Primary product dependency

When African's first gained independence they had little education at all; when Burundi gained independence there were only 2 people in the whole country who had a degree15. Most African's hadn't received any school-based education at all. Somalia has the lowest primary school enrolment in the world, at 22%16 and the years of schooling a Somali child could expect if they were born today is only 1. 817. Education and its effect through labour quality are generally found to be the most important contributors to economic growth18.

Studies have shown it to contribute 15-25% of growth in GDP per capita, and up to 90% in improving the quality of the labour force. The theory of human capital considers education as an investment that makes individuals more productive and focuses on pecuniary gains. If education (and training) enables individuals to produced more efficiently it can lower the costs to produce an additional output (marginal costs), which would shift the supply curve.

However Somalia has not invested in education, and how only has this caused potential loss of GDP growth, but an uneducated workforce means that a high percentage of the labour force must find employment in the primary sector as they are not qualified enough to produce in the secondary or tertiary markets. Primary product dependency: Primary product dependency is measured by the percentage of a country's merchandise exports that are primary products.

Agriculture is Somalia's most important sector, with livestock accounting for approximately 60% of GDP and more than 50% of export earnings19. The country produces bananas, corn, coconuts, rice and sheep to name a few. There are vast economic disadvantages to being primary product dependent. Commodities are subject to price volatility. The cobweb theory, introduced by Nicholas Kaldor, is an economic theory which explains why prices might be subject to periodic fluctuations in certain markets.

It is based on a time lag between price and output decisions; this year's price determines next year's output. Assuming that the market was in equilibrium, if there was a bad harvest output would fall. According to the laws of supply and demand this would result in the commodity fetching a higher price (as it is scarcer). On the basis of this higher price, famers would plant more in year two, but again, due to the laws of supply and demand this leads the price to fall; and so it goes on, with the farmers basing what they plant on the previous year's harvest.

The cobweb is unstable because the market price is moving away from the market equilibrium. Overspecialisation in agriculture can therefore be detrimental to growth, as investment in such products is risky due to their changes in price, especially since the sector is subject to exogenous shocks20. The low price elasticity of demand for these products mean that any increase in supply leads to a greater percentage fall in price than output – therefore the revenue of producing a primary product tends to fall as output increases.

Another drawback of being primary product dependent is that is stops diversification against risk. Locking a country into primary activity may deny it the possibility of long term growth, particularly since the West produce their own primary products (which can strain relationships between Third World countries and the richer West). If you're European you're paying to subsidise every cow in the European Union at  2.50 a day, whilst 300million Africans live on less that 1 a day21.

The exemplifies the way famers must be price takers in this industry – marginal productivity analysis determines how much the take-it-or-leave-it offers from Western firms are worth22, and if the Somali farmers choose to leave it and hold out for a better price? Well the West will use their buffer stocks to supply themselves with food, and the farmer and his family will be left to starve.

The Prebisch-Singer hypothesis23 argues that there will be a decline in the terms of trade of primary products due to factors like low income elasticity. This would result in a net flow of income from commodity producers to manufactured goods exporters. As world incomes rise the demand for goods with a high income elasticity of demand, such as high quality manufactures, will rise faster than the demand for goods with a low income elasticity of demand, such as agricultural products.

This suggests that the price of agricultural goods will fall relative to the price of manufactured goods. A country specialising in exports of agricultural goods will then experience a fall in its terms of export prices falling relative to import prices. This then implies that for every ton of cocoa (or any other primary product) exported the developing country will be able to import a smaller quantity of other goods.

This problem is compounded because primary products tend to be traded under conditions approximating perfect competition; primary products are homogenous, with many buyers and sellers and no barriers to entry or exit24. Manufactured goods, meanwhile, tend to be produced under more monopolistic conditions. Any technological innovation is likely to result in lower prices for the competitive primary producers and higher prices for the monopolist producers of secondary products. This dynamic then further reduces the terms of trade of developing countries.