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Africa Economy Landscape
Africa Economy Landscape
Measuring economic development is a difficult process. Existing attempts to assess national development are still suffering from conceptual and measurement challenges. This has led to a literature that is, in general, excessively focused on economic development without connection to the capabilities of those institutions to expedite economic development of citizens. (Holmes and Gutiérrez de Piñeres, 2006: 54)
Africa is home to most of the least developed countries in the world. It suffers from poor infrastructure, limited trade and foreign direct investment (FDI), huge external debts, rampant corruption, and mismanagement. Approximately, seventy percent of Africa’s population lives on less than $2 a day. Despite these challenges, a number of positive developments have taken place in recent years. Since 1995, Africa has generally averaged between 3 and 5 percent annual economic growth. Many countries have implemented political and economic reforms to strengthen economic growth and attract more FDI. Regional economic organizations have fostered greater trade among neighbors. Steps have been taken by developed countries to alleviate Africa’s debt burden. This update looks at the economic challenges that Africa faces and prospects for future economic development on the continent.
I-African Economies Today:
By the mid-1990s, many African economies began to improve after years of decline. But even with this improvement, poverty remains widespread. In order to truly understand African economies and their prospects for further development, one must first get a clear picture of the main economic activities on the continent. These activities include agriculture, energy and mineral resource extraction, industry and trade, and government service. In addition, it is important to examine rates of unemployment.
Sixty-two percent of Africa’s population lives in the countryside. Most of them work in agriculture. Agriculture is largely undertaken by hand on small plots of family or village land, where economies of scale cannot take hold. Many African farmers are poor and survive at subsistence levels.
African states often have only a few cash crops. When world demand for a country’s few agricultural exports declines, or when droughts or other natural disasters occur, the country is left unable to pay for badly needed imports. Such situations are made worse by the fact that neighboring countries often produce similar products. The production of similar products leads to increased competition, lower prices, and reduced opportunities for regional trade.
Nevertheless, the African Union’s New Partnership for African Development (NEPAD) characterizes agriculture as “the engine for growth in Africa.” This statement reflects the fact that 16 percent of all sub-Saharan African exports are food products.
Trade barriers and agricultural subsidies in industrialized countries also handicap Africa’s efforts to develop through agricultural exports. For example, West and Central Africa potentially lose $250 million in annual revenues from cotton exports due to the US subsidies alone. Better access to markets in the developed world would allow African countries to become less reliant on aid and loans.
I-2-Energy and Mineral Resource Extraction:
Africa has immense deposits of energy and mineral resources. In North Africa, oil and gas play a major role in the economies of Algeria, Egypt, and Libya. Libya derives over 70 percent of its gross domestic product (GDP) from petroleum exports, and Algeria derives over 30 percent.
Egypt’s energy earnings are more limited, but still significant.
In sub-Saharan Africa, Angola, Equatorial Guinea, Nigeria, and Sudan all have significant energy resources. Most of the west coast of Africa, stretching from Angola in the south to Côte d’Ivoire in the northwest, is rich in oil. In 2005, West Africa supplied 14 percent of U.S. oil imports, and that number is expected to rise to 25 percent by 2015.
Africa also has enormous non-energy resources. In addition to oil, Angola has diamonds, gold, bauxite, and uranium. The Democratic Republic of the Congo (DRC) has cobalt, copper, diamonds, gold, silver, tin, and uranium. Guinea has almost half of the world’s bauxite reserves.
Namibia has large deposits of copper, diamonds, lead, tin, and zinc. Zambia has large quantities of cobalt, copper, lead, and zinc. And South Africa, a rich African state in terms of mineral resources, has huge quantities of antimony, chromium, copper, diamonds, gold, manganese, nickel, platinum, tin, and uranium.
If Africa holds such enormous energy and mineral wealth, why is it one of the poorest regions of the world? First, one must consider Africa’s historical legacies and the general problems associated with a reliance on only a few primary products for export. Second, much of Africa’s natural wealth is concentrated in only a few countries. Third, some countries that have natural wealth have not been able to exploit it. Fourth, foreign corporations often play a central role in the exploitation of Africa’s natural wealth. These businesses pay wages and bring in investment and technology. However, there have also been many cases where foreign firms have abused populations, severely degraded the environment, and taken home huge profits. Finally, even when African states have control over their natural resources, few people generally benefit.
Corruption on the part of government and corporate officials is a significant problem. Money that could be used for development needs is often diverted into personal bank accounts.
