Trade and Development - ECON 3510 – African Economic

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
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)
I. 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
1980s and 1990s;
1950s, 1960s and 70s;
2000s and 2010s??
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
• 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
Some Indicators for Economic and Social Progress for
Some African Countries, 2011
Source: UNDP, HDR 2013
Mauritius S. Africa
Kenya Ethiopia
2011 Exports of G&S per cap.,
($US, 2005)
GDP per capita PPP, 2011
(2005, $US)
Human Development Index,
Rank among Countries (2011)
Human Poverty Index, Rank
among LDCs (103 total)
Source: UNDP, HDR 2013
Implications? Exports appear to provide an essential fuel for
economic and social development
“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;
III. Problems of Primary Commodity Trade
for Africa
1. Export Concentration in a Few Products
Diversifying Export Patterns
2. Price Instability => Foreign Exchange
Stabilizing Foreign Exchange Earnings
3. Declining Raw Material Prices???
4. Protectionism in Potential Markets??
5. The Character of Linkage Effects from Major
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
Export Concentration, Selected Countries. 2005
(Percentage of Total Exports)
S. Africa
Sub-Saharan Africa
Main Export
Diamonds 88.2%
Oil 99.9%
Cocoa 46
Tea 16.8
Oil 92.2
Platinum. 12.5
Gold 10.9
Copper 55.8
Oil 49.2
Other Exports
Nickel 8.1
Manganese 7.2
Flowers 14.2
Coal 8; Gold 7.9
Fish 9.7; Copper 8.6
Cobalt 7
Diamonds 12.6; Nickel 7.8
Problems of Primary Commodity Trade for Africa, cont’d
1. Export Concentration in a Few Products
Economic Diversification: urgent but
• 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
Problems of Primary Commodity Trade for Africa, cont’d
2. Price Instability => Foreign Exchange Earmings
– 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
See chart on G-7 GDP and Commodity Price relationship
African GDP and Commodity Prices, 2000-2009
• 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”
• 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
Problems of Primary Commodity Trade for Africa, cont’d
3. 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;
– 2009: world recession => major price reduction;
– 2010-2014: price recovery;
– See Charts and Tables
Terms of Trade and Mineral Prices
Sub-Saharan Africa, “Terms of Trade”
Annual Percent Change
2002- 2008 2009
Total Value, Exports
Total Value, Imports
Unit Value, Exports
Unit Value Imports
Terms of Trade
10.2 -16.4 +11.3
4. Protectionism in International Markets
• Note protectionism in High Income
• Minimal or no protectionism against fuels and
• affects other DMEs and some LDC agri
exporters the most;
• Affects African producers of Cotton in
• Protectionism for manufactured products
exists and is damaging but has been reduced
over the years
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
5. The Development Implications of Differing Export Activities
Large-Scale Mining or
K-Intensive; high tech.,
limited job creation,
Production Linkages: Strong links (machinery and
equipment) often from MNCs
Backward" (input
in DMEs
"Forward" (output Processing (beyond smelting)
usually "market-oriented"
Final Demand
"Fiscal Linkages"
K-Intensity => high profits for
owners; profit repatriation;
limited jobs => limited income
for locals
Some transport benefits maybe;
environmental costs often;
Some training transferable
Strong in many cases
Agricultural Exports
(e.g. coffee, cocoa, tea)
Simple technology;
labour intensive
Limited but harness-able
because tech is simple,
Limited due to marketoriented processing in
many cases
Strong due to labour
intensity and broad
Limited training; but good
for entrepreneurship
Beneficial investments on
OK, but often not that
Strong sometimes (petroleum)
OK to variable
Foreign Exchange
variable sometimes
Policies f or Increasing Harness linkages where possible; General support for
diversify on a resource base
Net Benefits
High Tech or LowTech Manufacturing;
Plantations; Tourism;…
IV. Trade Policies for Development
1. Import Substituting
2. Export Oriented Development
3. Regional Economic Integration
[To be examined in the next section]
A. Import Substituting Industrialization (ISI)
Basic Character of the Approach:
Industrialization and structural change;
Employment creation in the "modern
Balance of payments considerations:
reduce imports
"Economic Independence"
2. 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"
• Tax advantages of various sorts
• Provision of infrastructure
3. Origins of the approach:
a) Development theorizing, 1943-1960;
b) Experience of the higher income countries
earlier in their histories: (USA, Canada,
Germany, etc.)
c) The Soviet economic model in some cases;
d) The Latin American development experience:
1930s and WW II eras;
e) Classical Economics: the Infant Industry
argument changed to an "infant economy"
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.]
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
• Growth slowed down; inefficiencies with the
approach became overpowering in many
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
– 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
Export-Oriented Development Strategies
1. Basic Character of the Approach
– Definition
– Relationship with other aspects of ExternalOrientation;
– Objectives:
• Achieve accelerated and economically sustainable
growth and development;
• Accelerate high-productivity employment
• Improve income levels
• Relieve balance of payments constraints on
2. Policy Tools or Methods:
– lower tariffs and non tariff barriers (NTBs)
– cut other types of subsidization for old ISI
– 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;
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.
4. 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;
5. 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
• reduced discrimination against nonprotected sectors;
• intensified dynamic effects of
"learning through competition;“
• reduced monopoly-oligopoly power
for domestic firms;
• reduced rent-seeking activities.
• 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;
6. Problems or Difficulties with the
1. 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;
Problems or Difficulties with the Approach, cont’d:
2. May accelerate "resource stripping" if
environmental policies are weak and
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
Problems or Difficulties with the Approach,
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
7. Possible Longer Term Negative
– “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)??
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
Do past prescriptions regarding trade need
To Be Continued………….
Implications for Africa:
New approaches to export diversification are
Regional economic integration re trade is vital;
Improved regional infrastructure is vital
Transitional tariff protection vs. consumer product
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
“ISI” may have some limited potential for
larger African countries at the earlier
stages of their development (now largely
External orientation is advantageous in the
longer term
Asia/China role in world trading system
creates opportunities and challenges for
Regional Integration is vital.
See next topic!