NewsNorth AfricaThe elusive prize of value addition


Posted on Tuesday, 22 July 2014 15:02

The elusive prize of value addition

By Bright Simons

There is no truism more universally acknowledged in the discussion about Africa's economic redemption than that of the need for countries to add value to their natural resources. And this truism is not of recent vintage.

In many African countries, the acknowledgement, in fact, goes back to colonial times. And yet, this holy grail seems to elude Africa decade after decade, and not always for want of trying.

In Nigeria, Ghana and Sudan, the immediate era after independence was one of intense factory build­ing, all in homage to the doctrine of value addition.

except in places like Africa, regional trade continues to expand

Why is this universal theory of natural resource value addition (NRVA) so honoured in doctrine and yet so ineptly pursued? What could be amiss?

It turns out that most African economists tend to focus on diag­nosing the problems and symp­toms associated with the condi­tion of low NRVA, but very few conduct detailed empirical re­search into the how and where­ fore of actual efforts to achieve it in African countries.

Several years after Nigeria virtually banned the import of certain processed food items in order to encourage local value addition, I struggled to ac­cess even a single detailed value­ chain analysis of how the policy has turned out in practice.

It turns out that for real insights into NRVA dynamics in emerging and transforming societies, one has to look carefully into the re­search results of international economists working elsewhere, especially in Asia and Latin America, the likes of Charles Sabel, Ricardo Haus­ mann and Dani Rodrik.

When the data and analysis of the sub­ject is carefully studied, it be­ comes obvious that the NRVA theory is not a general theory about how to grow capacity in an eco­nomy in order to en­sure a broad change from lower­value eco­nomic activities to higher­value economic activities.

Instead, it is a much narrower focus on ver­tical integration in a manner that nevertheless appears oblivious to the specialised literature on vertical integration as a feature of business strategy, regardless of geographic setting.

This immediately raises the sus­picion that NRVA theories, despite their pretensions, tend to be nar­row lessons in business strategy for specific industries in emergent societies rather than comprehens­ive economic policy platforms ing to diversify beyond a dependence on a few crops or minerals. Some of the insights that underlie the suspicion are as follows:

● Major transitions from low incomes to high incomes have not really involved this NRVA approach. Britain grew rich through expansive trade, often leveraging other people's natural resources. Malaysia's game-changer was neither palm-oil-based biofuels nor tin trinkets.

● Many so-called natural resources are themselves products of historic accidents or specific machinations. There is nothing about Ghana that makes cocoa native as a resource in that country. Ghana's seeming advantages in cocoa production are themselves purely products of colonial interventions.

● The old idea that neighbours tend to specialise in complementary products and that regional trade can be driven by pure comparative advantage is clearly not borne out by practical evidence. Neighbours very often specialise in the same kind of things. Yet, except in places like Africa, regional trade continues to expand. The factors that drive trade are nowadays driven more by corporate and entrepreneurial behaviour than national natural endowments per se. Depending on how entrepreneurs are allowed to develop and to deepen their capacity, they can turn anything into a tradeable commodity, such as copra – dried coconut meat or kernel – which is processed in Jinja for sale as animal feed in Mombasa.

● It is also worth noting that around the world there is a consistent picture of countries, regardless of the size of their national income, not being dogmatic about adding value. Saudi Arabia exports most of its oil unprocessed. Australia exports most of its iron and other natural resources raw to China.

● The natural resource sector tends to lack strong connections to other industries. This means that as a country grows its competence in a particular natural resource sector through value addition, the spin-offs tend to be very low. An industry like electronics, on the other hand, is so interconnected that as one climbs the sophistication ladder in electronics, whole new industries will be born.

● Knowledge in natural resource sectors is less mobile than that in other sectors. Increasing competence in a natural resource sector translates much less easily to participation in broader global supply chains and to the ability to source capital and talent more broadly in a geographical sense.

● Rather than growing vertically up the value chain, it appears more efficient to grow laterally by focusing on adjacent sectors that require competencies somewhat similar to the sectors a country is already familiar with. Thailand discovered that rather than specialise in furniture, moving into chainsaw production was a more interesting jump. Over time, the Thais moved from chainsaws to lumberjacks.

● Diversification and capacity building should be the true aims of economic transformation. Whilst moving up the value chain in any sector is usually a good thing, premises that depend on a few arbitrary notions of what a country's natural resources are, and obsessing over a particular business strategy – vertical integration – is almost certainly short-sighted. ●

Bright Simons, Honorary research director, IMANI

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