Transforming Africa: Will agriculture, oil and gas, services, or manufacturing deliver the dream?

We look at five options for accelerating Africa’s transformation; all of them will require a bold reconceptualising of policy directions

CHINA’S stock market seem to be finally reversing a three-week crash, with share prices in Shanghai having lost a third of their value since June, and authorities frantically trying to shore up the market.

Trading was halted on 50% of the Chinese market, and analysts said then that the moves were a sign of “desperation” that would merely postpone the inevitable. It waits to be seen whether the slight rebound will hold.

The precipitous decline in the stock market was characterised as a dramatic, but not entirely unexpected correction that was bound to happen, as the stock market had become detached from the reality of China’s economy, and “appallingly overvalued”, according to Patrick Chovanec, managing director at Silvercrest Asset Management, on a Twitter post.

It heralds some lessons for Africa; first for South Africa whose market-capitalisation to GDP ratio is the third-highest in the world, and whose stock markets have also been described as having little relationship to the real economy.

The value of shares traded at Johannesburg Stock Exchange is nearly three times as big as the entire South African economy; only Hong Kong and Switzerland have larger stock markets relative to gross domestic product.

But China’s stock market spiral can also be seen as an indicator that the country’s roaring economy has definitively entered a slower, quieter phase.

It presents Africa with an opportunity to benefit from China’s slowdown and a shift away from investment there – but it will take bold reconceptualising of policy, and restructuring of African economies to thrive in the new economic reality. By 2050 almost a fifth of the global working age population will be in Africa. 

And Africa’s known reserves of oil, gas, and minerals, with further exploration over the next decades, are set to grow dramatically. However, Sub-Saharan countries are at a relative disadvantage in capital including physical infrastructure, as well as technology, and skills.

recent report from the African Economic Outlook (AEO) presented five options for accelerating Africa’s transformation, and we look at each in turn, identifying the strengths and weaknesses of each strategy, and suggesting the countries that are best suited for each:

Option 1: Manufacturing

China’s export advantage of low wages and a large workforce has been eroded in recent years, as rising incomes mean that labour isn’t as cheap as it used to be just a few years ago, giving Africa the opportunity to emulate export-led strategies of other emerging economies.

Already, four African countries – Ethiopia, Uganda, Kenya and Tanzania – have been identified as best positioned in Africa to take over as global manufacturing hubs, particularly in garment and footwear manufacturing, as well as mobile phone assembly, highly competitive areas that offer low wages but potentially quick growth.

But over the past three or so decades, Africa’s manufacturing sector has stagnated, and in many countries, has actually suffered from de-industrialisation. Manufacturing as a share of GDP in African economies fell from a high of 15.3% in 1990 to 12.9% in 2009.

But the biggest set back with this strategy is the low productivity of the industrial sector in Africa, because of the slow adoption of technology. According to data from the African Centre for Economic Transformation, wages for producing polo shirts, leather loafers, and wooden chairs in Ethiopia and Tanzania range from about a tenth to half those in China. 

But polo shirt workers in Ethiopia and Tanzania would finish just half the number of shirts that workers do in China, eroding half the wage advantage. For wooden chairs they would produce 1 or 2 for every 100 in China, pushing Tanzania’s real costs to 19 times those in China— and Ethiopia’s to 26 times.

It means that Africa has not kept up with technical change in the sector, and industrialisation alone may not be suffice to create the almost 30 million additional jobs that Africa will need every year.

Success stories Africa can look to: China, Taiwan and South Korea followed an export-driven manufacturing model into economic transformation

Africa candidates: Ethiopia, Cote d’Ivoire, Ghana, Nigeria and Kenya already have something of an industrial base, which can be boosted for greater productivity

Option 2: Service-led growth

The service sector has been the fastest growing in many African economies, typically accounting for 40-50% of GDP as other traditional heavyweight sectors, such as agriculture and manufacturing, languish from low investment and dismal productivity. Even a country like Nigeria found that services account for 51% of GDP when it recently rebased its economy.

Indeed, it appears that many African countries are directly replacing agriculture with services as the largest economic sector without passing through an intermediate phase of industrialisation, the experience of almost all successful economies.

But the problem for Africa, like in manufacturing, is that it consists of low value and low technology activities, such as personal services and petty trading. More productive service sectors, such as banking, ICT and (to a lesser extent) tourism, require high-skilled and educated workers, but Africa’s workforce is still mostly low-skilled.

And it is also uncertain whether employment opportunities in the service sector are enough to enable countries to bypass industrialisation.

