Competitiveness and economic transformation – Africa’s imperative
Africa has recorded robust economic growth since 2001 with average gross domestic product (GDP) of 6.0 per cent that has outpaced the rest of the world, with potential for sustained growth.
The resilience observed in the continent was attributed to its modest inflation, relatively stable exchange rates across economies, lower debt profile, huge untapped natural resources and large labour force with a population of about 1.0 billion, about 60.0 per cent of which are youth. Consequently, Africa has witnessed renewed global interest as an emerging investment destination. This must be leveraged towards attaining inclusive and sustainable growth as was theexperience in South-East Asia in the 1980s and 1990s. In order to sustain the growth momentum achieved so far, African economies must strive to be competitive for sustainable development.
Economic competitiveness captures the extent to which economies possess the essential factors to enhance productivity and transform the well-being of their people. It is defined as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be reached by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to grow faster over time and produce a higher level of income in the medium to long term. The concept of competitiveness thus involves static and dynamic components. Although the productivity of a country determines its ability to sustain a high level of income, it is also one of the central determinants of its returns on investment, which is one of the key factors explaining an economy’s growth potential. Economic transformation, on the other hand, involves all-inclusive growth and development in the social, political and economic institutions of a country.
Enhancing the competitiveness of economies transcends the issue of pricing to include critical factors such as industrialization, cost of labour and doing business, economic diversification, infrastructure, security, investment climate and institutions as well as corporate governance, transparency and accountability.
Enhancing Africa’s competitiveness is important because the continent needs to secure its position in the global market for trade, investment and services. The continent should enhance its competitiveness by harnessing its huge endowments in natural and human resources in an efficient manner that promotes global and intra-regional trade. This imposes a strategic imperative for African countries to improve their individual investment and business environments through the development of infrastructure, strong institutions, human capital, stable political and macroeconomic environment, as well as technological advancement and innovation. All of this will translate into sustainable economic growth and transformation.
Industrialization is a sine qua non for the transformation of the continent. The notable growth recorded in Africa over the past decade has mainly been attributed to commodity price increases rather than value-added production and enhanced competitiveness. Given the volatility and distortionary effect of commodity prices, this is not a sustainable growth model. Therefore, the undue reliance on commodity exports and failure to diversify their economies has been a major impediment to the industrial development of African countries as the continent remains the least industrialized region accounting for a dismal percentage of global manufacturing. Most countries in the continent are characterized by a weak industrial base with minimal structural changes and a general lack of economic diversification. The industrial competitiveness of a region is premised on its ability to export more in value-added products than it imports. The manufacturing sector in Africa currently provides relatively little employment with limited access and support for private entrepreneurs.
According to the index for the comparison of relative industrial competitiveness of economies computed for 133 countries in the Competitiveness Industrial Performance (CIP) Report for 2013, the upper ranking was mainly populated by transition and emerging economies in Asia and Latin America while most African economies fell at the bottom of the ranking with the exception of South Africa, Egypt, Tunisia, Morocco and Mauritius. Of the 133 countries, South Africa, ranked as the first African nation on the index at 41st, followed by Tunisia 58th, Egypt 62nd, Morocco 66th and Mauritius 79th. Botswana, Nigeria, Kenya and Ghana positioned at 86th, 95th, 102nd and 118th, respectively. The continent accounts for 1.0 per cent of global manufacturing with manufacturing representing 10.0 per cent of its GDP compared with 35.0 and 16.0 per cent in East Asia and Latin America and Caribbean, respectively. With the current statistics, it is evident that Africa lives on imports of manufactured goods.
• The region has been unsuccessful in the achievement of complete industrialized exports due to a limited openness to imported inputs, old technology, minimal foreign investment as well as a general lack of full information on the needs of potential markets. Multidimensional integration of trade which entails the free movement of people, innovation and capital also required for production of competitive goods and services is virtually non-existent. The region is plagued by poor and obsolete infrastructure, poor regulation, cartels and corruption which hamper its industrialization efforts. According to UNIDO, the region loses about 2.0 – 3.0 per cent of its GDP due to lack of reliable power and energy. It was also estimated that the amount of gas flared in Africa could supply half of the continent’s electricity requirements if suitably channeled.
Low productivity by African firms have increasingly constrained and stagnated Africa’s competitiveness in most economic sectors. Strategic policies have to be adopted in certain sectors to expand productive capacities through improved infrastructure, enhancement of workforce capacity and the promotion of entrepreneurship. To enhance productivity and competitiveness in the region, various strategic plans have been adopted to fix supply-side problems, promote entrepreneurship, expand technology and ease the effect of Free Trade Areas on tariff-dependent economies.
