Industrialise Africa to soften commodity slump
ECONOMISTS are rarely able to reach consensus on issues regarding economic policy, but the one area in which there has been surprisingly little contention is trade theory.
Conventional economic wisdom tells us that free trade is mutually beneficial and should be pursued at all times and in all countries.
Indeed, many of the World Trade Organisation’s prescriptions are based on this idea.
The idea itself is founded on the theory of comparative advantage, which states that a country should specialise in the production of goods that it can produce at a relatively low price and import goods that other countries can produce at a relatively low price.
The goods that a country can produce relatively cheaply are determined, among other things, by the domestic natural resource endowment and the skill level of the labour force. Although intuitively appealing, this theory has a major shortcoming. Countries with low levels of skilled labour and large commodity deposits are condemned to low levels of industrialisation and a dependence on raw commodity exports. This has been Africa’s fate for a long time.
The sub-optimal level of industrialisation in Africa has been a major socioeconomic stumbling block for several important reasons. First, manufacturing creates growthenhancing backward and forward linkages between different sectors by providing important inputs. It is also a source of demand for services and raw commodities. Second, an overreliance on natural resources creates macroeconomic instability because commodity prices are volatile and unpredictable.
The IMF’s latest World Economic Outlook report shows that domestic spending and investment are very sensitive to commodity price swings in countries that are intensive commodity producers and exporters. Through the domestic spending and investment channel, commodity price downswings have an impact on both the actual and potential growth rates of commodity producers.
Think of potential growth as the rate of growth an economy can sustain over long periods without causing excessive inflation and the economy to overheat. That potential growth is also impacted by declines in commodity prices is of particular concern, because this exacerbates the post-commodity boom downswing of the affected countries.
Third, resource dependence can exacerbate inequality as the sale of raw commodities provides considerable benefits to a minority, while creating limited downstream benefits.
A growing body of literature shows that targeted protection and incentives for key manufacturing industries can create long-term gains. In fact, it is difficult to find an industrialisation success story in which these two ingredients were not present.
England, the world’s first industrial empire, benefited from free access to its colonies’ raw materials, while restricting exports of its own commodities to force domestic beneficiation. China, the latest industrial success story, has aggressively implemented incentives for manufacturers, restricted exports of key mineral commodities, kept its currency at a weak level to boost exports and forced foreign firms to reinvest profits.
Africa can benefit from the industrialisation experiences of other countries and regions by adopting the following lessons.
A carrot of incentives and protection needs to be provided to infant industries with employmentcreating potential and links the rest of the economy.
Limited time frames for support and a desire to see unproductive firms fail must be in place. We must accept there’ll be some inefficiency in the short term as consumers pay higher prices for goods, but this is to create scale and long-term efficiency in production.
Effective industrial policy alone cannot create a flourishing manufacturing sector. An appropriate transport and logistics infrastructure, the provision of reliable power, the development of institutions and a supply of labour across the skills spectrum are also essential ingredients. We have little choice. The recent slump in commodity prices has brought Africa’s need to industrialise into sharp focus. With improving levels of infrastructure, a growing skills base and an abundance of oil and gas (which can provide energy), Africa has never been better positioned to take advantage of industrialisation.
Nxedlana is FNB chief economist