Africa's Economies
Commodity Dependence
Why many African economies rely on exporting oil, minerals or crops, and how price swings in these commodities create booms and busts.
Many African countries earn most of their export income from a small number of raw materials, such as oil, copper, gold, cocoa or coffee. This is called commodity dependence. The United Nations considers a country commodity-dependent when commodities make up more than 60 percent of its merchandise exports, and by that measure most African countries qualify.
Examples
- Nigeria and Angola rely heavily on oil exports.
- Zambia and the Democratic Republic of the Congo depend on copper and cobalt.
- Botswana depends on diamonds.
- Côte d’Ivoire and Ghana are the world’s largest cocoa producers.
- Ethiopia earns much of its export income from coffee.
The problem of price swings
Commodity prices are volatile: they can rise or fall sharply within months. When prices are high, government revenue and spending surge. When prices fall, revenue collapses, currencies weaken and governments may have to cut spending or borrow.
World oil prices fell by more than half between mid-2014 and early 2016. Nigeria and Angola saw export earnings and government revenue plunge. Their currencies weakened, inflation rose, and Nigeria entered a recession in 2016. Countries that had saved during the boom coped better than those that had spent everything.
Why dependence persists
Commodity exports are often the most profitable activity available, especially where manufacturing faces high costs from poor infrastructure and unreliable power. Commodity booms can also make other exports less competitive by strengthening the currency, a problem economists call Dutch disease.
Diversification
Economists recommend diversification: building a wider range of exports, including processed goods, manufacturing and services. Some approaches include processing raw materials locally, such as roasting coffee or refining minerals, investing in infrastructure and skills, and saving commodity windfalls in funds to smooth spending. Mauritius is often cited as a success: it diversified from dependence on sugar into textiles, tourism and financial services.
Resources can create problems, but they are not doomed to. Botswana used diamonds to build prosperity, and Norway's oil fund shows how resource wealth can be managed well. Institutions and policies decide whether resources help or harm.
- Most African countries are commodity-dependent, relying on a few raw material exports.
- Volatile commodity prices create booms and busts in revenue and currencies.
- The 2014 to 2016 oil price crash hit Nigeria and Angola hard.
- Diversification into processing, manufacturing and services reduces vulnerability.
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