Africa Programme
Meeting Summary
Economic Report on Africa
2015: Industrializing
Through Trade
Speaker: Dr Abdalla Hamdok
Deputy Executive Secretary and Chief Economist, UN Economic Commission for Africa
Discussant: Professor Machiko Nissanke
Department of Economics, School of Oriental and African Studies
Chair: Dr Gita Honwana Welch
Associate Fellow, Africa Programme, Chatham House
5 October 2015
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2 Economic Report on Africa 2015: Industrializing Through Trade
Introduction
On 5 October 2015 the Africa Programme at Chatham House hosted a meeting to assess trends,
challenges and opportunities in Africa’s economic and social development.
Africa’s economic growth has remained robust, despite the global economic downturn in commodity
prices. However, the continent’s social development lags behind, with high poverty and unemployment
rates still prevalent. Although trade will continue to play an important role in the continent’s growth,
economies need to be diversified to address inequality.
The event launched the 2015 UN Economic Commission for Africa (UNECA) report, Industrializing
through Trade, which examines policies necessary for inclusive growth, productivity and structural
transformation.
The meeting was held on the record. The following summary is intended to serve as an aide-memoire for
those who took part, and to provide a general summary of discussions for those who did not.
For more information – including recordings, transcripts, summaries, and further resources on this and
other related topics – visit www.chathamhouse.org/research/africa.
Dr Abdalla Hamdok
The central theme of Industrializing through Trade is the need for Africa to industrialize to sustain and
cement its economic transformation. To understand this proposition, aspects of the global and regional
context must be highlighted. There has been a shift in the balance of power, largely from West to East, but
also including the rise of the global South and the shift from the G8 to G20. This change presents both
challenges and opportunities, but a multipolar world provides a greater range of choices for African
economies. Global demographics are also changing, with an ageing population in the global North
contrasting with a youth bulge in Africa and the global South. These trends have coincided with increasing
inequality, rising unemployment, regional conflict, terrorism and competition for resources. This last
issue is particularly significant on the African continent, where outdated modes of business are all too
common – such as mining companies that work next to villages without running water. A report headed
by Thabo Mbeki which revealed the annual loss of $450 billion from the continent through illicit financial
flows, around 60 per cent of which was through the commercial activities of multinational mining
companies, demonstrates Africa’s need for companies to do business that adds value.
There has been a move towards global public goods, as shown by the global health response to Ebola. The
disease that might otherwise have spread across the continent was contained and overcome. Additionally,
Africa is experiencing an information and communications technology (ICT) revolution. The continent
should play a larger role in shaping the global fight against climate change, especially as African countries
are often the first to suffer its detrimental effects in the form of droughts and famine. Despite the high
cost, Africa should leapfrog other technological stages and immediately adopt green technologies. Finally,
increased migration from Africa to the wealthier countries of the global North is a concern.
Whether one agrees with the ‘Africa Rising’ narrative or not, many countries have experienced significant
rates of economic growth, sometimes reaching double digits. Ethiopia, for example, has had double-digit
growth for a number of years. This has occurred for a number of reasons. A significant determinant has
been improved macroeconomic policy, which has checked inflation and the public deficit. This has
paralleled an improving business environment, high rates of urbanization and a growing middle class
3 Economic Report on Africa 2015: Industrializing Through Trade
coming together to produce more dynamic economies. Another important factor has been the long and
sustained peace prevailing in some regions, especially unprecedented stability in Southern and West
Africa, although notable challenges remain – such as the wars in Sudan and South Sudan. Improved
governance and democracy has also contributed to growth. Comparing the continent with the situation 30
years ago, when 50 per cent of African countries were under military dictatorships, there is reason for
optimism about the spread of electoral politics. Despite some reservations, governance is moving in the
right direction to sustain economic development, especially with recent moves towards increased
infrastructural spending. The commodity boom was an important factor in Africa’s recent growth, despite
the current downward shift in prices.
However this positive picture of Africa’s economic trajectory must also be nuanced by the serious
challenges that still face the continent. Impressive growth has not resulted in job creation and has had
little impact on poverty, instead becoming commensurate with rising inequality. In this context, two key
questions will define Africa’s economic future. First, how can Africa maintain its current rates of growth?
