Experts Suggest Three Paths for Economic Structural Transformation When Facing Covid-19

Similar to the situation in oil exporting countries, the new Covid-19 epidemic dynamics has also hit the economies of African mining exporting countries.

Zhengzhou, China., August 27, 2021 -- Similar to the situation in oil exporting countries, the new Covid-19 epidemic dynamics has also hit the economies of African mining exporting countries. The Covid-19 lead to lockdown in many areas, and the mining industry is not an exception. For countries that are economically oriented towards mineral exports has directly led to a sharp drop in their income.

Data from the Steel Union Data Center shows that South Africa, the largest mineral resource country in Africa, will suffer the serious impact on the output of 714,000 to 800,000 tons of minerals if 21-day blockade. The international rating agency Moody's has noticed the resulting reduction in foreign exchange income and increased fiscal risks. Moody's therefore downgraded South Africa's sovereign credit rating from Baa3 to Ba1, with the rating outlook maintained at "negative".

He Wenping, expert of the African Research Office of the Chinese Academy of Social Sciences, said that the most vulnerable economies will always be the most hit by the epidemic. The epidemic has shocked the three chains of the African economy: the supply chain, the demand chain, and the trade chain.

The epidemic hits Africa's mineral exports in three chains

Due to the continuous deterioration of the Covid-19 epidemic, African mineral exporting countries have to stop. In the 168-year history of mining in South Africa, the suspension of production and work is the first time. At present, South African mining companies processing gold, diamond, copper and platinum group metal have all been affected.

The Congo (DRC), another major mining country, has taken measures to lock down cities and stop work at varying degrees in Upper Katan and Lualaba provinces, which mainly produce cobalt mines. Africa is rich in mineral resources, accounting for two-thirds of the world's reserves, and owning more than half of the global reserves of gold, platinum, palladium, cobalt, and diamonds. For South Africa, Congo (Kinshasa), Botswana, Zambia and other countries, mining has always been a pillar industry of their economies.

Some experts said that, on the one hand, due to the global impact of the epidemic, the international demand for raw materials and energy has decreased, and it is difficult to recover in the short term. On the other hand, due to concerns about the fragility of the public health system, African countries have suspended work and production in the mining sector thus causing the limitation in the supply of major minerals and exporting countries in Africa.

In addition to "demand chain" and "supply chain", He Wenping said that we should also pay attention to the third chain "trade chain". She explained that, on the one hand, the decline in demand and supply has caused the shrinkage of the mineral economy; on the other hand, the blockade has increased manpower and shipping costs. In addition, He Wenping also said that the epidemic will bring a series of chain reactions to these mineral resource countries. For example, from a macroeconomic perspective, it will cause unemployment, economic contraction, etc.; and from a financial sector, it will reduce its foreign exchange reserves and trigger a debt crisis.

Over-exploitation of resources and debt crisis

Moody believes that the epidemic has also exposed South Africa's debt risks. South Africa's government debt ratio was 56.7% in 2018, much higher than the 26.5% in 2008. At present, South Africa’s external debt is 3.5 times its foreign exchange reserves, and the pressure on external debt is prominent. Besides, the epidemic has worsened South Africa's financial situation, and its structural growth has been very slow. At the same time, he also stated that South Africa has been facing problems such as unstable power supply, continued lack of investment confidence, and continued rigidity of the labor market structure.

However, the governments of African countries are also aware of the need to find a balance between epidemic prevention and economic development. For example, the current platinum group metal furnaces in South Africa only implement capacity reductions rather than complete shutdowns, so ore is still being produced. The Congo (DRC) shutdown measures are also not strict, and mining companies have greater autonomy in whether to stop.

Expert suggestions: three ways of economic structural transformation

The so-called structural transformation is actually the shift from primary products (production and export) such as agriculture and mining to industries with higher productivity and added value (especially manufacturing and modern service industries). At present, from the perspective of the policies and practices of countries with the intention of transformation, it is mainly manifested in three ways or paths: heavy industry manufacturing orientation, light industry manufacturing orientation, and service industry orientation.

The first approach is based on mining (oil and gas and solid minerals) to promote industrial chain extensions on its upstream (such as products and services required for exploration and mining) or downstream (such as processing oil and gas or mineral deposits), therefore making a further development related manufacturing industries-usually the development of heavy industrial industries (such as petrochemicals, metal smelting, equipment manufacturing and assembly, etc.) characterized by intensive investment in capital and technology.

Of course, those who have the conditions to take this path are often countries with richer mineral resources such as South Africa and Congo (DRC).

The second path is based on agriculture (food and cash crops) to extent the downstream industrial chain, and to develop related processing and manufacturing industries-usually labor-intensive light industries (such as agricultural products processing, textiles and clothing, leather and footwear, etc.) Wood furniture, etc.).

The third path relies on existing resources (such as natural scenery) or through conscious support policies to develop modern service industries (such as ICT, tourism, finance, aviation, etc.), and finally realize the structural transformation from the traditional agricultural and mining industries.