How African policymakers should prepare for the coming commodity boom

I: Important lessons from the last commodity boom (2000-2014)

An important driver of African countries’ improved economic performance and surging exports in the early 2000s was the China-fueled commodity supercycle. Between 2000-2014 regional exports nearly quadrupled, per capita income rose by 37.1%, while the share of people living in extreme poverty declined from 62.5% to 45.7%. Overall, the first decade and a half of this century saw the steepest improvements in human welfare on the Continent since the rapid post-independence economic expansions (circa 1960-1976).

Trends in the sources of foreign exchange flows (constant 2020 US$). Source: How Africa Trades (2023)

Then the music stopped. China’s economic slowdown after 2014 resulted in slower growth rates in many African countries. Thereafter incomes plateaued or declined, and poverty reduction virtually stalled. Meanwhile, commodity-fueled government borrowing (including in private credit markets) during the boom years and the high cost of debt servicing (which many argue came with a steep “Africa penalty”) shrunk fiscal space in many countries.

Importantly, the return to the private credit market did not discipline public finance management in the region. While corruption consumed a non-trivial share of borrowed cash (see the tuna bond scandal), the more pressing challenge was inefficient and/or wasteful public spending. To this end, a number of governments even borrowed against yet-to-be-proven resource reserves. It did not help that many of the high-ticket capital expenditures failed to yield projected growth (in many cases money was simply misspent), or create the jobs that the Continent desperately needed. Tax collection stalled, even as economies experienced nominal expansions. COVID plus similarly inflationary global geopolitical upheavals exacerbated these problems. Many countries faced fiscal distress. A few defaulted. The aftershocks of these challenges will undoubtedly have long lags into the future.

Disaggregated trends in Africa’s exports. Source: Visual Capitalist

What exactly did African countries export during the commodity supercycle? The disaggregated data highlight the dominance of fuel exports over the 2000-2014 period (see above). However, it is also clear that agriculture, ores and metals, and manufactures also saw permanent increases. Notably, commodity exports during this period did not involve any significant value addition (despite all the conferences, workshops, and talk of “local content”). As a result, the overall impact on formal employment and incomes was largely muted.

Trends in the destination of African exports (constant 2020 US$). Source: How Africa Trades (2023)

Another change that happened during this time period was the rise in prominence of both intra-Africa trade and the Africa-China trade (see above). The rise in Chinese demand is under stable, but what explains the rise of “Africa” as the Continent’s second most important trading partner? More research is needed here to unlock the specific mechanisms at play, but it would seem that exposure to global markets (both as exporters and importers) substantially unlocked intra-Africa trade.

My hunch would be that improvements in transportation and logistics and export orientation (in terms of business outlook but also laws and regulations) — with an eye on new markets in China and Europe — had positive spillover effects with regard to regional trade. All those new roads, airports, and ports must have made a difference. The increase in intra-Africa trade was especially noticeable within the RECs. This was above and beyond what would be predicted by standard models of commodity booms which assume that a wealth effect from high commodity prices would mechanically increase demand (including from other African countries).

To understand how general openness to global trade can transform economies it is worth looking at the FDI data. The EU’s FDI into Africa during the commodity boom targeted mining, manufacturing, and financial services. Over the same period, Chinese FDI targeted energy, transport, metals, real estate, utilities, finance, and agriculture. In other words, trade openness (especially vis-a-vis China) led to denser commercial relations than what would’ve been predicted by the narrow commodities that may have been the original basis for growing economic ties.

II: Will this time be different?

Now, again, we seem to be entering a new commodity supercycle that will likely last through 2035 (projections vary quite a bit). This time, however the outlook is mixed across different commodity sectors. In addition, I think that African economies will do marginally better than the last time.

First, fuel exports will not dominate. Oil and gas prices are projected to experience downward pressure into the medium term. This should signal to African policymakers to ensure that they lock in, as much as possible, domestic and regional consumption into their hydrocarbon plays (even if it is just over a transition period).

Second, agricultural commodities are likely to face higher volatility relative to the last time (albeit always at a higher price level than last time). Again here, the best insurance against global cyclical pressures will be improving agricultural productivity with a focus on food crops with robust domestic/regional demand; and as much value addition as possible on the so-called cash crops before export (Ghana’s ambition with cocoa processing is therefore very welcome). Governments should also seriously support African private firms to venture into the commodity trading business. One could argue that investments towards a Green Revolution were hobbled by weak state capacity in the 1960s/1970s, and then structural adjustment of politics and policymaking in the 2000s. But what will the excuse be this time? State capacity, the technical know-how, and the logistical links in pivotal countries that can provide strong demonstration effects are good enough. Plus there’s (finally!) a massive regional (and global) market. Which is to say that there’s no excuse this time.

Copper demand is projected to be well above supply levels into the long term. Source: Bloomberg

Third, precious and industrial metals will lead the boom. Demand for precious metals, especially gold, will be driven by the search for safe assets in the wake of heightened global economic uncertainty and geopolitical risk. The value of regional gold exports is already up by more than 50% over the last five years. Demand for industrial metals will be fueled by the AI-driven expansion of data centers and investments in energy transition. Coming on the back of almost a decade of underinvestment in mining, meeting the rising demand for both industrial and precious metals will require significant FDI in the medium term.