The primary sector in Africa past and present

In brief… What has been holding back Africa is not the large share of its primary sector in itself, but the poor performance of this sector? The lack of agricultural transformation distinguishes Africa from other regions and exploration for mineral resources has remained below its potential while the negative side effects of extractive resources have often been managed poorly. There is some improvement. The recent boom in commodity prices has brought the expected growth effects, but exploration has also expanded much beyond previous efforts, largely driven by demand from emerging partners in the East and the South. Although exports of processed products have grown at a slightly slower pace than those of raw commodities, they have by no means been crowded out but gained significantly on the back of the trade boom in natural resources. At the same time, the massive inflows of foreign investment have helped job creation, particularly in the mining sectors, which are more labor-intensive than oil. In the future the resource price is likely to stabilize at a level higher than before the boom and the interest in Africa’s resources will remain, opening a window of opportunity that Africa should exploit.

In spite of its potential, the primary sector in Africa has often been seen as contributing little to economic development. Previous attempts to diversify frequently came at the expense of commodity production, particularly agriculture, and resulted in slow growth. Agriculture was branded as backward and extractive industries as enclave activities that offer few opportunities for employment and generation of important expertise for higher value-added activities. The terms of trade of commodities were assumed to be on a perennial downward path (Prebisch, 1950; Singer, 1950). As a result, economic policies in African countries have often conferred market power on the purchasers of agricultural and mineral commodities rather than on the producers (Ndulu et al., 2008). Some of this was done on purpose, as in the case of export credits, which were frequently granted to ensure domestic processing, and export taxes which raised the price of exporting commodities for the same purpose (Radetzki, 2008). However, much of it was the result of a political economy stacked against commodity producers. Marketing boards, for example, were originally devised to ensure producers of soft commodities of stable prices for their products. But when urban political interests took over these boards, they soon degenerated into mechanisms to extract rents from the rural sector (Ascher, 1999). 27 Exchange rates were frequently over-valued, with the intention of making cheaper the import of investment goods necessary for industrialization. The result, however, was to subsidize urban consumption and counteract structural transformation (Bruton, 1998). Slow growth was the result. The estimates reported in Ndulu et al. (2008) suggest that governments that adopted this mixture of policies lowered their countries’ rates of growth by nearly 2 percentage points per annum 1960-2000.

Similarly, exploration for geological deposits of resources has remained below its potential. While the geological distribution of resources is bestowed by nature, resource abundance in economic terms is largely determined by the exploration conditions faced by investors. The value of known subsoil assets per square kilometer of sub-Saharan Africa is barely one-quarter of that for high-income countries (Gelb, Kaiser, and Vinuela, 2012; World Bank, 2012a). Assuming that at large levels of aggregations (like continents or country income groups) the distribution of resources should approach a common average, Africa’s low ratio indicates that there are still many more resource deposits to be discovered there (Collier, 2011). Expenditure on mining exploration activity in Africa has long remained below USD 5 per square kilometer relative to an average of USD 65 in Canada, Australia and Latin America (Ncube, 2012). In addition to the overall difficult business environment highlighted in the preceding section, the low rate of exploration reflects inefficient incentive systems for exploration and insufficient public investment in geological knowledge of Africa.

Accordingly, in spite of the significant expansion of the primary sector in Africa over the last decade, benchmarking with other regions shows that much potential has been left untapped, reflecting difficult conditions. The strong demand and high prices for natural resources from which Africa benefited had the same effect worldwide. Resource production and exploration increased in all regions of the world, and mostly faster than in Africa. As a result, notwithstanding impressive growth and significant expansion of commodity output during the last decade, Africa’s share of global natural assets, which represent the present value of proven resources 28, declined. Figure 6.11 shows that Africa’s share of global natural capital shrank from 11.5% in 1995 to 8.5% in 2005. Mineral assets are particularly noteworthy: Africa’s share dropped by half from 10.3% to 5.2%. Oil is the only resource in which Africa kept its share of global assets. 29 At the same time, Africa’s share of global output (Table 6.2) dropped only in mining and there only by 2 percentage points (or by 15%; from 14% of global output to 12% of global output). Africa’s share in global output in energy and soft resources increased by 1 percentage point each. While production increased at a similar pace everywhere, other world regions have thus been able to add more proven reserves through exploration and new technology than has Africa.

