Africa

Economic Understandings

SS7E1 The student will analyze different economic systems.

• a. Compare how traditional, command, and market economies answer the economic questions of (1) what to produce, (2) how to produce, and (3) for whom to produce.

• b. Explain how most countries have a mixed economy located on a continuum between pure market and pure command.

• c. Compare and contrast the economic systems in South Africa and Nigeria.

What is a traditional economy?

• An underdeveloped economy in which communities use primitive tools and methods to harvest and hunt for food, often resulting in little economic growth. Traditional economies are often found in rural regions with high levels of subsistence farming (growing only enough food for your family and to sell at the local market).

In a traditional economy…

• 1. How would you determine what to produce?

• 2. How would you produce it?• 3. For whom would you produce it?

What is a command economy?

• An economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed.

In a command economy…

• 1. How would you determine what to produce?

• 2. How would you produce it?• 3. For whom would you produce it?

What is a market economy?

• an economy in which prices and wages are determined mainly by supply and demand, rather than being regulated by a government

• Cash crops are often produced for export to Europe, not necessarily for other African countries (ECOWAS –Economic Communities of West African States)

In a market economy…

• 1. How would you determine what to produce?

• 2. How would you produce it?• 3. For whom would you produce it?

What about mixed economies?

• What does mixed economy mean?– an economy in which some industries and

businesses are government-owned and some are privately owned

On a scale like the one below, where would you say most countries would be placed?

Pure Command Mixed Pure Market

Most countries have a mixed economy located on a continuum between pure market and pure

command.

Pure Command Mixed Pure Market

In other words, most countries have privately owned businesses and government-run businesses. How is the U.S. an example of a mixed economy?

South Africa

• South Africa has a mixed economy with a high rate of poverty and low GDP per capita.

• The economy of South Africa is the largest in Africa. It accounts for 24% of Africa’s Gross Domestic Product (PPP).

South Africa

• The country’s economy is reasonably diversified with key economic sectors including mining, agriculture and fishery, vehicle manufacturing and assembly, food-processing, clothing and textiles, telecommunication, energy, financial and business services, real estate, tourism, transportation, and wholesale and retail trade.

South Africa• South Africa is the world's largest diamond, gold,

platinum, manganese, chromium, vanadium, alumino-sillicates and titanium producer.

• South Africa is the largest steel producer in Africa.

• Other than Swaziland, South Africa is the only African state to produce pulp and paper.

• There are four oil refineries in South Africa, with a total production capacity in 2002 of 469,000 barrels per day.

South Africa

• According to official estimates, a quarter of the population is unemployed, however unofficial estimates put the real unemployment rate as high as 40%.

• A quarter of South Africans live on less than US $1.25 a day. Why do you think that is if they have Africa’s largest economy? Where is all of the wealth?

Resources in Southern Africa

Nigeria

• Nigeria is a middle income, mixed economy and emerging market, with expanding financial, service, communications, and entertainment sectors.

• It is ranked 30th in the world in terms of GDP (PPP) as of 2011.

• About 57% of the population lives on less than US$1 per day.

Nigeria

• In 2005 the GDP was composed of the following sectors: agriculture, 26.8%; industry, 48.8%; and services, 24.4%.

• Previously hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential.

Nigeria• Although much has been made of its status as

a major exporter of oil, Nigeria produces only about 2.7% of the world's supply.

• Nigeria's economy is struggling to leverage the country's vast wealth in fossil fuels in order to displace the crushing poverty that affects about 57% of its population.

• The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products.

West African Oil Coast

There is an increasing Chinese presence in Africa as China

searches for oil, minerals, and food for its markets.

Chinese Influence in Africa

• Trade rose from about $10b in 2000 to $100b+ in 2010 (1980s: Deng Xiao Ping)

-Oil (Angola, Sudan, Nigeria) -Copper (Zambia) -Agricultural land (Zimbabwe, Nigeria, etc.)

• Problems:– Hostility by African workers due to China’s appalling anti-

labor practices, low wages, and disregard for the environment

– Cultural clashes

Nigeria • Reportedly, 80% of Nigeria's energy revenues

flow to the government, 16% cover operational costs, and the remaining 4% go to investors. However, the World Bank has estimated that as a result of corruption 80% of energy revenues benefit only 1% of the population.

• Government focus is on the oil industry rather than food. Oil spills have contaminated land and people are moving into the rain forest which is causing deforestation issues.

Nigeria

• Corruption has been a huge issue:– In September 2005, Nigeria, with the assistance of

the World Bank, began to recover US$458 million of illicit funds that had been deposited in Swiss banks by the late military dictator Sani Abacha, who ruled Nigeria from 1993 to 1998.

Nigeria

• A longer-term economic development program is the United Nations (UN)-sponsored National Millennium Goals for Nigeria. Under the program, which covers the years from 2000 to 2015, Nigeria is committed to achieve a wide range of ambitious objectives involving poverty reduction, education, gender equality, health, the environment, and international development cooperation.

