eBusiness Weekly
The IMF recently launched the sub-Sahara Economic Outlook 2017 in Harare. This was an intentional choice by the IMF; a gesture Zimbabweans could appreciate to an extent as the institution continues to hint at more cordial relations. The report was a diligent breakdown of the debt burdens that plague most of the region and the fiscal pressures that are rampant.
The IMF then recommends fiscal consolidation and export diversification. Another key theme, though less explicit in the report, was that of comparative advantage.
The notion of comparative advantage has held weight in economic management for centuries. Nations that have exploited the commodities and services easiest produced in their locations have enjoyed dividends of specialisation.
Countries such as Qatar have created generational wealth at a national level through focused exploitation of oil reserves. Other countries have had to develop supportive elements to create their comparative advantages; Japan and Germany for instance, have developed the intellectual capital and technical resources to create a comparative advantage in high technology production of goods desirable worldwide.
In all these cases, the notion of specialisation in a comparative advantage has resulted in massive leaps in both economic and societal development sure to be felt well into the future.
For visionary nations, the exploitation of comparative advantage has been strategic in achieving development of upward industry mobility from primary sectors to manufacturing and services. This has set up respective countries for competitiveness in tomorrow’s industries.
African countries intend to do this as well. The intent echoes loudly in political rhetoric. But, this is where the IMF report falls short as it fails to address the structural difficulties that result in the ailments such as debt and currency risk highlighted in the report.
It is disingenuous to make economic recommendations without addressing the political factors that influence structural realities. In this regard, the IMF may be correct in recommending export diversification for African countries, emphasising less dependence on resources.
However, a more relevant commentary would address the continent’s structural difficulties in fully exploiting resources today, and utilise the returns to invest for the future.
For instance, the report does not address the structural difficulties faced by Ghana and Cote D’Ivoire who supplies 60 percent of world’s cocoa but only get 6 percent of the $100 billion industry.
Indeed it is correct to diversify sources of revenue, but perhaps more significant is to ensure the greatest accumulation of revenue from resources themselves.
The report makes no mention of this fact. The report paints a stark picture of the fiscal pressure that result from commodity dependence, yet it does not address the key need to accumulate as much returns as possible from those resources.
As the graphics illustrate, resource intensive countries have had more steep declines in GDP than diversified countries, particularly oil exporters. Sure, but what if resource intensive countries create structures to increase their revenues from resources from mere 6 percent to perhaps an ambitious 35 percent, (arbitrary number) of the returns of respective sectors?
Using the cocoa example, a percent increase in returns from a $100 billion cocoa industry is greater than the potential returns from Eurobonds or other debt instruments that either Ghana or Cote D’Ivoire can capture on the debt market, with the comfort of no debt servicing costs that place fiscal burdens.
As mentioned before, specialisation in comparative advantage has resulted in massive leaps in economic and social development. So the assumption that African countries must diversify, without addressing the structural marginalisation from greater resource revenues, disenfranchises the continent from the comparative advantage opportunity that continues to flourish elsewhere. Diversification is a second order priority. Greater revenue accumulation from resources is a much higher concern.
In South Korea, Samsung alone continues to be responsible for nearly 20 percent of the country’s $1,1 trillion economy. When oil prices were high Royal Dutch Shell contributed as much as 56 percent of tax revenue to Netherlands.
According to figures from the Research Institute of the Finnish Economy (ETLA), in the decade to 2007, Nokia was sometimes paying as much as 23 percent of all Finnish corporation tax.
By the numbers as well, marginal increases in revenues from resources are potentially a more effective debt aversion strategy than diversification.
According to the World Economic Forum, the total value of yearly issues of Eurobonds (foreign denominated debt) by sub-Saharan governments rose from just about $200 million in 2006 to about $6,3 billion in 2014.
These are small figures compared to the size of resource industries. Yet, these foreign denominated securities grow into debt service costs that take up most of our government’s fiscal commitment.
As the IMF report indicates, public debt has risen to over 50 percent of GDP in more than half of the region, and debt service costs take up large chunks of fiscal revenues. Indeed diversification is a necessary strategy for Africa.
It creates room for growth, but the infrastructure and supportive elements of new industries has to be financed by resources. This is a model that yields greater returns such as the financial services sector in Qatar and the luxury industry in the UAE. Debt will not finance the development of intellectual and technical infrastructure that conceives future industries, that has to be revenues from resources.
By under exploiting current resources, we are missing out on investment for the future. As a result, we are falling behind in tomorrow’s comparative advantages.