Second, how can this growth be inclusive and poverty-reducing, and have a positive social and
environmental impact?
Industrialization is the essential answer to both questions. It is the element that could break the
underdevelopment cycle as it creates direct and indirect employment, as well as forward and backward
linkages with other sectors in the economy. Industrialization and trade facilitate each other, and so it is
essential to understand how trade might encourage industrialization and structural transformation in
Africa.
This provoked three main questions for the 2015 report:
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When and how do trade policies benefit or harm prospects for industrialization?
What are the prospects for Africa to industrialize by tapping into global value chains?
What is the current state of national and regional trade policy, and how does it compare to
African aspirations to industrialize?
A positive sign in tackling these questions is the report’s finding that African economies should continue
to experience growth, perhaps up to 4 per cent, despite the global downturn. This growth should be
converted into a structural transformation of African economies. Global value chains are an important
feature of today’s global trade, especially with regard to trade in intermediaries. The production of goods
and services is no longer occurring in one place and in one direction, which complicates the economic
situation for African countries.
Currently, the African continent is on the lowest rung of the global value chain. Intermediate exports have
increased, but they remain dominated by mining and other material resources. African exports as a whole
have increased fourfold over the last 15 to 20 years, but consist largely of primary commodities. There is
therefore an opportunity to move up the value chain. For example, Africa exports $500 million in raw
cotton each year, but it also imports processed cotton to the value of $4 billion. Nigeria alone exports $5
billion in crude oil, only to import an equivalent amount of refined oil.
For Africa to effectively tap into the global value chain, it must first rise up the regional value chain and
foster training in appropriate skills. The expansion of financial services, design, logistics and other
services sectors will also play a key role. Preferential schemes, such as the African Growth and
Opportunity Act (AGOA) in the United States, have supported African trade while doing little for
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structural transformation. This is illustrated by the fact that 80 per cent of exports under this agreement
are of oil, while the remainder are primary materials.
Regional integration is a key factor to enable industrialization. The African Union’s (AU) planned
Continental Free Trade Area (CFTA) might prove a crucial step to transform commerce and move Africa
up the value chain, as long as reforms are gradual and well sequenced. This will also allow Africa to keep
abreast of the global trend towards mega-regional trade agreements. Despite its ambition, the CFTA could
be negotiated by 2017. In the event of such a breakthrough African markets should be reopened
progressively, only after regional economic integration has been achieved. After the establishment of a
free trade area will be the most opportune time to implement economic trade agreements with other
regions, such as the European Union (EU).
The report makes several policy recommendations:
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Trade policy should be used to promote efficiency, protect nascent industries, avoid negative
policy externalities and effectively engage all stakeholders to enhance industrial development.
Trade agreements should be oriented towards the crucial task of industrialization. This should be
underpinned by an Africa-wide negotiating template that helps coordinate and harmonize policy
towards a continental free trade area.
The development of regional value chains will be vital to moving up the global value chain. The
CFTA can do this by removing tariffs on goods within Africa in a sequenced series of policy
reforms.
There is a need to design trade policy to move up the value chain. This would require serious
political commitment, but the moment is right for this.
If Africa achieves these goals, it will have the basis on which to become an industrialized continent, and to
undergo a full economic transformation.
Prof. Machiko Nissanke
Since the turn of the century, growth has spread from resource-rich African countries to their continental
neighbours. Africa includes many heterogeneous economies, but there are nevertheless continent-wide
phenomena, including an ongoing surge in investment fuelled in part by foreign direct investment (FDI)
from new partners in the global South. The acceleration of private capital growth and a burgeoning
middle class in Africa has sparked a shift in investors’ perceptions of the continent, away from its image
as being aid-dependent. Remittance growth has been very significant, with remittances now exceeding
both FDI and foreign aid. The increase in investment in agriculture and infrastructure is particularly
promising, as infrastructure has been a key bottleneck throughout Africa’s economic history.
While there are a number of positive trends, African economies are still fragile and vulnerable in many
ways. Despite a 10 per cent reduction in poverty in the last decade, the decrease in poverty has been
minimal over a longer timeline. The detrimental impacts of economic policies in the 1980s and 1990s
have barely been balanced by recent growth. The continent remains one of the most inequitable regions in
the world, with six of the 10 most unequal countries being in sub-Saharan Africa. Notwithstanding the
clear potential for a demographic dividend and the rise of a middle class, 80 per cent of Africans continue
to live on less than $2 a day.
