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Africa: Economic Outlook, Structural Obstacles

AfricaFocus Bulletin
Oct 5, 2008 (081005)
(Reposted from sources cited below)

Editor's Note

"Confining African countries to the production of primary commodities amounts to condemning them to remain locked in the commodity trap. Africa needs to create a competitive advantage in the production of manufactured products, as many other developing countries have done." - United Nations Conference on Trade and Development

The international financial crisis, spreading from the United States to Europe and Asia, is sure to hit Africa as well, most commentators agree, despite relatively high growth rates that may remain above five percent and relatively low loan exposure by African banks. World Bank chief Africa economist Shanta Deverajan noted in his blog that both cutbacks in recent high capital inflows and possible falls in commodity prices could serious affect Africa.

Commodity prices, however, have differing effects depending on the commodity and the country. Most African countries are negatively affected by high food and fuel prices, while commodity price volatility affects oil and non-oil producers in different ways.

Regardless of short-term trends, however, says a new report from the United Nations Conference on Trade and Development, Africa's export performance demands a break from earlier policies based largely on trade liberalization, in favor of concentrating on building capacity both in the agricultural and manufacturing sector.

This AfricaFocus Bulletin contains excerpts from the press release and overview of that report. Complete versions of these documents, as well as the full report, are available at http://www.unctad.org Also available, with much relevant data and commentary on Africa, are recent annual reports from UNCTAD on investment and on trade and development.

For previous AfricaFocus Bulletins on economic issues, see http://www.africafocus.org/econexp.php

Of related interest:

International Monetary Fund Survey Online
Interview with Antoinette Sayeh, Director of IMF's Africa Department (Sept. 23, 2008)
http://www.imf.org/external/pubs/ft/survey/so/2008/INT092308A.htm

World Bank blog by chief economist for Africa region, Shanta Devarajan, "Financial Turmoil and Africa" (September 29, 2008) http://tinyurl.com/3n2fex

Third World Network summary of UNCTAD report on trade and development
http://www.twnside.org.sg/title2/wto.info/twninfo20080903.htm and
http://www.twnside.org.sg/title2/wto.info/twninfo20080904.htm

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

Report says strengthening supply capacity is essential for Africa to benefit from trade liberalization

UNCTAD/PRESS/PR/2008/027 15/09/08

[Excerpts. Full press release and entire report available on http://www.unctad.org Summary overview at:
http://www.unctad.org/en/docs/tdb55d6_en.pdf]

Effective policies are needed for agricultural and industrial sectors to remove constraints to production and achieve higher exports for Africa

Geneva, 15 September 2008 - Weak supply capacity -- that is, a limited ability to produce the quantity and quality of goods required to respond to global demand for those goods -- is the main obstacle to improved export performance in Africa, and explains why the continent has lost market share from 6% of world exports in 1980 to about 3% in 2007, reports Economic Development in Africa 2008.

Subtitled "Export Performance following Trade Liberalization: Some Patterns and Policy Perspectives," the 2008 edition of UNCTAD s annual report on Africa says two decades of trade liberalization have successfully removed many of the barriers that used to limit trade from the continent -- and there has been a slight increase in exports as a result. But the progress has been less than expected and is far below the increases achieved by other developing regions.

Gaining greater access to world markets opens up vast opportunities, but many African countries do not yet have sufficient ingredients in place to take advantage, the report says. They need such building blocks as well-trained workforces, reliable electricity supply, research and development skills, flexible investment and banking services, and efficient transportation to supply, at competitive prices, large volumes of products for which there is global demand.

Governments on the continent also need to take effective steps to reverse several worrisome trends, according to the study. These include decades of relative neglect of agriculture that have hindered African countries at a time of climbing commodity prices. In addition, diversification of their economies -- long recommended as a way of ensuring more robust and stable growth -- has not occurred; and the manufacturing sector, where potentially higher profits and higher living standards can be realized, has been stagnating while other developing regions have greatly expanded their industrial outputs.

Africa's export performance after liberalization has been modest

Trade liberalization in Africa was expected to result in increased production in the tradable sector, which should have increased export volumes and diversified the array of exported products. As of the second half of the 1990s, most countries in the region were liberalized. Their average ratio of exports to Gross Domestic Product (GDP) increased from 23% before liberalization to 26% after. This 11% climb is much lower than the 50% increase recorded in non-African developing countries following trade liberalization. Relative to other developing regions, the increase in Africa s export value had been driven primarily by an external factor -- rising export commodity prices -- rather than increasing volumes. Over the period between 1995 and 2006, both export volumes and prices grew at about 6% per year. This performance contrasts with the experience of developing Asia over the same period, where export volumes grew by 10% per year while the prices increased by only 1% per year, the report finds.

