Making policies work

GREAT insights Magazine

From Growth to Transformation

Time to close the gap between extractive sectors and other productive sectors

February 2013

Ramdoo, I. 2013. From growth to transformation: Time to close the gap between extractive sectors and other productive sectors. GREAT Insights, Volume 2, Issue 2. February-March 2013. Maastricht: ECDPM

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Africa’s impressive growth performance in the last decade, largely driven by the commodity boom, and in particular, by high demands from emerging markets, has been widely heralded. This is very positive and most welcomed, in particular after almost two lost decades during which many struggled hard with their macro-economic imbalances or with other political challenges. 

But although necessary, growth alone cannot do it all. More is needed to attain long-term, sustainable and inclusive structural transformation. Zooming into the economic structures of many African countries, much remains to be done to translate opportunities arising from the good economic performance into real, high-quality employment, business prospects for local entrepreneurs and more broadly, into a solid industrial base that can propel countries to a higher level of development. 

To maximise on the good fortune, development strategies in mineral-rich African countries, have to take a more transformative approach. In this regard, bridging the gap between extractive sectors and other productive value chains is necessary. Three complementary policies are thus essential, namely: 

1. Creating and promoting linkages within the extractive sector, notably through focused industrial strategies to boost backward and forward linkages;

2. Promoting linkages outside the extractive sector, notably in the field of agriculture, the most important economic sector in Africa; and 

3. Strategic positioning in the global value chain, to ensure integration into the complex system of fragmented production.

Linkages within the extractive sector

To overcome the current situation of over-dependency on few economic sectors, it is important to consolidate the growth performance by building strong economic fundamentals around productive sectors. The fiscal link can act as a first lever, by using the windfall gains from the extractive sector to support other productive sectors. 

To be transformative, the extractive sector can no longer be just a source of raw materials and unprocessed goods produced locally and meant to be transformed elsewhere. It is therefore important to provide incentives to facilitate business opportunities because and investment, which can in turn can act as a catalyst, in support of employment, industrial value creation and growth of an indigenous entrepreneurial class. This needs to fit in the overall development of the domestic supply chains.

While the purpose is not to turn miners into manufacturers nor for governments to pick winners from the business community, it is nevertheless essential to have a proper framework within which the private sector can operate. This requires a supportive business climate and a set of carefully designed industrial policies, aimed at promoting linkages within the extractive sector. Government can generally act as a facilitator, notably by providing efficient public goods such as infrastructure and education and by addressing some of the existing market failures (1), which are particularly strong in the extractive sector. It must also undertake complementary reforms to address numerous remaining challenges, such as the technological divide, infrastructure deficits and other institutional and governance weaknesses, amongst others. 

More broadly, it is also important to fix the current disconnect between the extractive sector and the wider industrial sector. So far, the lack of high value-added industrial activities in many African countries have resulted in countries accounting for negligible shares in global industrial output and manufactured exports. While it is widely recognised that industrial development is key to structural transformation, the current resource boom therefore represents a unique opportunity to create and promote those linkages. In essence, two types of linkages have substantial potential, albeit to different degrees:

1. Backward linkages, relating to industries that supply inputs to the extractive sector. Examples include industries that produce specialised equipments, machinery or services for the extractive sector or service provider and industries that operate at the exploration stage, prior to exploitation and production. 

2. Forward linkages, which consist of industries that use the inputs from the extractive sector into other activities. These linkages provide the opportunity to develop clusters of manufacturing activities around the extractive sector through beneficiation processes and higher value added activities (2). 

3. Taken together, linkages can therefore generate synergies with other productive sectors to create more productive jobs and competitive industries. 

Linking the extractive sector with other productive sectors: The case of agriculture

Agriculture is the most important economic sector in many African countries, with an average GDP contribution estimated at 30% in 2012. It can act as catalyst for Africa’s broader economic transformation, if supported in a strategic manner. Extractive sectors are next in line, although in some countries the latter have a far larger economic impact. 

That said, the extractive sector and agriculture have at least one thing in common: both are guided by strong political considerations, although for different reasons. In the case of the extractive sector, rents generated create, structure and maintain incentives for many stakeholders. The relationship between politics and rents not only have bearing on the (mis)management of resources, they also continuously shape governments’ relationship with citizens. High revenues too often lead to low tax collection, in turn weakening accountability link between the citizen and the State, in the end distracting governments’ attention from the needs of the people. 

In the case of agriculture, rural and small-scale agricultural farmers represent a significant proportion of voters. History and recent events have testified that food (in)security is a powerful instrument, capable of triggering popular upheavals against the political power in place and hence destabilise a government. 

Governments therefore have strong interests in policies in both sectors.

While both sectors have their own sensitivities, governments may, however, use the gains from one sector to compensate and lift the other sector to a higher level of development, notably by using financial resources from the extractive sector to irrigate agriculture, or through support to value chain development and to local entrepreneurship in agribusiness. 

