Trade and Development in the
African Context
ECON 3510
June 8, 2010
A. R. M. Ritter
(Text, Chapters 18)
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
IV. Trade Policies for Development
Import Substituting Industrialization
Export Oriented Development
Regional Economic Integration (Nest Topic)
Some Indicators for Economic and Social Progress for
Some African Countries
Mauritius
S. Africa
Ghana
Kenya Ethiopia
Exports of G&S per capita,
$US, 2005
1,100.
1,456.
179.
109.
16.20
GDP per capita PPP,
2005, $US
12,215.
11,456.
2,480.
1,240.
1,066.
Human Development Index,
Rank among Countries
0.804
#65
0. 674
#121
0.553
#135
0.521
#148
0.406
#169
Human Poverty Index, Rank
among LDCs (103 total)
#27
#55
#65
#60
#105
Implications? Exports provide an essential fuel for economic and social development
I. 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;
1980s and 1990s;
1960s and 70s;
2000s
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
increased productivity
• Stimulus to competition; curbs monopoly
power
• Technical transformation and transfer:
– from exports into imported capital equipment
that could not be produced domestically
– (a “magical transformation”)
Basically, exports
•earn foreign exchange,
•permit imports,
•permit technologivcal transfer,
•generate jobs and incomes,
•generatestax revenues,
& finance social programs
•support infrastructure development
“Trade Pessimists:”
Arguments against trade as an engine of growth and development
There are Numerous Problems re trade:
– Declining Terms of Trade ??
– Price volatility for many export products
– Protectionism in high income countries: tariff & non-tariff
barriers;
Still relevant? Only partly
– Enclave character of some export activities
– Low income elasticities of demand for some producs e.g.
coffee, tea, cocoa,
• Synthetic substitutes
– Over-dependence on single export products and
vulnerability to international business cycle
The Varying Development Implications of Some Types of Export Activity
Small Scale "Peasant"
Agricultural Exports
(e.g. coffee, cocoa, tea)
K-Intensive; high tech., limited job Simple technology; labour
creation,
intensive
Strong links (machinery and
Limited but harness-able
equipment) often from MNCs in
because tech is simple,
DMEs
Large-Scale Mining or
Petroleum
Technology
Production Linkages:
Backward" (input
provision)
"Forward" (output
processing)
Final Demand
Linkages
Externalities
Processing (beyond smelting)
usually "market-oriented"
K-Intensity => high profits for
owners; profit repatriation;
limited jobs => limited income
for locals
Some transport benefits maybe;
environmental costs often;
Some training transferable
elsewhere
Strong in many cases
"Fiscal Linkages"
(tax revenues for
support of Gov't
programs
Strong sometimes (petroleum)
Foreign Exchange
variable sometimes
Earnings
Policies f or Increasing Harness linkages where possible;
diversify on a resource base
Net Benefits
Limited due to marketoriented processing in
many cases
Strong due to labour
intensity and broad
ownership
Limited training; but good
for entrepreneurship;
beneficial impacts on
infrastructure
OK, but often not that
strong
OK to variable
High Tech or Low-Tech
Manufacturing;
Plantations; Tourism;…
III. Problems of Primary Commodity Trade
for Africa
1. Export Concentration in a Few Products
Diversifying Export Patterns
2. Price Instability => Foreign Exchange
Volatility
Stabilizing Foreign Exchange Earnings
3. Declining Raw Material Prices?
4. Protectionism in Potential Markets
Problems of Primary Commodity Trade for Africa, cont’d
1. Export Concentration in a Few Products
•
•
•
•
The historical pattern
Recent Trends
The evidence
The problem:
(price instability; price trend; market dependence)
• 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
Export Concentration, Selected Countries. 2005
(Percentage of Total Exports)
Country
Botswana
Chad
Ghana
Kenya
Nigeria
S. Africa
Tanzania
Zambia
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
2. Price Instability => Foreign Exchange 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
• 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;
Explain
– 2009: wor;ld recession => major price reduction;
– 2010: price recovery;
– See Charts and Tables
Sub-Saharan Africa, Trade and Price Indicators,
Annual Percent Change
19922001
2002- 2008 2009
2011
2010
Total Value, Exports
+3.6
13.7
23.5
-30.8
+27.1
Total Value, Imports
3.4
13.9
21.8
-17.3
17.2
Unit Value, Exports
-0.9
10.0
23.2
-25.7
+18.9
Unit Value Imports
-0.7
6.3
11.8
-11.1
6.9
Terms of Trade
-0.2
3.5
10.2 -16.4 +11.3
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
• Protectionism and unfair trading practices
among Developing Countries
• Note again China’s exchange rate policy and
manufactured export domination
• Protectionism among African countries
IV. Trade Policies for Development
1. Import Substituting Industrialization
2. Export Oriented Development
3. Regional Economic Integration
[To be examined in the next section]
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"
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"
activities
• 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" argument.
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 Brazil with Nicaragua]
5. Results:
– Initially, from 1945 to around 1970.
reasonably good especially for larger
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.
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;
– 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
II.
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
creation
• Improve income levels
• Relieve balance of payments constraints on
development
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;
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)
– 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 possible;
•
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
Approach:
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;
6. Problems or Difficulties with the Approach, cont’d:
• Trade diversion may harm some partners
What is “Trade Diversion?
• May accelerate "resource stripping" if
environmental policies are weak and
inappropriate;
•
Some countries may not be in a position to
benefit quickly if human resources, institutions
and other policies are weak.
•
Blocked by protectionism in high income
countries?
6. Problems or Difficulties with the Approach, cont’d:
• The China factor:
Implementation may pose difficulties especially
with competition from China, with its “beggarthy-neighbour” under-valued exchange rate,
giving it an unfair advantage
in domestic African markets
and in foreign markets that African countries could
be cultivating. ;
•
•
Vested interests may block implementation;
Major gains in employment and wages may
be slow in coming and may undermine
resolve to continue the approach
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?)
Possible cultural impacts (probably most serious
for small country-partners)
Conclusion:
“ISI” may have some potential for larger
developing countries at the earlier stages
of their development (now largely past)
External orientation is advantageous in the
longer term