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Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development

Written by: African Development Bank

Article Overview: 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.

Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development

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)

Related Articles
  Export Promotion Strategies for Primary Products: New Approaches to Trade Development in Africa
  Forms of Regional Integration
  Implications of the New Agreement for Africa’s Export Trade
  Export Subsidies by Developed Countries: Barriers to African External Trade
  Benefits of Regional Economic Integration

Article Tags: african countries, agricultural subsidies, domestic economic policy, empirical evidence, export processing zones, exports and imports, external constraints, external debt, external finance, gdp per capita, global trading system, inadequacies, income per capita, marginalization, regional economic integration, sub saharan africa, tariff barriers, western markets, world economy, wto regime



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