Analysis of Africa s export composition shows that most African countries have not diversified their export products. On the contrary, more than 60% of African countries registered higher export concentration indexes in 2006 relative to 1995, increasing these countries vulnerability to falls in prices for a small number of commodities. Most African countries that increased their export revenues owed it to unexpected hikes in the prices of fuel and other minerals, such as copper and gold. Indeed, the ratio of the value of fuel exports to GDP increased from 5% in 1998 to more than 15% in 2006. Over the same period, the corresponding ratio for non-fuel primary commodities and manufactured products remained constant, each at about 5% of GDP. These statistics suggest that the current commodity boom should not lure African countries into a false sense of prosperity. Africa remains vulnerable to the vagaries of international commodity prices, the report warns.

Agricultural export performance is hampered by structural and institutional constraints

Despite its importance, the agriculture sector in many African countries has been deteriorating over the years. In the space of a generation, Africa s agriculture has so dramatically declined that Africa has fallen from its status of a net food producer to become the region most dependent on external food aid. In fact, Africa is currently, experiencing a food crisis. The main explanation lies in the negligence in development policies pursued during the last 25 years, which have abandoned previous emphases on research, agricultural infrastructure, extension services, and the provision of credit for farmers. The recent policies, including trade liberalization, failed to recognize the strategic role of agriculture in African economies and went as far as dismantling the institutions that had previously supported the sector. Total donor support to agriculture declined from its peak of US$8 billion in the early 1980s to $3.4 billion in 2004; the proportion of official development assistance (ODA) allocated to agriculture declined from 16.9% cent in 1982 to just 3.5% in 2004. Domestic resources invested in agriculture followed the same trend. It is noteworthy that those countries that maintained strong agricultural export sectors were those that pursued sustained and coherent sectoral policies to increase and diversify their agricultural exports. Examples include Ghana and C“te d Ivoire.

Africa has not been able to diversify into manufactured exports

The importance of manufactured exports for economic development has been illustrated by the experience of the East and South East Asia region where manufacturing products account for about 90% of total merchandise exports. In Sub-Saharan Africa, exports from the manufacturing sector account for only 26% of total exports, the lowest proportion of all regions. According to the report, over the period 2000-2006, only eight African countries had manufactured exports worth more than 10% of their GDPs or more: Botswana, Mauritius, Morocco, Namibia, South Africa, Swaziland, Togo and Tunisia, according to the report.

The oft-heard argument that Africa s failure to export more manufactured products is due to the region s comparative advantage in the production of primary commodities is a simplistic and flawed argument, the report contends, and there is no fundamental reason why Africa should not be able to emulate the positive Asian experience. Arguing that Africa should stick to its traditional exports of primary commodities and a few labour-intensive manufactured products is tantamount to condemning the region to slower development, argues the report.

To achieve increased industrial output and exports, African governments must take steps to deal with several key problems, the report says. These include poor infrastructure, high entry costs for businesses, shortages of qualified labour, low investor protection, difficulty in accessing credit, and cumbersome tax systems. Together, these discourage investments that could increase productivity. Economies of scale also must come into play -- many African manufacturers are currently too small to benefit from the efficiencies achieved by larger firms elsewhere, and governments should enact measures to help them expand so that they are internationally competitive. Addressing these issues effectively will require industrial policies tailored to the specific characteristics of each country, the report says.

,,,


Overview Excerpts

For full overview see http://www.unctad.org/en/docs/tdb55d6_en.pdf

United Nations TD/B/55/6

...

I. Trade liberalization in Africa: timeline

1. In the twentieth century, Africa's trade relations with the rest of the world went through three principal phases. During the colonial period, African countries' trade policies were defined according to the interests of the colonizing countries. In the decades following independence, many African countries chose protective trade policies aimed at import-substitution industrialization. Following the economic crisis of the late 1970s and early 1980s, most African countries took measures to liberalize their trade regimes. Trade liberalization was often part of an extensive package of market-oriented reforms promoted by the international financial institutions at a time when African countries were in acute need of their assistance. These institutions argued that more liberalized trade regimes would improve the efficiency of the economy by promoting greater production of tradables and would expand output by increasing the level of exports.

2. Trade liberalization consists of a number of policy measures that aim to reduce the misalignment between domestic and international prices. These include reductions in tariffs, the conversion of non-tariff measures into tariffs, and a reduction in the overvaluation of currencies. ... the most comprehensive studies of liberalization suggest that the process started in the mid- to late-1980s and was completed in most African countries in the late 1990s. ...

