Economic Diversification in Africa: Overcoming Reliance on Primary Industry for Sustainable Growth -

Over the years, Africa’s economic landscape has been characterised by heavy reliance on primary industry and primary sector exports. As the continent developed, primary industry has become the backbone of the wider African economy and employs a significant portion of the continent’s workforce.

Historical focus on these industries, particularly agriculture and fossil fuels (to name a few) have built up an ecosystem of over-reliance which affects the continent to this day, exposing nations to considerable risks, vulnerability, and economic instability.

Primary industry refers to sectors of an economy that directly extract or harvest natural resources, this includes agriculture, mining, resource extraction, fishing, foresting, and similar activities. Although a subset of primary industry, agriculture industry is made up of companies, corporations, and individuals that are involved in the production of food and/or crops for consumption purposes, while over-reliance is the (excessive) dependence on a single sector or type of economic activity. It is crucial to examine the characteristics of this dependency, its wider implications, and how economic diversification is vital for the development of African nations.

Primary Industry in Africa

African agriculture is the foundation of the continent’s economy not only in terms of labour employment, but also contribution to African GDP – employing over 60% of the African active labour force, and accounting for about a quarter of the continent’s GDP. Continuing the primary industry trend, oil, fossil fuels, and agricultural commodities accounted for roughly 80% of Africa’s export 2011, approximately $457.6bn out of the total $572bn from merchandise exports.

It is therefore evident that the continent heavily relies on primary industry, agriculture, and primary sector exports. Considering Africa’s dependence on primary industry and general widespread poverty, we can understand that the continent is not benefitting enough from such industry and trade. A variety of hypotheses have emerged over the years, including mismanagement of resources, and unhelpful policy regimes as factors influencing the potential of agriculture and primary industry, however, could the source of the ‘non-benefits’ be the reliance itself?

The Risks of Over-Reliance

It can be argued that the said dependence on primary industry and agriculture has cut off Africa from high levels of growth, severely exposes it to market volatility, and hinders future development. Agriculture, being the growing, harvesting, and then trading of crops and livestock is extraordinarily vulnerable to unfavourable climate change and weather, leading to declining yields, increased numbers of pests and diseases which impair crop productivity and can destroy crops in their entirety, as well as unreserved crop failure among many. Furthermore, primary exports such as agricultural products and natural resources are extremely vulnerable to fluctuating prices, while oil producing nations such as Algeria, Libya and Nigeria are exposed to the inherent risks and volatility of the market. It is through the inconsistent and erratic nature of primary sector trade that reliance (and especially over-reliance) becomes precarious.

By being exceptionally dependent on such inconsistent industry (60%+ active labour force and 80% GDP) Africa allows itself to be vulnerable, reducing potential growth. Additionally, with the rise and rapid development of clean energy solutions, the global demand for coal, oil, and natural gas will diminish, creating severe impacts similar to when commodity prices drop, including the deterioration of trade balances, devaluation of currency, and overall loss of economic growth, employment, and revenue. Considering the significant exporting of such resources by North African nations such as Algeria, future clean energy solutions – which will have significant global advantages – will have severe consequences on the region if they remain reliant.

In light of the bleak predicted outcomes of reliance on primary industry, as well as the current negative impacts, it is apparent that African over-reliance on primary industry and agriculture poses significant challenges to the continent. Therefore raising questions on how to reduce this reliance via economic diversification, and transitioning and developing secondary, tertiary, and quaternary sector industries.

The Need for Economic Diversification

According to the UNFCCC “Economic diversification is the process of shifting an economy away from a single income source toward multiple sources from a growing range of sectors and markets”. In the context of Africa, economic diversification is the transition from high dependence on agriculture and primary industry, towards a wider variety of secondary, tertiary, and quaternary sectors in an economically sustainable manner, and maximizing potential long term economic growth, while providing the added benefits of reducing reliance. Not only does economic diversification bring the reduction of reliance and the reduction of vulnerability, but it is also recognized by the International Monetary Fund as a great system of economic growth (Christine Lagarde – “We know that economic diversification is good for growth”).

