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Commodity dependence in the Horn of Africa

The last UNCTAD report on the “State of Commodity Dependence”, issued in 2019, shows that all the Horn of Africa (HoA) countries are commodity-dependent, in most cases agricultural commodities-dependent. A country is defined “commodity-dependent” when more than 60 per cent of its total exports consists in primary commodities, these ones being represented by:

  1. agricultural products (which include livestock, crops, forestry, and fishing products),
  2. minerals, ores and metals, or
  3. crude oil, gas and other hydrocarbons in a natural state (not-refined).

Commodity dependence is usually deemed a negative factor for the economic development of a country because of the heavy fluctuation of commodity prices (which means that when they go down, commodity-exporting countries considerably reduce their foreign exchange earnings). These fluctuations are primarily determined by the forces of supply and demand in international markets. The theory of demand and supply, developed by the economist Alfred Marshall in 1890, says that commodity prices are mainly determined by the way two curves intersect, by reaching an equilibrium point, the first one representing the consumer demand (when this demand is high, prices tend to increase, while when it is low, prices decrease), and the second one representing the producer supply (when there is an oversupply of the commodity in the producer countries, price tend to decrease, while when the supply is low, price raise). 

The conclusion is that when a country’s economy is not diversified and relies heavily on commodities, it puts itself at the mercy of international market prices.

In Kenya, in 2017 agricultural commodities exports were 61% of the total exports of the country. Kenya’s manufacturing sector is however bigger than the other countries in the Region, as it contributes for about 8% to the GDP (with a declining trend since 2014, when this sector contributed for more than 10 percent to the Kenyan GDP). In recent years, after a long period where public resources were mainly concentrated on agriculture, the Government of Kenya has started to promote the development of Industrial and Technology parks as a key strategy to support the growth of the manufacturing sector. Examples are the Nairobi Industrial and Technology Park (NITP) and the Konza City Technology Park. NITP is a public-private partnership project of the Ministry of Industrialization (MOI) and the Jomo Kenyatta University of Agriculture and Technology aimed to promote the growth of some priority sectors, namely: agro-processing, agro-machinery, electric and electronics, metal, bio-technology, packaging and ICT. Konza City Technology Park is an industrial park whose construction is underway and that is expected to become the Silicon Valley of East Africa by clustering IT and related high-technology firms. Other Counties in Kenya also have plans of constructing industrial parks, including in the cities of Kisii and Bungoma. According to the UNCTAD Economic Development in Africa Report 2019, Kenya was in 2015–2017 among the 10 leading intra-African exporters (9th position).

In Ethiopia, another agriculture-dependent economy, commodity exports reach 72% of total merchandise exports. Conversely, the manufacturing sector is still small and uncompetitive, with a low export-orientation, contributing only 5% to the GDP of the country, despite the recent government’s efforts to modernize the sector. The dominance of the Ethiopian economy of subsistence agriculture and small-scale farming, that utilizes less inputs (knowledge, technology, finance, etc.), ultimately end up with less productivity and output. Ethiopia however has attracted in recent years significant foreign investment in some “light manufacturing” sectors, such as textiles, leather and agriculture by leveraging, similarly to Kenya, on industrial and agro-processing parks as a strategy to attract foreign companies to produce value added export-oriented items.

In Somalia, the agricultural sector is the largest economic sector in the country, with agricultural exports and live animals representing 84% of the total merchandise exports of the country. Somalia’s livestock and crop subsectors have however been suffering in the last 3 decades from an increasingly fragile and degraded natural environment and more frequent and severe cycles of drought and floods.

Eritrea, on the other hand, is mainly dependent on exports of minerals, ores and metals, where the exports of such goods in 2017 were 64% of the total exports of the country. According to the UNCTAD Economic Development in Africa Report 2019, Eritrea is the 3rd country, after Chad (0.2%) and Guinea (1.6%), with the lowest share of intra-African exports (2.3%).

In Djibouti, 61% of the total exports of the country consist in primary commodities, even though this percentage is more equally divided than the other countries in the Region (43% are agricultural exports, 13% are ores, metals and minerals, and 4% are fuels). In recent years, growth has been mainly driven by the growth of transportation and logistics services because of its strategic position to serve other landlocked countries, Ethiopia in particular. To date, over 93% of Ethiopia’s imports and exports pass through this gateway, accounting for about 70% of the total activity of the port.

The last UNCTAD analysis on the State of Commodity Dependence (2019) does not include South Sudan, because there are no reliable and updated trade data for this country. According to the World Bank, South Sudan is the most oil-dependent nation in the world, with oil accounting for more than 40% of its GDP. The country however, also holds one of the richest agricultural areas in Africa, with fertile soils and abundant water supplies. Cereals, primarily sorghum and maize, millet and rice are the dominant staple crops in South Sudan.

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