Consuming what we don't produce, producing what we don't consume By DANIEL K. KALINAKI | Tuesday, July 8  2014 at  14:52

Bidco Uganda factory in Jinja. Today, Jinja relies on tourism and a few remaining industries but the linkages to agriculture are, at best, tenuous. Without industries to absorb labour from the farms, the population density on land has led to fragmentation, food insecurity and low productivity. PHOTO | FILE  

African governments have spent decades asking their richer counterparts in the West for aid; these days, they ask for access to markets and have a new slogan — “Trade, Not Aid” — to justify their pleas.

These governments would help the continent better if they rethought what they ask for and, perhaps, looked closer to home for some of the answers to Africa’s problems.

Take aid, for instance. While some forms are useful and can make a difference if used effectively, it is now widely accepted that aid is, at best, a stop-gap measure and, at worst, a corrupting and corrosive agent that erodes domestic citizen agency and undermines accountability.

Although billions of dollars still flow into Africa every year as aid, it has been relegated in importance behind foreign direct investment and remittances from Africans in the diaspora.

In 2010, Ghanaian academic Adams Bodomo revealed that remittances to Africa from abroad had overtaken aid to the continent and gave figures of $51.8 billion versus $43 billion. The figures vary from survey to survey but the principle is the same: Africans working abroad are a key driver of financing on the continent and the money they send rarely suffers the pilferage that aid does.

There are, at least, two problems with the state of financial transfers. The first is that it costs too much for Africans in the diaspora to send money home.

A survey by the Overseas Development Institute last year found that it costs an average of 12.3 per cent for Africans in the diaspora to send $200 home. That is higher than the global average of 7.8 per cent and costs a tidy $1.4 billion per year.

African policy makers can start by breaking the duopoly of Western Union and MoneyGram, which between them control half the money transfer market in two out of every three countries in sub-Saharan Africa. Transfers of money within the continent are not much cheaper either, with the ODI survey finding that transfers from South Africa to Mozambique can top 20 per cent.

Getting central and commercial banks on the continent to work more closely together and stamp down on extortionist fees and charges could overnight improve real incomes and reduce the cost of finance.

Illicit outflows

The bigger problem with finance, however, is not with how much comes into Africa but how much leaves. A joint report by the African Development Bank (AfDB) and Global Financial Integrity, a US-based research group, found that cumulative illicit outflows from Africa between 1980 and 2009 ranged between $1.2 trillion and $1.4 trillion.

That is roughly Africa’s total external debt and does not include hard-to-trace amounts from smuggling and drug trafficking. That money stashed away in Swiss bank accounts by the Nigerian dictator Sani Abacha? Those mansions on the French Riviera beloved of dictators like Mobutu Sese Seko and Paul Biya? Those fancy super cars owned by Teodore Nguema Obiang’s son? That, there, is what Africa owes the rest of the world, a continent’s wealth on wheels.

If such illicit transfers were stemmed and stolen money recovered, Africa could finance most of its development needs, according to Mthuli Ncube, the chief economist at the AfDB.

A lot of the illicit outflows are done in broad daylight — for instance, by transfer pricing, tax evasion and avoidance, as well as under-pricing deals by multinationals. Yet, instead of clawing back what legally and morally belongs to Africa, governments and policy makers on the continent have spent more time asking for aid and loans.

Yet finance is just one part of the equation. Trade is the other. The problem here is that African economies are mostly built around sectors with diminishing returns over time (such as agriculture and the extractive industries) rather than those with increasing returns over time (such as manufacturing and services).

At the core of the problem is what a recent report by the United Nations Industrial Development Organisation (Unido) described as “the disturbing absence of manufacturing in Africa.”

Dreams of steel

The town of Jinja, in eastern Uganda, is a good place to study Africa’s attempt at industrialisation — but you have to know where to look.

At the source of the Nile, the longest river in Africa and second longest in the world, tourists take selfies and shop for curios. Downstream, white-water rafters are flung across rapids and waterfalls, past local fishermen and curious onlookers.

Jinja is a thrill-seeker’s mecca and a tourist town. However, four decades ago, it was the industrial heart of Uganda, producing everything from matches to beer and packaging materials to steel.

Some of the factories are still in operation but many are long shuttered. The copper smelter, with its distinctive towering chimney, has been out of operation for more than 30 years.

In the decade after Independence in the 1960s, governments across Africa set up ambitious plans to industrialise. Towns like Jinja sprouted across the continent as governments, high on nationalist euphoria, pursued import-substitution policies.

However, the experiment did not last long. Agriculture, which was the bedrock of most economies, was neglected, denying governments the foreign exchange they desperately needed to fund the industrialisation and the linkages to transform their agrarian economies.

By the early 1980s, with the prices of commodities falling and that of oil rising, many African countries ran to the World Bank and the International Monetary Fund (IMF) for financial bailouts.

In exchange, they were forced to abandon their industrialisation policies and open their economies up to foreign competition through the infamous structural adjustment programmes (SAPs).

It is clear that, while SAPs kept many African economies afloat, they sapped the energy from efforts to transform them away from the colonial construct in which they were structured as producers of raw materials for export and consumers of imported finished goods.

Many African countries continue to produce the same low-value commodities — coffee, cocoa, palm oil, tea, crude oil, etcetera — that they were set up to provide in the colonial era.

Between 1970 and 1990, in the heyday of towns like Jinja, the share of African manufacturing in GDP shot up from 6.3 per cent to 15.3 per cent. Urbanisation boomed, as did agriculture in the surrounding areas, as well as services.

After the introduction of SAPs in the late 1980s and early ’90s, manufacturing as a share of GDP fell to 12.8 per cent in 2000 and then to 10.5 per cent in 2008. SAPs were not entirely to blame but they played a key role.