Especially agricultural resources have seen much of their potential untapped. A look at the difference between output and potential for different resources well illustrates Africa’s agricultural gap. Figure 6.12 compares Africa’s share in global resource production with its share in global reserves in 2010. In the case of soft commodities, agricultural land is treated as the underlying reserve. While reserves and production are quite close in the case of energy resources, they are far apart in the case of agriculture. Some 24% of the world’s agricultural land is found in Africa, but it produces only 9% of global agricultural output. This ratio has hardly changed over the last 40 years. Africa’s share in world exports of agricultural products has been constantly declining, from over 10% in the 1960s to 3% in 2010. Most of Africa’s production of soft resources is for domestic consumption, especially in the case of food commodities. Non-food agricultural commodities account for only 2% of Africa’s agricultural production and Africa’s share of global non-food agricultural commodities dropped from 8% to 6% over the last decade. Although the expansion of agricultural production is not a matter of exploring for new reserves, it is very much a matter of providing the right conditions for the sector and facilitating the implementation of state-of-the-art knowledge and its continued expansion through applied research.

In the search for oil and in its production, however, Africa has not lagged behind other regions. Oil rents are high and country conditions are less important. Oil stands out in Figure 6.11 and Figure 6.12. Africa has increased its share of world assets by 1% and it boasts a higher ratio of production to known assets than any other resource. That is large because energy resources in general, and oil in particular, are much less dependent on country conditions than other natural resources. They boast higher rents, 30 can easily be exported in unprocessed form and are much less dependent on general infrastructure such as roads, railways and power stations than either hard or soft resources. Most metals, on the other hand, involve much higher production costs relative to their market price. Significant processing is required to make transport economically viable and deposit-specific technological challenges are significant.

Where extractive resources boomed only a few countries seized the opportunity to aim for broad-based growth in the past. Many did not overcome dependence and continue to suffer from the “resource curse”. Cross-country comparison shows that natural resource abundance (measured by reserves or production of natural resources) per se is linked to positive outcomes such as long-term growth, whereas dependence on natural resources (measured as the share of natural resource exports in total exports or the share of natural resource rents in GDP) comes with serious challenges (Brunnschweiler and Bulte, 2008; Gylfason, 2007). 31 As the preceding section has shown, initial dependence on natural resources in poor countries is to be expected but can be overcome if managed well. However, many African countries have failed to turn resource wealth into inclusive economic development. Instead, small elites control resource rents and good jobs remain scarce. Nigeria provides a sad example of a country that squandered much of its oil wealth through corruption. Angola stands out as an example of “Dutch disease”, which describes the process of soaring price levels crowding out the non-resource economy. 32 Equatorial Guinea has a per capita income level on a par with the European Union (EU), but because of extreme inequality, most of its people continue to live in abject poverty.

Instead of managing volatility, many governments exacerbated its effects through spending. The lack of financial access added to the problem. Natural resources are subject to substantial price volatility. In countries with a large share of natural-resource exports international resource-price volatility translates more or less directly into an unstable exchange rate and bouts of inflation, as there are relatively few other exports that could cushion the effect. The increasing uncertainty can quickly crowd out the non-resource economy which needs a more stable environment to prosper. 33 Cross-country comparison shows that controlling for volatility can eliminate most of the negative effects of natural-resources dependence (Van der Ploeg and Poelhekke, 2010). To manage volatility, an economy needs well- developed financial sector institutions that can provide liquidity in times of crisis and turn excess capital (in the form of savings during booms) into efficient investments. However, dependence on natural resources acted as a brake on financial sector development 34 and the relationship between the share of natural resources in GDP and the lack of access to finance across African countries remains positive. The government plays an important role, too. Instead of managing volatility through counter-cyclical government spending, many African governments exacerbated its effects by unsustainable spending and wasteful investments during boom times instead of building reserves for leaner years.

Combinations of rent-seeking and insufficient transparency led to waste and continued dependence. Research has shown that countries, where non-competitive bidding and non-transparent contracting procedures exist, are likely to face a large “corruption premium” on capital-intensive projects. Public investment in those countries is typically larger than average, but expenditures for maintaining public capital are extraordinarily low, which obviously undermines the efficiency of the investments (Tanzi and Davoodi, 1997). This is illustrated by the Ajaokuta steel mill in Nigeria, which was built by a parastatal body with government backing. More than USD 4 billion has been invested, but the mill has never been finished. After the end of the military government in December 1998, reports emerged about USD 2 billion, which had been siphoned off from the project into the pockets of leaders of the past government (Pritchett, 2000). In the same vein, revenues from natural resources can break the accountability link between government and citizens when governments can rely exclusively on such revenues without the need for any further tax collection from citizens. Consequently, the institutional environment will develop to ensure the government’s power, not prosperity and common rights for all. This includes preventing the emergence of strong non-resource sectors in the economy as they could become the basis for the emergence of powerful groups that in the long run will demand political changes.

Environmental impacts often went unchecked. In the past, exploration, mine development and waste disposal have at times led to substantial land degradation, which adversely affected local habitats and compromised alternative land use. Air quality suffered mainly from the smelting of copper and other non-ferrous metals that led to toxic dust pollution, sulfur dioxide emissions and acid rain (Warhurst, 1994). In some cases, mining-related operations depleted or degraded surface water, groundwater, and local aquifers through drilling, acid mine drainage, chemical leakages, soil erosion, and waste piles. Nigeria’s Ogoniland represents one particularly severe case of environmental pollution due to resource extraction. Although the oil extraction in the region stopped in 1993, there is still widespread environmental destruction and contamination (UNEP, 2011).

