African Industries: Primary processing African Economic Development Renata Serra – Feb. 22 nd 2007

What are the main obstacles to African industrialization? Colonial legacy Comparative advantage in non-dynamic commodity sectors Geographical disadvantages Lack of big regional investor! Will South Africa play this role? Policy risks: policy reversal and instability Unstable and not well defined property rights and inefficient institutions Poor infrastructures and high transaction costs This makes markets work ineffectively Lack of capital: can FDI help? Small domestic market Can this limitation be overcome by exporting? What are the difficulties?

What is primary processing? Processing primary commodities: Canned or frozen fruits and vegetables Frozen fish and shellfish Shelled and packed (and flavored) nuts Wood pulp, or laminate Cotton fiber Cocoa powder and chocolate Etc. etc.

What are the advantages from primary processing industry? Further specialization Building on production for domestic markets Possibility of capturing higher value added Higher employment Increase in export earnings Processed commodities face rising non declining demand Greater stability in export earnings Scopes for domestic sector linkages

Trends SSA countries increased primary processing during the 1960s and 1970s but this trend reversed during the 1980s Some countries have made a come-back since the mid-1990s Kenya (canned fruits and vegetables) Senegal (frozen shrimps) Seychelles (prepared fish)

What are the disadvantages of primary processing industry? Barriers to entry into OECD markets Increasing with processing stage Applicable now after preference erosion Market dominance by large and vertically integrated firms (often MNCs) Sophisticated consumer needs Need for high-quality, and speedily-delivered products

Lessons from Mozambique’s cashew nut processing industry case Limits of reducing debates to one policy issue e.g. export tariff on raw cashew Farmers may not respond to farm-gate price increases Right sequencing of policies essential Failure to take into account international market constraints e.g. India’s demand OECD competition may not matter for failure Internal structural constraints are huge If the international market is not competitive, then skilful state intervention is necessary