Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. It is estimated that for every extra dollar in foreign currency earned from exporting resources reduces non-resource exports by $0.74 – Torfinn Harding of the NHH Norwegian School of Economics and Anthony Venables of Oxford University.
Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.
According to the UN a country is dependent on commodities if they are more than 60% of its physical exports – in Africa that makes up 83% of countries. One of the major concerns for resource rich countries is the wild fluctuations in commodity prices which can lead to over investment – Sierra Leone created two new iron-ore mines in 2012 only for them to close in 2015 as prices collapsed. However the amount of jobs created in the mineral extraction industry is limited – across Sierra-Leone of 8m people, about 8,000 work in commercial mines. A major problem in these countries is that when there is money made from resources it tends to go on government salaries rather than investing in education. infrastructure and healthcare etc.
Norway – has a different approach. In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.
Source: The Economist – ‘When you are in a hole…’ January 8th 2022
Ghana and Ivory Coast produce nearly 2/3 of the global supply of cocoa. Most of the 2m cocoa farmers in west Africa are smallholders and therefore have little influence on the world price. Why is it so difficult for poor countries to command higher prices for cocoa and controlling more valuable areas of the supply chain?
Ghana – supplies 20% of all cocoa beans – earns $2bn a year which is less than 2% of the value of chocolate that is manufactured, branded and sold. It seems that cocoa producers are in a colonial style relationship with chocolate manufacturers.
Chocolate – $100bn industry and Ghana and Ivory Coast who produce 65% of the raw material only earn $6bn – see image below. But why couldn’t these two countries have earned more money by processing the cocoa into liquor, cocoa butter or chocolate. One reason is the electricity costs and the industry likes to keep most of the added value near the western markets that it serves.
Opec to Copec
From October 2020 Ghana and Ivory Coast will have a fixed premium of $400 a tonne over the benchmark futures price. Opec controls 30-40% of global oil supply and have a significant role in influencing prices. Ghana’s vice-president Mahamudu Bawumia refers to this in the cocoa industry as Copec. The premium known as the ‘living income differential’ (LID) is intended to increase farm-gate prices so that farmers can have a much higher standard of living than they presently have. However unlike oil wells, cocoa trees cannot simply be turned off to reduce supply. Even if prices go up, say traders, that will encourage farmers to grow more which will increase supply and reduce the price.
Being a bigger part of the supply chain. As well as seeking higher cocoa prices, Ghana wants to add value to its product and give tax breaks to chocolate manufacturers to grind cocoa beans domestically. However there are issues:
mechanised factories employ few people so tax breaks have a low return
Ghana has a small dairy industry forcing manufacturers to import
Electricity prices are high
The climate requires greater refrigeration which means costs go up
Costs are always going to be more in Ghana than in Europe – also manufacturers are closer to their market in Europe. If consumers want to help poor farmers trading houses and big companies need to be cut out of the loop. At the moment there is a monopsony market.
By end of the century 40% of the world’s population is projected to be living in Africa and still globalisation seems to have a limited impact on its people. In order to make Africa more inclusive policies will have to focus on accelerating regional integration, bridging gaps in labor skills and digital infrastructure, and creating a mechanism to own and regulate Africa’s digital data. Although the first industrial revolution resulted in a significant increase in international trade Africa has been a poor benefactor and this has led to the “great divergence” in income levels between the Global North and South. In the 1980s, the Brandt Line was developed as a way of showing the how the world was geographically split into relatively richer and poorer nations. According to this model:
Richer countries are almost all located in the Northern Hemisphere, with the exception of Australia and New Zealand.
Poorer countries are mostly located in tropical regions and in the Southern Hemisphere.
With the advances in technology over the last two decades Asian countries like China, Taiwan and South Korea have been able to narrow the gap with developed nations mainly because of the emergence of complex global value chains. However although Africa might have benefitted from the commodities market developed economies can now produce goods more cheaply and African countries have found it difficult to develop local industries that create jobs.
Unsurprisingly the economic disparity between Africa and richer countries has widened in recent decades, with the ratio of African incomes to those in advanced economies falling from 12% in the early 1980s to 8% today. In order to reverse this trend and enable Africa to benefit more from globalisation, the region’s policymakers should accelerate their efforts in three areas.
Policies to promote growth in Africa:
Governments should promote further regional integration to make Africa economically stronger and more effective at advancing its agenda internationally. Progress so far is very encouraging.
