Ideas & Debate

How commodities decline is good for Africa’s economy

It is a well-known fact that some commodities have been in decline. What seems to have been lost in the story, however, is how Africa is actually benefiting from this decline. The main story we’re hearing is that Africa is suffering from the commodities decline.

The International Monetary Fund (IMF) makes the point that particularly hard hit are the continent’s eight oil exporters (which together account for about half of the region’s Gross Domestic Product (GDP) and include the largest producers, Nigeria and Angola) as export incomes fall.

This results in sharp downward fiscal adjustments which limits government activity.

The IMF goes on to say that among oil exporters, the sharp and seemingly durable decline in oil prices makes adjustment unavoidable. Wiggle room is shrinking.

This column agrees with much of this—but the positive elements of the commodity decline have not received nearly as much attention.

To be clear, there are positive consequences for Africa. So although Africa has to be aware of the difficulties this dynamic raises, the positive elements also ought to be highlighted.

The first positive result is that Africa finally seems to be truly serious about building manufacturing capacity on the continent.

Once again Africa has found itself at the short end of the stick; because commodities were booming for so long, there was no pressure on Africa to domesticate value addition and build up manufacturing on the continent.

Africa, once again in the 21st century, found itself in the very old position of having just largely exported raw commodities during the commodities boom and is now suffering.

It is almost as though Africans told themselves, ‘let’s ride this wave while it lasts’, and the continent did not make any serious re-orientation in terms of domesticating value addition.

Now that boom has ended and clearly African economic growth still seems tethered to commodity prices than expected. Thus, we now see increased pressure on the continent to build up manufacturing and value addition capacity.

This is good news for Africa because the value of building up manufacturing, especially export-oriented, is pulling populations out of poverty.

Bearing in mind that China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030, Africa should step up to the plate.

Those interested in the African economy driving development, now due to the commodities decline, see manufacturing taking its rightful place.

Also, the commodities decline is very good news for East Africa. The region is minimally exposed. Yes, there are new oil deposits that have been discovered but these have not been fully exploited yet—so East Africa continues to grow in spite of the commodities decline.

Let’s look at some figures based on average growth rate of about 3.4 per cent for the global economy in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9 per cent this year according to the Financial Times.

Compare this to East Africa where Kenya grew by 5.6 per cent in 2015 and preliminary estimates suggest Tanzania registered 6.9 -7 per cent GDP growth in 2015, Uganda (5 per cent), Rwanda (6.9 per cent) in 2015 and Ethiopia (6.3 per cent) a year between 2016- 2020.

Please bear in mind getting data for some of these countries is difficult. But the point is that these are all well above the estimated African GDP growth rate of 2.9 percent and the global growth rate.

So the global community is alive to the fact that East Africa is really a bright spot and is a space where economies seem to be relatively unaffected by the commodities decline.

The story is simple: Africa should fully exploit what it stands to gain from the commodities decline. There is plenty of good news therein.

Were is a development economist. [email protected]