Giles Thompson - ‘To what extent should the current African commodity boom be viewed in a positive...

Giles Thompson -‐ ‘To what extent should the current African commodity boom be viewed in a positive light?’ The Politics of Sub-‐Saharan Africa -‐ Word count: 1993

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The commodity boom has expedited Africa’s 4.9% GDP rise between 2000-‐2008 (MGI, 2010: 2), and has provoked recent claims that ‘celebrations are in order on the poorest continent’ (The Economist, 2013). These claims are too positive; they overlook the extensive costs that commodity exportation incurs. The African commodity boom, which I define as the incremental increase in market price of both oil and minerals in the first decade of this millennium, must be viewed in a predominantly negative light. The surge in price of Sub-‐Saharan African (hereafter SSA) commodities, incentivises increased extraction and export of these natural commodities. This short-‐term incentive does not account for the incrementally negative effect that increased resource extraction-‐specialisation has on long-‐term economic growth and the resulting economic divergence between SSA (as extraction-‐economies) and the developed world (as centres of manufacturing). The short-‐term economic growth that’s fuelled by extraction is also a misleading indicator of success, diverting attention from this concerning trend of divergence. Despite this reality, if one accepts that the boom’s impact is so substantial that the overall impact of the boom is inexorably negative, one can still cautiously identify qualified positives. Increased government tax revenue from boom has resulted in qualified positive impacts for SSA, because it provides opportunities. However, in SSA, substantial structural obstacles have pervasively prevented these positive opportunities from being materially realised. Even so, these opportunities are sometimes materially realised, despite structural obstacles, when agency triumphs over structure. Examples of this agency are: forward-‐thinking government policymaking and the ‘benevolent’ infrastructural positive-‐externalities of Chinese foreign investment in SSA. In addition, qualified positive opportunities that the commodity boom presents are: opportunity for increased public spending on public services in order to benefit the poor, and opportunity to pursue diversification (and subsequent reduction in exposure to fluctuations in the market price of commodities). The first qualified positive is the opportunity for increased public spending on public services in order to benefit the poor. Most countries in SSA have tax bases that are ‘built overwhelmingly on [commodity] exports’ (Leonard and Straus 2003: 12). The boom raises additional tax revenue that could potentially benefit the poor through immediate spending on vital services such as hospital and schools. Importantly, this extra revenue also gives opportunity for more government investment for the future, as in ‘resource-‐rich societies, investment is particularly important since this is how resource surplus can be transformed into sustained increases in income’ (Collier, 2007: 44). These opportunities have been largely squandered in SSA due to the structural obstacle of ‘neo-‐patrimonialism’. In neo-‐patrimonialism, power is exercised ‘through the informal sector’ in a system of ‘political reciprocity which link[s] patrons with their clients along vertical social lines’ (Chabal, 2002: 450). In this system, government tax revenue is misappropriated and used as political patronage by public officials, to gain political loyalty from ‘clients’. The extra revenue generated by the boom is particularly hard to trace account for, and this helps engender informal misappropriation of government funds. This misappropriation occurred in Nigeria for instance. Nigeria borrowed heavily during the boom in the 1980s and undertook ‘massively wasteful projects saturated with corruption’ to facilitate patronage, and consequently, Nigerian living standards ‘approximately halved’