SS7E2 The student will explain how voluntary trade benefits buyers and sellers in Africa.

• a. Explain how specialization encourages trade between countries. Compare and contrast different types of trade barriers, such as tariffs, quotas, and embargos.

• b. Explain why international trade requires a system for exchanging currencies between nations.

Specialization• Not every country can produce all the goods

and services it needs– Because of this, countries specialize in producing

those goods and services that they CAN provide most efficiently.

– They then look for others who may need those goods and services so they can sell their products to those who need them.

*People producing cash crops have become efficient and successful with those crops, and they produce a higher quality product!

Specialization

• So What Does That Mean?– Countries trade with one another to get

everything they need for their country. In order to do that, each country

produces what they can make the best. Then they trade with one another.

Specialization• In international trade, no country can be completely

self-sufficient.– Which means….no country can produce all the

goods and services it needs

• Specialization: the products a country makes best and that are in demand on the world market– This is a way to build a profitable economy and to

earn money to buy items that cannot be made locally

The problem with specialization is that a country’s economy is wiped out with one crop failure; the demand and price lowers on the world market.

Trade Barriers

Let’s Review The Three Types of Trade Barriers!!

1. Tariff2. Quota3. Embargo

All three of these are considered to be trade barriers. They slow down or prevent one country from exchanging goods with another.

Trade Barriers

• Why have trade barriers?– To protect local industries from lower priced

goods made in other countries– Political problems between countries (trade would

be stopped until the political issues are settled)

Tariff

• Tariff: a tax placed on goods when they are brought (imported) into one country from another country.– Purpose: Make the imported good more

expensive than a similar item made locally.• Called a “protective tariff” because it PROTECTS local

manufacturers from competition coming from cheaper goods made in other countries

Quota

• Quota: sets a specific amount or number of a particular product that can be imported or acquired in a given period– Purpose: a different way of limiting the amount of foreign

goods that can come in to a country.

– EX: South Africa could decide that only 1500 cars could be brought into the country from Japan in a given year. That would make it more likely that people buying cars would have to buy South African made cars, if Japanese cars were not available.

Embargo

• Embargo: when one country announces that it will no longer trade with another country in order to isolate a country and cause problems with that country’s economy.– Purpose: to punish OR persuade a country

– Example: Member countries of OPEC (including Nigeria in 1971) decided to stop all sales of oil (petroleum) and gas to the countries supporting Israel in the 1973 Arab-Israeli war.

Exchanging Currency

• Most countries in Africa have their own type of currency.– In order to pay for goods as they trade with each other,

they had to establish a system of changing one type of currency to another.

• Exchange Rate– In order for them to trade with each other, they have to be able to

figure out what goods cost in each currency.

• To sum it all up…This makes it possible to buy and sell goods between nations with different types of money.

Currencies

Nigerian currency - Naira South African currency - Rand

Let’s try some currency conversions!

*First, let’s try to explain this as a class!

• http://www.xe.com/ucc/

SS7E3 The student will describe factors that influence economic growth and examine their presence or

absence in Nigeria and South Africa• a. Explain the relationship between investment in

human capital (education and training) and gross domestic product (GDP).

• b. Explain the relationship between investment in capital (factories, machinery, and technology) and gross domestic product GDP).

• c. Explain how the distribution of diamonds, gold, uranium, and oil affects the economic development of Africa.

• d. Describe the role of entrepreneurship.

Human Capital

• It is called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.

Research shows that investment in human capital (education & training) increases a nation’s GDP. Why?

Investment in Capital • Why invest in capital (factories, machinery, and technology)?

1. It contributes to current demand of capital goods.

2 . It enlarges the production base thus increasing production capacity.

3. It modernizes production processes, improving cost effectiveness.

4. It reduces the labor needs per unit of output, thus potentially producing higher productivity and lower employment.

5. It allows for the production of new and improved products, increasing value added in production.

6. It incorporates international world-class innovations and quality standards, allowing trade with more advanced countries.

How does the distribution of natural resources affect economic development

in Africa?

• Natural resources can be extracted and exported to bring in revenue.

• Diamonds, uranium, and oil are all natural resources that countries in Africa export for financial gain.

Africa’s Natural Resources

Entrepreneurship

• Indeed the issue of entrepreneurship in Africa is a problem we must address at the core. As an African proverb says, "The construction of a house always starts with the foundation"; thus develop entrepreneurship at its core and base concepts.

*Why is entrepreneurship so important to countries in Africa?

Entrepreneurship• There is no doubt that the creation of small

businesses would allow economic recovery of certain villages and cities.

• It would also offer youngsters the opportunity to work in their own villages and towns and stop the exodus in search of an imaginary paradise.

• People could work for the development of the African continent.

• Micro-lending (loaning small amounts of money) has helped people with the capital they need to start businesses.