Critical Appraisal of Africa’s Place in the Global Economy
Ghelawdewos Araia November 20, 2004
Ever since African countries gained independence in the late 1950s and 1960s, African place in the global economy has been discussed in myriads of conferences, debated by leading macroeconomists world wide, and critically appraised by scholarly journals and books.
The central theme of this article is focused on a comparative analysis of the Thirty Seventh Session ECA/Conference of African Ministers of Finance, Planning and Economic Development and the World Bank’s World Development Report 2005. While the Economic Commission of Africa Ministerial meeting emphasized ‘trade,’ the World Bank’s Report running theme is ‘investment.’ Incidentally, both trade and investment are inextricably linked together and both play a crucial role in Africa’s integration in the global economy.
One major problem Africa encountered in the last four decades is the inability of its leaders to translate the many blue prints and development agendas into action. Admittedly, the countless OAU (now AU) and ECA meetings were more of talk shows than workshops. This problem is partly
caused by lack of committed and visionary leadership (corruption being its main manifestation) and partly by the unwillingness of the North (particularly the G8) to support Africa’s initiative, however meager, and to overhaul the respective economies of African nations.
In June 2002, African leaders held a meeting in Durban, South Africa, to discuss economic development for the continent. At the heart of this Economic Summit was the New Partnership for African Development (NEPAD) as well as economic recovery and growth coupled by increased foreign investments.
Three months after the Durban economic summit, world leaders convening at the United Nations headquarters in New York in September 2002, ensured Africans that they will support NEPAD provided they overcome corruption and put an end to regional conflicts. The latter precondition is justified, although the pledges made by world leaders were also the usual cliché that we have heard time and again.
Tabo Mbeki, president of South Africa, told the UN General Assembly, “as Africans today we stand in front of the peoples of the world to make the pledge that we will honor the commitment we have made to ourselves and the world, that we will act firmly to extricate Africa out of her long night of misery” (BBC, September 11, 2002). But, how can Africa extricate herself from poverty and underdevelopment? Is it going to seek foreign assistance or pursue a self-reliant policy to implement development agendas? Or is it going to blend self-reliance and Northern bilateral and multilateral assistance? The latter could sound oxymoron, but it seems the present global reality dictates that Africans must indeed espouse the third path, i.e. African initiative coupled by foreign direct investment (FDI). In light of the latter thesis, rhetoric such as “Africa’s future will be determined by Africans” (Kofi Annan addressing the UN General Assembly) and “Africa is seeking to lift itself by its own bootstrap” (Nigerian president Olusegun Obasanjo, also addressing the same General Assembly), become flavorless especially vis-à-vis the failure of the North-South Dialogue and the New Partnership Discourse.
There is no doubt that African initiative to uplift the continent from its present misery is to be commended, but quite frankly, African nations need Northern support not in the form of loans but in grants. After all, the North, particularly Europe, is partly responsible for African underdevelopment. The first historic measure that Europe must undertake toward enhancing African development is to cancel all debts as IDEA proposed previously (IDEA Advocacy for African Debt Cancellation, June 10, 2004 or see
www.africanidea.org/idea_advocacy.html).African nations must also underscore the seriousness of debt burden and the significance of its cancellation.
Following debt cancellation (freedom from permanent trap) and the transformation of loans to grants, Africans can enter trade negotiation agreements with some confidence. However, although debt cancellation and massive Northern aid can boost African morale, the harsh reality is that Africa is not integrated into the global economy yet. As the African Ministerial Statement (Kampala, 22-24 May 2004) aptly puts it, trade is a very important component to overhaul African economies: “We acknowledge that trade is an important source of finance and raising prosperity, but are concerned that the continent has not reaped the gains of global integration to the extent of other developing regions. Africa’s share in world merchandise exports fell from 6.3 per cent in 1980 to 2.5 per cent in 2000. Africa has hardly benefited from the boom in manufactured exports, with Africa’s share in world manufactured exports remaining unchanged at 0.8 per cent in two decades.”
On top of Africa’s ever dwindling share in world merchandise, Africans were also disappointed by the failure of the Cancun World Trade Organization (WTO) Ministerial Meeting of September 14, 2003) “to reach modalities for negotiations on rich countries’ agricultural trade barriers and export subsidies that have effectively blocked Africa’s successful integration into world market.”
