Tuesday, January 05, 2016

Africa Rose and Fell

In recent years, economists with as much acumen as astrologers predicted that Africa was on the threshold of an economic boom. Pointing to a decade of high growth and increased foreign investment, this argument held that the continent was finally on track to leave its long years of poverty and under-development behind. Some even prophesised that Africa could become the next global economic powerhouse, following in the footsteps of East Asia. Africa was rising. Of course, socialists argued that Africa’s growth was not be real, lasting or beneficial for its people and the economic forecasters shouldn’t focus upon the number of mobile phones people possessed or count the new African billionaires.

Some more astute economists suggested the media in search of what was going on should look to see if manufacturing was increasing as a percentage of GDP, if the goods African countries exported were becoming more valuable — finished products rather than raw materials.  In 2011, a UN report looked into these very questions, and found that most African countries are either stagnating or moving backwards when it comes to industrialization. Oil and commodity prices are plunging, China’s demand is slowing down, and GDP growth rates across the continent are in steep decline. Reflecting these trends, the IMF has cut its 2015 projection for growth in sub-Saharan Africa from 4.5 to 3.75 per cent, concluding that the decade-long commodity cycle that had raised African export revenues “seems to have come to an end”. With increasing numbers of young, better educated people, experts now worry about how Africa will produce enough jobs. In November, the Economist commented that “many African countries are de-industrialising while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.”

Nigeria and South Africa, which together account for 55 per cent of the 48 sub-Saharan African nations’ GDP, and which have both been particularly hard hit by falling mineral and oil prices. Nigeria’s growth rate has slumped to 2.4 per cent in the second quarter, the slowest pace in at least five years, while South Africa’s economy contracted by an annualised 1.3 per cent as power shortages curbed output. The fall in commodities prices has hit other oil producers, too, such as Angola and Ghana, while Zambia, the continent’s second-biggest copper producer, has suffered as copper prices have plunged to a six-year low. The end of commodities boom, has now been laid bare the actual failure of Africa’s development.

One reason Africa faces difficulties is that it followed the advice of other economists looking in their crystal balls. The World Bank, the IMF, and the university economics academics over the last 30 years advocated the free market and free trade, denouncing the use of policies such as temporary trade protection, subsidised credit, preferential taxes, and publicly supported Research and Development. They said state intervention in the economy does more harm than good, because governments shouldn’t be in the business of trying to “pick winners,” and that this is best left to entrepreneurs and market forces. African politicians s were told to simply privatise, liberalise, and deregulate, to get the so-called economic fundamentals right and the capitalist system would take care of the rest. This advice from the economists neglected the actual history of how rich countries themselves have effectively used industrial policies for 400 years, beginning with the UK and Europe and ending with the “four tigers” of East Asia and China. This inconvenient history contradicted free market maxims and so has been largely stripped from the economics curriculum in most universities. The London School of Economics’ Robert Wade noted that, by the way, industrial policy never really went away in the rich countries, even if the right-wing in the US refuses to acknowledge its own federal programmes such as the Defence Advanced Research Project Agency (DARPA), the National Institutes of Health (NIH), or the National Institute of Standards and Technology (NIST), as “industrial policy.” As a result, African countries abandoned these key tools, which they could have used to build up their domestic manufacturing sectors. Both North America and the EU have adopted more industrial policies in recent years. Now, belatedly, the African Union, and the UN Economic Commission on Africa (ECA) have been promoting what it calls “smart protectionism,” suggesting that trade policy in Africa should be “highly selective”, with special treatment for certain sectors to advance national development goals.

However, regardless of this new approach, many African countries have foolishly signed on to World Trade Organisation rules that have clearly restricted their “policy space” for using such policies. And while WTO rules still afford them some limited provisions, this is not the case under a raft of other newer and further-reaching regional free trade agreements and bilateral investment treaties promoted by rich countries over the last 15 years. And even more are on the way: Some of the biggest deals on the immediate horizon are the Trans-Pacific Partnership (TPP), the Trade in International Services Agreement (TiSA), and the EU’s free trade deals with several African regions, known as Economic Partnership Agreements. Despite seeing a renewed appreciation of national industrial policy, trade negotiators from the rich countries are twisting arms, cajoling developing countries into signing new treaties and agreements that will restrict their use of industrial policies. Many developing country leaders either buckle under such pressure or willingly sign on in the hope that they can export more of their primary commodities into rich country markets in the short-term, even if this means foregoing long-term industrialisation.

African nations who are serious about pursuing industrial development will have to back-track, renegotiate, and re-design their previous international trade commitments, and refuse to sign new ones that put them at a disadvantage. Offending more powerful trading partners and big foreign investors would likely invite serious short-term consequences, including lawsuits, threats to cut off foreign aid and trade preferences, and possibly lower foreign investment. That is a definite. You don’t need a doctorate in economics or the ability to tell the future to foresee that happening.

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