As a continent, the agricultural sector is a promising area for specialization and competitiveness if suitably developed. However, African agriculture is largely dominated by subsistence farming despite its huge youth population with low skills and limited mobility. An example of a scheme developed to enhance productivity and competitiveness in agriculture is the Nigerian Incentive Based Risk-sharing System for Agricultural Lending (NIRSAL) introduced by the Central Bank of Nigeria. The scheme is aimed at bridging the financing gap through leveraging of about 60.0 per cent of agricultural financing requirement in the country. NIRSAL is designed to establish long term capabilities and institutionalized lending to the agricultural sector which had previously been perceived as high risk due to a wide-spread lack of understanding of the agricultural sector, intricate credit valuation processes as well as high operating costs.
NIRSAL seeks to create incentives and catalyze processes to encourage the growth of formal credit, direct and indirect, for the agriculture value chain, as a mechanism for driving wealth creation among value chain participants. Under the scheme, lenders have the prospect to net latent proceeds, sustain long term human, institutional and cultural capacity for value chain financing and achieve lower loan initiation and distribution expenses. While the goals of NIRSAL would boost productivity and competitiveness in the agricultural sector, its realization is dependent on provision of infrastructural facilities such as stable power supply, good road networks and effective transportation system. This will facilitate the movement of farm inputs and finished goods. However, despite these potentials of the scheme, factors such as low productivity, poor technology, low research and development as well as an under-financing of the agricultural value chain has impeded significant progress.
Africa’s labour market is largely populated with unskilled labour with limited technical know-how to promote efficient production and competitiveness. Production in most African countries is factor-driven and depends mostly on natural endowments; the industries are mostly at the extractive stage and employ a high portion of unskilled workforce with low productivity and low wages. Ensuring efficiency in Africa’s labour market through human capital development will unlock large untapped potentials. This will involve skill acquisition and training which governments must be ready to invest in to make the sector virile and competitive. It is worth noting that efficiency of labor contributed in developing Asia which has over the years become more productive to the point of converging with the averages in Organization for Economic Co-operation and Development (OECD) countries. In 2012, GDP per hour worker in sub-Saharan Africa was about US$18.0 compared to US$40.0 in developing Asia. The prevalence of low value-added production reduces the returns on capital which have resulted in Africa contributing less than 3.0 per cent to global trade.
From the foregoing, it is clear that a number of bottlenecks exist that hinder the emergence of a competitive public and private sector in Africa, such as high cost and lack of access to credit, the poor quality of infrastructure services, high unskilled labour force, lack of a transparent and friendly regulatory environment as well as corruption.
Since maximizing the return on investment is the ultimate goal of all investors, one way to achieve this is to minimize investment costs. Prospective investors will be attracted to invest in an environment where costs and risks are minimized. Some of the issues usually considered include legal requirements, tax regulations, foreign exchange controls and other statutory regulations or obligations to be met in the investing country, in order to set up the investment in the most cost-effective way.
The cost of doing business has a direct link to the return on investment. In many African countries, the return on investment is relatively low compared to most developed economies due to a number of factors which include multiplicity of taxes and tarrifs, land acquisition and ownership, business registration cost, high port charges, weak infrastructure such as poor road networks, epileptic power supply and inefficient communication systems. Other factors include high cost of funds, policy inconsistency as well as high level of insecurity. All these factors combine to heighten the cost of operation that undermine the realization of corporate objectives. To make African economies competitive, the high cost of doing business must be drastically reduced through sustainable economic and institutional reforms. There is also a need for substantial reforms in the banking sector so that African banks will be able to finance long term growth enhancing projects to enhance the competitiveness of the African economy.
A major economic challenge in Africa is the need to diversify the productive base of African economies of countries away from commodity exports to manufacturing. Economic diversification is vital to countries’ long-term economic growth, but many resource-rich countries in Africa remain heavily reliant on revenues generated from export of primary products, mining or oil production, thus jeopardizing their chances for sustainable growth.
Economies heavily dependent on natural resources can face serious challenges in sustaining growth because of swings in prices of those resources. African economies depend heavily on commodities as the main source of their foreign earnings accounting for over 81.0 per cent. This dependence is particularly high in West and Central Africa, where commodities accounted for some 95.0 per cent of exports in 2009-2010 as compared to 56.0 per cent for Latin America and the Caribbean and 28.0 per cent for developing Asia. This over-reliance on primary commodities makes African economies susceptible to price fluctuations since the value of most of these commodities (mainly mineral resources like gold, diamond, and columbite) and hydrocarbons like oil and gas are exogenously determined. The mono product nature of these African economies has led to the neglect and underdevelopment of other sectors of the economy which could have contributed immensely to GDP growth and the overall development of the African economy.
