen. After all it’s questionable whether mass production based on cheap labor still has a future in this age of increasing digitization and the automation of production processes.

Another oft-debated issue is whether Africa is overly dependent on China and could suffer from a declining momentum of the economy there. That should not be the case. Although China’s share of exports from Africa has quadrupled to 18 percent since 2000, Europe’s share is still almost twice as high. A World Bank analysis shows that a significant slowdown in the Chinese economy would hit Africa less than the world economy as a whole.

A Chinese reorientation toward more consumption would actually promote growth in Africa, because it would increase the demand for textiles and agricultural products from Africa. This is why the hope is that this time Africa’s upturn will be permanent, despite the infrastructure and governance shortcomings that persist on the continent. German industry should not miss out on this huge market.

 

To contact the author: heilmann@handelsblatt.com

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