Commodities, industry, and the African Growth Miracle

The 2016 Spring Meetings of the International Monetary Fund (IMF) and World Bank occur during uncertain times for the “African Growth Miracle.” After more than two decades of sustained economic expansion, growth in sub-Saharan Africa slowed to 3.4 percent in 2015, the weakest performance since 2009. The growth slow-down reflects lower commodity prices, declining growth in major trading partners, and tightening borrowing conditions. According to the World Bank, many of these factors—including low commodity prices and weak global trade—are expected to persist, pointing to a weak recovery for the region. GDP growth is expected to pick up to 4.2 percent in 2016 and to 4.7 percent in 2017-18. With population growth still about 2.7 percent per year, progress against poverty and growth of the emerging African middle class will slow.

Africa’s pattern of exports makes it particularly vulnerable to commodity price shocks. Fuels, ores, and metals accounted for more than 60 percent of the region’s total exports in 2010-14 compared with 16 percent for manufactured goods. Following sharp declines in 2014, commodity prices weakened again in 2015. The prices of oil and metals, such as iron ore, copper, and platinum, declined substantially, accompanied by more moderate declines in those of some agricultural commodities, such as coffee. Commodity prices are expected to stabilize but remain low through 2017. A sharper-than-expected slowdown in China could have additional repercussions. The World Bank estimates that in the space of two years a 1 percentage point drop in China’s growth could result in a decline in average commodity prices of about 6 percentage points.

In its January 2016 Global Economic Prospects report the World Bank proposes a policy solution to Africa’s continued vulnerability to commodities: “creating the conditions for a more competitive manufacturing sector.” Sadly, while advocating “structural reforms…to alleviate domestic impediments to growth [and] a major improvement in providing electricity,” the Bank is woefully short on specifics. This is hardly surprising. Beyond supporting improvements in the “investment climate”—structural reforms by another name—and pushing its Doing Business agenda, the Bank and the larger donor community have ignored Africa’s industrialization challenge for more than 20 years.

By any measure Africa’s failure to industrialize is striking. In 2013 the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, half of what would be expected from the region’s level of development. Africa’s share of global manufacturing fell from about 3 percent in 1970 to less than  2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries and manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low-income countries. For an institution dedicated to “ending extreme poverty and promoting shared prosperity” ignoring a sector that has the potential to create millions of well-paid jobs for people of moderate skills until the recent commodity price collapse seems a major oversight.

It turns out that finding policies to assist Africa to overcome its manufacturing deficit is not as simple as advocating structural reforms and more electrical power. Over the past five years the African Development Bank, Brookings, and the United Nations University-World Institute for Development Economics Research (UNU-WIDER) have jointly sponsored a multi-year, multi-country research project designed to answer the question: Why is there so little industry in Africa? On April 12, 2016 we will launch one output of the project, the book Made in Africa: Learning to Compete in Industry at Brookings.

Made in Africa offers some new thinking on how Africa can industrialize. A major finding of our research is that three closely related drivers of firm-level productivity—exports, agglomeration, and firm capabilities—have been largely responsible for East Asia’s industrial success, and their absence goes a long way toward explaining Africa’s lack of industrial dynamism. In Made in Africa we spell out how African governments can address the objectives of boosting manufactured exports, supporting industrial agglomerations, and building firm capabilities. We have some advice for the Bank and the donors as well: Try to become part of the solution rather than part of the problem.

On April 12, the Brookings Africa Growth Initiative, African Development Bank, and United Nations University World Institute for Development Economics Research will co-host an event to discuss these issues and more.  Professor Benno Ndulu, Governor of the Bank of Tanzania, will be among the panelists. You can register to attend here.