Trade and Development in the African Context

1. Trade and Development in the African Context ECON 3510 Carleton University June 3, 2014 Archibald R. M. Ritter Source: Text, Chapter 18; Collier, Chapter 8

2. Outline I. Introduction Central Questions Changing and clashing conventional wisdoms II. Theories of Trade and Development: How does trade promote development? III. Problems of Primary Commodity Trade for Africa (also considered re minerals earlier in the course) IV. Trade Policies for Development Import Substituting Industrialization Export Oriented Development Regional Economic Integration (Next Topic)

3. Introduction • Differing historical experiences with trade: • Contrast Canada and Africa Central Questions • Does trade promote development? How? • What types of policies are necessary for trade to promote equitable development? Changing and clashing conventional wisdoms 1930s; 1940s; 1950s, 1960s and 70s; 1980s and 1990s; 2000s and 2010s??

4. II. Theories of Trade and Development: How does trade promote development? • “Vent for Surplus” idea, AdamSmith • Comparative Advantage (D. Ricardo) • “Productivity Theory”: (Dynamic) Trade permits • increased specialization, • technical change & innovation; • development of economies of scale and agglomerative economies • increased productivity • Stimulus to competition; curbs monopoly power

5. Technical transformation and transfer: • from exports into imported capital equipment, fuel, food, medicines etc. etc. that could not be produced domestically • (a “magical transformation”????) • Basically, exports • earn foreign exchange, • permit imports, • permit technologivcal transfer, • generate jobs and incomes, • Generates tax revenues, & finance social programs • support infrastructure development

6. Some Indicators for Economic and Social Progress for Some African Countries, 2011 Source: UNDP, HDR 2013 Source: UNDP, HDR 2013 Implications? Exports appear to provide an essential fuel for economic and social development

7. “Trade Pessimists:” Arguments against trade as an engine of growth and development There are Numerous Problems re trade: • Over-dependence on single export products and vulnerability to international business cycle • Price volatility for many export products • Declining Terms of Trade ?? Low income elasticities of demand for some products?? e.g. coffee, tea, cocoa, • Synthetic substitutes for some products • Protectionism in high income countries: tariff & non-tariff barriers; Still relevant? Only partly • Enclave character of some export activities;

8. III. Problems of Primary Commodity Trade for Africa • Export Concentration in a Few Products Diversifying Export Patterns • Price Instability => Foreign Exchange Volatility Stabilizing Foreign Exchange Earnings • Declining Raw Material Prices??? • Protectionism in Potential Markets?? • The Character of Linkage Effects from Major Exports???

9. Problems of Primary Commodity Trade for Africa, cont’d 1.A Export Concentration in a Few Products • The historical pattern • Recent Trends • The evidence • The problem: (price instability; price trend; market dependence) 1.B Growing Concentration in Trade Partners

10. Export Concentration, Selected Countries. 2005 (Percentage of Total Exports)

12. Problems of Primary Commodity Trade for Africa, cont’d • Export Concentration in a Few Products Economic Diversification: urgent but difficult; • diversify into other primary commodities: agri, food, mineral • Diversify into manufactures for export to neighbours and DMEs. • Easy to say; hard to do; synonymous with the whole task of development

13. Problems of Primary Commodity Trade for Africa, cont’d 2. Price Instability => Foreign Exchange Earmings Volatility • Evidence • Causes: Supply and Demand Explanation: -graphical in class • Price in-elasticities of both supply and demand in the short run • Supply side disruption, especially for agricultural commodities; • Demand side disruption, especially for mineral products See chart on G-7 GDP and Commodity Price relationship

16. African GDP and Commodity Prices, 2000-2009

17. Consequences for African Countries: Price instability => foreign exchange instability => => national macroeconomic instability => => unstable tax revenues for government => • public sector management problems and => • general problems of ““boom and bust”

18. Policy Options: • Compensatory Financing” by IMF Facility: Already in operation; partial amelioration of instability of F.Xch. • International Commodity Agreements? Mainly unviable • National macroeconomic management? Difficult but possible • Diversification around primary exports? Again difficult but possible for some countries

19. Problems of Primary Commodity Trade for Africa, cont’d3. Long term Declining Raw Material Prices? • 1980-2000 steady decline in many primary commodity prices; • Why? supply and demand side factors • 2000-2008: Major increases: • again supply and demand forces at work; Explain • 2009: world recession => major price reduction; • 2010-2014: price recovery; • See Charts and Tables

22. Terms of Trade and Mineral Prices

23. Sub-Saharan Africa, “Terms of Trade” Annual Percent Change

24. 4. Protectionism in International Markets • Note protectionism in High Income Countries: • Minimal or no protectionism against fuels and minerals • affects other DMEs and some LDC agri exporters the most; • Affects African producers of Cotton in particular • Protectionism for manufactured products exists and is damaging but has been reduced over the years

25. 4. Protectionism in International Markets • Protectionism and unfair trading practices among Developing Countries • Note again China’s exchange rate policy and manufactured export domination • Protectionism among African countries

26. 5. The Development Implications of Differing Export Activities

27. Import Substituting Industrialization • Export Oriented Development • Regional Economic Integration [To be examined in the next section] IV. Trade Policies for Development

28. A. Import Substituting Industrialization (ISI) 1. Basic Character of the Approach: • Definition • Objectives: • Industrialization and structural change; • Employment creation in the "modern sector" • Balance of payments considerations: reduce imports • "Economic Independence"

29. Method, or "policy tools” for implementing “ISI” • Analyze import pattern; • “Protect” and subsidize new industries replacing most significant imports via • Tariffs • Non-Tariff Barriers (MTBs) • Low interest lending • Subsidies of various sorts to the "ISI" activities • Tax advantages of various sorts • Provision of infrastructure

30. 3. Origins of the approach: • Development theorizing, 1943-1960; • Experience of the higher income countries earlier in their histories: (USA, Canada, Germany, etc.) • The Soviet economic model in some cases; • The Latin American development experience: 1930s and WW II eras; • Classical Economics: the Infant Industry argument changed to an "infant economy" argument.