The non-diversification of African economies is further evident in the 2011 UNIDO report on “Economic Diversification in Africa”. The report showed that only South Africa and three North African countries, achieved substantial economic diversification in Africa. It also indicated that the performance of agricultural and manufacturing sectors has been stunted by lack of innovation and modernization. This fact was buttressed by the competitive industrial performance index (CPIx) of 2012/13 where Sub-Saharan Africa accounted for less than 1.0 per cent of both world manufacturing value added and world manufactures indices as compared to Latin America/Caribbean countries with 4.2 and 3.7 per cent and developing Asia’s 3.0 and 2.4 per cent respectively.
A further downside evidence of the lack of diversification of economies of African countries is that the global share of Africa’s trade to world total in 2012 stood at 3.5 per cent compared with developing Asia’s 31.5 per cent and South and Central America’s 4.2 per cent. Africa has experienced decreasing trade in virtually all sub-sectors of world trade, owing partly to the concentration of its exports in primary products such as oil and mining whose portion of world trade has been declining.
Only through diversifying their economies and transforming towards manufacturing, adding value to their natural resources, can African countries create jobs, create wealth, raise the living standards of their people and be competitive. In my book Emerging Africa – How the Global Economy’s ‘Last Frontier’ Can Prosper and Matter , I advocated a number of paradigm shifts as conditions precedent for economic transformation, one of which is economic complexity. African countries need to understand that truly transformative economic growth is based on the development of complex products and differentiated exports that confer competitive advantage, and not basic or comparative advantage such as natural resources, as is presently the basis of most economic policy thinking. Dependence on the export of natural capital has prevented African countries from creating true wealth for their citizens compared to industrialized countries.
The economic secret of wealth creation is to invest in manufacturing products that have more value and insight embedded in them, and also to create such products in a manner that is competitive, not just in terms of content, but also in terms of costs and specialization.
Malaysia is an example of an economy endowed with natural resources that has been successful in diversifying its economy over the past 40 years of post-independence growth and development. The economy has shifted from being one dominated by agriculture and the exports of agricultural commodities and tin to an economy that is now more industrialized. Manufactured exports now account for more than 70 percent of total exports.
Malaysia’s Industrialization was fuelled by a combination of state intervention in the economy and the growth of public enterprise, the use of fiscal policy and incentives to attract foreign direct investment (FDI), and the provision of industrial infrastructure and low cost labor.
Their story highlights the fact that a diversification policy requires a longer-term perspective; the outcome of diversification will only be seen in the long term. For diversification to succeed, concerted efforts are required to channel resources, especially financial ones, and to build effective institutions. Specialized institutions for agriculture and manufacturing are needed to spearhead diversification. An export-oriented industrialization strategy will require a combination of macroeconomic and fiscal policies to attract FDI as well as investments in human capital and infrastructure, among others.
Too often however, some African countries seem to lack clear policy guidelines on how to diversify, and policymakers appear to have limited understanding of why diversification is imperative.
A critical element for sustainable economic transformation is the existence of strong, sound and independent economic and social institutions that serve as a bedrock for growth and competitiveness. The continuous synergy among institutions needs to be coordinated in a sustainable fashion to propel economic growth and transformation. Public institutions in Africa are characterized by high bureaucracy, high degree of centralization and a perception of corruption which are inimical for economic transformation and competitiveness. Also, occasional instances of political instability especially in parts of North, Central and West Africa creates uncertain environment for investment and thus, hampers economic growth. Hence, creating strong institutions devoid of bureaucracy, corruption (perceived or factual) and government interference will help create a conducive environment for investment and other economic activities that engender competitiveness.
I had mentioned that in 2012, Africa’s proportion of world trade was 3.5 per cent and has been experiencing decreasing volumes/value of trade because of the tendency for its exports to be concentrated in primary products. This is underscored by the fact that over half of Africa’s (sub-Saharan Africa) trade is concentrated on oil and mining products. Heavy reliance on these commodities means that the terms of trade vary with unstable international market prices. Ironically, the proceeds from these products constitute a large portion of many countries revenue base which are subject to the vagaries of external shocks. This could have undesirable effects on growth and fiscal stability and thus reduce competitiveness. The way forward towards achieving economic transformation and competitiveness would include export diversification, and transition from primary stages of production to tertiary and innovative-driven stages which would ensure value addition to the economy.
