African Development Bank Group

You are here

From rocks to industries: How can the extractive industries be a platform for African industrialisation?

15/04/2016

 

by Pietro Toigo

Industrialisation is back. After decades when policy efforts were mostly focused on macroeconomic stability and opening up markets, the success of industrial policies in emerging Asian markets highlighted the importance of a concerted effort for Africa to climb up the global value chains and diversify away from reliance on raw commodities. The Africa Union’s Agenda 2063 puts value addition and industrialisation at the centre of its vision for a prosperous continent, setting a target for Africa to generate 10% of global manufacturing by 2050. The African Development Bank has made industrialisation one of its “High Five” priorities – along with energy and power, agricultural transformation, regional integration, and improvements in quality of life – setting out an ambition to help raise industrial Africa’s GDP by 130% by 2025.

The extractive sector can be a significant driver of industrialisation in Africa, as it has been, for example, in the United States in the late 19th and early 20th century. As estimated in the 2013 African Economic Outlook, 35% of economic growth and 60% of greenfield foreign direct investment over the past decade was generated in the sector, driven by the long cyclical upswing in commodity prices.

But as the downturn started, one wonders whether the past cycle had been a missed opportunity to spur industrialisation and economic diversification. In fact, Africa has de-industrialised in relative terms over the past two decades: the industrial share of GDP declined from 32% to 27.8% between 2005 and 2013, and manufacturing weakened from 17.7% in 1975 to 11% in 2013. Today, Africa’s industry generates just USD 700 of GDP per capita, less than a third of Latin America’s and barely a fifth of East Asia’s.

Some of the reasons for this disappointing performance rest with the lingering impact of a policy approach aiming to maximise taxation from the extractive industries while minimising their integration in the domestic economy. The consequence of this “enclave approach”? The main and often sole link with industrialisation becomes the national budget. Under this model, the state is expected to allocate resource revenues towards investment to facilitate industrial development: infrastructure, skills development, support to small and medium enterprises and the regulatory mechanisms needed to create a conducive environment for industrialisation.

This approach looks like putting all the eggs into one basket: despite progress in public financial management systems in the continent, delivering an industrialisation policy requires significant programming capacity, high efficiency in allocation of resources and execution of budgets, and rigorous project screenings. Even the most capable budgeting systems remain subject to the vagaries of the political cycle and changing focus of policy-makers. For example, Botswana achieved significant success in capturing resource rents through taxation and directing them towards investment in human capital. However, after an initial strong focus on project selection, in more recent years analysis has highlighted the emergence of project delays and increasing execution costs.

So what is the alternative to a revenue-driven push for industrialisation? The African Mining Vision, the pan-African blueprint for extractives-based development, argues for a holistic approach that overcomes the tax-maximising enclave model. The idea is to complement taxation with programmes that enhance the economic linkages between the extractive industries and the other sectors of the economy.

Linkages consist of opportunities for local businesses to supply inputs into the extractive activities (backward linkages); to transform raw materials into finished and intermediate products (forward linkages); transfers of technology and skills creation through training and on the job learning and R&D; and creating infrastructure nodes (transport, energy or ICT) that drive their main profitability from the extractive industries but are accessible to other economic actors.

Read more

 

Related Sections