Today, Jinja relies on tourism and a few remaining industries but the linkages to agriculture are, at best, tenuous. Without industries to absorb labour from the farms, the population density on land has led to fragmentation, food insecurity and low productivity.

Besides low-value products, Africa faces a challenge of finding and accessing the right markets or developing new ones. For the continent to attain sustainable development, it must add value to what it produces, manufacture more things and rethink whom it trades with.

Africa is trading more. Between 2000 and 2012, its exports quadrupled from $148 billion to $641 billion per year, according to AfDB data. Trade with the traditional partners — Europe and the United States — remains important but a lot of Africa’s trade is taking place with China, which is now the continent’s biggest partner, as well as India and Brazil.

This growth belies three handicaps. First, Africa remains a bit player in global trade, with only 3.1 per cent share in 2012, albeit up from 2.5 per cent five years earlier.
Secondly, although intra-African trade has more than doubled in the same period to $147 billion, this only represents 12 per cent of the continent’s total trade.

In addition, the growth has been driven mostly by increases in prices (up by a factor of 4.1) and less by volume (up by only a factor of 1.7), according to analysis by Unido.

Rethinking strategy

In fact, in real terms, Africa’s trade with itself is less than what the continent traded with the rest of the world between 1970 and 1979; between 2007 and 2011, some 13 African countries — about one in four — exported less than five per cent of their products to other countries on the continent.

The renewed commodity boom, driven primarily by demand from China, has boosted economic growth and contributed to the “Africa Rising” narrative but has not addressed these underlying vulnerabilities in the continent’s economies.

African policy makers have spent considerable time, money and effort negotiating for access for the continent’s products to global markets, particularly in Europe and the Americas.

Even where such access has been given, for instance through USA’s Africa Growth and Opportunity Act (Agoa) and the European Union’s Everything but Arms programmes, countries on the continent have not been able to take advantage of that or diversify their exports.

In fact, many experts now warn that the kind of access provided for under the World Trade Organisation (WTO) rules — which prohibit the use of quotas, export subsidies and local content requirements — will hinder, not help, industrialisation in Africa.

Many developed countries used the same tools to protect their industries while in infancy; the current and proposed rules kick away the ladder from poor countries seeking to industrialise.

African policy makers must rethink both their strategy and tactics. The evidence and data show at least five areas in which the structure of the economies can be changed.

First, and fundamentally, is the question of the role of the state.

The command economy was found to be inefficient and prone to rent-seeking but the credit crunch and the subsequent bailouts of the US banking and automobile industries served as a reminder that the markets are not perfect, either.

China has shown that state-run enterprises, while imperfect, can do business and, crucially, catalyse the growth of a productive private sector. African governments must find ways to intervene without suffocating private enterprise.

Second, attempts to industrialise must not be at the expense of agriculture — as happened in the 1960s and ’70s and appears to be happening — if the low share of agriculture in the national budgets in many African countries is anything to go by.

Manufacturing offers forward and backward linkages between agriculture and services but small- and medium-scale agro-based industries offer a good starting point to add value to Africa’s agro-produce while developing the technical base and expanding the entrepreneurial base.

Third, a lot of emphasis has been put on eliminating barriers to trade but not enough has gone into the supply side and improving productive capacities.

For instance, not enough attention has been paid to developing labour-intensive industries and the skills required to fill the jobs they create.

Labour-intensive industries such as leather-making, textiles and apparels account for only a fifth of Africa’s manufacturing value addition and the continent’s share of total exports has slipped from 23 per cent in 2000 to 20 per cent in 2009 — most of it ceded to Asian countries.

Fourth, Africa needs to develop new markets. Asia is a good place to be as it is expected to contribute 59 per cent of the global middle class by 2030, up from 23 per cent in 2009.

Fifth, and most important, however, Africa must find ways to do more business with itself. While 18 per cent of its trade with the rest of the world is in commodities, more than 40 per cent of intra-African trade, where it does exist, is in manufactured goods, data from Unido show.

In addition, the African market is growing together with its population while populations age and shrink elsewhere.

Despite the conventional wisdom of Africa as a poor continent, the numbers show some interesting changes. While there are many poor people in Africa, this generalisation misses some important facts — including its many rich or well-to-do people.

Since 2005, eight million Africans have moved out of poverty and the proportion of those living on less than $1.25 a day will drop to 41.2 per cent next year. In fact, Equatorial Guinea, the Seychelles and Libya have higher per capita incomes than Russia. Gabon’s is higher than Brazil’s and Mauritius, Botswana, South Africa, Namibia, Algeria, Cape Verde and Tunisia have higher per capita incomes than China.

That emerging African middle class will want mobile phones, refrigerators, motorcycles, watches and other consumer goods. Today, most of those goods are produced in Asia, and China in particular. Africa cannot develop sustainably by exporting coffee beans while importing mobile phones.

The global trading regime is too skewed for that. To understand how much, one needs to study the economics of the iPhone — which proudly proclaims, on the back, that it is “designed by Apple in California, assembled in China.”

At an average cost of $630, it is estimated that the components of the phone cost $207, or 33 per cent, while other expenses, including marketing, are $89, or 14 per cent. Foxconn, which assembles the phones in China, takes up only $15, or two per cent, of the cost, leaving Apple with a $319 profit per handset.

It is not surprising, therefore, that in 2009 China announced it would try to move away from “Made in China” to “Created and Designed in China.” Africa is a long way from writing the software to run the iPhone or manufacture the processor that makes it work but it is about time it found ways to assemble phones. Or at least package and market its own coffee.