Despite the promises and pledges made by the North to help Africa realize its development agenda, the developed nations have become impediments to African progress by escalating heavy tariff against African exports. Thus, Africa’s access to world market is systematically constrained. The tariff problem is also accompanied by Africa’s inability to have access to “trade financing, information, and communication technology,” which in turn has become “a major constraint for African entrepreneurs, particularly, the Small and Medium scale Enterprises (SMEs).”
The African Ministers, of course, are not interested in a litany of problems Africa encounters in the world economy; they also have clearly delineated solutions that need serious considerations. They propose to enhance information and communication technology (ICTs), implement better and efficient customs administration, reinvigorate regional integration, revive South-South Dialogue, remove non-tariff barriers, establish common external tariffs, and finally, reverse structural adjustment program (SAP) policy of liberalization.
The World Development Report 2005, on the other hand, is mostly a reflection of the African Report 2004 although, as always, it is a prescription to developing countries on how to achieve faster growth and reduce poverty by fostering a good investment climate.
As presented by Francois Bourguignon, the World Bank’s Senior Vice President and Chief Economist, “a vibrant private sector creates jobs, provides the goods and services needed to improve living standards and contributes taxes necessary for public investment in health, education, and other services. But too often governments stunt the size of those contributions by creating unjustified risks, costs and barriers to competition.”
Thus, the Bank’s recommendation is “for governments to improve their investment climates by expanding the opportunities and incentives for firms of all types to invest productively, create jobs, and expand.” And in order to improve their investment climates, respective governments of developing countries, the Report suggested that formal policies must be transcended by the following four prescriptions:
Restraining corruption and other
forms of rent-seeking. The majority of firms in
developing countries report having to pay bribes
when dealing with officials and many rate
corruption as their most pressing obstacle.
Policies and their implementation are also
distorted by the disproportionate influence
exercised by politically connected officials.
Building the credibility of
government policies. Passing new laws has little
impact if they don’t believe they will be
enforced or sustained.
Fostering public support for policy
improvements. Failure to build public support for
creating a more productive society slows reforms
and jeopardizes their sustainability.
Ensuring policy responses are
adapted to local conditions. Approaches that are
transplanted uncritically from other countries
often lead to poor or perverse results.
The Report also discusses relative success stories of some countries in fostering good investment climate, and as a result showed significant improvement in 1) stability and security; 2) regulation and taxation; 3) finance and infrastructure; and 4) workers and labor markets. In ‘stability and security,’ property rights are important and they “can be made more secure by verifying rights to land and other property, improving contract enforcement, reducing crime, and restraining expropriation by governments.” In ‘regulation and taxation,’ successful reforms include those that streamline regulatory procedures, as in Kenya and Peru, and modernize customs administration, as in Morocco and Ghana.” In ‘finance and infrastructure,’ “governments are getting better results by improving the investment climate for providers of these services, rather than by involving themselves more directly in service provision.” In ‘workers and labor markets,’ the Report suggests, “governments need to foster a skilled workforce and ensure that labor market interventions benefit all workers.”
The Report emphasizes persistence and sustainability as demonstrated by China, India, and Uganda especially in the areas of ‘stability and security.’ “Improving property rights in China launched a process that lifted 400 million people out of poverty, with initial reform followed by a succession of ongoing improvement covering most aspects of its investment climate.”
There is no doubt that the World Bank’s Report is a valuable and up-to-date guideline for developing countries especially if examined in light of microeconomic theory, but whether it could be helpful to African countries realize the Millennium Development Goals (MDGs) is yet to be seen. For one thing, although the Bank has now clearly departed from its SAP prescriptions of the 1980s and beyond, there are some vestiges of its liberalization polices that Africans perceived as impediment to the translation of their macroeconomic polices into action.