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(Collier, 2007: 40-‐41). This is statistic is striking, highlighting evident deprivation of ‘resources that might otherwise be spent on public goods’ (Kelsall et al., 2013: 13) by neo-‐patrimonialism. Governments across SSA instigate these ‘white-‐elephant’ (Collier, 2007: 44) contracts, which embody the blurring of the state’s boundaries between ‘public and private’ (Kelsall et al., 2013: 13) that is a central characteristic of neo-‐patrimonialism. Neo-‐patrimonialism hinders ‘planning for the common good [and instead systematically promotes purveyance] for private accumulation’ (Leonard And Straus 2003: 4). The obstacle of neo-‐patrimonialism is hard to overcome as it’s not straightforward embezzlement, it’s more subtle and pervasive, ‘corruption is rarely centralized’ it is ‘instead an interminable series of negotiations with an endless number of petty officials’ (Chabal and Daloz, 1999: 102). However, while neo-‐patrimonialism is a significant obstacle, it is not insurmountable and extra government revenue from the boom still represents a qualified positive. Botswana has overcome this obstacle with effective government policy-‐making agency. They have created ‘effective checks and balances on power’ (Collier, 2007: 46) and promoted a genuine degree of transparency in government expenditure despite ‘anti-‐corruption discourse [which is] primarily rhetorical’ in SSA (Chabal and Daloz 1999: 104). This has been implemented through a mandatory ‘minimum rate of return for all public projects’ (Collier, 2007: 46-‐50). Cautionary evidence that Botswana is ‘saved from patronage politics’ can be found in the very large amount of surplus funds that government has accumulated in foreign assets (Collier, 2007: 50). The second qualified positive of the boom is the opportunity that extra tax revenue presents to pursue diversification and a subsequent reduction in exposure to fluctuations in the market price of commodities. This opportunity is salient because, commodities’ increased ‘boom’ price is not indefinite, as The Economist (2013) reports, ‘one third of Africa’s GDP growth comes from commodities … this will not last’. Exposure to price fluctuations come about as a result of a substantial proportion of growth being reliant on the price of one commodity, which in turn makes forecasting a sustainable level of government borrowing difficult and perilous. This difficulty is exemplified by erroneous projections made by many SSA governments as a result of inflated expectations in the context of the ‘doubling of oil prices from 1979 to 1981’ (Jackson, 1985), immediately before the onset of the debt crisis in the 1980s. Given the risks of a non-‐diversified economy, a structural obstacle is necessary to explain why in SSA there is ‘little diversification’ (World Bank, 2000: 1) and countries remain largely dependent on ‘a narrow range of commodities’ (ACET, 2014: 2). This explanatory structural obstacle is know as the ‘Dutch disease’, it is, in essence, where, a ‘sharp inflow of foreign currency [due to the export of commodities] … leads to currency appreciation, making the country's other’ exports less competitive (FT, 2015). The Dutch disease in coordination with a commodity boom makes diversification more challenging because as government receives extra revenue, which it can invest in infant industries, the competitiveness and commercial viability of those industries is simultaneously reduced. However, whilst the structural obstacle of the Dutch disease mostly triumphs over the opportunity for diversification, the Dutch disease is not insuperable and the extra tax revenue


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still represents a qualified positive. The obstacle has been overcome in some cases, through forward-‐thinking government agency in policy-‐making and also through the ‘benevolent’ infrastructural positive-‐externalities of Chinese foreign investment in SSA. Forward-‐thinking government policy-‐making agency can capture the opportunity of the boom. The exemplary case is again Botswana, while ‘lucky to have rich diamond mines’ Botswana’s government, unlike ‘other poor countries’ has not squandered its natural resources (Easterly 2007: 25). The Botswana government enlisted ‘De Beers’ diamond mining and marketing expertise’ (Easterly 2007: 315) and with income it raised from this, it committed to diversifying its economy beyond the diamond industry (Easterly, 2007: 315). Diversification is far from complete in Botswana, but positive steps were taken towards diversification in 2008, immediately after the commodity boom. The government published and has to a large extent implemented a ‘Strategy for Economic Diversification and Sustainable Growth’ with the aim of ‘‘diversify[ing] the economy to ensure that Botswana continues to enjoy the fruits of sustained economic growth [regardless of the market-‐price of minerals and] post depletion of minerals’ (GICO, 2008: 3). The second form of agency I will explore is the ‘benevolent’ infrastructural positive-‐externalities of Chinese foreign investment in SSA. The commodity boom has coincided with, and has partially been triggered by increased Chinese imports from SSA of fuel and minerals. ‘China’s major interest in Africa is oil and minerals, which constitute 60 percent of its imports from Africa’ (Gordon and Gordon, 2012: 426). Chinese investors have been highly criticized for human rights abuses in their SSA investments. An extreme example of this, is the 2005 ‘explosion at a Chinese-‐owned explosives manufacturing plant in Chambishi [which] killed 46 Zambian workers’ and the subsequent riot ‘over work conditions [that] culminated in the shooting of at least five miners’ (HRW, 2011). Despite these abhorrent abuses, thinking purely in terms of diversification, Chinese investors have been ‘benevolent’. For instance, the Chinese have invested $3.8bn in and begun to implement the refurbishment and extension of the 380-‐mile ‘New East Africa Railway’, which is predicted to cut the cost of sending a tonne of freight one kilometre from $0.20 to $0.08 in Kenya (BBC, 2014). Increased involvement of Chinese foreign investors has resulted in a fairly comprehensive ‘Chinese-‐built infrastructure boom across the continent [comprising of] roads and railways, dams, telecoms, hospitals, schools, power plants, and even new towns’ (Gordon and Gordon 2012: 426). This infrastructural boom provides a route to circumnavigate the obstacle of the Dutch disease. Improved infrastructure has reduced business costs, has improved efficiency and in theory has made a contribution to SSA businesses’ competitiveness. Thus, the agency of the ‘benevolent’ infrastructural positive-‐externalities of Chinese foreign investment in SSA has also, in additional to government agency, presented an opportunity for agency to triumph over the structural obstacle of the Dutch disease in order to realise a material qualified-‐positive. On a different but crucial note, it is important to remember that the vital


