One thing leads to another

1 July 2014

How can Sub-Saharan African countries  make the most of the commodity price boom to promote sustainable development?

In the context of the opportunities opened up by the boom in commodities prices, how can sub-Saharan Africa (SSA) ensure that the benefits are widely spread and inclusive whilst promoting sustainable development and protecting economies against the volatility of commodity prices?

 

Commodity prices boomed in 2002, and despite a sharp fall in 2008 they rebounded in early 2013 and are likely to continue through 2014-2015. In fact  trends indicate that prices are likely to remain robust for some years, albeit with considerable price volatility. This robust price scenario arises from a combination of rising demand from emerging powers (such as, but not only, China) and limits to low-cost supply.

 

The limits to low cost-supply are attributable to a combination of factors. In agricultural commodities, climate variation (as much as climate change), a shortage of water and declining productivity rates are all barriers to increased low-cost production. In minerals, oil and gas, outside of the United States (US), low-cost deposits have already been exploited, and poor infrastructure adds to the costs of extraction and export. But, sustainability also has to be understood in relation to the social licence to operate. Are benefits of resource exploitation spread widely enough to legitimise the sustained exploitation of resources? Thus, the social and economic outcomes of commodity production are not only an objective for policymakers, but also a determinant of sustainable production.

 

Three factors frame the development of the resource sector in Africa. First, Africa is the new frontier for commodity production. As the CEO of Glencore (the world’s leading commodity-trader-producer) remarked prior to its public flotation in 2011, “Unfortunately, God put the minerals in different parts of the world. We took the nice, simple, easy stuff first from Australia, we took it from the United States, we went to South America and we dug it out of the ground there. Now we have to go to more remote [and unstable] places [in Africa].” Secondly, despite rapid economic growth (six of the ten most rapidly growing economies over the past decade have been in Africa), much of Africa’s population has been excluded from the development process. The number of people living below $1 per day increased from 224 million in 1990 to 355 million in 2008. Thirdly, Africa’s industrial base, infrastructure provision and modern service sectors are weak. Africa’s share of global manufacturing is about 1 percent and has been declining since the 1980s.

 

One key contributor in meeting the objective of linking the commodities boom to development is the promotion of linkages between the commodities sector and domestic industrial and service sectors. Traditionally, this policy agenda has tended to be confined to the development of downstream forward linkages, processing and then beneficiating the commodities once they have been extracted. However, these are not the only types of linkages that can be developed. There are manifold opportunities for the development of upstream backward linkages, feeding inputs into the resource sector. Moreover, beyond the first stages of backward and forward linkages, there is also scope for the development of horizontal linkages which feed inputs into other sectors (for example, basic metal fabrication industries). While initially directly linked to the resource sector, these horizontal linkages potentially have application in other sectors.

 

There is a widespread belief in policy circles that these production linkages are weak and hold little potential in the future, in part because of the enclave mentality of major resource-producing firms. The tendency of resource-producing firms to act in isolation from the rest of the economy may have been a historical reality. But, the modern firm increasingly seeks to concentrate on its core competences and to outsource everything else to other firms. If these other firms are proximate to resource extraction and can provide low-cost and quality inputs reliably, or process commodities effectively, this is in the direct interest of the resource-extracting firm. Thus, far from the lead commodity firms obstructing local linkage development, it is now increasingly one of their primary objectives.

 

Not much is known about the extent and determinants of these linkages into and out of the resource sector in SSA. For this reason, a group of 15 researchers, largely of African origin, devoted 2 years to an analysis of linkage development in 8 economies—Angola, Botswana, Gabon, Ghana, Nigeria, South Africa, Tanzania and Zambia. They examined a variety of sectors, including oil pipelines, oil services, diamonds, copper, timber, gold, mining equipment, construction and infrastructure.

