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How to mend Africa’s fragile economies

Sunday January 4 2015

Wheat in a field near Tioga, North Dakota, in

Wheat in a field near Tioga, North Dakota, in the United States, on August 19, 2013. Nearly 16 percent of Americans reported that in the past 12 months they had suffered from food insecurity. AFP PHOTO | KAREN BLEIER 

BITANGE NDEMO
By BITANGE NDEMO
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SARA MENKER
By SARA MENKER
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The news about plummeting oil prices should be welcome news to many, but in Africa, it means life and death for many states that solely rely on oil to finance their budgets.  

Virtually all African economies, including non-oil producing countries, are fragile because they are not well-diversified and have not optimised their resources well enough to cover their exposure in difficult times.

In this blog post, we utilise infographics created by Gro Intelligence to review economic growth drivers from selected African countries across all regions of the continent.

These visuals highlight key import/export vulnerabilities, demonstrate why we need a change in policy to enable sustainable and inclusive reforms, and suggest possible mitigation measures.

As Table 1 shows, between 2000 and 2012, Nigeria’s Gross Domestic Product (GDP) grew by 898 per cent (this was before the economy had been rebased).  Within the same time, GDP per capita grew by 87 per cent.  

During this same period, China’s economy grew by 587 per cent, but its GDP per capita grew by 198 per cent. In other words, even though Nigeria’s compound growth was higher during this period, Nigerians gained less relative wealth than the Chinese.

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One explanation for this is that China is more productive and has controlled its population growth. In 2013, Nigeria’s crude birth rate stood at 29.23 births per 1,000 population, compared with China’s 12.31 births per 1,000 population.

With respect to GDP per capita, Ivory Coast, Senegal and Kenya demonstrated the least amount of growth between 2000 and 2012. It is important to note that these countries experienced arduous political transitions during this time.

Egypt can also be included in this group, though it performed relatively better due to its diversified economy.

UNTAPPED IMPORT SUBSTITUTION

Ethiopia excelled in Africa with an impressive growth in GDP per capita of 99 per cent.  Ethiopia is Africa’s star performer today because of its improved productivity and sophistication in marketing cash crops, namely coffee and sesame.  

With an annual GDP growth rate of more than 12 per cent, it is currently among the world’s fastest-growing economies.

As African countries have become wealthier, their spending and consumption patterns have remained relatively stagnant on a proportional basis, as reflected in the share of various goods as a percentage of total imports.

Table 2 reveals that nearly one-third of the selected countries' import bill comprises two items: machines and mineral products. One notable example is Nigeria; Nigerian oil is exported in the form of crude oil and then imported back into the continent as a refined product.

As a result, Nigeria spent 31 per cent of its total imports on mineral products in 2012, consisting mostly of refined crude oil products. The import substitution of products remains a large untapped opportunity.

This 2005 file photo shows Shell's major oil
This 2005 file photo shows Shell's major oil and gas terminal on Bonny Island in southern Nigeria's Niger Delta. Nigeria spent 31 per cent of its total imports on mineral products in 2012, mostly on refined crude oil products. AFP PHOTO | PIUS UTOMI EKPEI

In a similar fashion, Kenya is falling into the Nigerian trap of strong reliance on its import market. A 1,000-megawatt energy plant is being built on the Kenyan coast, not because it serves as a strategic power location, but because it is convenient for the importation of coal minerals from southern Africa.  

Rather than cater to imports, we need to develop the Mui coal basin for its intended purpose: energy production. In 2012, Kenya’s mineral imports stood at 20.4 per cent of total imports; mineral imports stood as the single largest import item, and consisted of largely mineral fuels, mineral oils and products of their distillation.

Table 3 reveals how vulnerable Africa, a net importer, is to price shocks across a variety of commodities. Virtually all the countries analysed rely on a single product for their exports; more than 90 per cent of Nigeria’s exports are dependent on oil minerals, and in Zambia, 78 percent of total exports consist of metals, largely copper.  

Even in the case of South Africa, which is relatively diversified, nearly a third of total exports come from precious metals. Kenya and Ethiopia depend on agriculture for more than 50 per cent and 70 per cent of total exports, respectively.

DEFICIT DANGER

That said, there has been some benefit in the growth of Ethiopian agricultural exports; the export market has diversified beyond one that was solely coffee to one that now includes oilseeds, such as sesame, vegetables, and flowers.

Although the country continues to remain vulnerable to price shocks in coffee, it is no longer the only export crop that Ethiopians rely on.

If trade deficits continue to grow as they have across the continent, additional pressure on currencies will lead to unnecessary inflation, making it increasingly difficult to lift a majority of people out of poverty.  

The situation becomes more complex when global commodity prices crash, as we have recently witnessed with oil in 2014. Countries like Nigeria, Angola and Chad that rely on oil minerals for exports will experience severe economic deterioration, which will only deepen existing poverty.  

Likewise, Zambia and South Africa are vulnerable when base and precious metal prices drop, so the phenomenon is certainly not limited to oil.