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There are few established avenues for transforming current growth into broad-based development.
Compared with other developing regions, growth in Africa has not had a sufficient impact in addressing
poverty, nor has it facilitated a transformation away from the dependence on primary commodity exports
that leaves African economies especially vulnerable. The fall in commodity prices and the slackening of
key global drivers of economic growth also have a negative impact. Both rural and urban poor have been
absorbed into informal economic activity, which constitutes between 70 and 90 per cent of activity in
African economies. There is also little spillover between sectors, no culture of ‘learning by doing’, and a
restricted diffusion of knowledge.
For African economies, structural transformation is more than just a shift between sectors. It must also be
accompanied by a distribution of resources from low-productivity activities to high-productivity activities,
both within and between sectors. So far, however, the movement of labour from rural to informal services
on the urban fringe has actually coincided in a reduction of productivity, despite a notable structural
transformation. Since the mid-2000s there has also been a shift away from agriculture, and it is
questionable whether this has been a deep or shallow transformation, as there has been little in the way of
economy-wide spillover and linkages. Rather than emphasizing structural transformation, there is a need
to focus instead on raising productivity.
Structural transformation can be a purposeful and concerted societal effort to create a very articulated
economy where different sectors cross each other in a coordinated and dynamic manner. Diversification
to encourage higher productivity is essential if structural transformation is to achieve inclusive growth
from the beginning. Intra-African trade should be prioritized over deals with external stakeholders.
Enhancing regional and continental integration will also raise effective demand as per-capita
consumption goes up. Another important factor that will ease structural transformation will be whether
countries capitalize on the demographic dividend as an important productive asset.
Regional integration needs to take advantage of the dynamic effects of economic scales, and must enhance
positive externalities through cross-border production clustering, dense production and supply networks,
and consumption spillovers. In this way, higher productivity could spark a process of cumulative
causation in which FDI will become market-seeking, rather than driven by resources or the low cost of
labour. Such a change will encourage FDI that promotes the transfer of technology and knowledge to
enhance the African skills base. This should be complemented by the negotiation of investor deals with
transnational corporations for the benefit of all stakeholders, in order to allow coordination and
information-sharing. In addition, this could stimulate the accumulation of financial and physical assets,
knowledge and skills.
It is also crucial for African countries to develop comparative advantages within the global economy.
Trade policy will play an important role, but it is not the only component necessary for achieving this goal.
Social, technological, agricultural and other sectorial polices will be equally essential, as will building
productive human assets through health and education policies. A comparative advantage requires
Africa’s participation in technology-driven globalization, primarily through the use of green technology;
however, integration into the global economy does not guarantee a productivity-enhancing
transformation. Continued passive participation at the lowest rung in the global value chain does not in
itself engender the structural transformation that Africa needs. Comparative advantage should not be
based on impoverished wage labour and under-consumption. Instead, an expansion in domestic demand
will allow for greater inter-sectoral articulation, and will liberate private capital for meaningful public private partnerships.
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Strong institutional configuration is another important factor that is required to influence the quality of
policy-making. The effective provision of public goods, commensurate with a broadened tax base and
effective social contract, is central. Forging productive coalitions through fiscal dialogue, legitimacy and
sustainability is essential to sustainable development, in order to allow states to negotiate better deals
centred on domestic stakeholder interest, and to build a stakeholder-centred development process.
Summary of Questions and Answers
Questions
Why have governments not yet facilitated trade agreements to open up investment opportunities?
What lessons have been learned from the rush to industrialization in the 1960s and the subsequent
deindustrialization under Structural Adjustment Programmes (SAPs)? What role do you envisage for
government intervention in industrialization, and how might this fit with the World Trade Organization’s
strict and complicated rules on intervention?
Abdalla Hamdok
Encouraging governments to facilitate trade is an issue that stems from a wider problem of
implementation across Africa. The AU has limited mechanisms to secure implementation, but the change
from the Organization of African Unity to the AU signified a shift towards a more serious continent in this
regard. This was equally evident in the creation of a tripartite free trade area, incorporating the Southern
African Development Community (SADC), the East African Community (EAC) and the Common Market
for Eastern and Southern Africa (COMESA), involving 26 nations and nearly half-a-billion people. The
Economic Community of West African States (ECOWAS) has also done an exemplary job in stimulating
regional movement of goods and services. Such processes are always gradual, but there is incremental
movement in the right direction.
