The Case for Value Addition

Value addition to minerals is essential for Africa for several reasons, all of which aim to enhance the continent’s economic growth, industrialisation, and long-term development.

African economies must move up the global value chains.

A study of the value chains, governance and markets involved in the Global North and Global South demonstrate that the Global South is mostly at the bottom of global value chains.

Value addition leads to increased revenue and economic growth. Exporting raw minerals generally fetches lower prices than finished or semi-finished products.

By processing and refining minerals before export, African countries can capture more of the value chain, generating significantly higher revenues. Many African economies are overly reliant on exporting raw commodities.

Value addition promotes the diversification of the economy by developing downstream industries, such as manufacturing, which can be more stable than volatile commodity exports.

Value addition leads to job creation and skills development. Mineral processing and manufacturing require more labour than raw mineral extraction, increasing job opportunities.

Value-added industries can employ a wide range of workers, from skilled technicians to engineers. Establishing local value-addition industries helps build a skilled workforce, driving knowledge transfer and innovation. Implementing value addition leads to enhanced industrialisation and infrastructure development. Processing raw materials locally promotes the growth of industries such as metallurgy, manufacturing, and technology.

These industries play a critical role in boosting industrialisation in Africa, reducing dependency on imports of processed goods. The development of industries that add value to minerals can lead to improvements in infrastructure, such as roads, power plants, and ports, which benefit the broader economy. This is critical.

The lack of infrastructure is why Africa has not industrialised. Infrastructure is the foundation – a prerequisite – for industrialisation. Africa must reduce dependency on the Global North and foreign markets. Adding value to minerals can stimulate domestic demand for processed goods, reducing dependency on exporting raw materials to international markets.

This allows African countries to control more of the value chain and reduces vulnerability to fluctuations in global commodity prices. Exporting value-added products strengthens Africa’s bargaining position in global trade by enabling African countries to export higher-value goods rather than just raw resources.

Africa’s wealth must remain on the continent and be used to power its economic transformation and industrialisation. When raw materials are exported, the profits are often accrued by foreign companies that process them abroad. Local value addition retains more wealth within Africa, ensuring that more of the benefits from natural resources are captured domestically and reinvested in local economies.

African countries can invest in research, technology, and innovation by processing minerals locally, boosting local industries’ competitiveness and global standing.

Furthermore, mineral beneficiation generates environmental and social benefits. Local processing allows African countries to implement stricter environmental and social safeguards than might exist elsewhere. By processing minerals domestically, nations can better manage environmental impacts such as pollution or deforestation.

Local industries can be held more accountable for the well-being of communities and the environment, potentially leading to better corporate practices compared to foreign firms operating in less regulated environments.

However, it must be acknowledged that Africa’s regulatory frameworks regarding climate change and environmental challenges are nascent and poorly policed.

The African dream is continental integration and political unity leading to the United States of Africa – one country. This is achievable through successful integration in the African regional economic communities (RECs).

Integration provides the scale and large markets that are required for value-added products. In turn, beneficiation also promotes integration. The two are mutually reinforcing. Value addition helps create products that can be traded within Africa.

The African Continental Free Trade Area (AfCFTA) offers opportunities for African countries to trade processed goods with each other, creating regional supply chains and markets.

By focusing on value addition, African nations can break the cycle of dependency on raw material exports, foster industrial development, create jobs, and ensure more sustainable and inclusive economic growth.

The detailed discussion of the African situation generates lessons for the rest of the Global South. One of the most significant weaknesses of the Global South, which is typical of developing countries, is exporting raw materials and intermediate goods.

With the adoption of AI, deployment of other enabling technologies, crafting of enabling policies, and raising the requisite finances, countries of the Global South can successfully achieve beneficiation and value addition.

This will drive economic transformation and industrialisation, thus addressing the perennial socio-economic development challenges of unemployment, poverty, and inequality.

Financial Flows between the Global North and Global South

The flow of financial resources between the Global North and Global South is complex and multifaceted, encompassing various channels through which capital moves between countries and regions.

These flows include foreign direct investment (FDI), official development assistance (ODA), remittances, debt, trade, and other financial transactions.

Economic, political, social, and institutional factors influence the dynamics of these flows, and they have significant implications for both the sending and receiving countries.

Historically, FDI has been one of the primary channels through which capital flows from the Global North to the Global South. Multinational corporations invest in emerging markets and developing countries to access new markets, resources, and cheaper labour.

While FDI can bring benefits such as job creation and technology transfer, it can also lead to concerns about exploitation, environmental degradation, and exacerbation of inequalities if not appropriately managed.

ODA is financial aid that governments or international organisations provide to support development projects and initiatives in the Global South. It often includes grants, concessional loans, and technical assistance. ODA aims to alleviate poverty, improve infrastructure, promote healthcare and education, and foster economic growth in recipient countries.

However, its effectiveness has been debated, with criticisms regarding aid dependency, conditionalities, and limited long-term impact. Dambisa Moyo, in her acclaimed book “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa”, argues that:

Billions of dollars in aid sent from wealthy countries to developing African nations have not helped to reduce poverty and increase growth. Instead, she contends, poverty levels continue to escalate, and growth rates have steadily declined while millions continue to suffer.

