Africa’s production, consumption paradox

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Daniel Kalinaki

African governments have spent decades asking their richer counterparts in the West for aid; these days, they ask for access to markets and have a new slogan — “Trade, Not Aid” — to justify their pleas.
These governments would help the continent better if they rethought what they ask for and, perhaps, looked closer to home for some of the answers to Africa’s problems.

Take aid, for instance. While some forms are useful and can make a difference if used effectively, it is now widely accepted that aid is, at best, a stop-gap measure and, at worst, a corrupting and corrosive agent that erodes domestic citizen agency and undermines accountability.

Although billions of dollars still flow into Africa every year as aid, it has been relegated in importance behind foreign direct investment and remittances from Africans in the diaspora.
In 2010, Ghanaian academic Adams Bodomo revealed that remittances to Africa from abroad had overtaken aid to the continent and gave figures of US$51.8 billion (M554 billion) versus US$43 billion (M460 billion).

The figures vary from survey to survey but the principle is the same: Africans working abroad are a key driver of financing on the continent and the money they send rarely suffers the pilferage that aid does.
There are, at least, two problems with the state of financial transfers. The first is that it costs too much for Africans in the diaspora to send money home.
A survey by the Overseas Development Institute last year found that it costs an average of 12.3 percent for Africans in the diaspora to send M2 000 home. That is higher than the global average of 7.8 percent and costs a tidy M15 billion per year.

African policy makers can start by breaking the duopoly of Western Union and MoneyGram, which between them control half the money transfer market in two out of every three countries in sub-Saharan Africa.
Transfers of money within the continent are not much cheaper either, with the ODI survey finding that transfers from South Africa to Mozambique can top 20 percent.

Getting central and commercial banks on the continent to work more closely together and stamp down on extortionist fees and charges could overnight improve real incomes and reduce the cost of finance.
The bigger problem with finance, however, is not with how much comes into Africa but how much leaves. A joint report by the African Development Bank (AfDB) and Global Financial Integrity, a US-based research group, found that cumulative illicit outflows from Africa between 1980 and 2009 ranged between M12 trillion and M15 trillion.

That is roughly Africa’s total external debt and does not include hard-to-trace amounts from smuggling and drug trafficking. If such illicit transfers were stemmed and stolen money recovered, Africa could finance most of its development needs, according to Mthuli Ncube, the chief economist at the AfDB.

A lot of the illicit outflows are done in broad daylight — for instance, by transfer pricing, tax evasion and avoidance, as well as under-pricing deals by multinationals. Yet, instead of clawing back what legally and morally belongs to Africa, governments and policy makers on the continent have spent more time asking for aid and loans.

Yet finance is just one part of the equation. Trade is the other. The problem here is that African economies are mostly built around sectors with diminishing returns over time (such as agriculture and the extractive industries) rather than those with increasing returns over time (such as manufacturing and services).

At the core of the problem is what a recent report by the United Nations Industrial Development Organisation (Unido) described as “the disturbing absence of manufacturing in Africa.”
Many African countries continue to produce the same low-value commodities — coffee, cocoa, palm oil, tea, crude oil, etcetera — that they were set up to provide in the colonial era.
Between 1970 and 1990, the share of African manufacturing in GDP shot up from 6.3 percent to 15.3 percent. Urbanisation boomed, as did agriculture in the surrounding areas, as well as services.
Besides low-value products, Africa faces a challenge of finding and accessing the right markets or developing new ones. For the continent to attain sustainable development, it must add value to what it produces, manufacture more things and rethink whom it trades with.

Africa is trading more. Between 2000 and 2012, its exports quadrupled from M1.6 trillion to M6.85 trillion per year, according to AfDB data. Trade with the traditional partners — Europe and the United States — remains important but a lot of Africa’s trade is taking place with China, which is now the continent’s biggest partner, as well as India and Brazil.
This growth belies three handicaps. First, Africa remains a bit player in global trade, with only 3.1 per cent share in 2012, albeit up from 2.5 per cent five years earlier.
Secondly, although intra-African trade has more than doubled in the same period to M1.5 trillion, this only represents 12 percent of the continent’s total trade.
In addition, the growth has been driven mostly by increases in prices (up by a factor of 4.1) and less by volume (up by only a factor of 1.7), according to analysis by Unido.
In fact, in real terms, Africa’s trade with itself is less than what the continent traded with the rest of the world between 1970 and 1979; between 2007 and 2011, some 13 African countries — about one in four — exported less than five per cent of their products to other countries on the continent.

The renewed commodity boom, driven primarily by demand from China, has boosted economic growth and contributed to the “Africa Rising” narrative but has not addressed these underlying vulnerabilities in the continent’s economies.

African policy makers have spent considerable time, money and effort negotiating for access for the continent’s products to global markets, particularly in Europe and the Americas.
Even where such access has been given, for instance through the US’s Africa Growth and Opportunity Act (Agoa) and the European Union’s Everything but Arms programmes, countries on the continent have not been able to take advantage of that or diversify their exports.

In fact, many experts now warn that the kind of access provided for under the World Trade Organisation (WTO) rules — which prohibit the use of quotas, export subsidies and local content requirements — will hinder, not help, industrialisation in Africa.

  • Kalinaki is a Ugandan journalist working with the Nation Media Group as Managing Editor, Regional Content.
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