Sub-Saharan Africa is just as dependent on agriculture as it was 40 years ago, even as the sector’s importance in the economy of every other region in the world has plummeted.
Potentially worse still, the manufacturing sector’s share of overall economic activity has almost halved in Africa over the same period — an almost unprecedented example of deindustrialisation occurring in a poor region with a surfeit of low-income workers.
“Sub-Saharan Africa’s economic development model has contrasted with that of other developing regions,” said Giancarlo Perasso, lead economist for the Ceema region at PGIM Fixed Income, who compiled the figures, based on World Bank data.
“Regional production shares tend to shift from agriculture to industry and/or services as economies develop and become more integrated. Compared to other developing countries, sub-Saharan Africa is the only region with an increasing agricultural share of the economy,” Mr Perasso added, alluding to a slight uptick in the share of agriculture from 16.2 per cent of regional gross domestic product in 1981 to 17.8 per cent in 2018.
In contrast, agriculture’s share of output has plunged from 27.6 per cent to 7.9 per cent in east Asia over the same period, from 9.9 per cent to 5.6 per cent in Latin America and, since 1989, from 19.5 per cent to 5.6 per cent in Europe and central Asia, illustrated in the first chart.
Globally, agriculture accounts for just 4 per cent of GDP, according to calculations by Oxford Economics.
François Conradie, head of research at NKC African Economics, said a big issue in Africa was that the sector had been slower to mechanise than in the rest of the world, so a large chunk of the population was still living on the land and reliant on agriculture for their livelihood.
Mr Perasso was a little more upbeat, arguing that Africa boasted not just a competitive advantage but an absolute advantage for crops that cannot be grown in much of the rest of the world, such as cocoa, coffee, tea and flowers, making it a natural strength for the continent.
However, he argued that this strength was hobbled by low productivity, with plots becoming ever smaller and inefficient as they were typically divided among all of a smallholder’s children.
Moreover, Mr Perasso argued that price volatility in the agricultural sector tended to be higher than for manufacturing or services, meaning a farm-heavy growth model “can impair the ability of countries to meet external debt obligations”, a growing concern across much of the continent.
The simultaneous sharp decline in the importance of manufacturing across sub-Saharan Africa mirrored the “collapse in output” in central and eastern Europe in the 1990s after the collapse of communism, Mr Perasso said.
Manufacturing accounted for just 10.4 per cent of sub-Saharan GDP in 2018, down from 18.1 per cent in 1981 and comfortably below the levels seen elsewhere in the developing world, as shown in the second chart.
“Why develop the manufacturing sector when you can export oil, flowers, cocoa?” Mr Perasso asked.
Charles Robertson, chief economist at Renaissance Capital, an emerging markets-focused investment bank, said a number of African governments had prioritised manufacturing in the 1960s and 1970s.
“They thought that if they had big universities and manufacturing plants as in the west they would be as rich as the west, but they didn’t have the level of education,” he said.
At the time, high commodity prices allowed many countries to subsidise a lossmaking manufacturing sector, Mr Robertson said, but the 1980s commodity price crash brought this house of cards tumbling down.
“There was premature industrialisation in the 1960s and 1970s. It was decades too early,” he said. “There was a large, unsustainable manufacturing sector in the early 1980s that was inevitably going to crash, and it did.”
Although he argued that most African states had raised their education levels sufficiently to support large-scale manufacturing in the past decade, Mr Robertson said the main problem now was an inadequate power supply. “You can’t industrialise without electricity,” he added.
David Hauner, head of EM cross-asset strategy and economics at Bank of America Merrill Lynch, instead pointed the finger at “massive” competition from Asia, which had taken much of the market share Africa had managed to build up in the 1960s and 1970s.
“There have been complaints that China and other Asian countries are sucking all the manufacturing out of Africa because they are cheaper and more competitive, even when exporting these goods to Africa,” Mr Hauner said.
“The competition from Asia was vigorous and there seems to be a lot of evidence of excess supply in China. The whole thing about dumping that is driving the tension with the US and Europe probably applies to Africa, it’s just that these countries have much less power to fight back,” Mr Hauner added.
