Africa’s next focus: industrialization

Inclusive Economy10 Sep 2013Judith Fessehaie

Resource-rich Africa must expand its industrial sector on its way to economic inclusiveness.

Africa has seen very good economic growth rates since 2000: real GDP growth rate averaged 5.2% during the period 2001-2011. This has been largely driven by the commodity price boom and increasing Foreign Direct Investment (FDI) flows into the natural resource sector. However, it has resulted in neither significant poverty reduction nor sufficient job creation. Structural transformation of African economies has been elusive. Industrialization remains a key objective for the continent because it has the potential to absorb urban and rural unemployment and underemployment, creating direct and indirect job opportunities for not only skilled and semi-skilled, but also unskilled, labour. This in turn results in economically larger domestic markets for local farmers and SMEs as demand for goods and services from waged labour grows.

The experience of resource-rich countries elsewhere has shown that, with the right policies and institutions, natural resources can work as a platform for industrialization. Downstream and upstream industries to the resource sector create significant opportunities for deepening a country’s industrial structure, in terms of technological upgrading, value added content, and skills development. For example, the experience of the Nordic countries in the 19th century shows that sustained resource-based industrialization is possible and can lead to significant horizontal linkages into high-tech sectors. These experiences were invariably underpinned by long-term, private and public investment in national systems of innovations, with linkages and information flows between private companies, technological centres, universities and technical and vocational institutes. Access to capital and foreign skills was also important.

In the 20th century, there have been successful examples of resource-based value-added industrialization in Asia and Latin America. These efforts have often been characterized by interventions like export restrictions and local content regulations. Such measures, however, were complemented by effective industrial policies aimed at building technological capabilities, human capital, infrastructure and entrepreneurship, and at improving access for their firms to key marketing and distribution channels. Policies to raise productivity and product quality in the natural resource sector are also important. This is particularly true for soft commodities, where African processing industries often struggle with unreliable, poor quality or insufficient supplies of raw materials.

Generally, the highest value-added stages of global value chains are controlled by transnational corporations (TNCs). In mineral and energy commodities, TNCs have direct control of resource extraction, with the partial exception of oil, where we find significant levels of state ownership and an effective cartel by producing countries. In soft commodities, TNCs tend to control trading, marketing and distribution channels rather than production as such. The role of TNCs in global value chains has distributional implications between and within countries. The distributional outcome is shaped by a number of factors: whether African governments accrue a fair share of revenues and how revenues are consumed and invested, the extent and skill level of direct and indirect domestic employment, and the extent and nature of local upstream and downstream linkages to the commodities sector. Africa’s resource-based industrialization strategies have to be cognizant of TNCs’ corporate strategies. How TNCs organize their supply chains and marketing and distribution channels has direct implications for Africa’s value addition opportunities and for the industrial strategies required for upgrading.

The case of Zambia is illustrative. Zambia’s copper sector has received record levels of FDI in the past decade. Until recently, due to the tax regime enshrined in bilateral Development Agreements with the mining companies, very little of the copper price boom has trickled down to government coffers. Upstream and downstream linkages exist but have also been limited. They have included around 200 supply firms, a plethora of small importers, one large copper semi-fabricator and a handful of smaller ones. China’s USD800 million-worth investment in the Chambishi Zambia-China Economic and Trade Cooperation Zone, including a copper semi-fabricates manufacturing plant, could create a large-scale mining beneficiation industry. Moreover, the government has recently launched a mining local content initiative aimed at supporting the development of upstream industries to the mining sector. This happens at a time when other manufacturing sectors, such as garments, have dwindled or shut down all together. Copper mining is rightly seen as an opportunity to broaden economic development and reverse de-industrialization. To seize these opportunities, a comprehensive and ambitious industrial policy needs to tackle structural competitiveness issues such as skills, access to finance, technology, soft and hard infrastructure.

For African countries endowed with natural resources, the critical question should no longer be whether they should maximize opportunities for local value addition, but how to do it.