Success stories to look to: Mauritius, Singapore, Malaysia and United Arab Emirates focused on developing high-value services such as the financial sector and ICT. Macau in China developed as a centre for gambling.

Africa candidates: Kenya, Zimbabwe, Nigeria, Ghana already have a well-educated populations and relatively sophisticated service sectors; they are well positioned to capitalise on their human capital for transformation

Option 3: Natural resources – oil, gas and mining

African oil and gas have become important components of the world’s hydrocarbon supply–demand balance. This year, 13% of global oil production is projected to take place in Africa, compared with 9% in 1998. The continent has a majority of the world’s known resources of platinum, chromium, and diamonds, as well as a large share of the world’s bauxite, cobalt, gold, phosphate, and uranium deposits.

But international commodity prices are volatile and global demand is uncertain as emerging economies like China slow down. In the past 12 months, the price of crude oil has slumped 45%; the prices of copper, iron ore and gold are also tanking.

Even more importantly, the natural resource sector tends to be capital-intensive but not labour-intensive, thus is unlikely to offer the millions of jobs needed to absorb Africa’s burgeoning workforce. 

For this to happen, governments must focus on new ways to leverage their resource sectors for broad growth; for example, by using oil and gas as the catalyst for downstream energy such as power stations, refineries, and retail outlets; and related industrial development, including petrochemicals and fertilisers.

Success stories continent can look to: United Arab Emirates, Norway and Chile were able to invest their natural resource windfalls wisely, both for current development and savings for the future.

Africa candidates: Tanzania, Mozambique and Uganda are poised to be the next hydrocarbon powerhouses in Africa, and can use oil and gas revenues to uplift their economies from a low base. There is still time for Angola, too, to develop a more inclusive model, as well as South Sudan and Democratic Republic of Congo – if they could get their houses in order

Option 4: Agriculture

According to analysts McKinsey, agriculture is Africa’s largest economic sector, representing more than $100 billion annually. It is highly concentrated, with Egypt and Nigeria alone accounting for one-third of total agricultural output and the top ten countries generating 75%. But low productivity plagues the sector – it employs up to 70% of the workforce, but contributes just 15% to Africa’s GDP. 

Cereal yields are among the lowest in the world at about 1,500 kilograms per hectare, or a third of the yields of the other emerging economies. But the potential for higher productivity- and improved wellbeing – is huge. Half the world’s acreage of arable land not yet cultivated is in Africa. 

And because so many are engaged in agriculture, increasing productivity in the sector would be a powerful way to raise incomes: Research shows that growth in the agriculture sector is 11 times as effective at reducing poverty as growth in extractives, services or even manufacturing in sub-Saharan Africa. In the absence of a flourishing agricultural sector, the majority of Africans will be cut adrift from the rising tide of prosperity.

Success stories that offer inspiration: Indonesia, India, Brazil and Vietnam were largely rural countries that sharply increased agricultural productivity in the Green Revolution, lifting millions out of poverty.

Africa candidates: Nigeria, South Sudan, Zimbabwe, Zambia and Tanzania have large tracts of arable, uncultivated land, with large rivers like the Nile and Zambezi that can be tapped for irrigation

Option 5: Green energy

Africa is the world’s most energy-scarce continent. 45% of sub-Sahara Africa’s generating capacity is in South Africa alone, and without it, the region has less power available than New York City alone.

But Africa’s should be the world’s global centre for green energy. Thanks to the expansive Sahara desert, strong winds along its coasts and in its flat, arid interior, and geothermal reserves all along the Rift Valley, the continent has the world’s highest reserves of renewable energy resources. 

As battery storage for renewables becomes more sophisticated, it provides the opportunity to leap frog millions of consumers from no electricity at all straight to renewables, just like mobile phones in Africa bypassed the analogue age landline entirely.

The International Energy Agency has called the dismal energy sector “a brake on development”, but this can be overcome and the benefits of success are huge. Just sorting out the power woes could help boost sub-Saharan Africa’s economic growth by almost a third by 2040, according to the IEA.

But such a transition into green energy would take a long time, and the current resource extraction model will most likely continue to mobilise significant investments in the short to medium term.

Success stories to look to: The state of Gujarat in India aggressively invested in mega solar parks, making it an international leader in green energy.

Africa candidates: South Africa, Namibia, Somalia, Chad, Niger, Mozambique, Kenya, Djibouti, Morocco, and Ethiopia have huge potential for wind and solar energy, and can even become net exporters of electricity. Democratic Republic of Congo’s Inga Dam project is probably the biggest potential game changer for the story of electricity in Africa.


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