Wednesday, 5 June 2013

Why Africa must industrialize

Hydro power dam under construction: 
Investments to remove bottlenecks 
HERE IS A PARADOX: Africa has posted robust economic growth over the last decade. Her growth now is higher than the western world and is projected to post robust rates in the next five years. Yet Youth unemployment remains high and so is inequality in income distribution. What is wrong?

According to experts, this growth is not well diversified so that its benefits reach a large segment of Africans, hence growth with high unemployment rates.

According to the economic report on Africa, era 2013 Africa must industrialize to diversify and consolidate the benefits of the robust economic growth of the last decade.   It is rich in commodities and other resources. However, the continent’s resources are extracted and sold raw in the world. The resources thus do not have a forward linkage with the domestic economy.

This is why continent must industrialize, beginning with commodity based industrialization.  This means that Africa must start processing its raw materials into finished goods or semi-finished goods. Manufacturing commodities will: increase their links to the domestic economy, create more jobs, transform our economies, distribute wealth more equitably and finally, stabilize growth.

Sea port: Also under going improvements in Africa
 Commodity exports, say experts, are subject to vagaries of the market demand: When demand on the world Market is high; the prices are high when demand falls prices fall. High commodity prices lead to faster economic growth while lower prices lead to depression. In the past decade commodity prices have been high becoming one of the drivers of Africa’s robust growth.

However, it is time to move to the next level: Industrialize. The continent has in place all the ingredients needed to industrialize: It has a young and well educated population; its middle class is growing with a per capita GDP growth above three per cent a year and, finally the continent is edging closer to integrating its market.

COMESA, for instance, is likely to be one large FTA in 2017. This will bring together a population of 600million with a GDP per capita above US$1700. Once operational, COMESA will be the largest market bloc in Africa covering 60 per cent of its population.

There are two or so missing links however; transport and energy infrastructure. Energy and transport contribute to the cost of doing business in Africa.  The continent depends on the unreliable hydropower which is not even enough to meet domestic demand. This makes it vulnerable to shortages of electricity especially during drought.  To ensure continuity the region relies on expensive thermal power to keep the economy running. The result is expensive products and stagnant manufacturing units.

Economics theory teaches that, low cost of production attracts investment into a location. Africa is set to cut the cost of energy and transport, given the amount of investment into both. In fact investment is infrastructure is one of the drivers of economic growth says Era 2013.  

Africa is investing in an energy mix that includes, Hydro, wind and geothermal power which is expected to be fully operational in the next five to ten years. In addition, there is a flurry of discoveries of LNG, which could also add to the mix. Consequently, the cost of energy is expected to decline in the next five years. Both Geothermal and Wind power cost an estimated US$0.07 per Kilowatt hour.

There is also increased investment on Sea Port and road linking regions in a country and countries in a region.  Also plans are at an advanced stage to for construction of new railway lines. The idea is to link Africa with itself thus creating a large market for African industrial goods.

Given its large and relatively prosperous population, Africa is potentially a large market for manufactures. But its current structure is that it is a source of raw materials for industries in Europe.  Consequently, its infrastructure is directly linked to the former colonizers.  For instance, to fly from Anglo-phone Africa to a country in the Franco-phone Africa one has to be routed through Europe. Even the railway lines and roads link directly to sea port serving the former colonizers.

This increases the cost of doing business in Africa. The development of intra-Africa road and railway lines will remove this wall and open the continent for business.

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