Use resources to diversify African economies, unlock sustainable growth

21st May 2024 By: Schalk Burger - Creamer Media Senior Deputy Editor

Use resources to diversify African economies, unlock sustainable growth

A majority of African economies, or 83%, are highly commodity-dependent and are vulnerable to external shocks, experiencing good growth when commodity prices are high, but seeing growth reversal and setbacks when prices are low.

Chad, for example, experienced an average of 9% growth in GDP between 2001 and 2014, but since 2015, the GDP of the country has contracted and poverty increased. GDP per capita is decreasing and developmental gains have been reversed because of the inability to sustain economic growth.

The shift from agriculture to oil made the economy less diversified and vulnerable to external shocks, independent policy research initiative African Futures Innovation Programme senior researcher Dr Kouassi Yeboua said during the African Centre for Economic Transformation Summit on Economic Transformation on May 20.

However, Africa should leverage its resources to increase the investment capacity in economies and the resources available for long-term investment. Rather than finance current consumption, resources must be aimed at financing economic transformation going forward, University of Pretoria Department of Economics head Professor Nicola Viegi suggested.

"For example, if we were able to sell all our resources and use part of that to build infrastructure, then we would not have debt and have resources that we are able to invest. The question is how to rethink commodities as an opportunity for diversification and not a curse."

Demand for resources in Africa would increase because of their role in the global thrust towards the energy transition. However, Africa was currently the object of economics, not the subject. It was important economically, but African countries were small players in minerals and resources global value chains, he pointed out.

"We are currently at a place where other powers fight to get control of these resources. The recent African Transformation Index showed that the continent is becoming more dependent on the East, which is the manufacturing hub of the world.

"We are regressing towards less diversification, which goes against the transformation we want to achieve.

"It is also important to understand the concept of transformation. The only way to have long-term economic growth and to change the lives of people is by fundamentally transforming the characteristics of economies," he said.

The reality is that Africa has commodity-based economies, but leveraging these resources for sustainable development means investing in human capital and infrastructure linkages across the continent.

This will enable the use of these revenue to find ways to develop links with the private sector and use these extractive industries to mobilise revenues for long-term investments.

"This is where the lack of future orientation in Africa is problematic. Norway, for example, had oil-based commodities and used these natural resources to generate financial resources for long-term investment," said Viegi.

"If we only rely on our ability to export raw materials to the rest of the world, then this condition and cycle of growth when commodities prices go up and collapsing when the prices go down will continue.

"There are two main diplomatic attitudes towards Africa, namely an attitude of exploitation or an attitude of paternalism. We do not want either. Therefore, we have to find an inward-facing way for Africa to develop. African countries must also learn from other countries that have succeeded in using their resources effectively to transform their economies.

"We must decide, for example, whether we want to use debt to finance consumption or to use savings to finance investment and growth. Often, when we talk about resources, we say it is a curse. This is true historically, especially when looking at the [Democratic Republic of] Congo.

"We want to diversify away from resources, so that they do not become a curse but a lever to transform economies," he said.

While commodity demand would increase, the potential of the global green transition to build a strong partnership ecosystem meant that the continent must not export commodities to other countries for the manufacture of green technologies, which African countries would need to buy back, said Yeboua.

"We have suggested that the African Union recommend that African member countries not export raw materials, but at the very least semi-processed or processed materials. It is then up to African countries to attract investors to transform commodities into strong manufacturing sectors," he advised.

Africa was the second least economically diversified region, after Oceania. Raw materials and agricultural products accounted for more than 60% of exports and the problem was that African countries were exposed to price shocks and growth reversals, he noted.

"I do not believe resources are a curse, but the issue is poor governance in Africa and a lack of visionary leadership to use them to transform economies. If one looks at Saudi Arabia, its resources have not been a curse.

"Economic transformation is a difficult journey that requires visionary leadership, with the State guiding how resources are leveraged for growth and delivering activities that the market will not necessarily undertake," he said.

"We have the resources and the labour force, and these can be assets if Africa harnesses them well. This comes back to future thinking and it is important to integrate people into the reasoning for a resource-led strategy that will increase the ability of African economies to adapt, and use these assets to foster sustainable development," Yeboua said.

"To achieve sustainable economic growth, African countries need comprehensive approaches and integrated policies and measures to boost economic diversification, capital formation and social inclusion."

Further, the lack of infrastructure leads to an inability to make progress on economic integration and agricultural productivity. Additionally, high levels of unemployment prevent African countries from harnessing the productive potential capacity of a growing labour force.

"As critical minerals demand increases, it is up to countries to create better investment conditions, such as through developing infrastructure and human capital, regional value chains and grid integration to attract investors.

"Chinese companies are now building factories in Zimbabwe to produce lithium, and this approach is critical and the right path to follow," he said.

Bringing investors into the economies, and not only to export resources in their raw forms, required investment in infrastructure. Infrastructure was critical for economic transformation and to get the manufacturing sector strong, he emphasised.

"Our scenarios have showed that the best way to achieve long-term, sustainable economic growth in Africa is through diversification, including in the manufacturing and intensive services sectors. The green transition and the African Continental Free Trade Area present opportunities for Africa to emerge economically resilient," Yeboua said.

"Countries need to understand the experiences of successful African countries, and analyse what kind of choices they made. For example, the success of Morocco and Tunisia is because they made a choice to enter into the value chain of Europe, specifically entering into the manufacturing and tourism value chains. This has opened the skies to low-cost airlines and tourists, and has established it as a choice destination in the world," said Viegi.

Similarly, South Africa must find ways to fix its infrastructure and develop human capital, but it must define its position in the context of the regional and global value chains.

For example, South Africa must decide if it wanted to be the California of Africa, meaning attracting the best minds and human capital from the rest of the continent to make it a source of innovation and new enterprises for the continent, he said.

"South Africa has the universities and infrastructure and even the soft power of its Constitutional rules to attract and develop human capital in Africa."

Finding the inward-facing way to develop Africa meant South Africa must define its position and identify the opportunities in the context of what the rest of Africa was doing, he added.

"Africa is an agent of its own development and must become an agent in the global context. The solution to development is found inside the private sector and local government experiences.

"There are lots of different experiences and we need to be more analytical about what is happening on the ground, and especially in other countries."

However, if institutions are not stabilised and uncertainty is not addressed, then investments in Africa will continue to be high risk and high return. These investments tend to be extractive in nature and less developmental.

"Therefore, institutional stability and a system of accountability and transparency will make it possible for countries to focus efforts on long-term goals and investments. Accountability means that leaders have to use their power within the context of national development dialogue and objectives," he said.