The climate crisis underlines the urgency of diversifying African economies

But when Donald Trump announced his intention to withdraw from the Accord in 2017, the world did not stand still waiting for the United States to rediscover the severity of climate change.

In these five years of absence from the United States, the advanced economies of the EU in Japan have unveiled ambitious carbon neutrality strategies. China has extended its dominance in the industry of solar panels, wind turbines, batteries and other clean energy equipment. Devastating floods in African countries, apocalyptic forest fires in Australia, and other extreme weather events have shown the devastating impact of climate change on vulnerable populations around the world.

With America’s return to the global climate action arena, the weight of the world’s largest economy is now driving the fight against climate change. This dynamic also highlights the growing urgency for the African continent to diversify its economies.

Global climate action will affect resource-rich African countries

Climate change will affect African countries, with the greatest toll on the poor and most vulnerable. Extreme climatic fluctuations seriously disrupt rain-fed agriculture on which the income of 60 to 80% of African workers to depend. Droughts and desertification in West Africa are also forcing the migration of nomadic pastoralists further south, increasing the likelihood of violent conflicts with farming communities.

the acceleration of climate action by world powers has implications, not all positive, for African economies.

In 2017, the World Bank announced its intention to stop funding upstream oil and gas projects in developing countries. The project teams I worked with at the World Bank’s Extractive Industries Group struggled to obtain internal approvals for technical assistance on minerals and hydrocarbons in developing countries.

Likewise, NGOs are forcing commercial banks in Europe to reconsider their investments in oil and gas projects. The $ 3.5 billion East African crude oil pipeline that runs through Uganda and Tanzania is still struggling to find funders, for example.

Well-intentioned but abrupt ends to oil and gas investments by world powers and financiers could inadvertently devastate African economies exporting petroleum resources.

Take, for example, more than ten African countries that generate at least 25% of their exports from oil and gas. A sudden reduction in public and private funding for new projects – coupled with a steady decline in international demand – could reduce government oil and gas revenues by up to 50% in some African countries by 2040, according to Carbon Tracker projections.

While the hydrocarbon industries have enclave characteristics, are not labor intensive, and often represent only a small portion of a producer’s economy, they also generate government revenue. who finance public services, pay civil servants’ salaries and support small businesses. In Africa, this matters because these essential funds cannot be easily replaced in about 25 African countries where tax revenues constitute less than 15% of GDP.

This does not mean that sudden broad-based climate action will totally disadvantage African economies. Of the 19 African countries rich in minerals, new forms of clean energy technologies could have the opposite effect: increasing financial flows in mining projects and causing a growing demand for critical raw materials or “climate minerals” needed for batteries in electric vehicles, solar panels and wind turbines.

These minerals include graphite and manganese from Guinea, cobalt and nickel from the Democratic Republic of the Congo, copper from Zambia, platinum group metals from South Africa, and lithium deposits from the Sahel.

In fact, a new commodity growing demand supercycle in climatic minerals may soon be underway. But there are great risks of replicating the pathologies of previous commodity booms, in which the environmental devastation associated with the extraction of climatic minerals in poor countries fuels the clean energy technologies that power rich economies.

The urgency of economic diversification in Africa

To avoid these unintended impacts of global climate action, African countries must prioritize economic diversification. However, there remains little clarity on what economic diversification actually entails and how this definition affects the menu of policy options available to policymakers.

In one recent Carnegie Africa article, we try to bridging this knowledge gap in defining and contextualizing the challenge of diversifying African economies. Economic diversification involves moving away from dependence on a few products or activities such as crude oil, minerals and agricultural production in an economy.

Closely associated with the process of structural transformation from low productivity sectors to higher productivity sectors, economic diversification has three obvious dimensions:

  1. The expansion of economic sectors that contribute to employment and production, or the diversification of gross domestic product (GDP).
  2. Export diversification – refers to an increase in the range of goods and services that an economy exports to the rest of the world as well as to destination markets.
  3. Fiscal diversification as identified by our paper refers to an increase in the number of economic sectors that contribute significantly to government revenues and are targeted by government spending. With a recontextualized definition, it becomes clear that policy interventions aimed at supporting the diversification of an Angolan economy dependent on oil extraction and exports are very different from those required for Seychelles’ heavily touristic economy.

Fiscal diversification as part of fiscal policy more generally can play a central role in helping to catalyze the expansion of activity in specific sectors.

During economic crises, fiscal policy provides emergency liquidity to an economy – as we have seen with the trillions of dollars of stimulus injected into economies around the world to overcome the economic shock of Covid-19.

As part of ambitious plans to reorient economies towards a zero carbon future, rich countries are using fiscal instruments as industrial policies through investments in electric vehicle charging stations and carbon taxes, grants, tax breaks and research grants for clean energy industries.

At the end of the line

One of the five pillars of the recently unveiled industrial strategy by the US government is the commitment to target nearly $ 300 billion in investments in technologies, innovations and infrastructure to position the US economy for a low-carbon future and to compete with China.

African economies should follow the lead of the United States, using fiscal tools wisely as part of broader industrial strategies to target investments in burgeoning clean energy industries and their supply chains.

African countries have a closing window of opportunity during this decade to diversify their economies in order to strengthen their resilience to the shock of a sharp drop in demand for hydrocarbons (for oil and gas exporting countries) and pathologies of the extraction of climatic minerals (for countries rich in minerals).

To seize the opportunity for climate action, policymakers must first define what a diversified economy means in their country’s specific circumstances, and then use fiscal policies to achieve that goal.

With strong and diversified economies, African countries can I hope to avoid recreating the dependencies and pathologies of the fossil fuel era by creating new economic opportunities and isolating oneself from the vagaries of international markets.

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