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Global commodity craze should be good for Africa

May 12, 2011

By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

In theory, high commodity prices should be a bonanza for Africa’s many emerging economies. Soaring prices for the continent’s major exports bring higher revenues to cash-strapped states. The trouble is, for economic development to take place these funds need to be usefully converted into private sector activity. Africa’s endemic corruption, poor infrastructure and bad policies make that a tall order.

True, there are some other deleterious side effects from a commodities boom. African Development Bank president Donald Kaberuka described high commodity prices as a “Molotov cocktail.” In particular, while rural Africans may benefit from higher prices for their crops, the urban unemployed suffer real hardship from soaring food costs.

However, for most African countries higher global prices for minerals and other exports increase revenues. Indeed, when energy prices peaked in 2008 petroleum, natural gas and oil related products represented 60 percent of Africa’s exports and the continent ran a healthy balance of payments surplus of 4.1 percent of GDP. When prices retreated in 2009, Africa’s payments and fiscal surpluses swung into substantial deficits. If African economies truly reflected the free market paradigm, high commodities prices and the revenues they brought should speed the continent’s economic growth.

In reality, they don’t, largely because those revenues flow into local governments, fueling the corruption for which the continent is notorious. Bad, protectionist policies don’t help either; for example a South African government study estimated that Wal-Mart’s takeover of South Africa’s Massmart could cost 4,000 jobs if the chain shifts 1 percent of purchases to foreign from domestic suppliers. Whatever Wal-Mart’s failings, its world-leading purchasing capabilities should bring South African consumers substantial price benefits while forcing local producers to improve quality and price to top international standards. Closing markets off from international goods or best-in-class services will only serve to perpetuate the continent’s poverty.

The last decade’s rising commodity prices have greatly improved Africa’s fortunes after four decades of declining prices and soaring populations seemed bound to create further destitution. By battling corruption, opening markets and fostering private enterprise, African nations can use the commodities boom to find a genuinely sustainable path to prosperity. Unfortunately, history suggests many nations will blow this chance.

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