Some achievements have been recorded in the area of trade and market integration by some regional economic communities (RECs) in Africa. These include the establishment of the Economic Community of West African States (ECOWAS), Economic Community of Central African States (ECCAS), Common Market for Eastern and Southern Africa (COMESA), South African Development Community (SADC) and East African Community (EAC). The EAC achieved a customs union in 2005, while COMESA launched its customs union in 2009. By 2015, ECOWAS is expected to launch its customs union. In addition to these achievements, other RECs are in the process of harmonizing their Free Trade Areas (FTAs) into larger trading blocs. The ongoing initiative on the grand FTA (SADC, COMESA and EAC) is a good example of this new trend towards unifying the sub-regional markets. All these will promote intra and inter–regional trade in the continent and enhance competitiveness as countries leverage on their comparative advantages in production. It is only through collective efforts that Africa can conveniently overcome the multiple obstacles preventing the realization of increased trade and sustainable economic transformation.
Competitiveness among countries across the world is becoming apparent. Africa unlike its Asian counterparts has not been able to establish regional production chains that would eventually feed into international chains. Asia on the other hand, built on their inter-regional trade and promoted the diversification of their economies to ensure production complementarity. Asian economies have continued to ascend the value chain in their production processes. Africa must therefore, direct her efforts towards international economic value chains to be competitive. Polices should be export-oriented, value-add biased and structural bottlenecks must be tackled aggressively.
Africa must improve the state of infrastructure and promote innovative public-private partnerships that would drive rapid industrialization for sustained growth in the decades ahead. Infrastructure is vital in supporting inclusive growth in any economy. Huge investments in infrastructure will lower the cost of doing business, thus lowering the cost of production and providing other alternatives for promoting production efficiency and competitiveness. Also, encouraging public-private partnership (PPP) initiative in the infrastructural sub-sector will deepen the financing base of most of the economies.
Africa must actively promote the development of sound and stable financial markets that are competitive, since finance stimulates growth and investment. Currently, the financial system in the continent has remained, relatively, shallow and unable to adequately finance long-term growth. The productive sector is starved of investible capital; banking services are expensive with high interest rates and soaring overheads which encourage rent and create un-competitive intermediation processes. A viable, active and strong financial system is thus a prerequisite for competiveness and economic transformation in the region. Individual countries and regional groupings must focus on building strong institutions and financial architecture that provide funds at competitive rates from international markets and within Africa. In addition, governments should promote vibrant bond markets that provide long term funds for development.
At this juncture, it is pertinent to ask where Africa is currently in terms of competitiveness. This is an important question in view of the topic of this plenary session. Using the World Bank’s 2013 Global Competitiveness Index (GCI), the general picture of Africa’s performance was mirrored by the ranking of 14 African countries in the bottom 20 countries out of 144 countries worldwide. On regional aggregates, Africa as a group was ranked less competitive than Asian economies, for instance the GCI for North Africa averaged 3.82, and Sub-Saharan Africa 3.57, while Latin American/Caribbean and South East Asian were 3.97 and 4.46 respectively. Also, Africa’s competitiveness, in terms of the IMF 2012 purchasing power parity GDP per capita index, at US$3,000.0 was far below developing Asia at US$6,000.0; and Latin America/Caribbean with over US$12,000.0.
It should be noted that the heterogeneity of economic development among African countries indicates that competitiveness cannot be pursued on the same scale, but rather should be country specific. Borrowing from the recommendations of the 2013 Global Competitiveness Indicator (GCI) report, countries that are still in the factor-driven stage must accord priority to the establishment of effective public and private institutions, robust infrastructure, stable macroeconomic environment, and a strong educated and skilled labor force.
For countries that are already into manufacturing, increased efficiency in production processes and improved product quality must be pursed to be competitive. This should include the promotion of high quality goods and services and organized labour markets, development of efficient financial markets and the use of technological innovation. Highly skilled and active labour force should drive these processes. African countries identified in this stage include: South Africa, Egypt, Cape Verde, Mauritius and Namibia.
Countries that feature at the innovation-driven stage are able to sustain higher wages and the concomitant standard of living only by developing competing new and distinctive products. Seychelles is the only African country believed to be in transition from the production to the innovation stage.
Let me conclude by quoting Michael Porter who stated that almost everything matters for competitiveness. The schools matter, the roads matter, the financial markets matter and customer sophistication matters. These and other aspects of a nation’s circumstances are deeply rooted in a nation’s institutions, people and culture. This makes improving competitiveness for African countries a special challenge, because there is no single policy or grand step that can create competitiveness, only many improvements in individual areas that inevitably take time to accomplish. Improving competitiveness is a marathon, not a sprint. How to sustain momentum in improving competitiveness over time is among the greatest challenges facing African countries.
Dr. Kingsley Bosah Chiedu Moghalu is Deputy Governor of the Central Bank of Nigeria