Background
Since the early 1990s, Africa has been experiencing robust growth rates. However, this solid growth performance was interrupted by the global recession of 2008-2009. Despite the severity of the global recession, which was fuelled by the financial and economic crisis of 2007/2008, the continent did not go deep into a recession but rather saw its economies significantly slowed down. The negative influences of the global crisis brought the average growth of Africa's economy to around 2 per cent, significantly down from about 5-7 per cent previously. Although there are currently turbulent head-winds coming out of the Eurozone, the 2007/2008 financial crisis is behind us and Africa's economy is roaring back, forecasted to grow between 5-7 per cent in the period 2012-2015.
It is worth noting that six of the world's ten fastest-growing economies (Democratic Republic of Congo, Ethiopia, Ghana, Mozambique, Tanzania, and Zambia) are in Africa, recording at least 7 per cent growth rate. The optimism from around the globe has led some commentators to predict that the average African economy will outpace its Asian counterpart in the next five years. The respectedEconomist magazine, which dubbed Africa a decade ago as the hopeless continent is currently highlighting its economic prospects, calling Africa the hopeful continent.
Africa's recent growth performance can be explained by a number of factors including: (a) implementation of prudent macroeconomic policies, such as reduced debt burdens, low-inflationary monetary stance, and an enhanced investment climate; (b) the post-2002 surge in commodity prices and expansion of oil production; and (c) increased inflows of foreign capital, both private capital and foreign direct investment (FDI).
While sustained growth has contributed significantly to rapid economic transformation in other parts of the world, in Africa it has been observed that the relatively good growth performance has not been inclusive as many millions of Africans are caught in the poverty trap due largely to the lack of diversification of sources of growth, including a continued over-reliance on primary commodity exports. Also, growth has been largely jobless and has been accompanied by rising inequality in some countries. In addition, Africa's significant natural resources are being extracted and exported in their raw form and not as finished products. Hence, no value is added to Africa's extractive commodities exports.
This is a serious, missed opportunity for more robust, diversified and sustainable economic development. Moreover, some of these resources represent an irreplaceable, non-renewable asset, and their exploitation generally has weak linkages to the rest of the economy and, consequently, lower contribution to GDP than could be achieved. Furthermore, Africa's dependence on primary commodity exports exposes it to volatile global commodity prices and resulting economic instability.
In order to significantly transform the economies of African countries from the current low-income to middle-income levels, it is paramount that value is significantly added to Africa’s large reservoir of natural and agricultural resources. This will tremendously boost economic performance as well as uplift many Africans out of poverty through employment and wealth creation. The increased demand for Africa’s natural resources, together with increased urbanization and consumer demand for processed goods within the continent provide an opportunity for resource-based industrialization. Indeed, Africa has the potential for increasing its production of higher value-added products.
Accelerating industrialization can potentially contribute to the expansion of trade within Africa and between Africa and the rest of the world through the diversification of exports. Moreover, creating food-processing industries in rural Africa would contribute to lifting a significant number of Africans from poverty. Evidence shows that a number of African resource-rich countries have remained poor, while other resource-poor countries have become richer through the implementation of polices that promote value addition, demonstrating that prosperity and poverty alleviation are consequences of smart policy choices. Hence, African countries should take advantage of the growing opportunities to promote industrialization.
Despite the progress made in a number of countries, industrialization in Africa remains a challenge. First, agriculture has not been sufficiently modernized and the manufacturing base is very low around the continent. Manufacturing is dominated by artisanal activities in mostly in the informal sector and is therefore insignificant in most African economies. Africa therefore lags behind other developing regions in its industrial performance. Second, the degree of export diversification is very low as most African countries continue to export unsophisticated commodities. At the moment, only a small group of countries dominate African manufacturing (South Africa, Tunisia, Morocco and Egypt) and they have managed to diversify to some extent. Third, a number of African countries are landlocked and face high transport costs, low economic density and geographic isolation from high-growth clusters. Markets are small and fragmented in most parts of Africa.
Industrial agglomerations and diversification are also not very common in Africa. The Economic Report for Africa 2007 indicated that most African countries were still at a very early stage of industrial development. The Report recommended that African countries should strive for diversification into higher-valued products, capitalizing on its mineral and agricultural riches.
To capitalize on its mineral and agricultural resources, Africa needs to increase its participation in a broad range of global value chains (GVCs), starting with natural resource extraction and agro-industry and moving later into other manufacturing GVCs to create wealth and employment. For Africa to be successful with its diversification efforts, new industrial policies are needed that support the exploitation of its industrial potential.
The success of any industrialization programme requires the creation of an enabling environment that enhances the required domestic capacity and capability, particularly in respect of physical and social infrastructure, human capital, financial systems, research and development (R&D), technology, and governance. In addition, Governments should put regulatory frameworks in place for tackling market failures. The creation of such an enabling environment will help to realize the full potential of the African private sector in an industrializing economy. Deepening regional integration also offers potential for Africa to tackle some of the challenges it faces in pursuing an industrialization programme.
It has to be recognized that entrepreneurs in Africa continue to face greater regulatory and administrative obstacles. Compared to other regions of the world, the protection of property and investor rights is weak. Although there are improvements in some countries, doing business in Africa is not easy as entrepreneurs face high transaction costs, due to small and fragmented markets, protracted and cumbersome administrative procedures and bureaucratic bottlenecks, and poor physical and financial infrastructure.
Hence, there is a need for appropriate policies to encourage the development of Africa's private sector. This is because a credible private sector impacts positively on economic growth and poverty reduction through ability to contribute to the modernization of underdeveloped rural and urban informal economies. Moreover, Africa's vast unexploited resources and abundance of labour provide opportunities for development of the private sector and for attracting private investment. Africa also offers large untapped markets and all the benefits of emerging economies as well as attractive possibilities for investment diversification.