Mar 19, 2008

More News of an Africa on the Economic Upswing

by Laura Starita

The news has been awash the past few weeks with troubled stories about the state of commodities markets around the world. The The Financial Times has invested significant inches to the myth of commodities as “safe havens” during troubled economic times, a dynamic which is partly responsible for the major surges in prices for metals, oil and other commodities over the past few months. It is also a dynamic which will lead, the FT suggests, to steep price drops in short order. Like natural resource commodities, agricultural commodities have also been a favorite subject, as the rising prices for corn, wheat, soy, and other agricultural staples have caused food prices to rise by 23 percent in the past year, partly due to growing worldwide food demand and partly due to hunger for biofuels.

The precipitous rise and fall of various commodities prices has historically meant disaster for developing economies. The commodities boom and bust in the 1980’s left most developing nations worse off than they started. Particularly hard hit was sub-Saharan Africa, with its significant natural resource wealth and large farming population. Given this history, what impact might the current commodities boom have on the region.

Definitive answers are hard to come by. Long-term price increases of metals, timber and oil could help many African countries enjoy more income which, with good governance and sound investment, could contribute to much-needed infrastructure improvements and investments in their people (health, education, etc.) Commodities price surges might also contribute, however, to ‘resource trap’ dynamics in which commodities wealth increases the value of a country’s currency. High value currency can tamp growth in the other industries necessary to develop a diverse economic base. It also provides fertile ground for corruption.

Agriculture shows similar ambiguity. More than 60 percent of the population of sub-Saharan Africa is involved in the agricultural sector. Rising prices for farmed goods have the potential to result in increased income for farmers, assuming access to the global markets where these increases are occurring. It’s certainly possible that sustained high prices will also lead to investment in market access, such as the new Ethiopian grain exchange we wrote about recently. But increased income might not translate into increased prosperity if commodities inflation of all sorts overwhelms the raw material producer’s gains.

Markets show at least some evidence that sub-Saharan Africa is coming out on the upside economically. Record 2006 GDP from a number of countries was a positive. More recently, the region has seen the launch of the Duet Victoire Africa Index, a fund profiled in the FT that tracks the largest stocks across sub-Saharan Africa. The fund’s designer, Ayo Salami argues in the paper that as a “frontier investment” sub-Saharan Africa sees much less dramatic price swings than Eastern Europe, Asia or Latin America because its industries are minimally correlated, as are its currencies. As a result, drops in one sector or in one currency are offset by gains in another, and investments in the fund are in fact investments in the region as a whole. Of course, growth in the abstract does not necessarily translate into food on the ground. But the idea of a healthy investment sector for the poorest area of Africa tells a very promising story.