SHAWN HAGEDORN: Trade in the false logic of ‘beneficiation’

Words matter. Just as our political landscape has been abruptly reshaped, our national dialogue must now be reframed. We should start by binning “beneficiation” while embracing “diffusion”.

According to Merriam-Webster, beneficiation means “the treatment of raw material (such as iron ore) to improve physical or chemical properties, especially in preparation for smelting”. Diffusion means “the state of being spread out or transmitted especially by contact”.

“Beneficiation” is a mining term and, somewhat similarly, the origin of “diffusion” traces to the physical sciences, particularly chemistry. Yet they take on different meanings when used in an economic context. 

Diffusion of knowledge, capital and access to affluent markets has been central to how integration into global supply chains has spurred the rise of Asia, perhaps humanity’s most impressive feat. Conversely, economic beneficiation traces to patronage politics. The concept is refuted by basic commercial logic and abundant evidence.

It is highly laudable that commodity-exporting countries should pursue broad upliftment through morphing their economies to become value-added exporters. But it makes no commercial sense to think this path must be restricted to adding value to local commodity deposits. The cost of transporting raw materials across oceans is negligible, particularly relative to transporting a similar volume of finished products, such as cars.

The rise of Asia was not predicated on locating factories near commodity deposits. It was largely about exploiting labour cost differentials. If the relationship were inverted and transport costs were a large portion of total production costs and labour costs were incidental, then factories would be located near where the buyers were concentrated, which prior to the rise of Asia was overwhelmingly in the West.

Another problem with beneficiation’s false logic is that global growth is now dominated by services. This is particularly evident in employment trends. Yet half of beneficiation’s logic is absolutely central to what drives 21st-century upliftment. There has never been a more powerful upliftment driver than adding value to exports. If China had adopted the ANC’s economic model, which is the pursuit of rising industrialisation through import substitution, that country’s growth trajectory would have resembled ours.

Thinking that workers should focus on adding value to local commodity deposits is profoundly limiting. According to Unctad, the UN agency focused on trade and development, when energy, minerals or agriculture accounts for more than 60% of a country’s merchandise export revenue, it is deemed to be “commodity dependent”. According to a recent Unctad report, only 13% of advanced economies make the list, including Australia and Norway, compared with a staggering 85% of the world’s least developed countries.

Being endowed with mineral wealth should help fund upliftment initiatives. Instead, what it typically provokes is patronage-dominated politics. SA, very much a commodity-dependent nation, suddenly has an opportunity to tame political patronage but we lack a workable growth model as our economic perceptions have been distorted by pro-patronage political rhetoric.

Political patronage

Commodity-endowed nations are prone to political patronage and “big man” authoritarianism. Such biases deprioritise investments in people while seeking to avoid the competitive pressures that arise from adding value within global supply chains.

The Unctad website provides compelling evidence of commodity dependence undermining development. “In 2021, 29 out of the 32 countries with low human development index (HDI) scores were commodity dependent. On average, commodities accounted for 82% of these low HDI countries’ exports.” 

The term “beneficiation” is so politically contrived that it is rejected by serious economists. It is rarely heard in other regions. On the other hand, the concept termed “diffusion” is central to economic development. It is one of those rare “free lunches” that really do exist.

There has been an extraordinary diffusion of knowledge, capital and access to affluent markets in recent decades through broad integration into global supply chains. This has spurred phenomenal upliftment. The term is not used here as the patronage-focused ANC favours discredited import substitution policies, termed “localisation”. 

For our new coalition-based political dispensation to succeed, we must reconceive our national dialogue. We must distinguish between what works and what doesn’t. 

• Hagedorn is an independent strategy adviser.