Moreover, the privatization of the service industry by sidelining governments and completely discarding their role in this sector of the economy is not advisable. To begin with, even the Bank has espoused the significance of the state in development after upholding for decades the secondary role of the state in the economy, and it is for this apparent reason that I have stated ‘vestiges’ of old policies above. African governments should indeed encourage the private sector to partially own and run the service industry, but they cannot afford to remain bystanders and onlookers in the making, ownership and administration of the artery of the economy, namely the service sector. After all, the bulk of the transportation facilities in North America and Europe are also owned and run by municipal, state, and/or national governments. Nine years ago, I have reinforced the centrality of the state in the service industry as in the following:
“The interference of the state in the economic realm does not automatically make the latter a public or socialist enterprise. As a matter of fact, the state in the major industrial capitalist nations such as Germany, Great Britain and France control most of the infrastructure facilities. In the United States, the postal service is owned by the federal government, and the state governments such as New York and New Jersey own tunnels, bridges, airports, financial and trade centers and run them by the Port Authority.
Similarly, the South Korean interventionist state created the Economic Planning Board that was entrusted to procure finance, negotiate with foreign concerns, and even recommend individual firms to adopt specific technology that would in turn promote the national economy. South Korea was indeed the most successful capitalist nation from the developing world in terms of overall industrialization and relative equitable distribution of income.” (Ethiopia: The Political Economy of Transition)
Additionally, what is historically significant but hardly mentioned in the Report is manufacturing industry that in fact can guarantee real and sustainable development for African nations. The Bank attributes the Chinese success to improving property rights. Property rights could have played an important catalyst role in the overall development, but there is no doubt that manufacturing industry played a major role in overhauling the Chinese economy.
Unless African countries transcend the primary commodity production and pursue a manufacturing industrial path to development like the Asian Tigers and the newly industrialized countries (NICs), no matter how Africa gets access into international trade, that would not be a guarantee for the continent’s integration in the global economy. A solid manufacturing is less susceptible to international shocks and price fluctuations. Nations whose manufacturing industry is solid are also less vulnerable to unfair competition in international trade, and most importantly nations with a strong industrial base, not only do they enhance skilled manpower and create jobs but also drastically minimize brain drain.
Some African countries have successfully diversified their economies and headed toward manufacturing industry (e.g. Tunisia, Mauritius), but significant majorities are either still producing primary commodities or are stack in monoculture agriculture. A few African countries (e.g. Uganda and Kenya) have diversified their exports, but these are mainly flowers, vegetables, and fruits – all, primary and perishable commodities.
While African countries appeal to the Northern nations to lift their trade barriers and protection policies, they are also racing against time to reduce poverty by 2015. However, even the recent ECA Press Release (November 1, 2004) is focused on finance and not manufacturing industry. “African countries need to bridge a response gap of 12 per cent of GDP – US $64 billion – if they are to achieve the growth rate needed to meet the Millennium Development Goal of halving poverty by 2015,” the Release states.
Finance is indeed crucial in economic growth, and some countries have made great stride via finance (e.g. Singapore) although the main stay of the economy is manufacturing. But Africans know very well that they cannot domestically generate even a portion of the $64 billion. So, where is the money going to come from? Are Africans going to depend on Northern aid for their economic growth or are they going to ensure equal partnership in trade with the North, or simply give priority to South-South trade and regional integration and concurrently deal with the industrialized world?
There is a general consensus among African nations, including NEPAD, that Africa indeed needs Northern aid and massive FDI. A couple of years ago, World Bank’s president Mr. Wolfensohn “urged the world’s richest nations to lower their trade barriers to African exports. He also called on rich countries to pledge that more than half of the new aid promised at Monterrey Conference in March will go to Africa.” (BBC, 5 June, 2002). Africa, nevertheless, is now immune to promises and pledges that were never met. In point of fact, as per the ECA Report 2004, discussed above, Africans were disappointed by the failure of the Cancun World Trade Organization (WTO) Ministerial Meeting of September 14, 2003.
For the sake of argument, lets assume that African nations get the $64 billion aid package, and the next question that comes to mind is, given the long history of corruption in the continent, what guarantee do we have that all the money will be allocated to development?
