What Africa can learn from the tyranny of primary commodity booms and busts

On Friday, May 13th 2016, two distinctly separate events but with common strands connecting them took place in diametrically opposite sides of the globe.

On Friday, May 13th 2016, two distinctly separate events but with common strands connecting them took place in diametrically opposite sides of the globe.

While H.E. President Paul Kagame was holding a press conference in Kigali at the conclusion of the highly successful WEF Africa 2016, where he made a passionate plea for African countries to learn from past economic slowdowns, mainly due to cyclical declines in commodity prices and build resilience into their economies, the UNDP Africa Regional Director and one of Africa’s most brilliant Economists, Mr Abdoulaye Mar Dieye, was also preparing to brief in New York the African Group of Ambassadors to the UN, under the auspices of the AU Commission, on a recent knowledge product of UNDP Africa entitled: “Primary Commodity Booms and Busts: Emerging Lessons From Sub-Saharan Africa”.

 

Some of the very pertinent points President Kagame made include the following: “…emerging economies ought to draw lessons from past economic difficulties in order to build resilience against growth slowdowns in the future ….slowdowns will continue to occur in the future.

 

For Africa, there are things we are not doing that we should be doing that would make our economies more resilient even in the wake of such shocks”. In the face of these recurring slowdowns, President Kagame emphasised the imperative for African countries to make more use of regional cooperation to accelerate infrastructure development, expand their industrial sectors and boost internal production of goods and services for the domestic markets.

 

A few hours after President Kagame finished his above-cited press conference with, among other things, the above cautionary remarks against continued dependence by African countries on primary commodities, the UNDP Regional Director for Africa, Mr Dieye, stood in front of the Permanent Representatives of African countries to the UN in New York and echoed similar words pronounced by President Kagame.

The Report he was launching to the Ambassadors was also very clear about the risks associated with commodity booms and busts for sustainable development of African countries. It stated that “many African economies with abundant natural resources have failed to achieve sustained, high rates of growth over the long term.

Most African governments have yet to learn from past primary commodity prices booms and busts to decouple their fiscal and monetary policy management from heavy dependence on primary commodities.” Thus, it postulates that comprehending the policies and institutions required to generate sustainable and inclusive development and transformation in economies dependent on primary commodities constitutes a critical issue for African countries.

Undoubtedly, these events were occurring at momentous times for Africa’s economies. After experiencing one of the longest primary commodity booms in modern times, stretching from the early 2000s to 2014, Africa’s economies are facing stiff headwinds arising from sharp declines in the world market prices of their main commodities.

These increasing economic difficulties are casting shadows over the “Africa rising” narrative, which has provided a lot of optimism and confidence for the continent and its friends abroad after the lost decades of the 1980s and 1990s.

The prolonged commodity boom was one of the major underpinning factors for Africa’s high and sustained rates of economic growth over the past one and a half decades, even though many countries without abundant natural resources, like Rwanda, also have performed strongly owing to sound economic management policies.

Enduring Dependence on Primary Commodities: What is the Nature and Magnitude of the Problem?
Heavy dependence on primary commodities for export and fiscal revenues was one of the major development challenges that the newly independent African countries faced in the 1960s, and reducing it at an accelerated rate was one of the key promises and development objectives of the newly minted governments.

Fast forward to over 50 years down the post-independence period, one would have thought that this objective would have been met in large measure. Unfortunately, all the latest statistics indicate that commodity dependence in fact has worsened for most of the countries.

Let’s look at the facts: the above-cited UNDP Africa Report on commodity booms and busts shows that close to over 30 years after independence in the late 1990s, two primary commodities accounted for more than half of export earnings of 39 out of 47 African countries.

Further down the road in 2014, the export diversification index for Sub-Saharan African (SSA) countries (which measures success in reducing over dependence on primary commodities) increased only marginally from its level in 1995 while the export concentration index (which measures the extent primary commodities dominate the total exports from the countries) actually doubled on average.

The extent of the slow progress towards meaningful reduction on primary commodities by SSA countries is further illustrated by the following words: “Every African country, except South Africa, has a higher export concentration index than the average for developing countries, and 19 of the 49 African economies with data have an export concentration index that exceeds the average for developing countries (excluding China) by 30 percentage points.”