Furthermore, economic diversification provides a safety net that protects nations from external shocks and price volatility in certain sectors/industries, reducing overall damage that would have been exponentially high if a nation was severely reliant on a certain export. For example, if the prices of groundnuts and cotton worldwide plummeted (or if there was suddenly an issue in exporting these products), Gambia would suffer extreme economic consequences due to their reliance on those exports. It is also important to note that economic diversification provides advantages beyond growth, reduction of reliance and therefore reduction of risks, but the study ‘Export Variety and Country Productivity’ by Robert Feenstra and Hiau Looi Kee found that on average, a 10% increase in export variety (caused by economic diversification) leads to a 1.3% increase in overall productivity. However, it is important to recognise that although economic diversification brings significant benefits, it is through the successful integration of policy, strategy, investment, and initiative that is required for nations to develop economic diversity.

Exploring Economic Diversification Strategies of African Countries

Rwanda

Innovation – Rwandan Development Board’s Kigali Innovation City initiative is a $300million infrastructure project aiming to create a hub for Rwandan and African technology, innovation and start-ups. It is expected to generate $150 million in quaternary ICT exports annually – with room for expansion – while attracting over $300 million in foreign direct investments. It is also expected to create over 50,000 jobs once completed. This initiative was introduced to reduce reliance on Rwanda’s primary industries and to start the transition into tertiary and quaternary industry. The initiative, although costly in the short term, is expected to provide long term economic growth and diversity.

Innovation – The Smart City Rwanda Masterplan provides framework to develop smart city strategies. This strategy actively promotes foreign direct investment and boosts Rwandan innovation and ICT industries, further helping Rwanda transition to a tertiary and quaternary economy, whilst reducing reliance on primary industries, and ensuring overall economic diversity.

Tourism – Visit Rwanda initiatives leverage the country’s natural assets to create a relatively sustainable tourism industry which focuses on eco-tourism. Thanks to the initiative and government policy, Rwandan tourism grew at a rate of 25% annually between 2013 and 2018, and generated roughly $284 million in 2021, corresponding to 2.1% of Rwandan GDP. Although the tourism industry is relatively volatile, it is a lucrative industry that promotes Rwanda on a global scale and has been a successful step in Rwandan economic diversification.

South Africa

Industrialisation – The creation and adoption of the National Industrial Policy Framework in 2007 was the nation’s first comprehensive statement of the government’s approach towards industry and industrialisation. The main objectives of the NIPF revolved around facilitating economic diversification beyond South Africa’s then reliance on traditional commodities through the intensification of the nation’s industrial process. Although the 2007-2008 financial crisis hindered the expected outcomes of the initiative, it provided the first major plan for South African economic diversification, which South Africa are currently profiting from.

Finance – Through the continuous development of the Johannesburg and Cape Town Stock Exchanges and financial institutions, South Africa has built a reputation as a respected financial hub, with Johannesburg being the second most important financial centre on the African continent after Casablanca. The government focus on these institutions significantly boosted South African tertiary and quaternary industry, reducing reliance on traditional commodities. Overall, South Africa’s financial industry (as well as real estate and business services) is now a major contributor to the nation’s GDP, with an added value of roughly $58.6bn in 2023.

Despite currently suffering from corruption, economic mismanagement, and governmental failures compounded by the after-effects of Covid-19 and the war in Ukraine, South Africa is still recognised as Africa’s most sophisticated, diversified and largest economy, and it is through their implementation of diversification strategies which have enabled them to maintain such position irrespective of their current situation, further highlighting the importance of economic diversification.

Applying Strategies

Although examining the diversification successes of Rwanda and South Africa is important, the vast nature of the African continent, and the varying socio-political, economic and geographical contexts of each nation cannot be understated. However, by exploring, understanding, and learning from the successful strategies of these nations, governments can develop respective diversification initiatives for their nations, and apply them to their respective contexts at appropriate scales

Conclusion

Africa’s historic dependence and over-reliance on primary and agriculture industries exposes its economies to significant risks, leaving it vulnerable to market volatility, environmental challenges, and more, hindering the continent’s development and economic growth. Successful economic diversification strategies are essential for mitigating these risks and encouraging sustainable growth.

By investing in the development of secondary – but mainly tertiary and quaternary industry, African nations can enhance economic stability and resilience, prompting growth and development. The success of Rwanda and South Africa in implementing economic diversification strategies (to name a few) highlight the potential benefits of such initiatives. Embracing economic diversification and reducing reliance on primary industries is therefore crucial to Africa’s long-term economic health and development.

The Author

Francesco Kruse is currently interning at the AESC

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the AESC. The AESC is not responsible for any errors or omissions, or for the results obtained from the use of this information. The content of this article is provided for informational purposes only and should not be construed as professional advice. The AESC disclaims any and all liability in connection with the article.