As African imports continue to rise, Table 4 depicts these imports are dominated by a few select items, including mobile phones, cars, delivery trucks and wheat. In 2013, 125 million, or 75 per cent, of Nigerians owned a mobile phone.  

A NEW PHONE A YEAR

Mobile coverage stood at 40 per cent, but Nigerians buy more mobile phones per year than the number of subscribers. In other words, Nigerians change their mobile handsets on an annual basis, spending more than $1.3 billion annually to purchase new mobile handsets.  

Across Africa, the average African buys a new phone every year. Remarkably, only Ethiopia has seized this opportunity by becoming a domestic mobile phone manufacturer.

The rest of the continent remains a major importer, with imports of mobile phones having increased by over 1,000 per cent for the 2000 to 2012 period in Nigeria and Ghana; similarly, most other African nations have experienced high triple-digit growth rates on the value of phone imports.

The growing importation of wheat is another developing concern for the continent. Every country has seen triple-digit growth rates in the import of wheat for the 2000 to 2012 period.

Egypt, the largest importer of wheat on the continent, imported $5.5 billion worth of wheat in 2012, while Nigeria imported $1.4 billion worth of wheat. Tanzania, which imported only $24 million worth of wheat in 2000, was importing $235 million worth of wheat in 2012.  

MANUFACTURING ‘ANYTHING’

Given that Africa’s cultivable farmland stands at 1.73 billion acres, compared with 408 million acres of existing farmland in America, this growth in wheat imports is largely ironic and unnecessary. Yet the United States continues to be one of the largest wheat trading partners for Africa.

Our imports only serve others and do not create new employment opportunities across the continent. We need strategic policy shifts where governments deliberately invest and develop new environmentally sound industries.  

For example, governments could take the initial risk of 3D printing and begin to make vehicle parts locally, especially since this is an arrangement that can be made with most car manufacturers. Once the business has developed, the government can exit accordingly, either through the public markets or through a series of private deals.

Alternatively, governments could create the right incentive structures to allow for private industry to flourish where there is opportunity.

We as Kenyans need to remember what China accomplished within such a short window of time. In 1995, China was essentially a textile exporter with a small, albeit growing, light electronic manufacturing sector.  

By 2012, China had become a world leader in factory-related work, and had the ability to manufacture virtually anything. In the process, China moved more than 300 million people out of the ranks of poverty, and reformed their educational system to meet future demands.  

ETHIOPIAN SUCCESS

Germany, on the other hand, survived a historic economic crisis; its economy is well-diversified but more importantly, Germany’s educational system prepares students for distinctly appropriate vocational routes, including academia and trade schools.

We also need to learn from neighbours like Ethiopia, which has utilised its military to develop new labour-intensive industries, such as the manufacturing of military equipment, including tanks and trucks.  

In order to achieve what Ethiopia has achieved, we must change the public procurement law to give priority to local goods and services.  

Projects that strive for food security, like Galana in the Tana Basin, should be expanded to universities, so that these universities can leverage student populations to pursue bridging gaps in the space.

Such projects could range from increasing large-scale cereal production to environmental protection. Naturally, the greatest chance of achieving this is by providing incentives to students, such as college fee waivers and paid internships.  

KEEP GIRLS IN SCHOOL

It is imperative to understand that we do not have a private sector that can absorb any risk to the market’s equilibrium, and this explains why the sector has failed to create employment, despite many opportunities.  

The public sector must streamline the inherent risks in mining, agriculture, and energy, and then shift this risk to private entities. By doing so, we can begin to exploit local resources and avoid unnecessary, costly importation.

Above all, we must begin to deal with the growing population. Coercion is not the answer the problem can be solved by simply ensuring that girls remain in school. Research has shown that the more years girls remain in school, the expected value of the number of offspring decreases.

Therefore, we need comprehensive educational reform to create a better and more inclusive system that allows each child to identify and pursue his or her talents.

SOLUTIONS FOR ALL

On the political front, we must focus on Vision 2030’s political pillar to ensure sustained political stability.  

In this pillar, we had hoped-for objectives that would position us for a future as one nation with a democratic system that is issue-based, people-centred, results-oriented, and accountable to the public.

The pillar is anchored on the transformation of Kenya’s political governance across five strategic areas: the rule of law, particularly the Kenya Constitution of 2010; electoral and political processes; democracy and public service delivery; transparency and accountability; and security, peace building and conflict management. It is an endeavour that places responsibility upon each one of us.

Ban Ki-moon once said, “Saving our planet, lifting people out of poverty, advancing economic growth... these are one and the same fight. We must connect the dots between climate change, water scarcity, energy shortages, global health, food security and women's empowerment. Solutions to one problem must be solutions for all.”

Prof. Ndemo is an Associate Professor at the University of Nairobi’s Business School and former Permanent Secretary Ministry of Information and Communications.

Ms. Menker is CEO of Gro Intelligence

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