Why Africa must focus on creating local value

African policymakers need to understand the value that their economies are creating and retaining if they are to move away from their current reliance on raw commodity exports, writes David Rice, the director of the Africapitalism Insitute.

Over recent months, global oil prices have plummeted while the currencies and economies of oil-producing nations around the world have come under significant pressure. As a result, many assumptions about growth in 2015 have had to be reset.

In Nigeria, for example, the Naira has already fallen by 13% against the US dollar since oil prices began to fall in June 2014 – a fall that is having a significant knock-on effect across the country’s economy.

To place this trend in context, it is happening at a time when the contribution of oil and gas to GDP and GDP growth projections in Nigeria has been declining significantly. Nigeria’s rebased economy demonstrates only a 16% contribution to GDP from the oil and gas sector – but a 90% reliance on forex generated by the industry.

That structure creates vulnerability to price fluctuations and therefore represents a currency risk that has the potential to undermine the country’s wider investment story, and has already led to a sharp sell-off across the board of the Nigerian Stock Exchange, driving returns to levels not seen since 2008.

This story is not only driven by the oil and gas sector, however, but also by Africa’s general over-reliance on exporting its raw materials in exchange for foreign currency, which is then used to purchase and import goods that Africa can – and should – produce itself.

Whether we are looking at Ghana’s gold and cocoa, Guinea Conakry’s iron ore and bauxite or the DR Congo’s cobalt and copper, we see the same pattern.

Nor is this a new story, unfortunately. The need for Africa to diversify its economy in ways that domicile value locally, and for the long term, has been discussed and debated for decades. One-off successes are often showcased, but how can we actually understand the level of progress that is taking place? Is Africa successfully increasing the amount of value it is retaining locally?

This concept of local value creation lies at the heart of the philosophy of Africapitalism. Africans taking ownership of their own future by establishing the building blocks for growth that allow the continent’s countries to become independent economically and to retain value in local markets.

Whether we are looking at Ghana’s gold and cocoa, Guinea Conakry’s iron ore and bauxite or the DR Congo’s cobalt and copper, we see the same pattern.

It also requires African governments and business leaders to be honest with each other, and with their international partners about the level of progress that is being made and what must be done to accelerate it.

Widespread lack of local value creation across the continent represents a fundamental, systemic vulnerability that could fundamentally undermine the significant economic and development gains being recorded. Even the seven African economies ranked among the 10 fastest growing economies in the world are lacking in this regard, so in order to avoid them slipping backwards in the future, it is vital that we recognise firstly that growth alone is not enough and secondly, that we examine how to ensure we are generating the right kind of growth.

It is for this reason that Tony Elumelu, the Nigerian businessman and philanthropist, founded the Africapitalism Institute in 2014 and is also why we at the Institute have spent the last year constructing and testing an index designed to track the level of local value creation across 45 economies in Africa on an annual basis – The Africapitalism Index.

The index captures key indicators including the quality of the business enabling environment, how evolved are business practices, how large and diverse the private sector is, and to what degree overall economic growth is due to local value creation.

Across Africa, there are undeniably examples that must be celebrated. From the diamond industry in one our top performers Botswana, where no uncut diamonds can be exported, to the recent decision by Aliko Dangote to invest $11 billion in a refining and petrochemicals facility, with the potential to revolutionise Nigeria’s oil and gas sector and reduce the impact of price fluctuations. This is the kind of leadership we need to see and must celebrate.

The upcoming Africapitalism Index highlights the importance of policies that enable and promote the principles of Africapitalism: that is to say, inclusive economic growth and broad social development driven by the continent’s private sector.

Alongside this responsibility of policymakers to create a conducive regulatory environment, it is also incumbent upon the African private sector to play a leadership role, by committing to a future in which businesses operate in the interests of both profit and society. This is Africapitalism in action – and we hope that the index will play a part over the coming years in helping to make Africa an ever more successful and prosperous continent.