In December 2005, at the Second Conference of Chinese and African Entrepreneurs, China’s Premier, Wen Jibao, pledged that China’s trade with Africa would rise to US$100 billion a year within five years. Forget the capital markets, forget FDI, forget the US$40 billion a year aid programme, and forget trade with any other country in the world – this is just trade with China. Assuming that nothing else changed, that could be US$100 billion in 2010, US$100 billion in 2011, and the year after that, and the year after that, and the year after that.
By 2015, just five years later, that would be US$500 billion of trade income – 50 per cent of the trillion dollars of aid that has made its way to Africa in the past sixty years. The difference is, of course, one is laced with bromide, the other steroids.
Economic theory tells us that trade contributes to growth in at least two ways: by exactly increasing the amount of actual goods and services that a country sells abroad, and by driving up productivity of the workforce – our mosquito net maker from Chapter 3, selling 500 nets a week, could perhaps sell 1,000 were he able to export some of them abroad. To do so, his productivity would have to increase, which is good for growth.
The economic benefits of trade are, for the most part, a generally accepted truth (see Dollar; Sachs and Warner; Edwards). However, not all countries that have embraced trade have seen a concomitant rise in their growth. Indeed, countries can be classified into three broad categories: winning globalizers, who have increased trade and seen increased growth; non-globalizers, who eschew trade and have, unsurprisingly, seen little accompanying growth; and, paradoxically, the losing globalizers, who have increased trade but seen no associated growth. Tragically, many African countries fall into this third group. Why?
It all comes down to politics. In an uncertain world, Western countries (notably France and the US) are fearful of relying on other nations for their food in the event of a global war. Moreover, elected Western politicians have remained keen to protect their agricultural markets, and win the backing of the powerful farming lobby. The net result is a protective world of trade restrictions and barriers thrown up around the West, to keep African (and other developing regions’) produce out. But developed markets are crucial, in terms of both purchasing power and size, for African trade, which depends on such countries for much of its export revenue.
The members of the Organization of Economic Cooperation and Development (OECD) – a club of rich nations – spend almost US$300 billion on agricultural subsidies (based on 2005 estimates). This is almost three times the total aid from OECD countries to all developing nations (of course, some aid advocates suggest compensating Africa for this imbalance with more aid). Estimates suggest that Africa loses around US$500 billion each year because of restrictive trade embargoes – largely in the form of subsidies by Western governments to Western farmers.
In the United States alone, the total annual amount of farm subsidies stands at around US$15 billion, and that number is rising. As a share of farmers’ income, subsidies rose from around 14 per cent in the middle of the 1990s to around 17 per cent today. The 2002 US Farm Security and Rural Investment Act gave US farmers nearly US$200 billion in subsidies for the subsequent ten years – US$70 billion more than previous programmes, and represented as much as an 80 per cent increase in certain subsidies.
The Europeans are just as protective. The Common Agricultural Policy (CAP) eats into around half the European Union’s budget of €127 billion (direct farm subsidies alone are worth nearly €40 billion), and EU subsidies are approximately 35 per cent of farmers’ total income. What this means is that each European Union cow gets US$2.50 a day in subsidies,1 more than what a billion people, many of them Africans, each have to live on every day.
For the West, it would appear that everything is sacred: steel, cotton, sugar, rice, wheat, corn, soybeans, honey, wool, dairy produce, peanuts, chickpeas, lentils and even mohair. These subsidies have a dual impact. Western farmers get to sell their produce to a captive consumer at home above world market prices, and they can also afford to dump their excess production at lower prices abroad, thus undercutting the struggling African farmer, upon whose meagre livelihood the export income crucially depends. With the millions of tons of subsidized exports flooding the market so cheaply, African farmers cannot possibly compete.
Look at what has happened to two of Africa’s chief exports: cotton and sugar, both of which have to contend with their Western counterpart producers.
In 2003, US cotton subsidies to its farmers were around US$4 billion. Oxfam has observed: ‘America’s cotton farmers receive more in subsidies than the entire GDP of Burkina Faso, three times more in subsidies than the entire US aid budget for Africa’s 500 million people.’