I-3-Industry and Trade:
Industrial production in Africa is modest but it is increasing. It accounts for about one-third of the overall African GDP. Also, African trade grew from $230 billion in 2000 to $457 billion in 2005. Nevertheless, it is important to note that African countries account for only 2 percent of world trade.
Under the United States “African Growth and Opportunity Act” (AGOA), thirty-seven sub- Saharan African countries receive trade preferences as they export goods to the United States.
Initially, this expanded access led to strong job gains in the textile industry. However, since 2005, U.S. imports of African textile products under AGOA have been decreasing, while U.S. AGOA-related imports of crude oil, platinum, diamonds, and cocoa have been increasing.
An increasing number of Africans are engaged in export processing zones (EPZs). In these areas, they are paid by multinational corporations to assemble imported parts into finished products for reexport. The main criticism of EPZs is that export companies are physically separated into their own areas. Technology and production skills often do not spread throughout the rest of the economy.
African countries face many challenges. Even so, many people inside and outside of Africa are working to overcome these challenges.
No reliable estimates exist for the large number of unemployed Africans. However, a look at just a few countries gives some indication of the situation. In 2005, it was reported that 17 percent of Algeria’s work force was unemployed. In 2004, Botswana declared an unemployment rate of 24 percent. In South Africa, at least 27 percent of the country’s workers were looking for employment in 2005. Zimbabwe and Liberia both registered more than 80 percent unemployment in 2005 and 2003 respectively.
The number of underemployed is even more difficult to estimate. Many agricultural workers and those who have migrated to Africa’s cities hold only part-time jobs. They often work in the informal sector outside of taxes and regulation.
II-African economic landscape and its development struggle
Contemporary Africa is still struggling with the legacies of slavery, colonialism and the deleterious impact of structural adjustment programmes (SAPs) and now globalization.
This is not to say that globalization does not offer opportunities but without rethinking development economics both in theory and practice especially at a time when the market ideology has become the dominant one, there is a risk of witnessing further impoverishment of the continent.
Africa tends to be treated as a homogenous block, yet the economies of Africa are diverse, plural and often address their problems in different ways. Some parts of postcolonial Africa have attempted to set up ministries of economic development; others have concentrated on attracting on foreign direct investment (FDI) whilst some others have early on realized that the state and private capital should work hand in hand for development. But these different approaches have not always necessarily had the results that are necessary for development and to make matters more complicated, the continent have to struggle in a context where trade remains inequitable and finding a niche for themselves remains a difficult task. So rethinking development economics at the local, regional and international level has become imperative and different stakeholders such as academics, civil society, trade unionists, business community and the state have an important role to play in the process.
Development itself has for far too long been seen and interpreted within the narrow confines of economic growth and yet development is in fact as Amartya Sen points out development from illiteracy, from want, from diseases. But development seems to elude the masses on the continent. My intention is not to paint an Afro pessimistic picture of the continent but the reality is that the continent is still very poor, ridden with conflicts and struggling with the AIDS pandemic.
Sachs et al. argues that there are three types of poverty traps in Africa: the savings trap, the demographic trap, and the low capital-threshold trap. Thus Africa seems to suffer from many deep-seated, structural problems that propagate poverty. But analyzing poverty and human development without rethinking development economics would not make sense. Amartya Sen reminds us that development, which creates more inequality, is not humanistic. I will be looking for is how to unleash the potential at the “bottom of the pyramid” through pro poor macroeconomics policies that could lead to poverty alleviation in this part of the population. This point also deal with the issue of inequality that Amartya Sen vividly spearheaded when he argues that “everybody today believes in equality of something”: equal rights before the law, equal civil liberties, and equality opportunity and so on. Inequality is an inevitable product of any functioning market economy”
Hernando De Soto5 in his book “The Mystery of Capital” argues that growth in developing countries depends on bringing to life dead capital, and that capitalism has failed in developing countries. African countries for a long period of time were not effectively and efficiently using all their resources for sustainable development, and in some parts of the continent, they were embarking in some kind of macroeconomic policies not taking in consideration certain programmes for sustainable development; here come the issue of good governance. I will be addressing in the book, the issues on regional trade and integration, gender-centered policies, land reforms polices and agro industry.
Furthermore, for a long period of time many African countries were focusing on growth as an ultimate tool, in reducing or alleviating poverty in the continent. The book intends to equip development professionals with new thinking on the shift on development economies in the African context.
