African countries must break their reliance on commodities exports for economic growth and diversify towards higher-value services, the United Nations warned Thursday.
The call comes as the price of many key commodities — which skyrocketed over the past year to the benefit of many African export-led economies — have begun to cool off.
In its Economic Development in Africa Report 2022, the United Nations Conference on Trade and Development (UNCTAD) urged governments across the continent to boost investments in technology and financial services, among other sectors.
UNCTAD noted that 45 of the continent’s 54 countries still remain dependent on agricultural, mining and extractive exports, despite decadeslong efforts to diversify their economies.
‘Highly volatile revenues’ from commodities
The report said the heavy reliance on commodity exports like oil, gas, minerals, food and agricultural raw materials resulted in “highly volatile revenues” for low-income nations due to the “price boom and bust nature of the market.”
The paper described the so-called “resource curse,” where commodities-rich countries tend to have low growth and development outcomes due to the price instability of their exports.
UNCTAD said this vulnerability is “often amplified” by geopolitical factors and events like the COVID-19 pandemic and the 2008-9 global financial crisis.
While several African countries have taken steps to boost their services sectors, the UN body noted that they have been mainly focused on transport and tourism, which now makes up to two-thirds of service exports across the continent.
Information technology (IT) and financial services account for just 20% of Africa’s services exports, it said.
By moving economic sectors up the value chain, African nations could better weather economic shocks like climate change, future health emergencies, and the food crisis exacerbated by the Ukraine conflict, UNCTAD said.
Africa needs more high-tech investment
“Our latest report focuses on the services sector … particularly enterprises that are high-skilled and high- knowledge, such as fintech, health care technology, logistics technology as well as agriculture and energy [technology],” Paul Akiwomi, UNCTAD’s director for the Division for Africa, Least Developed Countries and Special Programs, told DW.
Akiwomi said investments in new economic areas would also bring benefits to support countries’ existing commodity sectors, for example, through new technologies.
“We believe that this can alter the development trajectory of many countries, moving them away from being solely commodity-based to more diverse economies,” he added.
He gave the example of Mauritius, which was an agricultural economy with sugar cane as its major export. Over the past 20 years, the Indian Ocean island has diversified its economy and more recently has moved into financial services and fintech, winning substantial investments from India and the United States.
“Now SMEs [small and medium-sized enterprises] account for 40% of GDP and 56% of jobs. So this is a massive shift in the diversification of the economy,” Akiwomi told DW.
He also noted how Nigeria and Kenya have become major hubs for fintech and health tech startups respectively.
Economic diversification would also help to boost the new middle class in Africa as it would create more high-skilled jobs in operations, finance, engineering and marketing, among others, the UN spokesman said.
However, UNCTAD’s report said it was vital that African governments provide adequate regulatory frameworks and financial mechanisms, and called for more innovative financial instruments for local SMEs to secure access to financing.
“The financing of SMEs that are innovative and technology-driven is still a very difficult area in Africa,” Akiwomi told DW, adding that “the culture of lending money for an idea is still not there.”
Citing data from the International Finance Corporation, UNCTAD’s report noted that Africa’s 50 million SMEs have an unmet financing need of $416 billion (€415 billion) every year.
African free trade zone will help growth
The paper described how the African Continental Free Trade Area (AfCFTA), which took effect in 2019 and which aims to create a single market for the continent’s 1.4 billion people, will help new sectors thrive by boosting inter-Africa trade.
“AfCFTA allows for scale,” Akiwomi said. “Each country will be moving at a different pace and level based on their comparative advantages.”
“You have shorter distances between countries, you get access to intermediaries, lower trade costs, access to other services. All of these benefits would allow African countries to transform their economies,” he told DW.
Commodities boom helps but hurts too
Rising commodities prices as a result of supply chain delays in the wake of the COVID-19 pandemic have been a blessing and a curse to many African countries.
While nations have achieved much higher prices for their exports, African consumers and businesses have not escaped the much higher costs of oil, gas, food and fertilizers.
While some financial analysts have declared a new commodity supercycle — a longer era of higher prices for raw materials — prices have already started to moderate in recent months.
The price of copper has since fallen to an 18-month low and oil prices are more than 20% off their recent highs, further boosting the argument for new, more reliable engines of growth.
Edited by: Hardy Graupner