Report says strengthening supply capacity is essential for Africa to benefit from trade liberalization

Effective policies are needed for agricultural and industrial sectors to remove constraints to production and achieve higher exports for Africa

Geneva, 15 September 2008 - Weak supply capacity -- that is, a limited ability to produce the quantity and quality of goods required to respond to global demand for those goods -- is the main obstacle to improved export performance in Africa, and explains why the continent has lost market share from 6% of world exports in 1980 to about 3% in 2007, reports Economic Development in Africa 2008(1).

Subtitled "Export Performance following Trade Liberalization: Some Patterns and Policy Perspectives," the 2008 edition of UNCTAD´s annual report on Africa says two decades of trade liberalization have successfully removed many of the barriers that used to limit trade from the continent -- and there has been a slight increase in exports as a result. But the progress has been less than expected and is far below the increases achieved by other developing regions.

Gaining greater access to world markets opens up vast opportunities, but many African countries do not yet have sufficient ingredients in place to take advantage, the report says. They need such building blocks as well-trained workforces, reliable electricity supply, research and development skills, flexible investment and banking services, and efficient transportation to supply, at competitive prices, large volumes of products for which there is global demand.

Governments on the continent also need to take effective steps to reverse several worrisome trends, according to the study. These include decades of relative neglect of agriculture that have hindered African countries at a time of climbing commodity prices. In addition, diversification of their economies -- long recommended as a way of ensuring more robust and stable growth -- has not occurred; and the manufacturing sector, where potentially higher profits and higher living standards can be realized, has been stagnating while other developing regions have greatly expanded their industrial outputs.

Africa´s export performance after liberalization has been modest

Trade liberalization in Africa was expected to result in increased production in the tradable sector, which should have increased export volumes and diversified the array of exported products. As of the second half of the 1990s, most countries in the region were liberalized. Their average ratio of exports to Gross Domestic Product (GDP) increased from 23% before liberalization to 26% after. This 11% climb is much lower than the 50% increase recorded in non-African developing countries following trade liberalization. Relative to other developing regions, the increase in Africa´s export value had been driven primarily by an external factor -- rising export commodity prices -- rather than increasing volumes. Over the period between 1995 and 2006, both export volumes and prices grew at about 6% per year. This performance contrasts with the experience of developing Asia over the same period, where export volumes grew by 10% per year while the prices increased by only 1% per year, the report finds.

Analysis of Africa´s export composition shows that most African countries have not diversified their export products. On the contrary, more than 60% of African countries registered higher export concentration indexes in 2006 relative to 1995, increasing these countries´ vulnerability to falls in prices for a small number of commodities. Most African countries that increased their export revenues owed it to unexpected hikes in the prices of fuel and other minerals, such as copper and gold. Indeed, the ratio of the value of fuel exports to GDP increased from 5% in 1998 to more than 15% in 2006. Over the same period, the corresponding ratio for non-fuel primary commodities and manufactured products remained constant, each at about 5% of GDP. These statistics suggest that the current commodity boom should not lure African countries into a false sense of prosperity. Africa remains vulnerable to the vagaries of international commodity prices, the report warns.

Agricultural export performance is hampered by structural and institutional constraints

Despite its importance, the agriculture sector in many African countries has been deteriorating over the years. In the space of a generation, Africa´s agriculture has so dramatically declined that Africa has fallen from its status of a net food producer to become the region most dependent on external food aid. In fact, Africa is currently, experiencing a food crisis. The main explanation lies in the negligence in development policies pursued during the last 25 years, which have abandoned previous emphases on research, agricultural infrastructure, extension services, and the provision of credit for farmers. The recent policies, including trade liberalization, failed to recognize the strategic role of agriculture in African economies and went as far as dismantling the institutions that had previously supported the sector. Total donor support to agriculture declined from its peak of US$8 billion in the early 1980s to $3.4 billion in 2004; the proportion of official development assistance (ODA) allocated to agriculture declined from 16.9% cent in 1982 to just 3.5% in 2004. Domestic resources invested in agriculture followed the same trend. It is noteworthy that those countries that maintained strong agricultural export sectors were those that pursued sustained and coherent sectoral policies to increase and diversify their agricultural exports. Examples include Ghana and Côte d´Ivoire.

Africa has not been able to diversify into manufactured exports

The importance of manufactured exports for economic development has been illustrated by the experience of the East and South East Asia region where manufacturing products account for about 90% of total merchandise exports. In Sub-Saharan Africa, exports from the manufacturing sector account for only 26% of total exports, the lowest proportion of all regions. According to the report, over the period 2000-2006, only eight African countries had manufactured exports worth more than 10% of their GDPs or more: Botswana, Mauritius, Morocco, Namibia, South Africa, Swaziland, Togo and Tunisia, according to the report.

The oft-heard argument that Africa´s failure to export more manufactured products is due to the region´s comparative advantage in the production of primary commodities is a simplistic and flawed argument, the report contends, and there is no fundamental reason why Africa should not be able to emulate the positive Asian experience. Arguing that Africa should stick to its traditional exports of primary commodities and a few labour-intensive manufactured products is tantamount to condemning the region to slower development, argues the report.

To achieve increased industrial output and exports, African governments must take steps to deal with several key problems, the report says. These include poor infrastructure, high entry costs for businesses, shortages of qualified labour, low investor protection, difficulty in accessing credit, and cumbersome tax systems. Together, these discourage investments that could increase productivity. Economies of scale also must come into play -- many African manufacturers are currently too small to benefit from the efficiencies achieved by larger firms elsewhere, and governments should enact measures to help them expand so that they are internationally competitive. Addressing these issues effectively will require industrial policies tailored to the specific characteristics of each country, the report says.

Some policy perspectives

The report suggests that sectoral policies to increase production and competitiveness in the agricultural and manufacturing sectors could be crafted on the basis of two building blocks: increasing productivity and developing reliable infrastructure, including major improvements to electricity generation, water supply, and telecommunication systems.

Productivity improvement could be achieved through technology upgrading, research and development, encouraging enrolment in technical education programmes, and fostering vocational and on-the-job training. Current state expenditure on agriculture remains far below the 10% of total government expenditure pledged for the year 2008 under the New Partnership for Africa´s Development (NEPAD). To attract investment to agriculture and manufacturing, governments could consider offering fiscal incentives to potential investors. Countries could also consider reestablishing some services that were traditionally provided to agriculture and industry, such as access to subsidized inputs and improved access to credit. Each country should consider setting up an export promotion agency with its own export promotion fund. These policies could be funded through the national budget and, where such funding is not available, aid allocations. Developed countries have an important role to play in helping African countries to improve their export performance, notably through their aid-for-trade initiatives, the report says.

To help overcome the problems linked with the small size of African national markets, regional economic cooperation could be encouraged, the report says.