Structural Diversification Seen As More Important Than Simple Agglomeration

MEFMI attended the 2018 Africa Development Bank Groups (AfDB) Annual meetings held in Busan, South Korea at the Busan Exhibition and Conference Centre (BEXCO).  The Institute was represented by the Executive Director, Dr. Caleb Fundanga and the Director Financial Sector Management Programme, Mr. Patrick Mutimba.

The AfDB annual meetings include statutory meetings of the Board of Governors, some learning events and workshops as well as meetings of other Pan African institutions like the AADFI, ADF, and a host of bilateral meetings. The 2018 Annual meetings focused on Industrialising Africa which is meant to leverage South Korea’s success in industrial transformation over the last five decades.

The official opening message was delivered by Dr. Akinwumi A. Adesina, the President of the African Development Bank Group. The event was also graced by the Korean Deputy Prime Minister and Minister of Finance and strategy, Hon. Dong Yeon Kim to address the meetings. 

 Dr. Adekuni Adesina stated that Korea took deliberate and consistent action in pursuing industrialisation strategy. Africa is deindustrialising although there is new growth in countries like Ethiopia and Algeria. This is manifest in high youth unemployment. Africa must fast track industrialisation and follow the strategy of adding value to all exports. Africa’s reducing share of manufacturing as a share of GDP can be addressed by focusing on services to enhance the value of the goods. Improving productivity enables entry into new markets from a better vantage point.

Structural diversification is seen as more important than simple agglomeration. In general Africa can focus on Human Capital / Skills and financing mechanisms. The Public and Private Finance sectors have a role to play in industrialising Africa. There were three suggestions for Africa’s industrialisation;
a. Have an innovative approach. Consider social economic context for opportunities to leapfrog and leverage structural factors like a huge proportion of youth together with their potential for brain power.
b. The importance of inclusive growth could not be overemphasised. It was deemed important to have a people driven development paradigm.
c. Africa could consider moving with smart infrastructure. These new approaches should aim at overcoming the shortage of airports, rail way stations. Hence the role for Knowledge sharing programmes.

It was apparent and emphasised that Korea invested in education before even the World Bank perceived it as a priority.

It was reiterated that job migration from China cannot be taken for granted, even if it happens, it will not be easy or automatic. There is increasing use of robotics and artificial intelligence in manufacturing. Manufacturing has evolved to be part of global value chains. Youth in emerging economies have high aspirations due to a high reference income, yet automation is reducing creation of new jobs.

Productivity in Africa improved about 4 percent mainly based on new labour entering the sector. Very little could be attributed to improvements in efficiency. Lessons from the recent developments indicate that it has been easier to achieve improvements in sectors like aviation, banking and telecoms rather than in manufacturing. Could this cause policy makers to rethink the drive towards manufacturing competitiveness of African businesses going forward? It is apparent that the manufacturing technology used in Africa is lagging and the gap may be increasing.

There is a need to increase the supply of skilled labour beyond tertiary education. Turning labour into human capital would then position the continent for global competition.  It was agreed that human resources play a stronger role than natural resources in a country’s development trajectory.

With respect to industrialisation strategy some panellists argued that African nations should start with targeted sectors and at least focus on key sectors first. Examples were drawn from Korea and Japan. In the case of Japan it was recounted that it started with minimum infrastructure, soon after the war, moved to steel, electrical appliances, auto manufacturing, heavy engineering and later to electronics and more recently artificial intelligence. At a certain time Japan took advantage of growing global trade to position itself as a premier exporter and grow its manufacturing industry.

On the other hand there was a proposition that Africa needs to cultivate the right values first. Its society first needs to properly operate the current infrastructure. There is also need to engender a pervasive attitude of discipline, and develop talent rather than simply buy new equipment and machines. This is seen as an approach that will sustainably lead to a better quality of life.

i. AT one of the breakfast sessions focusing on Improving Domestic Resource Mobilisation to Finance Industrialisation, the Keynote speaker, Former Governor of Central Bank of Nigeria, His Royal Highness the Emir of Kano, Muhamad Sanusi Lamido Sanusi II raised a few issues:

• He also highlighted the reduction of manufacturing sector in Africa. Which has retrogressed from about 19% of GDP in the 1960s to 11% of GDP in 2014. This is evidence of Africa’s de – industrialisation.

• He emphasised that African leadership has to take some deliberate decisions. He gave an example that China has moved from having about 8 million graduates to more than 300 million graduates over about 40 years. It also reduced the number of people living below the poverty line from 700 million to 30 million in the same period.  This was achieved through structural transformation.

• He gave a further example from Africa’s Tax / GDP numbers. While Africa’s Average is 18% against 23% for emerging markets as a whole, there is a wide variation from 6% (Nigeria) to 40% (Seychelles). The delegates were also reminded that the ratings as captured in the corruption perception index by Transparency International tend to be worse for economies with low tax / GDP ratios and better for countries with high Tax / GDP ratios. Large informal sectors are closely associated with low Tax / GDP ratio as well as unfavourable corruption perception ratings.

• With respect to ability to bear debt, many analysts have tended to focus on the debt/ GDP ratio. He explained that while debt/ GDP ratio tends to look at exposure to commitments, it would be better to remember that debt is serviced from tax revenues. Hence the Tax Revenue / GDP ratio needs to be factored in. A better assessment of a country’s ability to service debt needs to consider a combination of these two ratios.

This concept of headroom is further illustrated in the table below as follows: Consider a case where two countries access debt at a nominal rate of 5% and amortise the principal over 20 years ( at 5% pa. for 20 years) making total annual loan servicing costs at 10%. The country with a lower tax revenue / GDP ratio effectively spends more of its revenue on debt servicing, but also has smaller headroom in case tax revenues are subjected to a shock. 

His Royal Highness the Emir of Kano, Muhamad Sanusi Lamido Sanusi II proposed that African Nations should focus on three major issues;

• Growing the tax base, to support the initiatives
• Managing Resource allocation more efficiently (for instance reducing the large administrative costs associated with large numbers of public servants).
• Credible policies to avert demographic catastrophe. This would allow youth to grow into educated skilled producers instead of unskilled consumers.

With respect to trade negotiations it was noted that Africa Continental Free trade Agreement has been signed and some countries have delivered their ratifications with more expected to follow suit. However it was observed that Africa needs to combine its efforts in negotiations with larger economies like China for example. The WTO arrangements should not be expected to be adequate for African countries to be treated as equal partners across the table from stronger economies. Key thoughts were the possibility of Africa absorbing excess agricultural labour through moving up the value curve. A few issues around the concentration of certain industries in economies like Nigeria (where the Dangote Group within a few years would account for about 60% of that country’s manufacturing GDP) came up as a risk factor.

On planning, it was apparent that in Africa, nations tend to ignore the need for skills gap analysis. Hence education system still follows the postcolonial mind set. Even though many African countries are politically independent, the objectives for which they had been colonised in the start of the 20th Century are still being achieved by the former colonial masters even in 2018. They are a source of raw materials and a market for processed goods & services from former colonial masters.

The final message was a call for mindful interventions.