Economics of Africa

Economics of Africa

Review :

1)  Traditional

2)  Command

3)  Market

Most countries are mixed, with an economy between traditional and command. Have the students fill out this chart:

Economy / What to produce / How to produce / For Whom to Produce
Traditional / What people need to survive / Farming, hunting, Gathering / Make their own products
Command / Whatever government decides / However government decides / *Class reward system
* waiting in line
Market / What people want to buy and sell / Supply and demand / Determined by how much someone is willing to pay for it

Economic system of South Africa

·  This country has developed into the strongest economy of Sub-Saharan Africa after recovering from international sanctions placed on it during the apartheid era. South Africa has a mixed economy, transitioning from a command economy to a market economy over the past several decades. Citizens now own most businesses, though the government still owns some oil/gas companies, postal service, and some of the telecommunications network. Healthcare is both public and private. South Africa’s economy has grown primarily from mining, fishing, and agriculture to include manufacturing and service industries.

·  As more skilled labor was needed, blacks were allowed to hold skilled jobs. Wealth today is divided along racial lines, with whites having most of the wealth. The government is trying to help with a new program called BEE(Black Economic Empowerment) to include blacks at all levels of businesses and industry. Those companies who meet BEE requirements are allowed to do business with the government.

Economic System of Nigeria

·  Nigeria is at the opposite end of the economic spectrum from South Africa. Oil rich, its people and government spent large sums of money in the 1970’s. When oil prices dropped in the late 1970’s, Nigeria’s economy collapsed. Nigeria went from one of the richest 50 countries in the world to one of the poorest by he end of the century. The oil boom diverted attention away from their other important source of income, which was agriculture. Nigeria was forced to import food, despite more than half of the population being farmers. Most Nigerians live on less then $1 a day.

·  Nigeria has a mixed economy, and has been moving toward a market economy since 2006, when the government gave over most of the oil industry to the private sector. Nigeria still owns 2 of the TV stations, the post office, and public schools. Public schools are crumbling, with most Nigerians who can afford it sending their children to private school. Nigeria has a plan for national health care, but it is so poorly run that most healthcare is in the private sector.

Students can compare/contrast these 2 countries:

Country / Type of Economy / Growing or Struggling / What the Government Controls
South Africa / Mixed )from command to market) / Growing / Oil, gas, postal, some telecomm.
Nigeria / Mixed (moving to market) / Struggling / Post office, schools, 2 of 3 TV stations

Trade

·  Voluntary trade is when both parties expect to gain from the trade.

·  Countries specialize in what they do best. Specialization is an efficient way to work, and the cost of items is lower. Specialization increases trade because a country can get what it needs at the lowest cost when produced by someone who specializes in producing that item.

·  Currently, it is not easy for African nations to trade with one another. Most roads lead to a port instead of another city. Certain organizations, like ECOWAS, are trying to make things easier. However, terrible roads, roadblocks, border patrol searches, and other problems make trade difficult. The International Monetary Fund (IMF) says 75% of Sub-Saharan countries have policies that hinder trade within Africa. There has been recent movement to change these policies.

·  Most of Africa’s trade is outside the continent. Non-African countries desire African art and textiles, so African sellers benefit from their unique products. The U.S. lifted tariffs from South African diamonds and gold, also benefiting sellers in Africa.

Scenario:

Coffee drinkers prize Ethiopian coffee. Tea drinkers enjoy African red tea for its taste and possible health benefits. Neither of these can be grown in the U.S. The U.S. can manufacture technical and medical equipment and export it to African countries that are unable to do so. How does specialization in trade benefit the countries involved?

Define the bold-faced terms based upon the example:

High tariffs are one reason why African countries don’t trade amongst themselves. Some countries place a tariff as high as 17% on imports from other African nations because they may have the same item to export and want to give their own citizens a trade advantage. They set up high tariffs to keep out the competition.

In 2007, South Africa placed strict quotas on the amount of Chinese textiles that could be imported. Many South African textile workers had lost their jobs because of cheaper imports, and the government wanted to give South African clothing and textile businesses a good chance to compete in foreign and domestic markets.

In May, 2007, a six-year UN embargo against diamonds from Liberia was lifted. Money from “conflict diamonds” had been used to fund wars across the continent. Now, each diamond exported must have a certificate showing its authenticity.

Currency Exchange

Most countries do not use the same kind of money, so international trade requires a system for exchanging currencies between countries. Foreign exchange is when money is converted from one currency to another. The exchange rate is how much one currency is worth in terms of another. The South African currency is the rand, while Nigeria has the naira.

Check the students knowledge by giving sample problems with $1 = 8 rands or 120 naira.

Basic factors that influence economic growth

1)  Human capital – people who perform labor

2)  Capital – factories or machinery

3)  Natural resources – things that come from the land

4)  Entrepreneurship – the ideas, innovations, and risk in starting a business

Economic performance is measured by GDP (Gross Domestic Product). Investment in human capital through education creates a smarter and more productive workforce with new skills, which leads to a higher GDP.