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qualification for these positives is that the balance sheet of the commodity boom is predominantly negative. The incentivisation of increased extraction of natural commodities from SSA for sale to the developed world is incontrovertibly detrimental. The primary reason for this is observed by the ‘Prebsich-‐Singer hypothesis’ (Toye, 2003). ‘Prebisch-‐Singer’ highlights that over time the market value of primary products depreciates exponentially and irretrievably when compared to that of (manufactured) goods. Therefore the incentivisation of specialisation in primary commodities is abhorrent because it commits SSA extraction-‐economies countries to a trend of persistent economic divergence, where the price that they can fetch for their factors of production depreciates compared to the price that developed countries can achieve for manufactured goods. SSA countries, by exporting their primary commodities, incur the ‘opportunity cost’ of not being able to use the commodities they sell to undertake manufacturing and thus benefit from the additional ‘value added’ (GDP) that is gained from manufacturing goods. The boom has also been negative because it has shrouded this predominant negative in confusion by providing a ‘misleading indicator’ of economic success (GDP growth). Apart from the fact that the increased GDP growth rates ‘come on a very low base’ (Gordon and Gordon 2012: 419), the celebration of this growth by financial periodicals and international agencies has distracted from this ‘globalized double standard – of market fundamentalism for the non-‐west and an enduring unorthodoxy, protectionism and even mercantilism in the west’ (Harrison, 2010: 23) which serves ‘the interests of the more advanced economies… rather than those of the developing world’ (Stiglitz, 2002: 214). This globalised ‘double standard’ has been best embodied in the IMF SAPs, and despite the SAPs being replaced by the PRSP in 1999, ‘in a basic empirical sense the PRSP maintains the same’ flawed fundamentals of ‘macroeconomic liberalism’ (Harrison, 2010: 42). The commodity boom should be viewed in an inexorably negative light overall because it causes SSA countries to advance in their adoption of their extraction-‐economy role, which triggers increased economic divergence between SSA and the developed world as observed by the ‘Prebisch-‐Singer hypothesis’. However, conciliatory qualified positives of the commodity boom can cast cracks of positive light on one’s view of the commodity boom. These cracks of positivity are limited, because the agency on which these qualified positives are totally reliant on, in order to be prevalently and tangibly realised, is predominantly blocked by the substantial structural obstacles of ‘Dutch disease’ and ‘Neo-‐Patrimonialism’. To summarise the qualified positives of the commodity boom, I draw on the analogy that President Sirleaf makes between Liberia and SSA, ‘Liberia is not a poor country, but rather a rich country that has been poorly managed. The same is true for much of SSA’ (Radelet and Sirleaf, 2010: 5).


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Bibliography: Books:

• Chabal, P., and Daloz, J-‐P. (1999). “Africa Works: Disorder as Political Instrument”. Bloomington: International African Institute.