Mr Conradie agreed: “Imports are simply more competitive than we can produce at home.”
He argued that this was in part due to the commodity cycle. When raw material prices are high, the currencies of African exporters rise and the resultant Dutch disease forces manufacturers out of business. When the cycle reverses “it’s hard to set up a business and start again,” he added.
Mr Conradie said this trend was exacerbated by the likes of Nigeria and Angola keeping their currencies artificially strong “because so many wealthy and middle-class families depend on imports for everything they buy”.
“The governments move heaven and earth to prop up their currencies, so you don’t get the benefit to domestic producers you should have,” he said, while the dollars governments receive from commodity exports “are not as valuable as they should be for funding infrastructure”.
Sub-Saharan Africa’s reliance on commodities shows no sign of diminishing any time soon, with most economies just as reliant on natural resource exports as they were in the mid-1990s, depicted in the final chart.
This lack of economic diversification is particularly problematic because “it’s very difficult to increase the value-added of commodity products”, Mr Perasso said. “It’s very difficult for Ghana to increase the value added of cocoa because of how expensive electricity is.”
Mr Robertson argued that commodity dependence simply will not fall until African countries “get the manufacturing story up and running”.
Mr Hauner feared that “long term, it’s hard to be super bullish about commodity prices,” adding “there is not enough diversification. Ghana and Ethiopia have dome some, but most are beholden to commodity prices”.
Mr Perasso feared many African countries faced “structural problems” in diversifying their economies.
In Nigeria, for example, “a large percentage of the tomato harvest rots because there are no storage facilities, the trucks that transport them are not refrigerated, there is no canning facility in Nigeria.
“It’s a whole sector that needs to be developed, from harvesting to transport to putting it in a can and selling it. [But] you need capital to make that investment. An international investor will say ‘there are plenty of tomatoes in other countries. Why should I go elsewhere to a market I do not know?’”
He does believe there have been some “success stories,” such as Ghana, Ivory Coast and Kenya, the latter of which “went almost from barter to mobile phone banking”, leaping the manufacturing phase.
Mr Hauner also noted some successes that have managed to diversify to some extent, with BofA forecasting that, out of the 71 countries it tracks globally, Rwanda, Ivory Coast, Ethiopia and Senegal would be the four fastest-growing this year.
He remains pessimistic about sub-Saharan Africa at large successfully following the tried and tested model of manufacturing-led development, however, arguing that the concept of “peak stuff” limited demand for manufactured goods, alongside rising concerns about climate change.
“A lot of trade that is happening is environmentally disastrous and I assume that increasingly politicians will say we don’t like this any more, we will raise the tax on it. That could reduce the attractiveness of emerging markets as a manufacturing base,” Mr Hauner added.
“My concern would be that for a lot of poorer emerging markets, because of the combination of automation, climate change and so on, and the restrictions because they are relatively small, they will never become anyone’s big manufactured goods producer.”
For his part, Mr Robertson disputes the “peak stuff” concept, arguing it is largely a first-world phenomenon.
“The Chinese want stuff in a massive way. China had 1m cars not so long ago. Now it sells that in a month,” he said.
“Then there are 1.3bn Indians and there will be 2bn Africans wanting stuff by 2050. That means a huge market. There are a lot of people who will need to be clothed and they are not going to be clothed by robots requiring electricity, it will be by Ethiopian textile workers earning $20 a day.”
Mr Perasso feared that the rising African population was more likely to be an obstacle, rather than a path to prosperity, however.
“Traditionally, population growth is one of the factors of production, but the development model based on cheap labour is not very promising,” he said, citing Ethiopia’s recent decision to rethink this approach.
“Population growth can become a problem,” Mr Perasso said. “In Africa things are moving in the right direction but it’s slow and the population pressure is an issue. We cannot think that these countries will develop super-fast in one or two generations. It will take longer.”
If anything, Mr Hauner is more downbeat. “Most emerging markets have spent most of the last 100 years not converging [with the developed world],” he said.