 

Linking commodity boom to development

One of their most important findings was a surprising degree of linkage development in each of these economies, and that the market played an important role in diffusion. Lead resource companies are increasingly happy to outsource non-core activities (see Figure). These linkage developments include the well-developed mining equipment supply industry in South Africa, knowledge-intensive indigenously-owned supplier firms in Nigeria, undersea-pipeline fabrication in Angola and diamond cutting and polishing firms in Botswana. Although each commodity has specific production characterisitcs, and each economy has specific capabilities, five common factors were identified by the researchers as having  a bearing on the promotion of a sustainable pattern of development in the resource sector.

 

The first was the growth in outsourcing by the lead commodity-producing firms. In most cases, this was spurred by their desire to focus on their core competences and, in other cases, by the promotion of corporate social responsibility (CSR) programmes. In other cases, government policies designed to promote linkages reinforced the commitment of lead commodity producers to local outsourcing.

 

The second factor affecting the promotion of linkages was the ownership of both the lead commodity firms and their first-tier suppliers and customers. The research uncovered no general trend to reinforce the conclusion that foreign-owned firms were more or less likely to promote linkages. But, they did find important variations in the behaviour of different nationality foreign firms (particularly Chinese firms), different types of foreign firms (for example, state-owned Chinese firms operated differently than privately owned Chinese firms), and individual firms pursuing different strategies in the same sector (this was an important factor in the Angolan oil industry).

 

Third, the development of linkages was influenced by the quality and availability of infrastructure. Infrastructure is a pervasive problem.  The African Development Bank estimates Africa will require more than $90 billion in investment in infrastructure per year to make up its infrastructure deficit. In some cases, the weakness of infrastructure promotes local sourcing (since imports are both expensive and face delays in reaching users). But, more often poor infrastructure proved to be an obstacle to linkage development, constraining the development of local suppliers.

 

Fourth, skill deficits and weaknesses in the national systems of innovation (NIS)—the educational and research establishments supporting the resource, industrial and service sectors—constrained linkage development. The skills gap was ubiquitous and a continuous concern to all firms in the commodity value chains. The constraints imposed by the NIS become more important as linkages develop and become more sophisticated.

 

Fifth, effective policy design and implementation has the capacity to speed up and deepen linkages into and out of the commodities sector. By the same token, however, poorly designed and delivered policy has acted to slow down and to reduce the depth of linkages to the local economy.

 

An effective policy framework is the key

Of these five factors, perhaps the most important determining factor in the development of local linkages was found to be the policy framework. An effective policy environment clearly acts to promote linkage development. Botswana has a focused vision that guides the development of downstream linkages. By contrast, in other environments, such as Tanzania, the absence of a clear vision, the contradictory nature of individual policies and weaknesses in policy implementation all acted to hinder linkage development. There is a widespread tendency for governments to confuse linkage development with the indigenization of ownership (since not all local firms are owned by citizens).

 

Emerging from all the individual country studies is the need to decompose the “policy challenge” into a series of discrete steps: the development of a coherent vision; the introduction of specific policies that contain both positive incentives (carrots) and negative incentives ( sticks); efforts to ensure that individual policies are “joined up” and supportive rather than being mutually  exclusive; and measures to attune policies to the capabilities of the state. It is also critical for the state to have the integrity and will to implement its stated vision.

 

Finally, and perhaps least recognized, the policy challenge is not  confronting only governments. The same problems (vision, incentives, joined up policies, capabilities and integrity and will) are evidenced in the private sector. Almost all the lead firms failed to “walk the talk” in the promotion of local linkages. This is not because management is deliberately disingenuous. It is  because, for firms in all countries and all sectors, the deployment of corporate strategy is filled with pitfalls. Based on these failures in both the state and the private sectors, the researchers concluded that there is an urgent need for the state and the private sector to align their efforts in linkage development and together to focus on what is required to achieve win-win outcomes in promoting value-chain efficiency in the resource sector.

 

Conclusion

 

While the commodity price boom has the potential to force SSA back into conflict and resource dependency, it also has the potential to  promote more sustainable patterns of development. Neither outcome is pre-ordained; each is the consequence of how governments and lead commodity firms react to the boom. What is required to make the most of commodities in Africa is for governments and firms to act in concert.

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