Namibia’s Diversification Strategy: Finding A Way Forward

By Soulange Gramegna

Namibia is a country of 2.5 million people that gained independence from South Africa in 1990 and shares a legacy of apartheid that informs the socio-spatial distribution of its citizens. Its economy is highly reliant on the exports of a few primary commodities, such as minerals like diamonds, copper, uranium, gold, and zinc, and agricultural goods like fish and livestock. The mineral economy drives much of the growth of the country. Similar to my country, Peru, Namibia had a period of high growth during the commodity boom (2002 – 2015) but is now facing a growth challenge because of exogenous shocks such as falling commodity prices and COVID-19.

The Growth Lab is supporting the Government of Namibia (GoN) in the quest of finding new growth drivers that promote inclusive development. The project covers a wide range of research activities, such as: understanding the drivers of macroeconomic sustainability, diagnosing the constraints to growth and identifying the most binding structural barriers preventing Namibia from realizing sustainable growth and diversification opportunities, studying inequality and labor market dynamics across the country, and analyzing the economic and export diversification opportunities by applying the framework of complexity analysis. A key objective is leveraging the existing capital-intensive industries (i.e., minerals) to set the basis for productive diversification towards industries that can employ more people with higher capabilities and jumpstart the Namibian economy.

Although productive diversification and inclusion are shared goals, there are different approaches being considered to foster these new opportunities. On the one hand, the GoN has consistently promoted “beneficiation” since 2012 through its homegrown agenda. The beneficiation, or value-added, strategy focuses on adding more value downstream to current exports. On the other hand, the Growth Lab sees productive transformation as focusing on sectors that are “similar” in terms of skills and capabilities because of the shared knowhow required in the production process. These opportunities are (i) implicitly revealed through production and export data – i.e., like the product space; and (ii) not necessarily along the lines of vertical value chains, which might seem unintuitive at first glance. Put simply, while many governments believe that a strategy to diversify should go from cotton to textiles, the Growth Lab finds evidence of an optimal strategy that may go from cotton to fruits or coffee. "Similarity" is better understood through knowhow in the production process rather than vertical value chain integration.

Nonetheless, the idea behind beneficiation is intuitive and appealing to an economic-political messaging about "doing more at home."It is an appealing idea for many reasons: saving on transportation costs as well as secured and cheaper local supply, and domestic import substitution. It also supports a sense of national pride by promoting the notion that employment and skills “evolve” downstream to higher-value products. Moreover, in a country with a dependence on commodities, adding value is also seen as an option to reduce exposure to the volatility of the international markets (i.e., selling batteries is less volatile than selling copper).

However, the Growth Lab has empirical evidence proving that countries do not transform by adding more value to their existing exports down the value chain. Klinger et al (2008) assess the effectiveness of beneficiation by analyzing international trade data for 200 countries over the previous 50 years. The conclusions – which are aligned with the economic literature on the same topic – is that countries do not transform by adding more value to their existing exports down the value chain. Instead, countries accumulate productive capabilities, redeploy, and recombine them into larger sets of more sophisticated products and services. Hence, beneficiation is likely to be unsuccessful.

My role in the Namibia project during the internship largely consisted in creating a new dataset using Namibia’s trade data to identify and compare the two approaches to industrial diversification. Based on Klinger et al (2008), I worked on the analysis, refined it with members of the team and external experts, and then presented my work to the counterparts. My findings were used in the policy recommendations made by the Growth Lab team to the Government of Namibia.

These are just a few highlights of what I learned:

  • Analysis is a stronger piece of evidence than intuitive arguments: During my internship, I helped advance the agenda by identifying the top 50 industries that should be prioritized following a beneficiation strategy, and preparing a graph that contrasted them vis-à-vis the industries identified in the economic complexity report within the same product space. The graph showed how beneficiation is "as good as random": the prioritized industries require different sets of capabilities and can differ greatly from Namibia’s existing industries. The visual contrast between both strategies made a stronger point than any theoretical discussion.
  • History matters, context matters, and public perception matters:  In the MPA/ID program, we learn that policies are not just about what is technically correct. One must take into account political and administrative feasibility. Given the historically salient role of beneficiation in the country, and in the broader South African Development Community, it was politically complex to expect a full shift out from beneficiation, so the team proposed a “middle ground” strategy: following capabilities first, then beneficiating if that's in the optimal set. Some products in the plastics and rubbers product group fit these criteria since they were both directly downstream and in line with the existing set of capabilities.
  • It matters not only when assessing policy recommendations, but also when thinking about the messages we want to convey: In Namibia, the Growth Lab recognized that we were outsiders to the country and that our message could be perceived as though we believed that the country was not capable of adding value to its existing industries. Thus, we looked for examples of industries where Namibia currently adds value to imported products (i.e., copper) to make the point that we do believe they are able to add value, but that it did not necessarily have to be to domestic products.
  • Every good idea on paper leads to a lot of effort to implement them in order for them to materialize: Many policy recommendations sound reasonable on paper but fail to delve into how policymakers can actually “make it happen” given the existing organizational capacity and institutional setup. To address this natural gap in going from ideas to action, the Growth Lab facilitated the introduction of productivity taskforces and developed a framework of best practices to show how policymaking could be implemented to reduce coordination failures that constrain diversification efforts. As part of this process, we met with counterparts in the GoN to first understand similar efforts in the past to set up such taskforces and we incorporated those learnings into our recommendations.
  • You cannot pursue single policies in isolation of other policy priorities. They have to complement each other. Fiscal sustainability and industrial policy had to go hand-in-hand: While diversification is a way of addressing Namibia’s growth and inclusion challenges, the team was also very aware of the fiscal constraints that the GoN currently faces. To that end, we argued that a beneficiation strategy was likely to require more fiscal resources given the big push needed to develop new capabilities. Similarly, a key best practice for the implementation of productivity taskforces is that they should not focus on measures that increase profits for firms (i.e., tax benefits), but on measures that help increase overall productivity.