How Africa can transition from extractive industries to learning economies

For a summary of Prof. Juma's Twitter Q&A on this topic, click here.  #AskCJuma

The current slump in world commodity prices is forcing Africa to rethink its traditional dependence on raw material exports. The time for African nations to lay the foundations for transitioning from extractive to learning economies is now.

The jolts are real. The International Monetary Fund has projected that the continent will grow by 3% in 2016. This is well below the 6% average growth over the last decade and the lowest rate in the last 15 years.

Some argue that Africa has already squandered the commodity boom and wasted the opportunity to increase its manufactured exports. Others point to the fact that extractive industries crowd out manufacturing, making diversification more difficult.

International policy discourse on the issue is still dominated by the need to bring more transparency to extractive industries. The assumption here is that such transparency will help control the operations of multinational corporations, which in turn will improve the use of revenue from exports. Noble as they are, the suggestions are still framed in the context of commodities and will add little to economic diversification.

Extraction is not just an economic activity in Africa. It is a pervasive worldview that defines behavior from business interactions to relations between the state and its citizens. This phenomenon is vividly captured in Tom Burgis’s book The Looting Machine: Warlords, Oligarchs, Corporations, Smugglers, and the Theft of Africa’s Wealth.

Lamentation is not enough. Neither is the magical thinking that the downturn in the commodity boom and consumer-driven growth will automatically lead to economic diversification. This can only be achieved through practical efforts to focus on creating learning economies driven by technological innovation.

The good news is that African policymakers are aware of what needs to be done. For example, in 2014 the African Union adopted a 10-year Science, Technology and Innovation in Africa Strategy to help reposition the continent as a collection of technology-driven economies. This strategy contributes to Africa’s 50-year Agenda 2063. The challenge is how to do it. One example can be found in the decision by the AU and the NEPAD Agency to collaborate in building executive capacity among African ministers through the Technology, Innovation and Entrepreneurship program funded by the Schooner Foundation.

Rhetorical statements about value-addition are not enough. For example, in 2015 Africa exported nearly $2.5 billion worth of coffee. Germany’s re-export of coffee, on the other hand, was about $3.9 billion. Adding value to coffee in Africa is hardly the best response.

There is little evidence to support the view that commodity-exporting countries diversify their economies by adding value to their raw materials. To the contrary, nations add value to imported raw materials when they already possess the minimum technological competence. In effect, they do so because they are learning rather than extractive economies.

But how do nations shift from extractive to learning economies? First, they do not do so by simply shifting to another sector and hoping that diversification will occur automatically. An example of this is the description of Nigeria’s emphasis on agriculture as the country’s “new oil.” As noted by former President Olusegun Obasanjo, agriculture can be more than the “new oil”: “One day the oil will run out—but Sub-Saharan Africa will always have its fertile land, its rivers, its youthful workforce and its huge domestic market. Investing now can turn that potential into prosperity.”

Agriculture is an important entry point for economic diversification not because of abundant land, but because it offers a foundation for building learning economies through technological innovation. Agriculture can serve as an effective source of technological lessons for the wider economy.

Shifting from extractive to learning economies therefore requires refocusing attention on continuous improvement, adaptation, and diversification. The key starting point for Africa is not to retreat into the false safety of “African solutions for African problems.” It is to learn from other economies—not just to copy them—and adapt the lesson to local needs.

African nations have the benefit of being latecomers. The world is full of inspirational examples they can learn from. In fact, many of the countries that have recently transitioned to being learning economies started off with a lot less resources (finance and research facilities) than the majority of African countries have today.

Take the case of Taiwan. In the early 1960s, the country’s main export was mushrooms, of which it was a world leader. The prospects of industrial learning were quite limited when dealing with a high-volume, low-value and perishable export commodity. It transitioned to becoming a semiconductor powerhouse by redefining itself as a learning economy.

Taiwan’s premier research center, the Industrial Technology Research Institute (ITRI) that spawned many of its leading semiconductor firms, was created by consolidating four dilapidated research center left behind by Japanese occupiers. ITRI was not created to add value to mushrooms but was part of the country’s policy reinvention as a learning economy.

The case of Taiwan illustrates the fact that economic diversification results from the initial use of existing technologies that can be readily combined to generate increasingly diverse products. Some technological capabilities generate more combinations that others. Semiconductor and chemical industries are examples of such platform or generic technologies.

As my colleague Professor Ricardo Hausmann explains, industrial growth proceeds like a game of Scrabble. Nations start off with minimum technological capabilities that they recombine to create more technologies in the same way letters are used to create new words in a Scrabble game. Not all letters are created equal. Some have higher values, but they do not combine readily to form words.

Raw materials, for example, are like J, Q, X, and Z, which appear to have high value but are hard to use in creating words. Players often have to substitute them with more versatile letters. This is like using revenue from raw materials to acquire technological capabilities that have higher recombinant value. Like in Scrabble, industrial development involves considerable learning, not just about letters but also about vocabulary and strategies for thinking about creating new words.

Africa’s economic downturn is not itself a fatal development. Countries need not recoil into despair and leave their future to the fate of commodity price fluctuations. It is an opportunity for them to start building new futures that focus on enhancing human capabilities as the foundation of durable economic development.

Unlike its predecessors, Africa has access to a much wider range of technologies that can serve as platforms for industrial learning. They cover diverse fields such as digital technologies, genetics, synthetic biology and new materials. Harnessing them requires building among the youth a culture of innovation that is driven by learning and not extraction.

A version of this article was presented at the 4^th Ministerial Retreat of the Executive Council of the African Union, 5-7 May 2016, Nairobi Kenya.