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Can Africa’s natural resources be an effective driver of growth?

By Cristina Casabón 

A few decades ago, the 1980s debt crisis hit Africa deeply. Stagnant economies and heavy borrowing created huge debt burdens. As the crisis deepened, the IMF and the World Bank created stabilisation and structural adjustment programs. It took two or three decades for low-income African countries to get out from under the debt burdens. Today, the debt crisis is finally winding down but Africa’s resource-rich economies face new challenges.

Nowadays, Africa sees limitless opportunities in the march of globalisation, but natural resources continue to be important determinants of its performance. Its growth has been financed mostly by income generated from exports of natural resources – minerals such copper, nickel, gold and other precious metals, diamonds, oil and natural gas.

The fragile economies could lead to a sharp slowdown if they don’t succeed in harnessing commodity booms for sustained increases in production. Africa’s sustained growth will depend on the grade of diversification, the ability to embark on sustainable industrialisation and trade in manufactured goods as well as the creation of infrastructure and a a more inclusive growth.

Africa’s Growth in the short term:

The International Monetary Fund (IMF) said on July 24 that according to his calculations, the economies of sub-Saharan Africa will grow 5.4% this year and 5.8% in 2015, compared to 1.7% and 3% in the United States in those two years, and a growth of 7.4% and 7.1% in China, respectively. More interesting is the Annual Report of 2013 of the Bank Group, which shows Africa’s Growth Projections by sub-regions.

Growth in Central Africa was expected to be about 6% in 2014 before the armed conflict in the Central African Republic, but is likely to be lower in the medium term. The Democratic Republic of Congo has the potential to grow at 8% or more during 2014 thanks to its natural resource-rich economy. Chad is projected to grow at close to 9% in the medium term, driven by investments in oil and agriculture.

In East Africa, countries are expected to grow at about 6% this year, but the dynamics are changing with the new oil and gas discoveries in the region. Armed conflict in South Sudan has disrupted business in the region, but is not expected to have a strong impact on the region.

North Africa is expected to grow by 3.1% in 2014 and by 5.5% in 2015. However, the report says that political developments in the region will be a key determining factor. Economic growth is slowing, fiscal buffers are depleting, unemployment is rising, and inflation is mounting in seven transition countries in the region.

In Southern Africa, South Africa is projected to grow at 2.7% this year. Other countries in the region, notably Zambia, are expected to show higher growth rates, above 7%. Mozambique is becoming one of the world’s biggest producers of coal and gas, growing to above 8%. Oil-rich Angola, are now achieving growth rates as high as 20% per annum.

West Africa will continue to demonstrate Africa’s best prospects for growth in the medium term. Average growth is projected at about 7%. With a population of 170 million and huge oil reserves, it should be no surprise that Nigeria is Africa is the largest economy in Africa.

A sustainable growth in the long run?

Countries dependent on oil, gas, and mining may have weaker long-run growth, higher rates of poverty, and higher inequality than non mineral-dependent economies at similar levels of income.  How can natural resource wealth be an effective driver of growth?  This emerging economies can start taking better choices.

a) Diversity and sophistication

Firstly, African emerging countries should increase its independency from the global market, where they are exposed to fluctuations in prices and demand. The global trends that have supported growth in sub-Saharan Africa in the past are expected to become less favorable in the near term, as suggested by the International Monetary Found.

Energy and strategic mineral reserves are very important to USA but also to China, India, and other countries in the broader Indian Ocean basin. If the growth in emerging economies (BRICS) slow much more than currently envisaged, many countries in the region would be certain to face lower export demand. In addition, tighter financial conditions, especially in China, could also reduce the appetite of companies for investing in sub-Saharan Africa.

African resource-rich countries with a typical resource extracting economy must reduce their commodity dependency from external partners by diversifying their economies. This boom can lead to a less favorable period and only countries that diversify and build flexible labor markets are more likely to have a sustained growth in the long term. 

It is far easier to expand an existing industrial agglomeration than to start a new one, but only the diversification and sophistication of the manufacturing production will bring independence as well as a durable and more inclusive growth in sub-Saharan Africa.

b) Infrastructure 

According to the World Bank, the continent’s infrastructure deficit is considered one of the most significant barriers to sustaining Africa’s growth. Current growth needs to invest in infrastructure to create a firmer basis for structural transformation.

Africa can achieve high levels of productivity and face the  continent’s inability to feed itself by stimulating rural entrepreneurship and the creation of an infrastructure in rural areas and cities for transportation, energy, telecommunications…

Africa will benefit greatly from improvements in infrastructure. Millions of lives are threatened every day for lack of clean water or safe sanitation. Businesses and commerce suffer from lack of reliable power for industrial processes or because they cannot get their goods to the market.

For an important subset of countries, power emerges as the most limiting factor. Deficiencies in broader transport infrastructure and infrastructure for information and communication technologies (ICT) are also another huge obstacle.

c) More inclusive growth

Despite some improving social indicators, growth has not been inclusive in most of the African countries. In Africa the poor still being the majority of the population. This situation won’t be improved unless the government or foreign investors promote more and better jobs, financial inclusion, and raise productivity in key sectors.

In 2011, massive protest raised in the North of Africa in response to unpopular reforms, such as removal of subsidies. The reason is that the poorest were being the most affected by economic reforms, and most of them are unemployed and have to face rising inequality.

This situation presents a deeper challenge to the legitimacy of leaders in all African countries. While global demand for Africa’s natural resources will continue to attract investors, the growing gap between the rich and the poor can bring instability. Growth should be people-centred, diversified, promoting green activities and targeted at reducing inequality by integrating the poor into productive sectors.

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