African Commodities Bonanza still not financing sustainable development

November 26, 2013
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The major low-wage manufacturing expansions of certain “emerging economies”, such as China, India, and Brazil, have driven up the world prices of a list of international commodities being produced in Africa in large quantities.

These include crude oil, copper, iron ore, phosphates cassiterite, and columbium-tantalum. Prices for these commodities are the highest since the early days of African independence.

The commodities boom has provided the producing African countries with a revenue bonanza. The opening of new mines and oil producing blocs has created both direct and indirect employment. New financial institutions have arisen to finance growing trade, and supporting industries have been created to service the producers.

The net result has been the growth of an African middle class with disposable income. This in turn has attracted investors who see profit opportunities in selling to this new class. For example, the largest American super market chain, Walmart, has established retail outlets in ten African countries. Retail banking is also growing.

What does this all mean for Africa’s priority objective of achieving sustainable economic development? In other words, to what extent are high revenue earnings being invested in ways that will reduce poverty, increase local production of wealth, and set the stage for Africa’s full entry into a globalized economy?

The answer, unfortunately, is very little. Once a powerhouse of agricultural exports, Africa is now heavily dependent on imports of food to feed its growing population.

The infrastructure that is needed to encourage African investors to move into manufacturing is still absent. There are still large deficits in electric power, roads, rail, ports, and potable water. In addition to infrastructure, educational systems continue to be sub-standard with very few school leavers possessing the skills required for modern economies.

African farmers continue to be inhibited by antiquated land tenure systems, the absence of farm to market roads, the lack of access to modern agricultural technology, and the absence of appropriate storage facilities.

Commodities are being exported with virtually no value added. Except for South Africa that came to majority rule with an established industrial base, nowhere in Africa are basic commodities being transformed into higher value products. Some Ghanaian cocoa is being transformed into chocolate, and Senegalese groundnuts are being transformed into oil, but that is about it for sub-Saharan Africa.

As far as private investment is concerned, the World Bank ranking of favorable and unfavorable environments continues to rate most African countries on the low end. The absence of the rule of law is the most important inhibiting factor for both domestic and foreign investors.

The day will come when commodity prices will return to average levels as they did in 1975 after a decade of high earnings. If African governments do not use their current high revenue earnings to eliminate the key deficits listed above, then the growth of gross domestic product will have provided little benefit to the African populations concerned.

At the present time, a few governments are moving in the right direction with respect to infrastructure improvements, including five of Nigeria’s 36 states, Kenya, South Africa, Ghana and Côte d’Ivoire. But on the whole, there is little actual long-term development taking place.

There is also a need for basic reforms to allow for trade among African countries to flourish. At the present time, only about ten percent of African trade is intra-African.

There is no reason why low cost African labor cannot compete with Chinese labor ten thousand miles away. Investors want access to the large markets that can be created by intra-regional free trade. Such free trade does not yet exist and, except for the interior of Nigeria, markets remain small.

So, the next time the financial press becomes animated by reports of significant increases in African GDP, the reader should look behind the headlines to see whether or not the commodities bonanza is financing sustainable development. In most countries of Africa today, the answer is still in the negative.

By Herman Cohen

Herman ‘Hank’ Cohen is former US Assistant Secretary of State for African Affairs.

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