Africa’s slow but sure movement toward value added economies

The following article is based on information obtained by the author while undertaking a comparative study on African nations’ competitive statuses for a client of IOA. Other IOA research is also referenced.

Is there an African economist who hasn’t advised against making an economy predominantly dependent on raw material exports? The governments of Africa mostly lack the political will to venture into value added manufacturing rather than shipping out natural resources in their unprocessed state. With investment in the value added chain, raw agricultural products and minerals have their profitability enhanced. Oil that can be refined for domestic consumption in oil-rich African countries is instead refined on other continents and shipped back at higher cost to African countries of origin. Instead, Nigeria, Africa’s largest oil producer, recently invited tenders for the importation of petroleum products.

While it is clear that value added petroleum products are more profitable, for the governments of Nigeria, Angola and Equatorial Guinea, Africa’s second and third biggest oil producers, shipping out crude oil is a habit hard to break. Evidently, the operative mentality is that the “known” of today’s oil contracts is preferred over the “unknown” of investing for tomorrow’s markets. The opportunism of corruption also plays a role:the concern of a despot like Equatorial Guinea’s Teodoro Obiang or Angola’s former President Eduardo dos Santos was to reap as much cash as possible for their regimes, with income affected but not curtailed by lower world oil prices, rather than earning less profit by spending on industrial infrastructure of value to their countries.

As Tanzania and Mozambique begin to exploit their massive, recently-discovered liquid natural gas deposits, they are gearing up for export rather than immediately investing in refineries, of the type Nigeria needs for its crude oil. However, all African countries exporting agricultural products, particularly timber, and minerals, require a shift from shipping out their natural resources in raw state to investing in processing plants. Such work would jump start countries’ manufacturing sectors and create much-needed economic diversity.

The more diverse a country’s economy, the stronger and more competitive it becomes. In 2016, Nigeria was replaced by South Africa as the continent’s largest economy because the former’s economic boom was based primarily on oil exports. When oil prices dropped, so did the country’s fortunes. Meanwhile, South Africa’s economy is not only Africa’s most technologically advanced but draws its strength from diversity. Every South African economic sector, from agriculture and aviation to tourism and transportation, is a single engine of an economy powered by a multiplicity of these. When one engine loses full power – agriculture due to drought or mining due to a drop in ore prices – other engines keep the craft airborne.

According to the Observatory of Economic Complexity, in 2016 South Africa exported $69.1 billion of exports such as platinum, cars and refined petroleum.
In contrast, Nigeria exported a total of $47.8 billion with the main exports being crude petroleum and petroleum gas. Data courtesy: Observatory of Economic Complexity

One reason Ethiopia is now East Africa’s leading economy is due to value added production made possible by a diverse economy. In January 2018, a consortium of Asian and US investors chose Addis Ababa as the site for an oil refinery. They preferred landlocked Ethiopia over Djibouti, with its large sea port, and over countries that unlike Ethiopia have oil deposits. Ethiopia has a well-established value added industry and has been successful in marketing such products.

Zimbabwe’s new government can turn its long-ailing economy around through value added production of the country’s significant agricultural potential and natural resources. One indicator is a bilateral trade agreement made with Botswana in February 2018. Zimbabwe never developed a diamond processing industry to cut and polish raw gemstones. The old ruling regime preferred the immediate monetary benefit of selling uncut diamonds to Europe for processing. This has been the standard route for central and eastern African countries as well. In fact, Tanzania’s unique blue gemstone, Tanzanite, was given its name not locally but at Tiffany Jewelers in New York, where the then-unknown precious stone was sent in 1967 for marketing and sale. In the past years, however, Botswana with its valuable diamond reserves has built up a gem processing capacity. Botswana’s agreement with Zimbabwe calls for the evaluation, cutting and polishing of its neighbour’s diamonds. Both countries will profit from the trade.

Somalia can overcome its failed state status by developing a value added industry for its primary export, the volume of fish species harvested from the country’s long Indian Ocean coastline. Africa’s tourism industry can become more robust by going beyond sight-seeing tours with the development of more lucrative holiday spas and theme parks. The continuing development of locally-manufactured vehicles in Algeria, Morocco and South Africa can spawn an industry of local parts suppliers to the assembly plants. The list goes on, but requires political will to execute value added economic policies. With the continuing democratisation of Africa, new leadership is looking beyond opportunities for self-enrichment and toward the creation of long-term, sustainable economies, for which value added production is essential.