Namibia - Cursed By Its Resources

23 Jun 2015 13:10pm
By Anna Tervahartiala

WINDHOEK, 23 JUN (NAMPA) - Professor Pertti Haaparanta of the School for Business from the Finnish Aalto University begins his lecture with a headline introducing the ‘Dutch disease’.
Even though the name so suggests, the professor is not talking in medical terms but in economic terms, and how Namibia’s resource-rich economy could possibly be experiencing the disease.
The lecture held at the Scientific Society here on 15 June 2015 drew a full house with an audience ranging from learners to lecturers.
The London-based weekly newspaper, The Economist, first used the term Dutch disease in 1977 to describe the economic changes that shook the Netherlands after the discovery of natural gas in 1959.
The finding of natural resources strengthened the country’s currency, which enhanced imports but weakened the business of exports.
As wages and prices rose, the manufacturing sector lost its international competitiveness and declined, and the account deficit of the country increased. The Netherlands drifted into deindustrialisation.
Since the introduction of the Dutch disease, the same phenomenon has more commonly become known as the ‘resource curse’.
Going through his lecture slides, Haaparanta poses the question of whether the commodity boom of the last 10 years created a Dutch disease in Sub-Saharan Africa ˗ Namibia in particular.
Before immersing in theory, Haaparanta lists the biggest exports of the country: semi-precious diamonds, copper and uranium.
“This list shows that most of the Namibian exports are in basic commodities or raw materials. This is something that is not regarded as good for long-term development,” the professor says.
He is not alone with his worries. President Hage Geingob in December 2013 stated that it is time for Namibia to start adding value to its bountiful raw materials.
Even though the omens are there, diagnosing the Dutch disease is not simple. One of the key symptoms of the resource curse is the loss of competitiveness.
Haaparanta presents a curve depicting Namibia’s Real Effective Exchange Rate (REER), which measures the development of the value of a country’s currency against those of trading partners. The curve proves a point; the REER has been rising since the beginning of the millennia and thus the past decade has seen a slow, but certain, decline in competitiveness.
In spite of the downward trend, the same timeframe has seen the improvement of export prices versus import prices. This, in turn, has brought more income to the country and resulted in the growth of domestic demand. Albeit the rates of investments and services have risen, national production has not followed. Imports have been on the rise.
Since the beginning of the year 2000, import volume has grown on average 10 per cent annually and this has equalled in a trade deficit. Namibia imports more than it produces.
“During the past years, the volume of the closed sector production, such as construction, retail sales, hotels and restaurants have grown very fast; faster than the gross domestic product (GDP),” Haaparanta says.
“That is not always a good sign. Especially as you look at what happened in North America and Europe. Both are still trying to recover from the collapse of the finance sector in 2008,” he said.
As the Dutch disease is connected to global trade and value chains, Haaparanta emphasised the importance of looking at the issue in a global context. One of the biggest questions in modern trade is the relationship of trade, technology and productivity.
Today, technological solutions enhance the fragmentation of production, thus production is no longer bound to the location of consumption. As the technology and knowhow for production has spread, it is not the raw material that counts, but what is being done to the material.
“The situation has changed. Today, the emphasis is on exporting products globally, which have been value-added locally,” Haaparanta explained.
“Competition is thus in value addition, not in gross exports,” he said.
When looking at the global value chains in general, Haaparanta stated that countries tend to benefit by participating in global production chains.
In theory, global chains enable a country to focus on production in areas and materials which it has an advantage on, and in turn enables the outsourcing of the production of materials it is disadvantaged in to countries where production is cheap.
“One can expect that global value chains increase productivity globally. But this is not the case,” Haaparanta added.
According to studies done by a PhD student of the University of Geneva, Richard Kummriz, only middle-income and rich countries have benefitted from the participation in global value chains. Low-income countries have rarely benefitted; on the contrary, they have been hurt.
This trend is also visible in Namibia. When looking at the curve of the total factor of productivity in Namibia, the diagram was quick to show that not much has happened since the 1990s. Productivity has even declined.
Participation in global value chains has also become harder. The reasons for this lie in the fact that the hub of global value chains have shifted to China and neighbouring countries, qualifications of entry have risen and international trade agreements have made it impossible for certain areas or countries to participate in the chain.
“An African free-trade agreement might be an answer as the trade agreements with Europe and the United States of America (USA) restrict the formation of African-wide value chains,” Haaparanta suggested, pointing to the European trade agreements, such as the Economic Partnership Agreement (EPA) and Everything But Arms (EBA), which African countries have participated in.
One of the side effects of the global value chains has been seen in the increase in income inequality. In a country like Namibia with a high-income inequality, Haaparanta sees this as especially worrying.
“You cannot compete with low wages for a long time. In the end, you need to improve your quality and productivity.”
Even though some symptoms of the Dutch disease can be seen, Haaparanta concluded that action can be taken to prevent the disease from spreading. A cure could lie in emphasising industrialisation, quality, know-how and negotiation power in international trade agreements.
“I have never been good in forecasting. I hope that is the case this time also,” Haaparanta concluded.