1) South Africa

It is strongly committed to education, an investment in human capital. They started educational and training programs to improve worker skills. The investment paid off in that South Africa’s GDP has been growing at 5% annually. They continue to offer services to low-income areas to increase education and job growth.

In 2008, South Africa invested nearly 50% of its capital investment to improve electrical output. It also invested heavily in the rail system and expansion of ports, paving the way to increasing its GDP.

Even with all of these investments, about 50% of the population still lives below the poverty line.

2) Nigeria

Nigeria does not spend much on education, making growth in human capital difficult. Nigeria focused its economy primarily on its oil industry, causing it to neglect education and training in other areas of the economy. Nigeria has a relatively strong GDP, but 70% of Nigerians live below the poverty line. Oil income remains in the hands of a small group of wealthy individuals. From 1968-1998, average income dropped from $1,000 U.S. dollars to $300.

Though Nigeria spends a lot of money, it has not managed its money well. This means it has little money to invest in capital resources like factories, machinery, or technology. Nigeria is trying to reform its economy and create public-private partnerships to improve roads and the distribution of electricity.

Use this chart to answer the following questions:

Country / Population / GDP / # of TV stations / # telephones
South Africa / 44 million / 282.6 Billion / 556 / 4.7 million
Nigeria / 138 million / 166.8 Billion / 3 / 1.6 million

1)  Nigeria has four times South Africa’s population, yet it has far fewer TV stations. What factors do you think influence this vast difference?

2)  What are some things that Nigeria can do to improve its economic growth?

Entrepreneurs:

Valuable in that they are creative and help economies adapt to changing conditions.

Nigeria:

Entrepreneurs with fresh ideas could play a vital role in jump-starting the economy. However, few banks are willing to fund them and their ideas. International investors are stepping in to help, offering long-term investment in a business rather than a loan. The investors then work with the entrepreneur to help the business grow. Government and consulting firms are also working to teach and help future Nigerian entrepreneurs.

South Africa:

South Africa has 2 million small businesses, about 98% of the total businesses in South Africa. However, financing and gender equality issues are common problems. The government is working on these problems. Colleges offer classes on how to run a business. Business owners are helping others start their own. The BEE program is encouraging black involvement in business. South Africa has also started an Angel network to connect entrepreneurs to potential business investors. The South Africans call this effort ubuntu, or togetherness.

1) Question:

Pretend you have a business idea in Nigeria or South Africa. Describe your idea below. Make sure it relates to your particular country. Explain what the entrepreneur does, what goods or service you want to provide, where you got your training, and what obstacles you may have ahead of you.

Natural Resources:

There is an uneven distribution of resources in Africa. More important than the riches of a country is how that country does with its wealth. In a country with a stable government, revenues from these resources would usuall y be used for development that benefits the economy. But in countries with unstable governments, resources like diamonds, gold, uranium, and oil do not always guarantee a prosperous economy and often have a negative impact on a nation’s development.

1)  Diamonds and gold

About half of the world’s diamonds are found in Africa. Botswana has benefited from a prosperous economy and a stable government. Money from its diamonds goes back into the economy to build up the country’s infrastructure with roads, schools, and clinics. In Sierra Leone and the DRC, diamonds have been used to fund wars.

South Africa has almost one-half of the world’s gold reserves. It has used this gold to support a strong economy and to build up its infrastructure.

Ghana’s gold has given it twice the standard of living as its neighbors, but still relies on foreign assistance. Mali is one of the poorest of nations despite its gold. In Senegal, gold plays no role in the economy.

These are examples that show that natural resources alone cannot sustain an economy.

Note: Use a map from online to show the resources for Africa.

2)  Oil

Nigeria has the sixth largest production facilities in the world and is a major supplier to the U.S. Corrupt politicians steal this oil wealth, leaving most Nigerians very poor. Though Nigeria takes in $2.2 million a day, most of the population make less than $1. Pollution from the oil industry is a major problem, with an average of 2 spills a day. Nigeria’s oil attracts many other countries to become a part of their economy, such as foreign energy companies investing in schools and hospitals. However, not all of this is helpful. For example, China offers monetary assistance for infrastructure, but the Chinese who come along with this aid take jobs away from Nigerians. Chinese companies also sell their goods at lower costs than local producers, driving these out of business and further hurting the economy.

3)  Uranium

A radioactive element found in the ground and in some water. It can be dangerous to handle. It is used to produce weapons and fuel for nuclear power plants. Africa produces about 20% of the world’s uranium (Niger, Namibia, South Africa, and Gabon are exporters). Dropping prices hurt Niger’s economy in the past. Alternatives to oil for energy has made uranium more valuable. Mining this resource in Africa is much easier than gold. Countries like Zambia, Botswana, and Namibia are hoping for new jobs and tax revenue based on this resource, thus increasing GDP.

South Africa uses the uranium from its mines to fuel nuclear power plants. Careless mining practices have led to increasing land and water pollution. New technologies are in the works to reduce the level of pollution.