3. Tariffs on imports were one of the main instruments used to protect domestic industries in Africa. Trade liberalization sought to simplify tariff structures, reduce the number of tariff bands and reduce tariff levels. Overall, tariff levels in Africa were nearly halved between 1995 and 2006, from 22 per cent to 13 per cent. ...

II. Export performance trends following trade liberalization in Africa

7. Improvements in export performance following trade liberalization have been limited in most African countries. Indeed, as a proportion of gross domestic product (GDP), exports in Africa increased by only 10 per cent following liberalization. In comparison, non-African developing countries saw their exports as a share of GDP increase by 62 per cent. The increase in exports was also smaller than the increase in imports, leaving the trade balance in Africa in a worse situation after liberalization. ...

10. The trade structure of African countries did not undergo significant changes in the years following trade liberalization. Most countries in the region remain essentially primary commodity exporters, with only a handful of countries drawing a significant part of their export revenue from manufactured products. In comparative terms, sub-Saharan Africa remains the region with the highest dependence on primary commodity exports. It also appears that export concentration has increased in the years following trade liberalization, strengthening Africa's standing as the region with the highest concentration of exports.

11. There are several trends in the destination of African exports. However, these appear to have been generally unaffected by the process of trade liberalization. European countries continue to represent the largest market for African exports, although their share has been decreasing steadily over time as the influence of historical ties on African trade patterns diminishes. North America's share in Africa's export markets has increased in recent years, mainly as a result of increased oil exports and new preferential market access initiatives such as the African Growth and Opportunity Act. The importance of Asia to African exporters has increased considerably since the 1990s. This is mainly due to sustained high rates of economic growth in Asia and the associated need for primary products produced in Africa.

...

III. Trade liberalization and agricultural exports

12. Agriculture remains the bedrock of African economies. It contributes around a fifth of total GDP and employs nearly two thirds of the population in sub-Saharan Africa. Agricultural exports also represent the bulk of total merchandise exports in most African countries.

13. Though the value of African agricultural exports has increased by 74 per cent since 2001, this rise has mainly been proportionate to the increase in GDP and has been considerably lower than the rise in agricultural export values seen in East and South-East Asia or Latin America. As a result, the contribution of agricultural exports to GDP has not increased noticeably since trade liberalization and the African share in global agricultural exports has actually decreased. Moreover, the proportion of agricultural production that is traded fell steadily in sub-Saharan Africa between 1995 and 2006.

14. Looking at individual country experiences, it appears that the countries that have been most successful in exporting agricultural products are those in which a deliberate export orientation of agriculture and product diversification was pursued by Governments. Overall, however, most sub-Saharan African countries continue to export traditional bulk agricultural commodities. Only a few countries have started to export new market-dynamic horticultural products.

15. Much of the explanation for the lack of agricultural export response to the new incentives created by trade liberalization is rooted in the constraints that limit agricultural production in general in African countries.

16. First, African agricultural producers tend to face severe credit constraints. This situation is partly due to the insecurity of land titles in many African countries and the poor performance of the financial sector in rural areas. In addition, marketoriented reforms, of which trade liberalization measures were a part, dismantled many of the institutions designed to provide credit and other inputs, including extension services, to small agricultural producers. As a result, agricultural producers lack access to capital and other inputs which would allow them to intensify or extend their production for exports.

17. Second, public investment in the agricultural sector and the rural economy in general has diminished over time. This has aggravated the difficulties facing agricultural producers, mainly owing to poor infrastructure provision and agricultural research services that do not address the main priorities of African countries. Indeed, the poor quality and lack of maintenance of infrastructure in rural areas impose high costs on production and commercialization. It appears that the fall in public investment in the agricultural sector is related to the decline in official development assistance targeted at this sector. Indeed, public investment in agriculture was previously strongly supported by external funding in many African countries.

18. The result of these constraints on the agricultural sector is that cereal yields in Africa have not significantly improved since the 1960s and are now several times lower than those of other developing regions. ...

... Countries exporting mainly agricultural commodities that compete with developed-country production - such as wheat, meat or cotton - face very high tariffs and non-tariff measures as well as competition from highly subsidized production.

20. Furthermore, agricultural commodities are increasingly traded within global marketing and distribution channels in which only a small share of the final sale price goes to the producer. Africa's share in global agricultural exports has been reduced by a combination of the way in which African producers are integrated in global value chains and increased competition from other developing regions that have improved their agricultural productivity.

