Industrialisation is back. After decades when policy efforts were mostly focused on macroeconomic stability and opening up markets, the success of industrial policies in emerging Asian markets highlighted the importance of a concerted effort for Africa to climb up the global value chains and diversify away from reliance on raw commodities.
The Africa Union's Agenda 2063 puts value addition and industrialisation at the centre of its vision for a prosperous continent, setting a target for Africa to generate 10% of global manufacturing by 2050. The African Development Bank has made industrialisation one of its "High Five" priorities - along with energy and power, agricultural transformation, regional integration, and improvements in quality of life - setting out an ambition to help raise industrial Africa's GDP by 130% by 2025.
The extractive sector can be a significant driver of industrialisation in Africa, as it has been, for example, in the United States in the late 19th and early 20th century. As estimated in the 2013 African Economic Outlook, 35% of economic growth and 60% of greenfield foreign direct investment over the past decade was generated in the sector, driven by the long cyclical upswing in commodity prices.
But as the downturn started, one wonders whether the past cycle had been a missed opportunity to spur industrialisation and economic diversification. In fact, Africa has de-industrialised in relative terms over the past two decades: the industrial share of GDP declined from 32% to 27.8% between 2005 and 2013, and manufacturing weakened from 17.7% in 1975 to 11% in 2013. Today, Africa's industry generates just USD 700 of GDP per capita, less than a third of Latin America's and barely a fifth of East Asia's.
Some of the reasons for this disappointing performance rest with the lingering impact of a policy approach aiming to maximise taxation from the extractive industries while minimising their integration in the domestic economy. The consequence of this "enclave approach"? The main and often sole link with industrialisation becomes the national budget. Under this model, the state is expected to allocate resource revenues towards investment to facilitate industrial development: infrastructure, skills development, support to small and medium enterprises and the regulatory mechanisms needed to create a conducive environment for industrialisation.
This approach looks like putting all the eggs into one basket: despite progress in public financial management systems in the continent, delivering an industrialisation policy requires significant programming capacity, high efficiency in allocation of resources and execution of budgets, and rigorous project screenings. Even the most capable budgeting systems remain subject to the vagaries of the political cycle and changing focus of policy-makers. For example, Botswana achieved significant success in capturing resource rents through taxation and directing them towards investment in human capital. However, after an initial strong focus on project selection, in more recent years analysis has highlighted the emergence of project delays and increasing execution costs.
So what is the alternative to a revenue-driven push for industrialisation? The African Mining Vision, the pan-African blueprint for extractives-based development, argues for a holistic approach that overcomes the tax-maximising enclave model. The idea is to complement taxation with programmes that enhance the economic linkages between the extractive industries and the other sectors of the economy.
Linkages consist of opportunities for local businesses to supply inputs into the extractive activities (backward linkages); to transform raw materials into finished and intermediate products (forward linkages); transfers of technology and skills creation through training and on the job learning and R&D; and creating infrastructure nodes (transport, energy or ICT) that drive their main profitability from the extractive industries but are accessible to other economic actors.
Local content policies (targets or aspirations for locally procured goods, employment or training); improvements to the general business environment; provision of finance and technical assistance to local business to enter the extractives supply chain; and agreements to share extractives-related infrastructures are all tools that can leverage the extractive industries for industrialisation.
But what are the key strategic choices for resource rich countries to industrialise? Downstream linkages - processing and transforming extractive output into manufactured products - have attracted policy-makers' attention for its potential for industrialisation. However, not all minerals lend themselves to downstream value addition - for some transport costs are low enough that vicinity to the final markets, rather than to the point of extraction, is more important, and therefore investors will look at other factors, such as general investment climate, quality of infrastructures, availability of skills, labour costs, etc. when taking their decision of where to locate downstream processing activities.
As pointed out in a recent paper by ECDPM, downstream linkages strategies can be based on a supply side approach - that is, driven by what minerals are most available in the country's geological endowment and investing in processing the raw input - or be demand driven - looking at what intermediate or finished products a country needs to drive its industrialisation programme, with a view to developing a cost-effective processing industry able to supply the domestic market for such products. The former approach is the one that has attracted the most attention from African policy-makers, with mixed results. Probably the most well-known and generally successful is Botswana's foray in the diamond cutting and polishing industry. Botswana agreed with De Beers in 2011 to move its supply and sale of diamonds from its offices in the UK to Botswana, and to supply some US $800 million of raw diamonds locally by 2014. The cutting and polishing industry in Botswana has grown to employ around 3,400 people. However, Botswana's is somehow a special case, not necessarily replicable by other African countries: as the world largest producer of diamonds, its negotiating power with private multinationals is unrivalled compared to other countries. Moreover, while Botswana's polishing and cutting industry represents a significant move up the value chain, jewellery manufacturing, marketing and retailing, where more than a half of the value in the diamond value chain is generated, still take place mostly outside the African continent.
Demand-driven linkages have attracted less attention from policy-makers, perhaps because of the complexity of analysing potential demand for a product that is not yet being manufactured. The chart below, mapping raw minerals into intermediate products and sectors of domestic consumption, shows that the menu of options is large; demand driving the domestic processing and beneficiation process ranges from manufacturing, infrastructure, power and agriculture.
Source: Paul Jourdan (2015)
In a demand-driven approach, a country would select its linkages based on the growth prospects of the downstream sector (on the right hand side of the chart) most likely to generate demand for the intermediate input. The development of the cement industry in Nigeria provides an example of a demand-driven approach: having identified the cement industry as yielding an early potential for development, the government set out to prioritise the development of limestone, gypsum, and other raw materials needed for cement
manufacture (while the rest of the mining potential was generally neglected in favour of the oil and gas industry) as well as providing fiscal incentives for investment in the downstream industry. As a result, cement production increased six fold between 2000 and 2013, while attracting an estimated $8 billion in investment and leading to a reduction of cement imports from 77 percent of the market in 2003 to 10 percent in 2012.
As I argued elsewhere, a regional dimension to natural resource-led industrialisation is essential and needs to be put in the broader context of investment climate and business support policies aiming to improve the overall environment for industries.