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NS4301 Political Economy of Africa Summer Term 2015 Overview Introduction I • Most sub-Saharan economies have been performing very well since 2008 • Growth in the region has reached nearly 5% since 2008. • Occurred despite: • International financial crisis 2008-09 • Ongoing Eurozone crisis • Slow growth in the advanced industrial countries • Declining growth trend in the large emerging economies • Brazil • Russia • India for a while and • More recently China 2 Introduction II • A number of reasons for the African success • Relatively low initial per capita wage level • High foreign investments in context of abundant world liquidity • More stable political environments • Public finances in better condition thanks to numerous debt cancellations • Also important • Relatively high prices of raw materials • Oil, metals, minerals and foodstuffs are 80% of region’s exports 3 Introduction III • Situation today: • Sharp fall in global raw materials prices over last year • Raises a number of questions: • Has the situation worsened for all countries universally? • Which countries are coming out best in this environment? • Are there other sources of growth to protect these countries from further problems in the world economy? • Want to first identify those countries hardest it by fall in raw material price • Should make distinction between countries which export nonrenewables from those exporting renewables • Prices of the former have deteriorated much more • Which non-renewable export countries have diversified their exports and economy to reduce vulnerability? 4 Introduction IV • Importance of: • agricultural sector (20% value added) and • that of extractive industries and utilities (21% value added) • Shows dependence of Sub-Saharan economies on commodities • Markedly different patterns across region • Central Africa (Angola, Cameroon, Gabon, Equatorial Guinea, Chad, Congo, but not Nigeria) importance of extractive activates and utilities greatly expanded in 2000s. • Much higher than the African average (46% in 2012). 5 Sector Patterns: Central Africa 6 Introduction V • Southern Africa (mostly South Africa) Proportion of agriculture has fallen to low levels • Importance of extractive industries and utilities light despite abundance of natural resources • Growth much less dependent on raw materials • Eastern Africa (Kenya, Ethiopia Tanzania) • Some similarities with Southern Africa • However agriculture still important • Western Africa (Nigeria, Ghana, Ivory Coast) • Middle position with • extractive industries, agriculture and services having about equal weight. 7 Sector Patterns: Southern Africa 8 Sectoral Patterns Eastern Africa 9 Sectoral Patterns Western Africa 10 Oil Patterns • Of the raw materials sub-Saharan African countries are strongly reliant on oil rents • Oil rents are the difference between the total cost of production and the value of production at world prices. • After peaking in 2008 contribution of oil has slowly diminished • Production concentrated in small number of countries • Production stagnating in Angola • Falling trend in Gabon, Equatorial Guinea an Chad • Production erratic in Nigeria • Oil alone accounts for nearly two thirds of the total contribution of natural resources in sub-Saharan Africa • Oil rents represent 11% of the region’s GDP in 2013 11 Natural Resource Rents % GDP I 12 Natural Resource Rents II 13 Patterns of Commodity Exports I • Analysis of share of commodities in goods exports shows more pronounced dependence of region in raw materials than that of different sectors in the economy • Commodities represent 80% of region’s exports of goods • Fuels (essentially oil) account for more than half of sub-Saharan Africa’s sales abroad • Far ahead of minerals, metals and precious stones (17%) or agriculture (11%). • Countries most dependent of raw materials: • Fuels between 60% to 100% of exports of: Angola, Equatorial Guinea, Chad, Nigeria, Congo, Gabon, and Sudan 14 Share of Fuels in Exports 15 Patterns of Commodity Exports II • For mining products, sub-Saharan Africa mainly exports (order of importance) iron, gold, copper, precious stones, silver, and platinum • Between 60% and 90% of exports of Botswana (primary diamonds), DRC (copper), Zambia (copper), Mauritania (iron ore), and Eritrea (gold). • Food and agricultural products chief exports are cocoa, fruits, cotton, fish and coffee. • Between 60% and 100% of exports of Guinea Bissau (fruits), Somalia (animals), Seychelles (fish), Ethiopia (coffee, vegetables, and grain) • Raw materials less than half exports of South Africa, Comoros, Lesotho, Malawi, Mauritius and Swaziland • Intermediate countries (percentages between 50% and 65%) Djibouti, Kenya, Madagascar, Niger Uganda, Senegal, Togo and Zimbabwe. 