21. Overall then, it appears that the expectations of the advocates of trade liberalization policies have not been met in most African countries. ...

IV. Trade liberalization and manufactured exports

22. Manufacturing exports represent a negligible proportion of GDP in most African countries. Indeed, in the period 2000–2006, only eight African countries had manufacturing exports worth 10 per cent of GDP or more. As a result, Africa is the region in which manufacturing represents the lowest share of total merchandise exports. Furthermore, a handful of middle-income African countries account for the quasi-totality of African manufacturing exports. In global terms, Africa plays a minor role in manufactured exports.

23. Above all, the low level of manufacturing exports reflects the small size of the manufacturing sector in most African economies. The level of manufacturing in the economy has not increased noticeably in Africa since trade liberalization. If anything, there has been a slightly downward trend in the ratio of manufacturing value-added to GDP in the years following liberalization.

V. African manufacturing and comparative advantage

29. Many analysts have attributed Africa's limited success in exporting manufactured products to the continent's comparative advantage. This influential position holds that, given the continent's endowments of natural resources, labour and capital, it should focus on exporting unprocessed primary commodities and use the revenue gained to purchase manufactured goods from abroad.

30. The comparative advantage argument is, however, flawed on many accounts. First, the assumptions underlying the argument are empirically untenable, especially in Africa. Full employment of resources, perfect competition and immobile factors of production cannot be considered close approximations of the reality in most African countries. Second, the comparative advantage hypothesis sees all products as being equivalent, when in fact there are important differences between primary agricultural product exports and manufactured exports. Indeed, primary commodity exports have faced declining terms of trade when compared to manufactures during the twentieth century and their prices tend to be considerably more volatile than those of manufactures. Additionally, the global commodity chains through which these products are marketed typically leave only a small proportion of the final selling price for producers. It appears, therefore, that confining African countries to the production of primary commodities amounts to condemning them to remain locked in the commodity trap. Africa needs to create a competitive advantage in the production of manufactured products, as many other developing countries have done. The products that a country specializes in by developing its competitive advantage have a strong influence on that country's development.

31. Manufactured goods, and especially technology-intensive products, are characterized by improving secular terms of trade and more positive externalities for the domestic economy than agricultural products. Additionally, specialization in higher value-added products carries higher dynamic gains over the long term. In other words, countries acquire new comparative advantages over time depending on which products they specialized in at the outset. Comparative advantage, therefore, needs to be seen as a dynamic attribute that needs to be actively cultivated rather than a static constraint imposed by countries' natural resource endowments.

VI. Strengthening Africa's export performance: some policy perspectives

32. Export performance in Africa has not improved much in the years following trade liberalization. This lack of response points to the need to identify the constraints that continue to limit export performance. Indeed, trade liberalization measures have comprehensively addressed macroeconomic policies such as overvalued exchange rates and restrictive trade policies that constrained export performance. The lack of a supply response to the removal of these constraints suggests that there are deeper problems related to the production and marketing of exports in both the agricultural and manufacturing sectors. There is therefore a need for policies specifically targeting the constraints that continue to dampen export performance in African countries.

33. More specifically, Governments in Africa should focus on promoting and enabling horizontal and vertical diversification towards higher value-added products. ...

34. In the medium to long term, Governments should also review the opportunities to tackle such issues as land tenure systems and the gender division of labour in rural areas in order to improve the productivity of agriculture.

35. Steps can also be taken at the global level to improve agricultural export performance in Africa. First, there should be effective liberalization of agricultural trade in developed-country markets. Second, it may be desirable to revisit options that have been explored in the past, such as international commodity agreements and diversification funds, in order to improve the terms on which African agricultural exporters interact with the market. Finally, Aid for Trade and other technical assistance programmes should be directed at upgrading Africa's trade infrastructure. This would enable African countries to strengthen their capacity to trade more efficiently and attain quality and consistency in their exports, including by meeting the health and safety requirements for food in their export markets.

36. In manufacturing as in agriculture, more attention needs to be paid to production and marketing aspects in order to facilitate a substantial increase in exports. In particular, manufacturing firms' competitiveness needs to be addressed as a priority; it is arguably the most important determinant of participation in export markets. Competitiveness needs to be tackled at the level of both the economy and the firm. At the level of the economy, weaknesses in basic productive infrastructure need to be remedied. Key sectors such as power generation, water supply, telecommunications and transport need to be improved in order to build a competitive export sector. At the level of the firm, labour productivity must be increased through such measures as vocational and on-the-job training, the sharing of best practices and other capacity-building measures. Efficient export promotion agencies can also help firms to identify and seize opportunities in export markets. ...


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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