Abstract This paper reviews Africa’s role in the global trading system and discusses the constraints and options for Africa to move from its current marginalization to an exportled approach to economic development. It discusses the impact of regional economic integration on intra-African trade, reviews the WTO regime, analyses the internal and external constraints to African trade, including the controversy over Western agricultural subsidies and tariff and non-tariff barriers to African trade in Western markets. It then discusses new approaches to trade development in Africa with special emphasis on the role of export processing zones and concludes that there is urgent need for Africa to diversify its exports through a systematic structural transformation.
Introduction The socio-economic conditions in African countries deteriorated drastically during the 1980s, a decade that is widely regarded as Africa's lost decade of development opportunities. Available empirical evidence shows that, in sub-Saharan Africa, income per capita declined at an annual rate of 2.4%; Africa's real gross domestic product (GDP) per capita fell by 14.3%, investment contracted by 15%, while exports and imports declined drastically during the period. By 1990, the total external debt of African countries was in excess of US$270 billion, leading to a crushing debt-service burden and further aggravating Africa's development problems.
Many reasons can be adduced for the dismal economic performance of African countries in the 1980s. While domestic economic policy inadequacies cannot be ignored, it seems certain that external economic conditions played a significant role. According to the World Bank's World Development Report 1990:
Adverse developments in the world economy also had a part in the falling growth rates of the 1980s. Weak external demand, declining terms of trade, a diminishing supply of external finance, and a great increase in the volatility of interest rates combined to produce an unusually adverse climate.
In fact, in the area of external economic relations, we can identify three main issues that have had significant impact on African economic performance. They are (i) the escalating external debt and crushing debt-service burden; (ii) rising trade deficits; and (iii) the declining inflow of concessional finance and deteriorating terms and conditions of loans.
These issues are interrelated and inextricably linked. However, the issue of commodity trade seems to be the most fundamental. This is because it is invariably an imbalance in merchandise trade that leads to financing imperatives like borrowing. Specifically, any deficit in the trade or current account balance brings about the need to finance it either by external borrowing (leading to escalation of debt) or other non-debt creating financial flows.
The high susceptibility of most African economies to trade and current account deficits arise from the following:
· extreme volatility of primary commodity prices; · high dependence on the exportation of a limited range of primary commodities; · high external trade dependence; · low world share; · declining terms of trade; and · excessive export earnings variability and falling export revenues.
Prices of primary commodities, particularly tropical products and food crops, fluctuate sharply in response to changes in global supply and demand. During the decade of the 1980s, prices of many primary commodities exported by African countries fell to their lowest levels since the end of the Second World War. Many countries in Africa depend on the exportation of a limited range of primary commodities. Some countries like Nigeria, Algeria and Libya obtain the bulk of export revenues from oil. In fact, many African countries obtain over half their export earnings from 1 or 2 primary commodities. In 1988, Uganda derived 100% of its export receipts from primary commodities while sixteen other countries obtained over 90% of their export revenues from primary commodities.
It has been found that exports account for almost one-third of the GDP in Africa while imports account for a slightly higher proportion. The typical African country therefore exhibits a high degree of "trade openness" which renders it unduly susceptible to external shocks. The adverse effect of this on Africa is increased by the continent's low market share of world trade. Indeed, Africa now accounts for less than 2% of the world export trade.
There is thus an unfortunate asymmetry -- because of its low market share, Africa has little or no influence on international trade yet because of its openness, it is highly susceptible to internationally transmitted shocks. The situation is further worsened by the phenomenon of declining terms of trade, which became quite pronounced in the 1980s when the prices for many primary commodities collapsed. By 1989, average commodity prices were still 33%
lower than in 1980 in spite of a slight recovery in prices in 1988. The World Bank estimates that the fall in commodity prices during the 1980s cost sub-Saharan Africa 15% of the real purchasing power of exports.
All these factors combined to bring about a drastic fall in Africa's export earnings and a rising trade and current account deficit in the 1980s. In 1988, Africa's export trade totaled US$65.3 billion while its imports amounted to US$65.9 billion. Therefore, in 1988, the import surplus (or trade deficit) amounted to US$0.6 billion while the ratio of the import surplus to total export earnings was an approximately 1%. In year 2000, exports of goods and services totaled US$116.3 billion while imports amounted to US$106.6. Thus, the ratio of export surplus to total earnings was 8.3 percent; see World Bank (2002).
It should be pointed out that the increasing marginalization of Africa in world trade has been aggravated by the excessive dependence of African countries on the European export market. In 1988, the European Community alone absorbed over 60% of exports of many commodities from Africa. Yet, intra-African trade accounted for less than 6% of Africa's total trade. This low degree of intra-regional trade compares unfavourably with Latin America (15%) and Asia (43%). With the industrialized countries placing more and more tariff and non-tariff barriers on the manufactured exports of developing countries and the attainment of a single European market, it is obvious that continued over-dependence on the European market will become even more unrealistic and counterproductive. In fact, until African countries resolve to increase intra-regional trade, the continent will continue to be marginalized in world trade and become increasingly irrelevant in global economic affairs.
A solution being considered by African countries is that of economic integration of the continent, specifically, by the establishment of a Continental Customs Union or Common Market. Believing that intra-African cooperation and trade are essential to the economic survival of the continent in the years to come, the Heads of States and Government of the Organization of African Unity signed a treaty in June 1991 to establish an African Economic Community by the year 2025. The need for such economic integration is supported by many academic economists and some international organizations.
According to UNCTAD (1994), there is little doubt that economic co-operation and integration, in the long-term perspective, is crucial to the economic development and survival of African countries. Indeed, very few African countries possess the resources and market size necessary for viable industrialization and accelerated development.
Fewer still can participate on their own in the rapid technological revolution that is sweeping the world today.
The remainder of the this paper concentrates on a discussion of the impact of regional economic integration on intra-African trade (Chapter II); a review of the WTO regime, with special emphasis on the implications of the WTO regime for African countries and African trade expansion (Chapter III); an analysis of internal and external constraints to African trade, the controversy over Western agricultural subsidies, and tariff and nontariff barriers to African trade in Western markets (Chapter IV); and a discussion of new approaches to trade development in Africa with special emphasis on the role of export processing zones (Chapter V). The final chapter provides some concluding remarks.
African Development Bank Economic Research Working Paper Series Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development Milton A. Iyoha Professor, Department of Economics & Statistics University of Benin, Nigeria Economic Research Working Paper No 77 (August 2005)
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