Extractive companies can also play a lead role in supporting agricultural economic activities. This can be a way to maintain their social license to operate in regions where agriculture is a mainstay, but where farmers still struggle to provide for their own subsistence. In their endeavour to work better with local community, there are basically three ways in which extractive companies can support the creation of linkages with and for local farmers, namely:

1. Supporting programmes to encourage value chain activities in existing farming activities or encouraging the development of new, integrated activities from farm to fork. 

2. Pursing a breadbasket approach, when industries operate in regions that have high agricultural potential by virtue of their relatively good climate or soil endowments. They can support linkages between small farmers and the larger, market-oriented farming operations, encouraging small farmers to grow staple food and helping them to sell their surpluses on the local/national/regional markets.

3. Developing spatial agricultural activities along infrastructure corridors, which serve first and foremost the needs of the extractive sector. This includes support to storage, warehousing and processing facilities around already existing major infrastructures and support to the development of clusters of activities or regional agricultural value chains, in and across countries that are serviced by these corridors.

Integrating the global value chains

The context in which countries are today promoting industrial development is far more complex than what it was a few decades ago, as the available policy space for pro-active industrial policy intervention has been dwindling. Today, self-imposed international legal frameworks and bilateral and regional liberalisation commitments greatly constrain the margin of manoeuvre of countries, who could be tempted to frame their national policies to protect their nascent industries. 

Furthermore, the world is far more globalised and production structures are more integrated and sophisticated. In addition, there is a growing interdependence between services and manufacturing industries, where the production of manufactured goods involve a multitude of services inputs and service-like activities, to the extent that distinction between manufacturing and services has become increasingly blurred. The recent mergers and acquisitions between mining companies and companies that have commercial activities, as in the recent Glencore and Xstrata merger, give some flavour of the complexity and increasing fracturing of the global value chain. 

The growing importance of global value chains in the production process is at the heart of the economic system. The increasing fragmentation of production processes, coupled with country specialisation in specific tasks and business activities, as well as the growing role of networks, global buyers and suppliers have all shaped industrial activities and policies (3), as reflected by the rising share of trade in intermediate inputs, estimated (4) to represent some 50% of OECD imported goods and almost 75% of imports from countries such as China and Brazil.

Medium-sized and large companies generally dominate the extractive sector in developing countries, leaving little space for small, local companies to operate. In addition, they outsource their activities to enterprises overseas, where the business environment is more efficient and where competitive advantages are more important. 

Africa still lags behind in this cobweb of value chain integration. This is in part due to weak domestic industries and relative competitive disadvantages vis-à-vis Asian economies, but also due to the difficulty to link theirs existing industries to geographically dispersed and continuously shifting activities. However, bottlenecks need to be addressed to ensure access to international markets.

The way forward

Attaining an effective structural transformation necessarily requires the disenclavement of the extractive sector. Linkages can provide for that, if done in an effective manner. Otherwise, once the commodity boom is over, countries will have little solid basis to sustain development objectives. Policies must be consistent, sequenced and coherent, and take into account commitments with third partners as well as concurrent policies developed at the regional or pan-African level. Internalising broader frameworks such as the Africa Mining Vision, the Accelerated Industrial Development of Africa (AIDA), the Comprehensive Africa Agriculture Development Programme (CAADP) or the Programme for Infrastructure Development in Africa (PIDA) in national strategies can help foster synergy between national and continental approaches and facilitate a more encompassing and coherent transformation framework. Acting as a facilitator, Government must also work in partnership with industries to complement to their own efforts and with international development partners, engaged on their side, in supporting national and regional initiatives. Bringing all the stakeholders to the table to support transformation can only bring more positive and inclusive results.

This article is a summary of a forthcoming ECDPM Discussion Paper: Ramdoo I. 2013. Fixing Broken Links: Linking Extractive Sectors to Productive Value Chains. (ECDPM Discussion Paper 143). Maastricht: ECDPM. 

Isabelle Ramdoo is Policy Officer at ECDPM. 

Footnotes

1. These include information asymmetry, notably on the geological knowledge; inefficient financial markets, which prevent local investment; excessive red-tape, preventing innovation and entrepreneurship; rent-seeking behaviours and corruption, that often shape the (in)efficiency of policies and development outcomes; dominant market conditions of large firms, which often prevent local firms to tap the benefits of the super-cycle etc.
2. On the example of diamonds, see the article by Roman Grynberg in this issue. 
3. OECD. 2012. Mapping global value chains. Paper prepared for the final WIOD Conference: Causes and consequences of globalization, Groningen, The Netherlands. April 24-26 2012.
4. World Economic Forum. 2012.

This article was published in Great Insights Volume 2, Issue 2 (February-March 2013)

Economic Transformation and TradeExtractive Sectors