Yet, the livelihoods of at least 10 million people in West and Central Africa alone depend on revenues from cotton, including some 6 million rural households in Nigeria, Benin, Togo, Mali and Zimbabwe.
In May 2003, trade ministers from Benin, Burkina Faso, Chad and Mali filed an official complaint against the US and the EU for violating WTO rules on cotton trade, claiming that their countries together lost some US$1 billion a year as a result of cotton subsidies.
In Mali, more than 3 million people – a third of its population – depend on cotton not just to live but to survive; in Benin and Burkina Faso, cotton forms almost half of the merchandise exports. Yet thanks to subsidies, Mali loses nearly 2 per cent of GDP and 8 per cent of export earnings; Benin loses almost 2 per cent of its GDP and 9 per cent of export earnings; and Burkina Faso loses 1 per cent of GDP and 12 per cent of export earnings. Moreover, a 40 per cent reduction in the world price (that is, equivalent to the price decline that took place from December 2000 to May 2002) could imply a 7 per cent reduction in rural income in a typical cotton-producing country in West Africa like Benin.
The case of sugar is a similarly sour tale.
The US sugar industry receives US$1.3 billion of support per year, European Union producers receive US$2.7 billion, and in the two years between 1999 and 2001 the OECD supported its sugar farmers to the tune of US$6.4 billion, an amount more than the total value of sugar exports from developing countries, and 55 per cent of the US$11.6 billion annual world sugar trade.
Like cotton, sugar subsidies hurt Africa. The charity Oxfam estimated the regime has deprived Ethiopia, Mozambique and Malawi of potential export earnings of US$238 million since 2001. The costs of Mozambique’s sugar losses equalled one third of its development aid from the EU and its government’s spending on agriculture and rural development. The EU also supports its producers by blocking the entry of developing-country imports into its markets with tariffs of more than 300 per cent. Oxfam estimated that Malawi could have significantly increased exports to the Union in 2004 but that market restrictions deprived it of a potential US$32 million in foreign-exchange earnings, equivalent to around half the country’s public-healthcare budget.
It’s not just developed countries that are guilty of distorting trade markets. China is reported to support its cotton sector by an estimated US$1.5 billion annually. Turkey, Brazil, Mexico, Egypt and India put US$0.6 billion into their cotton sectors during 2001/2002.
But perhaps the most egregious examples come from Africa itself. African countries impose an average tariff of 34 per cent on agricultural products from other African nations, and 21 per cent on their own products. As a result, trade between African countries accounts for only 10 per cent of their total exports. By contrast, 40 per cent of North American trade is with other North American countries, and 63 per cent of trade by countries in Western Europe is with other Western European countries.
The glaring trade inequity has led to a lot of talk, but despite round after round of the World Trade Organization negotiations – Uruguay, 1994, Doha 2001 and on-going, et al. – all the chatter has amounted to little for Africa.
Perhaps the most notable Western efforts to level the trade playing field have been the US African Growth and Opportunity Act (AGOA)2,3 of 2000, and Europe’s Everything But Arms (EBA)4 of 2001, neither of which can claim to have made an overwhelming impact on the state of play. This may, to some extent, explain why Africa’s share of global trade remains at around 1 per cent (having fallen from a high of 3 per cent sixty years ago), even though Africa is commodity-rich. It seems truly bizarre that such a large continent in population terms is pretty much irrelevant in trade terms.
AGOA opens US markets to a range of African products, especially textiles, on the basis that freer trade will create jobs and reduce poverty in many sub-Saharan Africa countries. For example, the average duty for garment imports into the US stands at 17.5 per cent, but apparel imports from the twenty-five eligible African countries into the US are duty-free. These imports are, however, capped at a limit of 3 per cent of total US apparel imports.
In 2003, AGOA exports were worth more than US$14 billion (£7.4 billion). While the headlines look strong, the devil, again, is in the detail. Only a handful of African countries have benefited – and even then, most of them are the oil-rich and larger economies. Nigeria, South Africa, Gabon and Lesotho account for more than 90 per cent of AGOA duty-free benefits, and of the total US$14 billion export value, petroleum products accounted for 80 per cent, with textiles and clothes accounting for US$1.2 billion.