• Collier, P. (2007). “The Bottom Billion: Why the poorest countries are failing and what can be done about it”. New York, NY: Oxford University Press.

• Easterly, W. (2007). “The White Man’s Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good”. United Kingdom: Oxford University Press.

• George, S. (1988). “A Fate Worse Than Debt”. United Kingdom: Penguin Books. • Gordon, A. A., and Gordon, D. L. (2012). “Understanding contemporary Africa”. Boulder, CO: Lynne

Rienner Publishers. • Harrison, G. (2010). “Neoliberal Africa: The Impact of Global Social Engineering”. United Kingdom:

Zed Books. • Kelsall, T. et al. (2013). “Business, Politics, and the State in Africa: challenging the orthodoxies on

growth and transformation”. London: Palgrave Macmillan. • Leonard, D. K. and Straus, S. (2003). “Africa’s Stalled Development: International Causes and Cures”.

United States: Lynne Rienner Publishers. • Radelet, S., and Sirleaf, E. J. (2010). “Emerging Africa: How 17 Countries are Leading the Way”.

United States: Centre for Global Development. • Stiglitz, J. E. and Stiglitz, J. (2002). “Globalization and its discontents”. New York: Norton, W. W. &

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Economic Reports: • African Center for Economic Transformation (ACET) (2014). “2014 African Transformation Report:

Growth with Depth”. African Center for Economic Transformation. Available at: http://acetforafrica.org/wp-‐content/uploads/2014/03/2014-‐African-‐Transformation-‐Report.pdf. (Accessed: 6 May 2015)

• McKinsey Global Institute (MGI) (2010). "Lions on the Move: The Progress and Potential of African Economies". McKinsey Global Institute/Mckinsey & Company. Available at: http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Productivity%20Competitiveness%20and%20Growth/Lions%20on%20the%20move%20The%20progress%20of%20African%20economies/MGI_Lions_on_the_move_african_economies_full_report.ashx. (Accessed: 6 May 2015)

• World Bank (2000). “Can Africa claim the 21st century?”. World Bank Publications. Available at: http://www.worldbank.org/html/extdr/canafricaclaim.pdf. (Accessed: 6 May 2015)

Government Documents:

• Botswana Government Implementation Coordination Office (GICO) (2008). "Botswana Excellence: A Strategy for Economic Diversification and Sustainable Growth". Botswana Government Implementation Coordination Office. Available at: www.gov.bw/global/portal%20team/botswanaexcellencestrategynovember08.pdf. (Accessed: 6 May 2015)

Journal Articles:

• Chabal, P. (2002). “The Quest for Good Governance and Development in Africa: Is NEPAD the Answer?. International Affairs, 78(3), pp. 447-‐462.

• Jackson, H. F. (1985). “The African Crisis: Drought and Debt”. Foreign Affairs, 63(5). • Toye, J. (2003). “The Origins and Interpretation of the Prebisch-‐Singer Thesis”. History of Political

Economy, 35(3), pp. 437–467.

Newspaper Reports: • The Economist (2013). “The World’s Fastest Growing Continent: Aspiring Africa”.

Available at: http://www.economist.com/news/leaders/21572773-‐pride-‐africas-‐achievements-‐should-‐be-‐coupled-‐determination-‐make-‐even-‐faster (Accessed: 6 May 2015)

Webpages:

• British Broadcasting Company (BBC) (2014). “China to build new East Africa railway line”. Available at: http://www.bbc.co.uk/news/world-‐africa-‐27368877

• Financial Times (FT) (2015). “Dutch Disease Definition from Financial Times Lexicon”. Available at: http://lexicon.ft.com/Term?term=Dutch-‐disease (Accessed: 6 May 2015)

• Human Rights Watch (HRW) (2011). “You’ll Be Fired if You Refuse: Labor Abuses in Zambia’s Chinese State-‐owned Copper Mines”.

• Available at: http://www.hrw.org/reports/2011/11/04/you-‐ll-‐be-‐fired-‐if-‐you-‐refuse

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