The most recent data further indicate that for 28 of the 38 African countries surveyed, primary commodities account for over 60% of their merchandise exports and in most of the economies that are especially dependent on primary commodities, the top two or three export commodities make up more than 80% of merchandise exports.

It seems that during the boom periods, most African governments become oblivious to the adverse implications of over dependence on primary commodities for the sustainability of their growth rates, industrialization efforts, adequate employment creation and fiscal revenues.

There is consensus that the long commodity boom that started in the early 2000s has for the moment come to an end owing to the growth slowdowns in China, Brazil and a host of other emerging economies in Asia and Latin America.

Between 2013 and 2015, the prices of most commodities have witnessed further significant declines, for instance: Iron ore by 55%; Crude oil by about 60%; Platinum by over 20%; Cotton by 20%; Soybeans by 31%; Tea and Coffee by close to 10%; Copper by 14% etc.

The adverse effects of these declines are being felt in the deteriorating outlooks for growth, dwindling foreign exchange earnings and reserves, widening current account balances and attendant difficulties in macroeconomic management as well as progressively deteriorating debt situations in most of the African economies.

What Lessons Could be Learnt and How Could They Be Best Applied?

In recent years, considerable theoretical and empirical research has been carried out by a host of national research institutions, think tanks and international development organizations, notably by UNCTAD, ECA, UNDP, AfDB, the Bretton Woods Institutions and bilaterals like DFID and USAID, into the challenges of commodity booms and busts. For instance, ECA devoted three of its last three “Economic Reports On Africa” to the issue, and its Executive Secretary, Carlos Lopez, has been devoting a lot of energy to advocating for commodity-based industrialization.

UNDP Africa’s above-cited report does a very good analysis of the challenges posed by commodity over-dependence by African countries as well as sets out valuable lessons for effectively responding to them.

The fundamental lesson is the imperative to fully comprehend that the cyclical movements in commodity prices and the attendant challenges will continue, as clearly noted by President Paul Kagame.

This has been the case for as far back as the time that the capitalist system was taking root in the 18th and 19thcenturies.
There is no doubt that the most recent commodity boom, which had lasted for close to 15 years, contributed significantly to Africa’s high growth rates and increased export and fiscal revenues during that period.

This favourable funding situation allowed many African countries to undertake huge infrastructure developments and facilitated significant increases in per capita incomes. But commodity over-dependence has impeded economic diversification and transformation in the continent as well as meaningful job creation for the expanding and young labour force in the continent.

It has been noted that many of the ambitious infrastructure projects funded by revenues from the commodity booms have not facilitated expansion and deepening of productive sectors through which the resilience of the economies could have been bolstered.

But another vital lesson learnt from commodity booms and busts in other parts of the world as well as in the Africa continent itself is that the inherent weaknesses and challenges of over dependence on a few commodities notwithstanding, achieving broader-based and sustainable development from exploitation of the commodities is possible, if certain strategic postures and policy actions are taken during the booms. For instance, maintaining an aggressive developmental strategic posture could allow countries to utilize mineral and commodities wealth to accelerate the expansion of other productive sectors notably manufacturing, knowledge-based services and the tourism sector as well as transformation of the agricultural.

Cases in point are several countries in Asia and Latin America but also African countries such as Botswana, South Africa and increasingly Ethiopia and Rwanda.

Other important lessons learnt include the utility of setting up sovereign savings fund to cushion the inevitable fall in prices during commodity busts. It has proved useful to combine these savings measures with prudent expenditure policies even in the face of abundant foreign exchange inflows.

Another important lesson learnt is not only the desirability but also feasibility of promoting transparency in investments for equitable and long-term development by multi-national companies.

Importantly also, promotion of development regionalism that could allow primary commodity dependent countries to take advantage of economies of scale of value chains that are beyond the capacity of individual countries potentially constitutes a powerful instrument for overcoming the tyranny of commodity booms and busts.

But perhaps the biggest lesson is that the main issue may not be the lack of adequate awareness on the part of the Governemnts about the points raised above, but rather the lack of sufficient will to implement them.

As President Kagame always emphasizes, when urging for the shift from debates and strategies to a focus on implementation: “the issue has not been how, the issue has always been whether….Failure comes in not doing it, not because we don’t know it but because we don’t do it”

The international community, including the UN system, could potentially play a more potent supporting role in helping the African countries end the tyranny of commodity overdependence.

The writer is One UN Rwanda Resident Coordinator.

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