Some of this has changed. Improving terms of trade and the reversal of past policies have led to the recent revival of the primary sector, contributing to the growth and structural change. Between 2000 and 2011 prices for metals and fuel more than tripled and reached unprecedented levels, overtaking their previous maximums from 1967 (metal) and 1982 (oil) in 2006 and 2007. Prices for agricultural commodities reached levels not seen since the 1970s and are currently 50% higher than they were in the 1990s. Although many countries in Africa are net resource importers, overall the continent has benefited significantly from the resource boom. Between 2000 and 2011 Africa’s GDP grew by 64%, double the rate of world economic growth (Figure 6.13) and natural resources accounted for roughly 35% of this growth since 2000. At the same time, the renewed commitment (see Box 6.6) to agriculture has increased the sector’s productivity, freed up labor and thereby contributed to structural change. 35 The long period of decline in agricultural productivity was associated with increases in employment in agriculture and the recent uptick in agricultural productivity is leading to the positive structural change outlined in the preceding section.

Box 6.6. The Comprehensive Agricultural Development Programme: A sign of new commitment to agriculture

The commitment of governments to agriculture is illustrated by initiatives such as the Comprehensive Agricultural Development Programme. The Comprehensive Africa Agriculture Development Programme (CAADP) is an Africa-led and owned agenda that serves to provide a common framework for policy and partnership renewal in the agricultural sector. CAADP’s primary objectives are to increase investment in agriculture and improve agriculture policy and strategy design and implementation. Through these outcomes, CAADP is supposed to help meet the goals of higher growth, poverty reduction, and food and nutrition security. Specific benchmarks for participating countries are to allocate at least 10% of the national budget to the agricultural sector and achieve an annual agricultural growth rate of 6%.

In spite of continued setbacks, indications suggest that Africa is also getting better at avoiding the resource curse. Ghana is a new oil producer and started production in 2010. Its Petroleum Revenue Management Act (Government of Ghana, 2011) is considered strong and transparent by international observers. It provides for the creation of a stabilization fund and a heritage fund. The former cushions the impact of potential oil revenue shortfalls, while the latter provides an endowment to support the welfare of future generations. In addition, since 2011 Ghana’s Ministry of Finance has successfully been hedging both oil imports and exports in order to preserve macroeconomic stability against volatile oil prices. Ghana has also been able to preserve its democracy despite the presence of oil. Nigeria has managed to embark on a democratization process despite its oil dependence. Although problems with corruption and a difficult business environment continue, much progress has been made in the management of public funds. At the same time, because of budgetary pressure, Nigeria and Egypt are in the process of abandoning or at least significantly reducing, unsustainable fuel subsidies. More and more countries are signing up to initiatives that promote transparency of resource revenues to ensure citizen control and responsible spending. International regimes set up to prevent the trade in conflict minerals, 36 which often serve to finance violence, have proved very effective. Awareness of environmental challenges has increased as well. A recent example is Morocco’s leading phosphate producer OCP, which has established activities for water-saving, desalination, and recycling to limit its use of this “scarce and costly” resource (OCP, 2012).

High global demand led to an expansion of natural resource production. Table 6.2. shows that resource production in Africa expanded significantly between 2000 and 2010 for all resource categories. Measured in real terms, both soft and energy resource production increased by about a third, and mining output by about a quarter, with important variation between different metals and hydrocarbons.

On the back of high prices and increased output, Africa’s exports boomed and showed that growth in manufacturing exports can go side by side with a strong natural resource economy. However, reflecting terms of trade, commodity exports grew faster than those of processed goods. Among the main arguments brought forward against growth based on natural resources is that it threatens to crowd out the manufacturing sector, which can be the engine of structural transformation by providing productive jobs for low-skilled labor. Between 2000 and 2011 Africa’s exports of raw commodities expanded by 120% in real terms from USD 160 billion to USD 350 billion (both in 2010 prices). Instead of disappearing, however, processed goods from Africa equally expanded their reach, albeit only at half the rate of commodities. The exports of processed goods grew by 60% from USD 110 billion to USD 180 billion (both in 2010 prices – Figure 6.14). The difference in the speed of growth by comparison with raw commodities resulted in processed goods dropping from 40% to 30% in Africa’s export basket. Contrary to scenarios of the deindustrialization of Africa, however, the higher share of natural resources merely reflects the change in terms of trade, documented above. In the mining sector, for example, most of the recent increase in prices has gone to miners, not processors. Refining charges accounted for 30% of the price of refined copper in the 1990s but are down to less than 10% today.

