Primary Commodity Dependence and Africa’s Future

Until recently virtually all developing countries were heavily dependent upon exports of primary commodities. Globally, this gave rise to three severe problems. First, because commodity prices are highly volatile, countries had to cope with large shocks, both positive and negative. Evidence suggests that the largest of these shocks were poorly managed, with negative shocks causing substantial contractions in output. Second, for various reasons, the rents generated by primary commodities have been associated with poor governance. Third, primary commodity dependence is associated with a substantially higher risk of civil war. Given these problems, diversification seems desirable, and indeed on average over the past two decades developing countries have massively diversified their exports so that such dependence is a thing of the past. Africa has not experienced this diversification and remains heavily dependent upon primary commodities. Does this indicate that Africa has an immutable comparative advantage in primary commodities? The paper argues that Africa's current comparative advantage in primary commodities is often due, not to its intrinsic endowments or location, but to a poor investment climate that is policy-related. This most handicaps those activities that are intensive in transactions. Globally, manufacturing and agricultural processing have a high share of non-factor costs in total costs compared to agriculture, natural resource extraction and services. It discusses how it may be feasib le to lower these costs in a coordinated way, through EPZs and so become competitive in manufacturing. However, for the next decade, even if Africa embarks upon effective diversification, ir will have to live with primary commodity dependence. Hence, there is an urgent task of reducing the problems that have to date been caused by such dependence. Many of the policies that could be effective require action by developed countries. The paper suggests a range of such policies, including making aid flows cont ingent upon commodity prices, and greater transparency in corporate payments of primary commodity rents to governments. * The findings, interpretations, and conclusions expressed in this paper are entirely those of the author. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.