Africa must improve its digital infrastructure and technology-related skills to avoid being further marginalised. Moreover, the low-cost, low-skill labour on which Africa has traditionally relied is becoming less of a competitive advantage, given the advent of the Fourth Industrial Revolution
Africa must create a system for owning and regulating its digital data. In the modern era, capital has displaced land as the most important asset and determinant of wealth.
By 2030, the continent will be home to almost 90% of the world’s poorest people. Unless globalisation works better for Africa than it has in the past, its promise of shared prosperity will remain unfulfilled.
Source: Project Syndicate – Making Globalization Work for Africa May 30, 2019 Ngozi Okonjo-Iweala , Brahima Coulibaly
When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:
The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.
Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.
Why is developing to developing becoming more prominent?
Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
Poorer people cannot afford travel to the West or the Gulf
The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
Neighboring countries often share a language
Tribes often span borders of developing countries
In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
More less-skilled work is available in developing countries.
The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.
Sources: McKinsey Global Institute, The Economist.
Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.
I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:
With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.
However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.
The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:
Nigeria – oil – 2016 GDP = -2%
Angola – oil – 2016 GDP = 0%
South Africa – gold – 2016 GDP = 0%
In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.
It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.
As is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.
Major central banks around the world have maintain interest rates at record low levels since the global financial crisis in 2008. However, yesterday the Bank of Ugandan (Central Bank) increased its benchmark interest rate by 150 basis points to 14.5% in order to protect the currency and ease inflationary pressure. However interest rates did reach 23% in January 2012. The Bank of Uganda has intervened in the foreign exchange market to the extent that foreign reserves have decreased in the last year by 17% to US$2.8 billion but have been forced to increase interest rates as an alternative. Uganda is Africa’s biggest exporter of coffee with a current inflation rate of 4.9%. How some developed countries would love to have a bit of inflation.
A common feature in the labour market of many Africa countries is the high rate of low-productivity and under-employment in their economies. Furthermore firms in southern Africa take on 24% fewer employees than is the norm in other countries. So what are the constraints in these countries that put a stop to firms hiring more workers?
One of the main reasons is the informal economy that exists in many of these countries. It is estimated that nine out of ten workers have cash jobs, mainly in the primary sector, and therefore are not part of the employment figures. Their choice makes it harder for Africa to reduce poverty because increases in revenue in this sector do not mean that wages will also become greater. The size of firms will also impact on employment numbers as small firms will want to maintain that status. A firm below 50 workers is classified as small and therefore will not have the burden of government regulations that a large firm (over 100 workers) will have to contend with. In Nigeria and Liberia firms with more than 100 employees have to spend 14% longer in its communication with government officials than their smaller counterparts. Additionally where a company has fewer employees government officials are less likely to allocate time in search of tax fraud and bribes than would be the case with large firms – the latter being more inclined to pay up.
Labour in Africa should be cheap as income levels are very low – World Bank Classification low income country is less than US$766 per person. However unit labour costs on average are higher in Africa than in China as the productivity of the workforce is much lower. In comparison to other countries of less developed status outside Africa, the wages are 80% higher which makes employers less inclined to hire more workers.
The issue of trust between employer and employee is another reason for the low employment numbers. As firms start to grow bigger they switch away from family-only employees to those in the labour force and this lack of trust can play a role in limiting the size of the firm.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
Here is another documentary type movie which has had some very good reviews. Produced by the Directors of the award winning documentary “Black Gold”.
On the front line of China’s foray into Africa, the lives of a farmer, a road builder, and a trade minister reveal the expanding footprint of a rising global power. A historic gathering of over 50 African heads of state in Beijing reverberates in Zambia where the lives of three characters unfold. Mr Liu is one of thousands of Chinese entrepreneurs who have settled across the continent in search of new opportunities. He has just bought his fourth farm and business is booming.
In northern Zambia, Mr Li, a project manager for a multinational Chinese company is upgrading Zambia’s longest road. Pressure to complete the road on time intensifies when funds from the Zambian government start running out.
Meanwhile Zambia’s Trade Minister is on route to China to secure millions of dollars of investment.
Through the intimate portrayal of these characters, the expanding footprint of a rising global power is laid bare – pointing to a radically different future, not just for Africa, but also for the world.