The picture is not much rosier with the EBA. The EBA is designed to give duty- and quota-free access for the forty-eight countries (thirty-three African nations) described by the United Nations as ‘least-developed’. But in 2001, trade in goods given preference for the first time under its auspices amounted to just 0.02 per cent of exports by least-developed countries to the European Union. The narrow range of goods eligible, coupled with the amounts, dramatically minimize these schemes’ effectiveness. The process can be arbitrary and absurd. For instance, whereas T-shirts produced in war-torn Somalia are welcomed under the EBA, shirts made in the equally deserving Kenya are excluded.5
As things stand in 2008, the European Union is still Africa’s largest trading partner (26 per cent), followed by the United States (18 per cent), and then China at 11 per cent (Asia excluding China is 11 per cent as well). It is clear that however good their hand may seem, when trading with the West the cards are stacked against Africa, and will always be. Western political imperatives against freer trade continue to reign, and efforts to depose the current regime are proving futile. If the West wants to be moralistic about Africa’s lack of development, trade is the issue it ought to address, not aid. Of course, such are the West’s demands that even if all its trade barriers were lifted, Africa no longer has the technological equipment and know-how to compete on many products where it once had a comparative advantage. Together with environmental and labour issues, these are now serious barriers to trade.
Although Europe remains Africa’s main trading partner, its share of the region’s foreign trade has dropped to 26 per cent from 40 per cent in the ten years from 1996. It’s time that Africa faced up to this fact and moved on; time that Africa sat down at another table, with another set of players – ones who deal a fairer deck. For now, China again is just one such player.
China is motoring. It’s getting richer and hungrier. Since 1998 China has accounted for nearly the entire increase in global consumption of major commodities such as copper, tin and aluminium. But China also needs to feed itself, clothe itself and, as discussed, fuel itself. All this requires vast amounts of grain, beef, cotton and oil, the very things Africa is poised to provide. What China so desperately needs, Africa has: tea in Kenya, coffee in Uganda, beef in Botswana, cashews in Mozambique, cotton in Mali, oil in Gabon – the list goes on and on and on. And, in addition, Africa also accounts for nearly half of the world’s production of bauxite, chrome and diamonds, for more than half of its cocoa and platinum, and nearly three quarters of its cobalt.
Over recent decades, China has registered unprecedented rates of economic growth – to the point that, today, China is the world’s third-largest economy. It has achieved the seemingly impossible – moving vast numbers of its people from the depths of poverty,decidedly into the ranks of the middle class. Yet the 300 million in China’s rising middle class are just a fraction of its 1.2 billion population. As China’s middle class continues to grow, so too will its appetite.
For Africa, this is a golden opportunity.
But, in 2008, Sino-African trade was a paltry 2 per cent of China’s total; fortunately these numbers are growing. Between 1990 and 2000, trade between China and Africa grew by 450 per cent. From 2002 to 2003, it rose over 50 per cent to almost US$12 billion and then nearly quadrupled by 2007, jumping to US$45 billion. China is now the continent’s third most important trading partner, behind the US and France, and ahead of the UK.
As with FDI, the impressive rise in trade between China and Africa has primarily been driven by China’s voracious appetite for raw materials, and most notably oil. But, although oil and mining have dominated trade between the two continents, there are now welcome signs of diversification, such as agricultural commodities. Burkina Faso sends a third of its exports, almost all of which are cotton, to China, compared with virtually nothing in the mid-1990s.
The trade figures sound fantastic – doubling, tripling and even quadrupling; on paper it looks like a bonanza. But the reality is quite different. There are still too many African countries standing by the sidelines, unable or unwilling to capitalize on the obvious opportunity staring them in the face. A mere five oil- and mineral-exporting countries account for almost 90 per cent of Africa’s exports to China (in order of importance, Angola, Sudan, Equatorial Guinea, Gabon and Mauritania); this at a time when China’s demand for grain, meat (China’s meat consumption has doubled in just three years) and other foodstuffs is rising at an unprecedented rate. With only 7 per cent of the world’s arable land, and a billion-plus people to feed, China will have to shop everywhere. And it is doing everything it can in Africa to make up the numbers – offering duty-free treatment to some goods (increasing the number of tariff-free imports to over 400, from 190), establishing trade and economic cooperation zones, and going so far as to set up a China–Africa Joint Chamber of Commerce and Industry.
