Business Day

Africa must turn resources into manufactur­ed export products

• Global growth can only happen if countries create industries around raw materials

- Moses Obinyeluak­u

There is a shared sense that internatio­nal trade has great potential to contribute to growth and poverty reduction. There are several examples of countries in which integratio­n into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that trade opening does not automatica­lly bring growth.

The question therefore arises why the effects of internatio­nal trade have been so different among countries. If the developed world is dependent on the developing world for raw materials for manufactur­ing, how is it that the developing world is still poor and cannot compete in internatio­nal markets?

To make real profits from raw materials, poor countries need to develop processing industries. In the words of former World Bank chief economist Justin Lin, all countries that remain poor have been unable to diversify away from agricultur­e and the production of traditiona­l goods into manufactur­ing and other activities.

So an increase of trade openness is a growth opportunit­y for a country only if local resources can be deployed in adequate quantities to produce goods for the external market.

Domestic production capabiliti­es have to be already in place to respond to internatio­nal competitio­n, improve technology and exploit trade opportunit­ies from increased liberalisa­tion. In other words, differenti­al patterns of structural change (and industrial production capabiliti­es) account for the bulk of the difference­s in the extent of countries’ economic prosperity and success.

Structural change is the key to significan­t and sustained growth, and opening up a country to internatio­nal trade does not in itself lead to such change.

The relative success East Asia has achieved in terms of export growth and structural change is a reflection of the pronounced complement­arity between the government’s proactive policies to attract foreign direct investment and equally proactive policies in support of the developmen­t of local firms’ capabiliti­es.

Numerous studies have shown that one of the major difference­s between the success stories of East Asia and the experience­s of Latin America has been that the East Asian economies have made the transition to knowledge generation, whereas Latin America is lagging behind in this respect.

As pointed out by Augusto de la Torre, the World Bank’s chief economist for Latin America: “After the Second World War the East Asian economies linked up to Japan and in the process of getting connected they created the ‘Asian Factory’.

“It became a virtuous circle. The better they connected to the world, the better they connected to each other.”

Latin America’s post-war experience has been the reverse: “We were connected to the most important growth centre, the US. But instead of the ‘Latin American Factory’, we got dependency theory, structural adjustment and a lot of disappoint­ment,” he said.

Similar trends are evident in Africa. The continent has 12% of the world’s oil reserves, 40% of its gold and between 80% and 90% of its chromium and platinum, according to the 2013 report from the UN Conference on Trade and Developmen­t.

It is also home to 60% of the world’s underutili­sed arable land and has vast timber resources. Yet together African countries account for just 1% of global manufactur­ing, according to the report.

This creates a cycle of perpetual dependency, leaving African countries reliant on the export of raw products and exposed to exogenous shocks.

Ivory Coast and Ghana produce 53% of the world’s cocoa. But the supermarke­t shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerlan­d and the UK.

Ethiopia, Ghana, Nigeria, Rwanda, Senegal and Tanzania each produce more than 250,000 tonnes of fruit a year, but they do not add value to a large share of output through processing. Although Nigeria had imposed an import ban on single-serve or consumer-size juice products to promote value addition, it is difficult to disentangl­e how much of the growth has involved manufactur­ing juice versus repackagin­g bulk juice manufactur­ed elsewhere.

African coffees of the Arabica variety are among the best in the world, with the highest-graded Kenyan and Ethiopian coffee trading for many multiples of the price of “standard grade” Arabicas. But the continent has only a marginal role in processing and adding value. The region’s imports of oilseed products are broadly reflective of global flows of processed oilseeds into the continent that farms them.

Africa’s abundant labour and low wages make it potentiall­y competitiv­e in the export of labour-intensive manufactur­es. But since labour productivi­ty is low relative to China and other East Asian countries, abundant low-wage labour does not necessaril­y translate to low labour costs in production.

Consider Ethiopia and Tanzania. Wages for producing polo shirts and wooden chairs range from about a tenth to half those in China. But polo-shirt workers in Ethiopia and Tanzania finish half the number of shirts workers do in China.

For wooden chairs, they produce one or two for every 100 in China, pushing Tanzania’s costs to 19 times those in China and Ethiopia’s to 26 times.

The young and growing workforce in Africa can be a global competitiv­e advantage and a great asset in driving industrial­isation if it is healthy and has the right skills.

African exporters now import most of their fabric. But the region has the potential, with additional progress on regional integratio­n, to develop a more integrated textiles and clothing industry. West African countries such as Burkina Faso and Mali are significan­t producers and exporters of raw cotton, but they lack the industrial infrastruc­ture of some of their neighbours.

Successful industrial­isation in Africa requires bold leadership and strong policies. Of the many factors that have contribute­d to China’s industrial and technologi­cal rise, government policy has been critical.

Many African economies are small and have to import most inputs in order to manufactur­e. They also lack a large domestic market that would provide natural protection.

These challenges are ultimately surmountab­le through becoming competitiv­e on global export markets. But at the early stages of industrial developmen­t, they make it more difficult for domestic firms to compete against foreign firms.

Harmonised policies through regional integratio­n and suitable institutio­nal arrangemen­ts can help countries overcome these challenges and advance on economic transforma­tion.

TRADE OPENNESS IS A GROWTH OPPORTUNIT­Y ONLY IF LOCAL RESOURCES CAN BE DEPLOYED … TO PRODUCE GOODS FOR THE ETERNAL MARKET

Dr Obinyeluak­u is chief economist at the Internatio­nal Trade Administra­tion Commission of SA. He writes in his personal capacity.

 ?? /AFP Photo ?? Load: A truck carrying cocoa arrives in Abidjan.
/AFP Photo Load: A truck carrying cocoa arrives in Abidjan.

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