Economic diversification key for development in the long run, says UN development agency
Kinshasa, Democratic Republic of the Congo, – Governments in Africa should put into place fiscal rules, sovereign wealth funds and other mechanisms to buffer their economies from the commodities roller-coaster, according to a new report issued here by the United Nations Development Programme (UNDP).
“One third of Africa's impressive growth rate is due to the huge demand of emerging economies and the ensuing surge of the prices of commodities. But heavy dependence on commodities often fail to generate development as commodity prices tend to be volatile. And busts follow booms. Governments must then seize the opportunity of commodity booms to structurally transform their economies and invest in human development,” said Abdoulaye Mar Dieye, Head UNDP’s Regional Bureau for Africa.
The UNDP report, Primary Commodity Booms and Busts: Emerging Lessons from sub-Saharan Africa, was launched at the 10th Africa Economic Conference, which opened today in Kinshasa.
“It’s like the Cricket and the Ant tale, where one insect idles all summer while the other prepares for winter. If countries don’t save and manage their revenues adequately during periods of expansion, when commodity prices go down, there’s very little left other than austerity and development grinding to a halt,” said Ayodele Odusola, Chief Economist at UNDP’s Regional Bureau for Africa.
Africa’s export revenues increased six-fold between 2001 and 2011, thanks to strong demand from middle-income economies such as China, Brazil and India. Between 2011 and 2014, due to a sharp decline in commodity prices, per capita growth on the continent decreased by half as compared with the previous ten years.
“There has been the tendency to increase expenditures during booms and cut back during price declines, rather than ensuring smooth and sustainable levels of expenditures over the commodity price cycle,” Odusola added.
Further, the report shows, over-reliance on primary commodities, particularly minerals and fuel, is often associated with higher levels of corruption and even conflict, income inequality, as well as social indicators such as disease prevalence, higher mortality rates and uneven access to education.
In order to avoid such downturns, with potentially catastrophic implications for development, countries can initiate a number of options which can actually boost long-term economic growth and development over time. Sovereign wealth funds, for instance, can build savings for future generations and be used to manage investments rationally over time. To achieve this, sovereign wealth funds must target stabilization and long term-saving objectives simultaneously.
Other measures include fiscal, exchange rate, and monetary policies to improve savings so that adequate resources are available to sustain expenditures once commodity prices fall.
The report provides detailed analyses of the impact of the commodity price cycle on ten commodity-dependent African economies which successfully buffered the impact of lower commodity prices on their economies.
In Botswana, for example, the Pula sovereign wealth fund has led to better macroeconomic management and rapid growth, and appears to have been associated with better governance and institutional quality.
In Nigeria, the local content policy focuses on the capacity development of the country’s human resources and use of local firms to link the oil sector with the rest of the economy.
In Ethiopia, fiscal policy has led to an acceleration in the collection of taxes, while raising spending for the poor, including in physical infrastructure.
In Ghana, steps are being taken for the Ghana Cocoa Board (Cocobod) to issue energy and cocoa bonds to fund its long term capital and infrastructure needs.
Over the long run, the report shows, Africa’s economies should diversify so as to minimize risk. Primary commodities account for more than 60 percent of merchandise exports in 28 of the 38 African countries with recent data. Every African economy with data, except South Africa, has a higher export concentration index than the average for developing countries, excluding China.
Primary Commodity Booms and Busts: Emerging Lessons from sub-Saharan Africa is available online here.
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