For some reason, many African countries seem to be reluctant to embrace this eager suitor. There are fears that an African fixation on trade with China, and catering to China’s all-pervasive needs, will solidify the continent’s status as only a commodity exporter, and history has shown that no country has become rich by relying on its agricultural exports alone (save, perhaps, New Zealand). But this is not about perfection; it’s about survival – and survival today.
The theory would go that the trajectory of economic development starts with agricultural production (African states dominate this lowest rung of the economic ladder, mirrored by their lowest per capita incomes), moves up the curve to manufacturing (currently dominated by Asia), then services, ending up with high-value-added research and development (the latter two stages populated with the world’s most economically rich and industrialized countries – the US, Singapore, Germany, etc.). And, obviously, it should be every country’s dream to attain the highest income levels. But many of the most successful Asian countries have made the transition from commodity exporter to manufacturing powerhouse. The question is, what has happened to Africa?
While Asian economies were scaling the manufacturing ladder, African nations have (all but a few) been relegated to agricultural producers (but even so are sometimes unable to feed themselves). African labour is not more expensive than Asian labour – the converse is, in fact, true. On pure wages alone, Africa should dominate the world’s manufacturing slot (manufacturing does tend to employ lowly skilled workers, so Africa’s poor education showing ought not to hamper its prospects of becoming a manufacturing engine). But once the infrastructure costs are factored in, Africa is a let-down in spades.
Although Africa is the centre of the universe on the area-accurate Peters Projection Map (occupying a much-coveted proximity to the industrialized hubs of Europe and America), it takes way too long to transport goods on its unnavigable rivers, impassable bridges and pot-holed roads. Besides, to state the obvious, no profit-seeking company can afford to bet on Africa’s unreliable power and erratic telecommunications as the source of its manufactured inputs. Of course, were Africa’s dire infrastructure predicament remedied, its chance for higher-value trade (thereby distancing itself from the tag of commodity exporter) could dramatically improve. Thankfully, as discussed in Chapter 7, the recent foray into Africa by China and others means there is some hope that the infrastructure will be there for Africa to move up the development curve.
There are also concerns – given that trade works both ways – that Africa is susceptible to China flooding the markets with cheap manufactured goods. There is clearly the risk that cheaper Chinese goods can undercut African manufacturers, putting our mosquito net producer back out of business. He is definitely out of business in the aid scenario, and could be out of business in the Chinese trade scenario, but the important point here is much more nuanced. Crucially, under the aid regime there is nothing else for him to do – he lives in a sterile landscape, opportunities are scarce, and corruption is rife. In the trade scenario, even with a modicum of corruption, opportunities abound – there is a thriving economy, people are buying and selling. Our mosquito net producer, who’s forced to stop making mosquito nets, might start making hair nets for a burgeoning middle class; or may in another way need to retool. The point is, as hardhearted as it sounds, it is better to face economic hardship in a thriving economy with prospects than to be confronted by it in an aid-dependent economy, where there are none. Mosquito man lives.
Dongo can benefit from trade
Dongo can clearly benefit from more trade – trade creates employment, improves trade balances, lowers the price of consumer goods through greater imports and generates income for the country’s exporters, but, perhaps most importantly, trade produces income that accrues to governments through tariffs and income taxes.
However, common sense should tell Dongo that it would be foolhardy to hitch itself to China alone. Certainly Africa makes up only 2 per cent of China’s trade, so obviously there is scope for expansion. But, equally, there is a lot of scope for Africa’s trade partnerships to develop elsewhere, and although China has emerged as Africa’s preeminent partner, it is by no means the only one.
