Why Beneficiation or How Professor Hausmann got it wrong !

Why Beneficiation?

For the better part of a decade the word beneficiation or adding local value to basic raw materials has, as an economic policy, been a dirty word amongst economists in the major capitals of the developed world and in their institutions such as the OECD and the World Bank. For those in Africa, the process of adding value locally to what few raw materials one has in a small country only seems logical. To many in the older generation who were trained 30years ago in economics, beneficiation has been seen rather as a holy grail. If you look at the SADC industrial policy framework  beneficiation of raw materials is a central plank of economic and industrial policy throughout the entire southern African region.

So why are institutions such as the World Bank and even researchers at what is supposed to be Africa’s bank, the African Development Bank so adamant about not bothering to beneficiate our raw materials and continuing to export raw unprocessed materials? Some of the reasons offered are valid, others make far less sense. The most valid ones is that beneficiation  to the next stage of a raw material such as copper or nickel is often very capital intensive and usually does not create that many jobs and therefore it is no panacea for Africa’s many problems that hold back investment. This is certainly true of copper in Zambia or zinc in Namibia or even diamonds in Botswana - these have hardly been sectors that have been the sources of major employment generation. They tend to create a few, sometimes even a few thousand, relatively good well paid jobs and then there is no more growth because the sector does not go add more value. Government’s obvious reply is that  when you are faced with the option of the market place producing very few good jobs at all then beneficiation looks pretty good to policy makers.

‘Neo-imperialists’ vrs ‘Economic Illiterates’

The arguments on both sides of the beneficiation debate tends to have a great deal of emotion attached. Those who are arguing against beneficiation are often simply dismissed by their opponents as ‘neo-imperialists’ who want to keep Africa in exactly the same position it was a century ago shipping raw ivory to the coast for export to Europe and Asia. Those who oppose beneficiation see it as a failed economic policy that has not succeeded in most locations and is the policy of what they refer to as ‘economic illiterates’. Instead, they argue, countries should just try to develop industries that are similar in complexity and technology to their existing technical capacities.

Those industries downstream of their raw materials often require technologies and  skills that are often not available locally. Those in Washington as well as some in Tunis at the African Development Bank think we should simply stick to simple economic activities that are close to their existing skill set.

Hausmann over Botswana

The economist most closely associated with anti-beneficiation argument is Professor Ricardo Hausmann who was dispatched to Botswana and South Africa by the World Bank to convince the two countries most closely committed to the idea of beneficiation that ‘beneficiation is a poor policy paradigm’. I once heard Professor Hausmann present an interesting analogy. Businessmen, he said,  are like monkeys in a tree, if they try to swing to branches that are too far they are likely to fall. If however they swing to branches that are technologically close to what they are doing now then they are more likely to succeed. This seems perfectly sensible ‘motherhood and common sense’ – stick to the simple stuff until you get really good at producing complex things. How can one argue with that?

The good professor argues that few countries ever have been able beneficiate. He looks at  three goods -sugar, textiles and logs. Countries that export these commodities rarely if ever move downstream and beneficiate to produce confectionary, clothing and furniture. Professor Hausmann’s view is that the development path of countries is technology and skills driven but the reality is that it is driven by money and the trade rules created by the developed countries. Scores of countries in the developing world never went beyond growing and milling brown cane sugar not because they lacked the  technology and skill to refine sugar as suggested by Hausmann but because the EU and the USA did not want exports of refined sugar under their quota regimes. The import of sugar milled beyond 88 polarity i.e. to refined sugar was not sought after by the Europeans wanted the sugar for their own refineries.  For decades the EU paid very high prices to a dozen or more developing countries ( e.g Mauritius, Swaziland, Guyana etc) to keep them producing only brown sugar.

In the garment industry for decades up until 2005 the countries that produced and exported garments to the US and parts of the EU were determined by whether they got an Multi Fiber Agreement  quota and not whether they were particularly good and effective at producing garments. Tropical log exporting countries never went beyond exporting raw logs to exporting sawn timber, let alone furniture not because of the technology but because it is such a corrupt industry where loggers frequently, with very small sums of money, are able to  bribe customs officials to misclassify mahogany as box wood and hence despite often high export taxes they never processed the logs locally. The amount of money to be made from this corrupt trade meant exporting raw logs to Malaysia and Korea where they were in short supply was the most profitable thing to do with tropical logs and certainly not to process them locally.

Botswana – export sugar and coffee??

Professor Hausmann came to Botswana 2011 for a very short visit and suggested we not proceed with beneficiation and instead move to industries that are similar to the ones we already have- an early harvest as he called it. He and his trusty computer model suggested some new industries that were technologically similar to what we grow and produce, what he called an ‘early harvest’ and he suggested we start producing such commodities as sugar and coffee. Interesting!  Clearly if Professor Hausmann had left the Grand Palm hotel for a while or known something about either crops he would have thrown such folly out the window as neither crop is possible on a commercial scale in Botswana. Subsistence cane sugar is already grown in Botswana but commercial sugar requires lots of cheap water at the right time of the crop cycle – and while we will get lots of expensive water from the Zambezi, cheap water is something Botswana does not have. ( Please try Swaziland) Coffee requires a climate, altitude and soil types also not readily available in this country ( please try Uganda Tanzania or Kenya) . What was he thinking? Computers can only do so much- sometimes economists need to leave their 5 star hotel, talk to real people and then do some basic homework before they give developing countries advice. 

Competitiveness Matters

Beneficiation of diamonds has created over 3,500 jobs in Botswana but this has not grown and as long as we stick with the current business model for beneficiation diamonds that means we are uncompetitive at cutting any diamond below at sizes below 1 carat rough. This in turn will mean that the industry will never grow much. God did not make that many 1 carat diamonds and so we are in effect at saturation with 21 factories and 3,500 jobs. Over 80% of all rough diamonds coming from the earth are under 0.2 carat and this means the Indians will continue to beneficiate most of our diamonds unless we learn to become more competitive than we are now.

We have never beneficiated our base metals and have sold copper/nickel matte for refining in other countries. Unless there is a profound shift in policy nothing much will happen.  The South Africans would dearly love us to stop beneficiating our cattle i.e. selling beef to Europe and instead sell our cattle as weaners to them so they can ‘beneficiate’, much like our neighbours in Namibia do.

Then what can beneficiation do for Botswana? It can only be a beginning of industry that then obliges government to see how we can make our industries truly internationally competitive. The more clamour from the private sector there is for international competitiveness the more government will have to move to assure that services are provided competitively and that our prices are right. If we could make our diamond cutting industry genuinely competitive there would certainly be no more unemployment in Botswana and we would be able displace India as the world’s premier diamond cutting centre.  It is a prize worth fighting for. But to do this would require a steely eyed commitment from government to being hard and fiercely competitive, no matter what the political costs. This fierce commitment to make Botswana ‘win, no matter what the cost’,  was not entirely evident during the 1990’s with the FAP when only employment considerations were paramount, and certainly not evident in government’s dealings with BMC which, without government loan guarantees, would now be shut. If that ‘will to win’ does not surface with diamond beneficiation then it will surely go the same way as our previous attempts to  diversify.  

These are the views of Professor Roman Grynberg and not necessarily any institution with which he may be affiliated.