III-Some Important Indicators
Current measures of economic development include overall growth rates; growth rates being measured in purchasing power parity (PPP), human development index (HDI), and independent measures of inequality such as Gini coefficients. Based on the preferences of decision and policymakers, these different measures always tell different stories. To remedy the failure of Gross Domestic Product (GDP) to capture purchasing power inequality and to allow cross-country comparisons, PPP equivalents were constructed.
However, growth rates based on constant American dollar (US $) values often mask the distribution of wealth. Growth rates can increase dramatically but still fail to raise the overall well being of the general population of a country or region. (Holmes and
Gutiérrez de Piñeres, 2006: 54). Other measures were constructed to address the fact that income alone is not a sufficient measure of development. The physical quality of life index is a composite score of life expectancy, infant mortality, and literacy. The problem is that this measure reveals more about the quantity as opposed to the quality of life.
A very wide variety of indicators can be used to characterize the difference between developed and developing countries. However, some of these are more reliable than others.
III-1-GDP per capita:
GDP per capita is the total value of (final i.e. not intermediate) goods and services produced within a country divided by the total population. It also illustrates the relative difference between countries categorized as “developing”.
On average, people there live on no more than about $2 a day. As a measure of development this seems to be the most important indicator: if people want to be in a position to buy commodities and enjoy high standards of health and education then they will need the income to match.
There are some issues concerning the reliability of this indicator. One problem is measuring GDP in countries where much economic activity is unofficial. The data itself may be collected by governments who use different and more or less efficient methods of measurement. The measurement of inflation is also problematic: if inflation is under-estimated then real output will be over-estimated. Government officials may have an incentive to over-value output (particularly the unsold output of nationalized industries). Another major problem is the high level of subsistence farming in developing countries: non-marketed output may never get measured.
To enable cross-country comparisons the data needs to be standardized to a particular currency. Using current exchange rates is unlikely to be appropriate for this. They are only based on traded goods and are greatly affected by speculative capital flows.
The alternative, finding a purchasing power parity (PPP) rate with which to do the conversion, is non trivial in a world where goods and services differ so widely between countries. There are some other problems. First, it may be more informative to see patterns of GDP per capita growth over time, rather than just a snapshot of a particular year.
Second, there is no sense in which this indicator can tell the whole story of a country’s economic or social situation.
For example, there can be widely varying standards of health and education for countries with similar levels of GDP per head.
The distribution of GDP may also vary, in some countries being much more uneven than in others. Third, increasing GDP per capita may bring with it costs as well as benefits, particularly if it is brought about in a non-sustainable way: the level of negative externalities needs to be considered.
III-2-Measures of Poverty
It is important to understand the difference between absolute and relative poverty.
Absolute poverty refers to the inability to acquire goods necessary to satisfy basic needs e.g. the means to obtain the minimum level of nutrition necessary to sustain an active life. Basic needs also tend to include clothing and shelter. Put simply, absolute poverty is having .just enough to survive but no more. However, it is well worth considering whether what counts as absolute poverty is, to some extent, relative to the culture concerned: the concept is by no means uncontroversial.
Relative poverty refers to the differential of income and wealth between people or countries. That is, it involves some comparison across economies.
One indicator of absolute poverty is the percentage of the population receiving less than the equivalent of $1 a day income. For most developed countries there is no absolute poverty according to this measure because of social security benefits. The World Bank estimates that 1.2bn people live off less than $1 a day, with a further 1.6bn existing on less than $2 a day.
The figures for absolute poverty have to be treated with some caution for reasons similar to those discussed for GDP per capita. The concept is itself rather loose, and a $x a day measure is somewhat arbitrary: especially as local costs of living vary enormously and there are wide variations across countries of, for example, climate.
There is also something of a preconceived idea involved in defining poverty in terms of income levels. It may be that for some people there are other more pressing objectives e.g. having shoes to wear or establishing a separation of living quarters for people and animals. These other objectives may be improving even when income is falling. Many commentators therefore prefer to see "poverty” as a multidimensional concept. This is important because the way poverty is conceptualized will influence the policy measures adopted to deal with it. For example, a definition based exclusively on income will tend to see growth in GDP per head as the only solution to poverty.
Other dimensions of absolute poverty might include access to .essential drugs and the proportion of the population using regulated water supplies.
To shed light on relative poverty it is possible to compare GDP per capita between countries or to look at income distributions within a particular country. The inequalities of income in developing countries can be very pronounced.
Note that relative poverty is an issue even at a local scale of description. For example, within households there can be widely varying distributions of resources e.g. on the basis of age or gender.
About the Author
Shanghai University of Finance and Economics
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