India, too, is anxious to trade with Africa. Although the Indian Junior Commerce Minister, Jairam Ramesh, remarked that ‘there is no race between us, the Chinese have left us far, far behind’, Indo-African trade has risen from US$1 billion in 1991 to US$30 billion in 2007/2008.6
At the first India–Africa Forum, attended by eight African heads of state, calling for a ‘new architecture’ in the Indo-African partnership, India’s Prime Minister, Manmohan Singh, announced duty-free access to Indian markets for the world’s fifty least-developed countries (LDC), thirty-four of which are African. India has pledged preferential market access on 92.5 per cent of all LDC exports, including diamonds, cotton, cocoa, aluminium ore and copper ore.
In just five years (since 2003), African trade to Asia has grown by almost 30 per cent a year.
According to the World Bank economist Harry G. Broadman, ‘skyrocketing’ Afro-Asian trade represents the beginning of a change in trade patterns. Although most trade is still between Africa and Europe, Japan or North America, Broadman notes: ‘what’s going on in China, India, and Africa is part of the broader trend in the world of rapidly growing South–South investment and trade – trade among developing countries’.
But, like charity, trade begins at home. Africa need not look so far away: it can look to itself. Although since the 1970s there has been a proliferation of economic and trade agreements – the Preferential Trade Agreement, Common Market for Eastern and Southern Africa, Southern Africa Development Community, Economic Community of West African States, East African Community and, recently, New Partnership for Africa’s Development – most of these agreements have had a lot of bark but very little bite. No doubt political intransigence and myopia have once again prevailed.
There are numerous policies the African leadership should seriously embrace to boost trade and increase regional cohesiveness and integration. A simple decree to remove inter-country trade barriers, which average more than 30 per cent, would be a good start. It is bizarre that shipping a car from Japan to Abidjan, in Ivory Coast, costs US$1,500, whereas moving it from Abidjan to Addis Ababa, in Ethiopia, costs US$5,000.7
African leaders must also take a broader view on what a trading market means. There are 10 million people in Zambia, but 150 million in the Southern African region alone. Similarly, Kenya has almost 40 million people, but with Uganda and Tanzania the East African market is about 100 million. How much more economically (and politically) powerful these regions would be if leaders learnt to think big. One day soon, hopefully, Dongo could become part of a free-trade, single-currency, vibrant economic zone – think America, think European Union. But also think East Asian Miracle, where regional integration such as the Association of Southeast Asian Nations played a vital role in ensuring the region’s startling success.
Trade is not the panacea of Africa’s woes – but with the prospect of US$100 billion in trade income each year from China alone, it is bound to put a dent in them.
Trade need not just be international. Take a country like Pakistan, for example. With little trade to show (Pakistan’s trade share of GDP in 2006 was only 37 per cent – less than half the low-income group mean trade openness ratio), it has registered solid growth rates – in 2006, Pakistan’s GDP growth was around 7 per cent. How has it done this? The simple answer is, by generating domestic demand for goods and services locally produced (that is, its non-tradeable sector).
African countries must also focus on their non-tradeable sector by encouraging their entrepreneurs (of course, FDI can boost the non-tradeable sector also). The entrepreneurs (their small and medium-sized enterprises) are the life-blood of any economy, and the crucial emerging private sector in poor countries is the engine for private-sector-led growth. Yet, although small and medium enterprises (SMEs) are a significant part of the total employment in the most developed and rapidly developing countries, their share across African economies (rather disturbingly given the abundance of labour) lags behind. Whereas SMEs (defined as formal-sector enterprises with up to 250 employees) account for as much as 60 per cent across countries like Japan, Denmark and Ireland (and more than 80 per cent in Italy and Greece), Zambia’s share of SMEs is 40 per cent, and Cameroon’s just 20 per cent. If these two African countries are anything to go by there is clearly much scope for improvement across the board.
Entrepreneurs need a receptive and user-friendly environment within which to thrive, but they also need money. Entrepreneurial firms are more likely to spring up in countries where there is better access to finance (as well as business environments where it’s easier to do business). Fortunately, there are other non-aid ways to finance themselves and contribute to their countries’ development.