Despite the capital intensity of the extractive sectors, the expansion of natural-resource production has created a large number of jobs. The previous section highlighted the importance of agricultural employment. Although most of these jobs are of low productivity they form the livelihood of almost half of Africa’s population and an important source of demand for other products and services. Hagbladde, Hazel and Reardon (2009) estimate that one dollar of income from agricultural activities generates 50 cents in non-agricultural rural income. Although extractive industries are highly capital-intensive, they have generated a large number of productive jobs in Africa over the last decade. Greenfield FDI into natural resource sectors in Africa is estimated to have created about 600 000 jobs between 2003 and 2012 (fDi markets, 2013). 37 Of these 400 000 were created in mining, which, with three jobs per USD million of investment, is ten times as employment-intensive as oil. Estimates of employment multipliers in mining range from 0.5 to three additional jobs in supply firms for every job created in mining (McMahon and Tracy, 2012; McMahon and Remy, 2001; Kapstein and Kim, 2011). Assuming a multiplier of two this would translate into 800 000 FDI-related jobs in mining. 38 In addition, an estimated 6 million Africans find their livelihood in informal artisanal mining (BGR, n.d.), although these are not the types of jobs that drive structural transformation as their productivity is much lower than that of jobs informal firms (La Porta and Shleifer, 2011), artisanal miners benefited from high resource prices.

In the future, demand for natural resources will remain strong but the boom of the last years is likely to cool down. Growth patterns of the last decade and a general trend of growing natural- resource intensity in countries with per capita incomes under USD 16 000 (Komesaroff, 2012) suggest that demand for minerals will continue to be strong as China, India, and other emerging economies continue to grow in the long term. However, this growth seems to be cooling off somewhat at the moment and China’s growth pattern is likely to shift from investment to consumption, implying lower intensity in demand for hard and energy resources (but the potentially higher intensity in demand for food commodities). Most price forecasters agree that stabilization at a level somewhat below the current peaks is likely in the medium term (Courvalin and Currie, 2012; IEA and OECD, 2012; World Bank, 2012b; see also Figure 6.13). A drop back to the much lower price levels of the early 2000s, however, is unlikely because production costs have risen significantly, as new types of deposits have come online that can only be profitably exploited at current price levels. A significant drop in prices would lead to supply constraints which in turn would support higher prices. 39

Nevertheless, driven by recent discoveries, the expansion of proven reserves and resource production in Africa is set to accelerate. Recently important discoveries have been made in both oil and gas in a number of East African countries, from Uganda to Mozambique. In particular, the gas discoveries off the East African coast in Tanzanian and Mozambican waters are very large and have attracted much international attention to the region, which until then had been a blank spot on the map of African subsoil resources. So far the finds amount to 100 trillion cubic feet, more than ten times Africa’s current annual output and rivaling the world’s largest fields, such as those in Qatar and Western Australia (Bloomberg, 2012a). Africa can also catch up in mining. Current projections are for output to expand at a significantly higher rate than in other world regions. The US Geological Survey (USGS) estimates Africa will expand its metal and mineral production of 15 important metals by 78% between 2010 and 2017, compared to only 30% in the Americas and Asia. In West Africa, the resumption of mining for base metals such as iron ore and bauxite (the basis of aluminum) in Guinea 40 and Sierra Leone will quadruple the African output of these metals over the next years and most likely lead to significant expansions of known reserves. Cobalt and copper production from known reserves will expand by more than 80% in the Democratic Republic of Congo ( DRC) and Zambia respectively. Over the long run, soft resources hold arguably the greatest potential for expansion, as the productivity gap between Africa and other world regions closes. To realize this potential, however, concerted action is needed and will be discussed in the last section of this chapter.

With a comparatively high price level remaining for some time and significant expansion of production over the next years, Africa faces a window of opportunity to create economic structures that can provide employment and income for all on the back of its resource wealth. First, the previous long decline in natural resource prices from the late 1970s until about 2000 (see Figure 6.13) had tilted the balance of competition far towards international investors, who received very favorable conditions from governments, often leaving little for domestic investment. Higher international demand gives African governments more leeway to negotiate for a bigger take of natural resource revenues. Second, the main supply constraint is at the raw commodity level and the terms of trade between raw and refined products have shifted. Primary production, Africa’s comparative advantage, should be the main beneficiary of higher prices. This mechanism works most strongly in the case of hard and energy resources, where refining margins have dropped significantly over the last decade. Unfortunately, it does not yet work well in the case of smallholder agriculture, where market power often lies with distributors that have a monopoly on purchases and do not pass on higher prices. Africa is thus set to benefit from an expanding primary sector, offering employment and linkage opportunities and bringing in more revenue that can be invested in structural transformation. The next section focuses on how Africa can make the most of this opportunity.