16 Shares of Ores, Metals in Exports 17 Patterns of Commodity Exports III 18 Commodity Prices I • After reaching record highs in 2011, prices of raw materials began to fall • Slide accelerated in second half of 2014 • Was uneven depending on the raw materials concerned • Should make a distinction between non-renewables and renewables • Prices for the first group fallen sharply -35% for base metals and 40% for oil between January 2013 and May 2015 • While limited decline for second, -5% for agricultural raw materials and -20% for foodstuffs 19 2014-15 Fall in Commodity Prices 20 Commodity Prices II • To measure differentiated effect of recent drop in raw mineral prices: • Calculate difference between exports and imports of non-renewables and that of renewables • A positive (or negative) score indicates the country a net exporter (or importer) of these products • Then calculate the difference between these two scores to classify countries according to their vulnerability • Classification: • Countries very vulnerable – net exporters of non-renewables and importers renewables – terms of trade worsening significantly • Moderately affected – net exporters both renewables and nonrenewables • Relatively unaffected –net exporters of renewables and net importers of non-renewables • No countries net importers of renewables and non-renewables – would have been big winners. 21 Vulnerability to Commodity Price Change 22 Debt Situation I • The cancellation of the debt of nearly 30 African countries under the heavily indebted poor countries initiative (HIPC) since 2000 and • Acceleration in growth • Have made it possible to bring overall burden of subSaharan debt within reasonable limits • Region’s public debt/GDP ratio dropped from 66.7% in 2000 to 23.6% in 2008 – lowest in three decades • Since 2009 has been a period of re-indebtedness along with the reappearance of budget deficits • After five years of surpluses, region’s public accounts recorded a deficit of nearly 3% GDP over 2009-2014 23 Debt Situation II 24 Debt Situation III • Turning away from concessionary loans from multilateral institutions, some African countries including some former HIPC countries have successfully taped financial markets. • Other countries took significant bilateral loans outside Paris Club countries – China • Bowers benefit from greater freedom in their borrowing policy • Particularly where their infrastructure requires mobilization of a significant amount of capital. • Facilitated by monetary easing applied in western countries, and abundant credit, this renewal of debt proceeded at very rapid pace • Cost of these loans higher than that of loans obtained from multilateral institutions or Paris Club countries 25 Debt Situation IV • These patterns could increase the region’s vulnerability • Also recovery in US and the fall in oil prices already beginning to lead to tightening of borrowing conditions • Noticeable especially for oil-producing countries. • Some countries will be forced to scale down their bond issuance program • Could delay their investment programs and will make it difficult to refinance existing debts. • Depreciation of certain currencies against the dollar (currency in which international bonds are denominated) further complicates the task since it increases the value in local currency of repayments to foreign currencies. 26 Diversification Efforts I • Greater economic diversification reduces country vulnerability to external shocks in raw materials prices • Two possible diversification strategies • Expand manufacturing sector, in particular upgrading the agricultural sector favoring the agri-food industry • Developing the relatively high value-added service sectors • Manufacturing’s share of GDP is generally fairly weak in Africa – average around 7.8% with significant gaps between counties 27 Diversification Efforts II • Among economies were the production of manufactured goods contributes most, not all have increased their share of manufacturing in GDP since 2000 • Stability tends to suggest that manufacturing sector could have difficulty in driving economy in the long-term if production stagnates • Some have seen this sector’s share in economy increase in last 10 years, but this does not necessarily reflect increased diversification • Success of Southeast Asian countries has been based partly on the expansion of manufacturing linked to successful integration into global value chains (GVC) 28 Share of Manufacturing in GDP 29 Diversification Efforts V • Integration of a country into global value chain enables its businesses to focus on their comparative advantages and create value added by transforming goods imported from another country • Two main indicators can serve to access a country’s integration into GVCs • Upstream integration used to measure share of foreign value added in a country’s exports • Downstream integration which is used to measure the share of added value contributed by a country in the exports of other countries 30 Diversification Efforts VI Strategies: • Initially develop products with high labor intensity (because of low wage costs) followed by • An increase in value added content is a development model which has enabled a number of