Africa is home to eight of the world’s 15 least-diversified economies, according to an International Monetary Fund analysis of the export composition of countries as of 2014. The African eight are Algeria, Angola, Equatorial Guinea, Gabon, Libya and Nigeria (oil), Botswana (diamonds) and Eritrea (livestock).
Such narrowness isn’t a problem in classical economic theory. David Ricardo, the great British economist, said two centuries ago that countries should specialize in producing what they’re best at and import everything else from other countries.
In reality, though, specialization can be disastrous if what your country specializes in is a raw commodity, particularly oil or minerals. Commodity prices fluctuate, producing boom-and-bust economic cycles. The commodities often fall under the control of a corrupt elite, resulting in extreme inequality and undemocratic government. And other sectors that hold promise for producing prosperity in the long term, like manufacturing, are starved of investment. This is the famous resource curse.
Zainab Usman tackles this longstanding problem in a paper, “Economic Diversification in Africa: How and Why It Matters,” published this year. Usman, a native of Nigeria, is director of the Africa Program at the Carnegie Endowment for International Peace. Her co-author is David Landry, a fellow at the Duke University Sanford School of Public Policy.
In a recent interview, Usman told me that the lack of diversification in African economies has interested her since her doctoral work at the University of Oxford and a job as a public sector specialist at the World Bank, during which she worked in several African countries as well as Papua New Guinea, Serbia and Uzbekistan. She’s developed the ideas into a book coming out next year from Bloomsbury Press called “Economic Diversification in Nigeria: the Politics of Building a Post-Oil Economy.”
“In work addressing the resource curse there’s barely any mention of diversification,” Usman told me. “I kept hitting a brick wall on that point. There’s talk about managing revenue and addressing corruption but you need to give countries an alternative.”
The natural resources themselves are not the curse, Usman said. “Look at the U.S., Canada, Australia. The resources did not obstruct their development. They became a springboard. Like California with the gold rush. Even Malaysia and Indonesia have made some progress.”
Usman has worked in development long enough to know not to over-rely on development strategies that have failed Africa in the past, such as import substitution and protection of infant industries. Import substitution is the principle of making things at home instead of importing them. Protection of infant industries, a closely related idea, involves putting up tariff barriers to give young sectors a chance to get established. These aren’t necessarily bad approaches — they have worked in East Asia, for example — but in countries with weak governance they can harm consumers while enriching inefficient but well-connected domestic producers.
The solution, Usman says, is a multipronged effort that includes expanding trade within Africa, providing targeted government support to promising small and medium-sized companies, raising the skills of the work force and diversifying sources of government revenue.
Free trade in Africa is an obvious opportunity. The World Bank estimated in a report last year that the African Continental Free Trade Area agreement that was signed in 2018 has the potential to lift 30 million people out of extreme poverty, with two-thirds of the gains coming from cutting red tape and simplifying customs procedures. It’s more efficient for Africans to buy from other Africans — which would result in greater economic diversification — but that often doesn’t happen today because intracontinental trade is costly and complex.
Manufacturing has been the way out of poverty for many countries, including China. But now that manufacturing has become more capital- and technology-intensive, that route has become a less effective job creator. Says Usman: “Africa has some window of opportunity, maybe two decades, before the robots take over.”
Usman’s paper focuses on a type of diversification that gets less attention, namely diversification of government revenue sources. That’s obviously correlated with economic diversification — you can’t tax factories if there aren’t any factories.
One solution, although not an easy one, is to raise taxes from enterprises that are now in the “informal” sector — that is, not registered, regulated or taxed. But overtaxation of small companies by government at multiple levels can be a problem as well, she says. Usman points to research showing that it’s easier to raise taxes when the public believes the government is honest and effective. The money raised by casting the revenue net wider can fund government programs that promote economic development and diversification, the paper argues.
One product that’s instantly recognizable as African is the brightly colored, intricately designed fabric that’s made into women’s dresses, especially in Central and Western Africa. What’s less known is that the biggest producer of the fabric, Vlisco, is Dutch and manufactures it in the Netherlands. Nothing wrong with that, of course; Vlisco is serving a need and serving it well. But Usman sees in Vlisco a missed opportunity. Why, she asks, can’t an African company supply a quintessentially African product?
Peter Coy has covered business for nearly 40 years.