Raising the quality of East Africa’s economic growth
While East Africa’s promising growth rates are good news, they remain based upon limited diversification in the region’s economies, writes Darryll Kilian, partner and principal ESG consultant, SRK Consulting and Wouter Jordaan, partner and principal ESG scientist, SRK Consulting.
This is the first in a series of two articles in which the authors highlight why environmental, social and governance considerations are vital to building more resilience into East African economies.
While East Africa’s promising growth rates are good news, they remain based upon limited diversification in the region’s economies. This makes them vulnerable to external shocks, not least of which will emanate from climate change; changing rainfall patterns, for instance, will affect agricultural performance – a regional mainstay.
Diversification into secondary industries, however, will bring its own environmental risks. These need to be anticipated and well managed, so that more inclusive growth can be sustained for future generations.
It is well understood that bald statistics on gross domestic product (GDP) give little insight into how these change the daily life of average citizens. So it is with East Africa, where promising growth levels belie the stubborn levels of poverty that development aims to eradicate.
The fastest-growing region on the continent, East Africa boasted an average growth of 5% in 2019. Indeed, the respective GDP figures for Rwanda, Ethiopia and Tanzania for 2020 placed them in the top 10 ranking of the fastest-growing economies globally. Between 2007 and 2017, Ethiopia grew at a rate of 10,3%, while Rwanda followed with 7,5%.
However, these figures tell only a part of the story. As the African Development Bank points out, East Africa’s strong growth has been achieved without any substantial reduction in poverty and inequality.
The AfDB notes that the region is still characterised by high poverty, inequality and unemployment – particularly in Burundi and Rwanda. This is a stark indication that economic growth is not reaching deeply enough into these societies to generate a lasting transformation.
Essentially, the nature of the growth is not of itself stimulating sufficient additional opportunity to draw in more participants – and is as such not really sustainable. This is shown by the various ‘downside risks’ that the AfDB highlights – predicated largely on the region’s reliance on primary industries like agriculture and the extractive industries.
Agriculture is vulnerable to the vagaries of nature – rainfall and other weather conditions – while primary commodity exports rely on international prices to determine their viability.
Significant changes in any of these factors lead regularly to ‘shocks’ that these countries are ill-equipped to absorb. Add to this the high level of indebtedness of the region, and it is clear that the risks associated with current growth levels are high.
Focussing on long-term solutions
When looking for long-term solutions, it is important to recognise that underlying East Africa’s economic structure and growth patterns are low levels of industrialisation, and a lack of economic diversification and product differentiation. Efforts to address these challenges are underway, and it is worth taking a broad view of just how vital and how interconnected the solutions are.
Building a more sustainable growth model will rely heavily on more effective economic diversification – to ensure that greater local benefit flows from the key primary commodities at the core of the economy. Such diversification can only be realistically fostered by a combination of many supporting elements – from infrastructure and skills to regulatory enforcement, political stability, and regional trade integration.
Diversity in these economies implies more active and enabled secondary and tertiary sectors, which ideally add value to locally available raw materials and builds the local economy.
Manufacturing, for instance, accounts for about 70% of global trade, and remains a driver of economic prosperity in advanced economies – an indication of the potential for the developing world. Former AfDB president Donald Kaberuka highlighted some years ago that the global manufacturing cycle – which started in Europe and America before moving to South East Asia and China – is now coming to Africa.
Without reliable and accessible electricity, though, manufacturing and service sectors are non-starters. Exciting opportunities for new sources of energy in East Africa – such as geothermal, hydropower and gas notably in Ethiopia and Tanzania – need to be actively harnessed and made readily available to emerging businesses.
Secondary and tertiary industries also need a functioning and affordable transportation network including roads, rail and ports. The goods and services produced need access to markets – local and cross-border – so regional trade integration is the key to opening market opportunities. While most East African countries have joined the Continental Free Trade Area and trans-continental highways are being constructed, much still needs to be done to improve integration in the region.
With more diversified industries, though, comes the potential for more pollution and environmental degradation. To spur on such economic activity without the necessary regulatory instruments and enforcement capacity is to invite ecological disaster which would undermine livelihoods.
A key element of a sustainable economic model is an institutionalised respect for the natural and social ecosystem in which it exists. This means that the state’s revenue gains from greater economic endeavour must feed and enhance the control systems for environmental sustainability.
It is counterproductive to promote a secondary industry if it is permitted to discharge hazardous chemicals into rivers, for instance, to the detriment of downstream communities and environments. Our work in the region, including environment and social impact assessments (ESIAs), has therefore highlighted the kind of impacts that projects generate – and how to mitigate these effectively.
The advantage of secondary and tertiary sectors is that they can accommodate smaller players, but the concomitant challenge is that these firms have fewer resources to develop their own infrastructure; they need more support from state initiatives to pave the way.
Waste management becomes a priority where raw materials are being converted into saleable products – especially if the producers are not equipped to develop such bulk facilities themselves.
Based on our experience, various strategies and technologies are available to establish waste management systems that minimise waste while protecting the supply and quality of scarce resources like water.
The growing role of environmental, social and governance (ESG) concerns will need to be carefully managed by East African countries as their economies diversify. This is already a priority for financiers and could be better facilitated if governments have the necessary frameworks and systems in place.
The high-road trajectory for East Africa, then, lies in forging a better quality of growth – which will require considerably more focus on practical steps to support economic diversification through industrialisation.
As with any economic ecosystem, the right infrastructure and incentives need to be developed, and the presence of an established financial sector in the region is an advantage. While encouragement is one part of the equation, effective control and regulation is another – to ensure that the growth achieved is rendered sustainable by protecting its natural resource base.
In the next article in this two-part series, the authors will look at the valuable role of strategic environment assessments (SEAs) – as well as regional ESIAs – in charting a sustainable path to economic diversification.
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