Remittances refer to funds transferred by migrants to their home countries. They constitute a significant source of income for many countries in the Global South, often surpassing ODA and FDI.

In countries such as Ghana, Ethiopia, India, and Zimbabwe, these financial resources from the diaspora have been significant in sustaining economies.

Remittances are crucial in reducing poverty, covering household expenditures, and investing in education and healthcare. They also contribute to economic stability and development by providing a reliable source of foreign exchange.

Debt flows between the Global North and Global South are characterised by loans extended by Global North creditors (governments, international financial institutions, and private creditors) to Southern borrowers.

While debt can finance development projects and infrastructure, excessive debt burdens can lead to debt crises, economic instability, and dependence on external creditors.

Debt servicing often diverts resources away from essential social spending, perpetuating cycles of poverty and underdevelopment.

Trade between the Global North and Global South involves the exchange of goods and services, with the North typically exporting manufactured goods and the South exporting raw materials and commodities.

Trade flows can either promote economic growth and diversification or reinforce existing patterns of inequality and dependency. Issues such as trade barriers, unequal terms of trade, and asymmetrical power dynamics can hinder trade’s benefits for Global South economies.

Net Outflow of Financial Resources from the Global South

After considering these financial flows between the Global South and Global North, the question is: What is the net flow of financial resources between the two groups of countries?

A naïve, uninformed and unsophisticated assessment would posit that there is a net inflow of financial resources into the Global South from the Global North.

No. Quite the opposite.

There is a net outflow of financial resources from the Global South to the Global North. The extent and nature of this outflow can vary depending on several factors. This net outflow of financial resources from the Global South to the Global North has devastating implications for economic development in the Global South countries.

Why is there a net outflow of financial resources from the Global South to the Global North? Many countries in the Global South have significant external debt obligations to creditors in the Global North, including governments, international financial institutions, and private lenders.

Debt servicing, which involves repaying the principal and interest on loans, often leads to substantial outflows of financial resources from Southern economies to Northern creditors.

There is massive capital flight from the Global South to the Global North – the movement of funds driven by factors such as political instability, economic uncertainty, corruption, and perceived lack of investment opportunities in the Global South.

Wealthy individuals, multinational corporations, and even governments may transfer funds abroad, often to Global North financial centres, for reasons such as tax evasion, asset protection, or seeking higher and less risky investment returns.

Corrupt African dictators bank their ill-gotten loot in such countries as Switzerland, the United Kingdom, Canada and the United States with the connivance of these champions of democracy.

Of course, these stolen financial resources benefit these Global North economies to the detriment of the source countries.

Multinational corporations based in the Global North often operate subsidiaries or affiliates in the Global South. Profits generated by these entities are frequently repatriated to headquarters in the Global North in the form of dividends, royalties, or other payments.

This results in a net outflow of financial resources from Global South countries to Global North economies. The terms of trade between the Global North and Global South are often skewed in favour of the former.

Global South countries typically export primary commodities and raw materials, which have a lower value compared to manufactured goods imported from the North. This can lead to a net transfer of wealth from the Global South economies to those of the Global North through trade.

Furthermore, the lack of value addition and beneficiation in the Global South is a major driver of financial resources to the Global North. The emerging and least industrialised economies export raw and unrefined products at very low prices (determined by the Global North) and import value-added products and finished goods from the Global North at high prices (determined by the Global North).

Clearly, in that state of play, more money leaves the Global South than comes in.

As if all these causes of net financial resources outflow to the Global South were not enough, the matter is compounded by the scourge of illicit financial flows – activities such as tax evasion, money laundering, transfer pricing, and illegal trade.

These shenanigans exacerbate and contribute to the outflow of financial resources from the Global South to the Global North.

Illicit financial flows involve using offshore financial centres and complex financial structures to conceal the origin and destination of funds. Indeed, there is a net outflow of financial resources from the Global South to the Global North.

While there are financial inflows into the Global South, such as FDI, ODA and remittances, the overall impact is a net outflow of financial resources to the Global North. This remains a significant, debilitating constraint for many Global South economies.

Given that colonial commercial arrangements, untransformed economic structures, net outflow of financial resources, and lack of value addition characterise most emerging and least industrialised countries, the case for decolonising their economies is imperative and non-negotiable.

The deployment of AI as a driver of inclusive development and shared prosperity for these countries can only be premised on this historical obligation and ambition – the decolonisation of Global South economies.

Yes, to the transformative power of AI. However, first things must come first. Foundational issues matter.

AI must be embraced and deployed as part of a broad, comprehensive, and exhaustive agenda to pursue inclusive development and shared prosperity in the Global South.

* Prof. Arthur G.O. Mutambara is the Director and Full Professor of the Institute for the Future of Knowledge at the University of Johannesburg. This is an excerpt from his book: Artificial Intelligence: A Driver of Inclusive Development and Shared Prosperity for The Global South.

** The views expressed do not necessarily reflect the views of IOL or Independent Media.