If Africa must move from being a commodity exporter to being a value-added product exporter, we must invest in building cottage industries.
At the moment, Africa is stuck right at the bottom of global value chains. We only produce and export commodities that have very little value. But depend so much on finished or value-added products for our consumption.
This is why Africa is always seriously affected whenever there is a price fall in the commodity market.
Africa’s Place In Global Value Chains
Just take a look at what happened when the prices of cocoa beans fell for instance. Ghana and Ivory Coast lost over $1 billion each just in a swoop. But what if they were processing these cocoa beans into chocolate and its derivatives? Obviously, they wouldn’t be so affected by the commodity price crash.
Take a look also at the price of coffee beans especially genus coffea (native to Ethiopia and Sudan) used in the production of coffee drink.
Whereas the price of coffee beans keeps plummeting, the price of coffee drinks at Starbucks keeps increasing. The result is that Africa’s participation and earnings in global value chains keep plummeting with falling prices of commodities.
If you take a look at cornflakes which almost everyone around the world consumes, you would see how much Africa is losing. Africa remains the largest producer of maize globally. Sadly however, our participation in the global cornflakes market is negligible.
One wonders what the brain surgery is in making cornflakes. Cornflakes is simply extruded maize and some additives like sugar, milk etc. This is what cottage industries in Africa can competently handle. But the situation is that we buy these from outside Africa.
What about custard which is nothing other than cornflour, egg, milk, sugar and cream? These ingredients are readily and abundantly available in Africa. But just look at the custard market in Africa. It is almost entire dominated by foreign custard manufacturers.
This is obviously not any goodnews for Africa. We can’t keep remaining at the bottom of global value chains. We must move right to the top. To do that however, we will need to build cottage industries.
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How do we build and support the growth of cottage industries?
Mentioned above are just few of the commodities Africa produces very competitively. We must build cottage industries in rural communities where these commodities are produced.
These industries will buy directly from the farmers. They will process these commodities into value-added products which can serve the African market as well as the global market.
To encourage the growth of cottage industries however, Africa must improve on its infrastructure.
Africa has a huge infrastructure gap that will not allow small scale industries to thrive.
We must therefore mobilize domestic capital to close these infrastructure gaps and create an enabling environment for businesses to thrive.
Once externalities like power supply, water, roads, rail, ICT etc. are taken care of, doing business in Africa will become more profitable.
The reason why there is so much risk in doing business in Africa is because of the huge infrastructure cost. If we can address infrastructure, businesses will spring up and flourish in Africa.
Again, to encourage the growth of cottage industries, we must make capital cheaper and more accessible in Africa.
We have a number of young African entrepreneurs desirous of establishing cottage industries that would allow us participate in global value chains.
However, due to lack of access to capital, these African entrepreneurs are unable to attain their goals.
Governments and development finance institutions must therefore provide co-guarrantee structures that will encourage financial institutions to lend to small-scale industrialists.
In addition, business registration, licensing and approval processes must be made less bureaucratic to allow more entrepreneurs formalize their businesses.
When more African entrepreneurs formalize their businesses, they will be able to access financial instruments to grow their businesses.
The Case for domesticating the Africa Continental Free Trade Agreement
Importantly too, African leaders must commit to fully ratifying and domesticating the Africa Continental Free Trade Agreement (CFTA).
In addition, we must build transport corridors, invest in aviation and ICT and develop train routes that would make mobility of products, services and Human Resources across Africa effortless.
Transnational power grids will allow Africa attain self-sufficiency in electricity which is very critical to sustaining cottage industries.
How do we mobilize capital to accelerate industrialization in Africa?
Indeed, Africa can mobilize the resources it needs first to close its infrastructure investment gap and then to accelerate industrialization on the continent.
If you take a look at the pension funds, sovereign wealth funds and insurance pool of funds in Africa, they are roughly about $684 billion. That would grow to about $1.8 trillion in 2020. Just a fraction of this amount is what we need to close our infrastructure investment gap which currently stands at $68-108 billion.
What about our taxes? Africa today collects annual taxes in excess of $500 billion. Only a fraction of that would close our infrastructure investment gap and support the establishment of cottage industries.
Also, we have global pension funds, sovereign wealth funds and institutional investors that currently stand at over $60 billion. This is projected to grow to about $111 trillion in 2020. If Africa positions itself or better still markets itself properly, we can attract some of these monies to not only close Africa’s huge infrastructure investment gap, but, finance industrial development projects.
There are indeed a ton of opportunities for Africa to access to the right amount of capital it needs to effectively industrialize. But of course, African leaders and policy makers would need to do the right thing to attract these capital. We must reform our legal, regulatory and fiscal policies to attract and retain capital that would allow us industrialize aggressively.
Benefits of Building Cottage Industries across Africa
By promoting the growth and expansion of cottage industries particularly in rural areas, we will participate more in global value chains. Most importantly, we would create so much prosperity in the rural areas.
This will allow us lift hundreds of millions of people out of poverty into wealth. We would also effectively transform rural economies from zones of economic misery to zones of economic prosperity.
That’s the kind of development that would allow Africa become competitive and eventually achieve the sustainable development goals.
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