John Cassidy, writing for The New Yorker (March 18, 2002), cites an interesting and relevant topic from William Easterly’s book The Elusive Quest for Growth: Economist’s Adventure and Misadventure in the Tropics and discusses a pertinent theme of foreign aid and corruption: “Easterly pointed out that between 1950 and 1995 the developed world dispensed the equivalent of more than a trillion dollars in today’s money in economic assistance, yet many of the aid recipients remain poverty-stricken. Zambia, for example, received no fewer than twelve adjustment loans from the World Bank and its sister organization, the International Monetary Fund, between 1980 and 1994, yet it is still poor, on a per capita basis, than it was at independence in 1964. Easterly listed dozens of countries that wasted significant amounts of aid, including Kenya, Tanzania, Somalia, Sierra Leone, Nicaragua, Haiti, and most notoriously of all, Zaire (now the Democratic Republic of the Congo), where Mobutu Sese Seko and his cronies shipped money out of the country to their private bank as fast as the World Bank and IMF could send it.”
As per the promise of African Ministerial Report 2004, if African nations are seriously engaged in combating corruption and the aid money is spent on development including education, health care, infrastructure and other social projects, domestic and foreign investors will be attracted to come in.
Despite the civil war, which clearly is a drawback to Ugandan economy, the country overall is considered as one African nation that successfully blended economic reform with foreign aid that, in turn, led to the expansion of the private sector and control of inflation. As a result, the Ugandan economy exhibited an annual growth of seven per cent, although we have to wait and see whether Uganda maintains the current trend and fosters sustainable development. At least for now, the Musevini regime’s monetary and tax policy looks conducive to poverty reduction and may very well meet the deadline of MDG in 2015.
African Ministers “are concerned at the continued insufficiency of financing for development in Africa, despite the fact that with the current trends the MDG will not be met by most countries in Sub-Sahara Africa.” A year before the African Ministerial conference, however, Ernesto Zedillio, advisor to Kofi Annan, surmised that the MDG could be met if developed nations give 0.44 per cent of their GDP to developing nations, unless African Ministers are saying the latter allotment is inadequate to help African nations realize the deadline.
In any event, Northern aid is not a guarantee to African development, and even if the Northern nations are forthcoming they will come up with their usual preconditions. But lets assume there won’t be preconditions this time and the North is even determined to help out Africa. Even under that rosy scenario, money alone, no matter how much, (including the $150 billion suggested by the progressive Columbia University economist Jeffrey Sachs; see
www.africanidea.org/spend/html) will not solve African predicament.
African nations should seriously rethink aid-economic growth nexus and rather view it in light of a comprehensive development package that systematically concatenates education, infrastructure, public health, agricultural and industrial development etc. in the absence of skilled manpower, appropriate technology, industrial base, and sound investment policy, Africa can hardly uplift itself from its current abyss. This is the crux in the entire African development agenda.
The crux of the matter that I have alluded to above is historically significant in terms of determining Africa’s place in the global economy; and it is incumbent upon African leaders to clearly delineate the nature of free international trade and the yields engendered by it.
The political economy parameters of international trade are complex and elusive especially when there is no comparative advantage (another elusive, sloppy, and loaded concept) for African countries engaged in import-export within themselves and with the developed world.
There is no doubt that some Asian countries, including the Tigers, China, India, and more recently, Thailand and Malaysia, have enjoyed access to the world market and scored relative comparative advantage. As a result, they have managed to break the cycle of poverty. These Asian countries, however, can offer either labor-intensive clothing (e.g. Indonesia), manufacturing products, including automobiles (e.g. Taiwan and South Korea). What can African nations (with the exception of Mauritius and Tunisia) offer in order to be reckoned with by the North in the global economy?
I think African countries must re-read (giving them the benefit of the doubt) classical political economy of Adam Smith and David Ricardo to better fathom the nature of international trade, the present trend of globalization, and the advantages they can harvest in this complex scenario.
In The Wealth of Nations, Adam Smith anticipated the current outsourcing by major industrialized nations and the absolute advantage they are in a position to garner. In plain language, Smith argued that it is logical for a country not to produce anything that it can import cheaply from another country. For instance, if the United States can cheaply import coffee from Ethiopia, there is no need for it to grow it domestically. And this is what precisely Star Bucks is doing—import coffee from all over the world and make billions of dollars in profit. Other African countries that can provide primary products only, will encounter the same fate as the coffee producing nations and will remain at the periphery of the global economy, and it is for this apparent reason that I have argued money alone (unless finance is methodically utilized for manufacturing industry) could not overcome African poverty nor pave a way for global integration.