There has been minimal understanding of what constituted good industrial policy in the 1960s, as
demonstrated by the institutional requirement for consultation and the failure to address unvaried
economies. A ‘lost decade’ did follow the 1960s, and SAPs were crucial to deindustrialization. Many
lessons were learned from this experience, yet it is still clear that states must lead the way in industrial
policy, though not through central planning in the Soviet style. Historically in both the West and East,
under capitalist modes of production, socialist economies and in Communist China, industrialization has
been led by the government. In this systematic process, the government must play a role. It cannot be left
to the invisible hand of the market alone. It is equally clear from previous experiences of democratic
development projects that African countries must have a vision that transcends individuals and orientates
society for this effort to succeed.
Questions
Can you comment on the failure to reach the target of $93 billion for investment in infrastructure, as well
as on the Ethiopian experience in the last two decades?
How can African development be made beneficial for other developing nations and the developed world,
without the continent becoming a one-stop shop for resources?
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Which regions, and what type of intra-regional value chains, offer the most potential for industrialization?
Abdalla Hamdok
The challenges of infrastructure do pose a major obstacle to industrialization. Without improvements to
road, rail and air networks, regional integration will remain wishful thinking. The New Partnership for
Africa’s Development’s (NEPAD) recent privatization of infrastructure projects on the continent is a sign
that Africa is trying to define its priorities in this area.
The Ethiopian experience is an example of visionary commitment and is a step in the right direction. If
the country continues on its positive trajectory, it may leave the rest of Africa behind. Countries such as
Rwanda and Ethiopia may form models of home-grown development for the rest of the continent to
follow.
In the current global climate, with production dispersed across regions, there is ample opportunity for
Africa to move up the value chain, though entry will be difficult as such a process remains under the
control of multinational firms. But Africa still has much to offer in terms of investment. One
infrastructure-related example is that of the Inga dam project in the Democratic Republic of the Congo
(DRC). If this is constructed, then the DRC could export energy not just across Africa, but also to Europe.
East Africa appears to be the most promising region with regard to regional value chains. For example, 60
per cent of trade between Kenya and Uganda is in manufactured goods. The EAC is the most integrated
regional community, and is likely to see the complete removal of tariff barriers. Southern Africa, under
the leadership of South Africa, is also seeing progress in the development of soft and hard infrastructure.
Questions
As stability and good governance are key to encouraging FDI, how can investment be balanced with the
goal of reducing conflict across Africa?
There is frequent discussion of growth in joblessness, but can you comment on lacking entrepreneurial
skills?
As capital-intensive modes of production increase, what impact does this have on the potential for
manufacture in Africa?
Abdalla Hamdok
In theory FDI always goes to places with good governance and stability, but at the moment investors are
ready to take risks. Money has been made in high-risk contexts such as Angola, the DRC and the Central
African Republic. This type of FDI flow will always continue, but development-oriented FDI would be
more desirable. The latter form requires rule of law, democracy, transparency and accountability, and
Africa is seeing some advances in this.
This is a result of lessons learned from the early experience of industrialization. At that time, many
African countries did not address the skills mix, and entrepreneurial skills in particular were neglected.
To counter this, there is a need for investment in research, development and education, though this
should be context-specific to promote issues of development and innovation in skills that will attract
investors.
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Although technology is being developed in an environment of labour shortage, Africa’s unique context
means that it will be affected by this differently to other regions. Current research on ‘learning by doing’
suggests that although core activities are becoming capital-intensive, there are still forward and backward
linkages that would create learning-by-doing environments in the context of an articulated economy.
Africans themselves can become innovators by appropriating their own resources, so countries on the
continent can be more than just passive players – adapting rather than adopting.
Machiko Nissanke
There is no going back to previous industrial policies in Africa. Instead, there should be more open-door
industrialization, with room for private counterparts who must play an active role in formulating policy so
that governments cannot monopolize knowledge. This should be combined with a vision of the future that
allows all stakeholders to work towards a shared goal.