31. 4. Strengths of the Approach • initial potentiality of substituting for some major import products; • ISI as a "natural process" • The larger the country, the greater the potential of ISI due to the existence of a larger market. [e.g. compare Nigeria with Liberia.]

32. 5. Results: • Initially, from 1945 to around 1970. reasonably good especially for larger Latin American and Asian countries; • Rapid growth and significant industrialization plus structural change in many countries; • Later, around the late 1960s into the 1980s, the approach was "running out of steam” • Growth slowed down; inefficiencies with the approach became overpowering in many cases.

33. 6. Problems with the approach: • Indiscriminate and extreme implementation in many cases; • Thwarting of various types of economies of scale • promotion of oligopoly and monopoly power through protection against imports;

34. discrimination against all non-protected sectors (usually agriculture and resource based activities) • blockage of intra-industry specialization; • impacts on income distribution • Balance of Payments impacts often adverse (due to high demand for imported capital goods, and inputs; • tendency to exhaust itself

35. II. Export-Oriented Development Strategies 1. Basic Character of the Approach • Definition • Relationship with other aspects of External-Orientation; • Objectives: • Achieve accelerated and economically sustainable growth and development; • Accelerate high-productivity employment creation • Improve income levels • Relieve balance of payments constraints on development

36. 2. Policy Tools or Methods: • lower tariffs and non tariff barriers (NTBs) • cut other types of subsidization for old ISI firms; • provide transitional support for export activities or the "clusters" of economic activities around major export activities' • let the exchange rate float, i.e. let the exchange rate realities prevail by permitting a market determined rate;

37. 3. Range of Approaches: • Complete "Apertura" • Generalized multilateral trade liberalization; • Regional trade liberalization; • Restricted liberalization in some sectors only; • Some bilateral liberalization • "Export Processing Zones" • Various combinations of the above.

38. Origins of the Approach: • the experience of some major cases, e.g. Japan, the G-4 (or Asian Tigers” Hong Kong, S. Korea, Taiwan & Singapore) • China and india strategy now; • economic theory and argumentation • problems with ISI; • regional integration experiences, esp. European Common Market;

39. Strengths: • Actual Historical Experiences: • Highly successful: Asian Tigers; China; India; Malasia, HK, Taiwan, S. Korea, Chile • Positive but debatable: Mexico, much of Latin America; • Vis-a –vis Disaster ISI cases: e.g. N. Korea • Reduction of Economic Waste(improved efficiencies; rising productivity) • improved economies of scale; • intra-industry specialization becomes possible;

40. reduced discrimination against non-protected sectors; • intensified dynamic effects of "learning through competition;“ • reduced monopoly-oligopoly power for domestic firms; • reduced rent-seeking activities.

41. Positive and more sustainable effect on balance of payments; • Increased foreign exchange earnings permit increased importation of capital goods and thence increased technological transfer; • Higher productivity employment permits rising real wages and incomes, and thence improved family well-being and human development; • Improved growth permits increased taxation and social expenditures and thence improved human development;

42. 6. Problems or Difficulties with the Approach: • Costs of Transition to Larger Markets: Some industries or types of economic activity may not be able to compete with imports. The result is then labour displacement, economic dislocation, and unemployment. Are these “costs” of economic integration borne by the workers and enterprises themselves, or does society share in their burden? Enterprise and industry restructuring costs; Short-term transitional costs of restructuring may make the approach unsustainable at first;

43. Problems or Difficulties with the Approach, cont’d: 2. May accelerate "resource stripping" if environmental policies are weak and inappropriate; 3.Some countries may not be in a position to benefit quickly if human resources, institutions and other policies are weak: further “marginalization” ?. 4. Blocked by protectionism in high income countries?

44. Problems or Difficulties with the Approach, cont’d: 5. Vested interests may block implementation; Major gains in employment and wages may be slow in coming and may undermine resolve to continue the approach 6. Current Blockage of African development of manufacturing for export or for domestic markets by Asian Dominance

45. 7. Possible Longer Term Negative Impacts: • “agglomerative dis-economies” for some regions or countries • consequent loss of economic activity and employment; (e.g. the Maritime provinces in Canada?) 8. Possible cultural impacts (probably most serious for small country-partners)??

46. The Asia or China factor Has Africa been “marginalized” in the “globalizing” trading system Implementation of any development strategy aimed at developing manufacturing may pose difficulties especially with competition from China Do past prescriptions regarding trade need reconsideration?? To Be Continued………….

47. Implications for Africa: New approaches to export diversification are imperative • Regional economic integration re trade is vital; • Improved regional infrastructure is vital • Transitional tariff protection vs. consumer product imports??? • New trade deals with high income OECD countries re access to markets e.g. a generalized “African Trade and Opportunities” Program of the US, but with all of OECD

48. Conclusion: “ISI” may have some limited potential for larger African countries at the earlier stages of their development (now largely past) External orientation is advantageous in the longer term Asia/China role in world trading system creates opportunities and challenges for Africa Regional Integration is vital. See next topic!