countries, particularly East Asia to create basis for sustainable growth • Increased integration into GVCs seems to be a prior condition for initiating a virtuous circle of growth and structural transformation and for • Generating a basis for job creation and inclusive growth leading to genuine developments • Unfortunately integration of sub-Saharan Africa into GVCs generally weak because structure of exports dominated by primary products and the poor diversification of products exported 31 Diversifiation Efforts VII • There is a potential for strengthening this integration through increased diversification of exports. • The more different products that a country exports, the more diversified its production structure and the better it will be integrated into international trade. • The number of products exported by the oil producing countries is generally much lower than that of non-hydrocarbon exporting countries. • The diversification index is a UNCTAD indicator • It is the number of products of which the valued added of exports is • Above USD 100,000 or • Represents more than 0.3% of the country’s total exports 32 Diversifiation Efforts VIII • Diversification index is • 36 for Equatorial Guinea, • 70 for Chad and • 82 for Angola • while it is above 250 for South Africa • Nigeria is an exception at 229 • Three newer industrializing countries stand out, Uganda, Ethiopia and Rwanda -- For these economies, diversification can be a key factor for long term growth. 33 Diversification Efforts VIII 34 Services I • • • • The service sector is dominant in African economies For Sub-Saharan Africa, sector grew by 5.2% 2000-03 Agriculture grew by 5.1% and 3.5% for industry Several countries have revised their national income accounts, and services appear even more important than previously thought. • Particularly the case for Nigeria, Ethiopia, Ghana, Mozambique and Kenya. • Services account for more than 50% in more than half of subSaharan economies. • In general the extractive economies – oil, minerals have below average service sectors 35 Service Sector More than 50% of GDP 36 Services II • A development model based on services is unusual • The sector does not act as a driver in the early phases of development • However several countries have been able to increase their level of development through high value added services – India • The lasting quality of economic growth and the positive impact in terms of develop can be established providing services provide high added value. • Dominant sub-sectors in sub-Saharan Africa are trade and public services • Trade services usually underreported because many are carried out in the informal sector 37 Services III • Appears that the share of trade in GDP is on a stagnating or even falling trend in the richest countries. • With exception of Angola, trade’s contribution to national economy was the lowest in GDP in countries with highest GDP. • Conversely the share of trade grew in the poorest economies. • The trade sector, essentially retail trade is an activity with low productivity and low value added • Low productivity also prevails in public services (health, education, administration). Offsetting this • Good sources of employment • Good in contributing to development 38 Services IV • Other services • In general transport and communications activities considered having a higher value added • Financial series – limited development • Only 8 countries have financial sectors accounting for more than 5% of GDP • Services to businesses also important in that they are tradable. However very limited in sub-Saharan Africa. • These services capable of driving other sectors – improving transport and communications infrastructures supporting the development of the financial system will have a positive impact on industrial sector and even agriculture. 39 Public Services % GDP 40 Transport & Communication Share of GDP 41 Financial Services Share of GDP 42 Service Exports % GDP 43 Summary I • Want to identify countries with both lower exposure to recent fall in world commodity prices and which have already begun a process of economic diversification • 13 countries little affected by fluctuations of world prices • Both efficient net exporters of renewable raw materials and net importers of non-renewable raw materials • For the manufacturing sector, those countries where number of exported products more than tripled between 2000 and 2013. • Uganda, Rwanda, and Ethiopia 44 Summary II • Success in services • Where share of transport and communications services in GDP is above 10% and has increased since 2005 • Where the share of financial services in GDP is above 5% and has increased since 2005 • Where share of exports of services is over 40% of total sales abrad and has increased since 2005 – Kenya only country • Several countries meet none of the total criteria • They are exposed to fall in commodity prices and have not diversified. • Three countries meet all the criteria – Ethiopia, Uganda and Kenya. 45 Summary III 46