Yves here. Africa followed the economic advice of brand name Western institutions like the World Bank. The resulting setbacks should lead any government to lock the door when these snake-oil salesmen come calling.
Advanced economies looting Africa is so long-standing that it verges on a “dog bites man” story. Nevertheless, I was gobsmacked to learn from Nicholas Shaxxon’s Treasure Islands that the poor continent was a net capital exporter, thanks to multinational transfer price gaming and corrupt elites gifting and sending their plunder abroad to tax havens.
Similarly, many readers may recall the factoid of perhaps five years ago, which is likely still true, that pretty much all of the poverty reduction in developing economies resulting from trade liberalization took place in China. That’s even worse than it seems. Economic restructuring is politically and socially disruptive, since the process created winners and losers. That means disruptive fighting with no net gain to reduce the pain of destabilization. This post from Jomo adds to that sorry picture by showing how freer trade make Africa worse off.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
Africans have long been promised trade liberalisation would accelerate growth and structural transformation. Instead, it has cut its modest production capacities, industry and food security.
Berg Helped Sink Africa
The 1981 Berg Report was long the World Bank blueprint for African economic reform. Despite lacking support in theory and experience, Africa’s comparative advantage was supposedly in export agriculture.
Once obstructionist government interventions were gone, farmers’ previously repressed productive potential would spontaneously achieve export-led growth. But there has been no sustained African agricultural export boom since.
Instead, Africa has been transformed from a net food exporter in the 1970s into a net importer. Over the next two decades, its share of world non-oil exports fell by more than half from the early 1980s.
Sub-Saharan Africa (SSA) export growth from the late 20th century has mainly been due to foreign direct investment (FDI) from Asia, especially China and India. Nevertheless, Africa’s share of world exports has declined.
High growth in Asian economies contributed most to raising primary commodity prices, especially for minerals, until they collapsed from 2014.
Underdeveloped Agriculture
African agriculture has been undermined by decades of low investment, stagnation and neglect. Public spending cuts under structural adjustment programmes (SAPs) have also depleted infrastructure (roads, water supply, etc.), undermining output.
SAPs’ neglect of infrastructure and agriculture left many developing nations unable to respond to new agricultural export opportunities. Meanwhile, projections ignored the fate of African food security.
SAPs undermined the already poor competitiveness of African smallholder agriculture. Unsurprisingly, most of the poorest and least developed African countries were projected to be net losers in the Bank’s more ‘realistic’ World Trade Organization (WTO) Doha Round trade liberalisation scenarios.
Uneven partial trade liberalisation and subsidy reduction have mixed implications. These vary with the food shares of national imports and household spending.
Wishful Development Thinking
World Bank research claimed African countries would gain $16 billion from ‘complete’ trade liberalisation. But this scenario was never envisaged for the Doha Round negotiations – virtually abandoned two decades ago.
Nonetheless, the Bank claimed SSA would gain considerably because “farm employment, the real value of agricultural output and exports, the real returns to farm land and unskilled labor, and real net farm incomes would all rise substantially in capital scarce SSA countries with a move to free merchandise trade”.
Total welfare gains envisaged for SSA minus South Africa were slightly over half of one per cent. But World Bank projections for the overall effects of multilateral agricultural trade liberalisation expected significant losses for SSA.
Gains worldwide would mainly accrue to major food exporters, primarily from the Cairns Group, largely from rich countries. The rich world has long dominated food agricultural exports with indirectly subsidised farming.
Lowering agricultural subsidies in the North has thus raised some imported food prices in developing countries. Also, most African governments cannot easily substitute lost tariff revenue with other new or higher taxes.
After years of trying, developing countries have virtually given up trying to ‘level the playing field’ by cutting OECD governments’ agricultural subsidies, import tariffs and non-tariff barriers.
Gains from Liberalisation?
Greater trade liberalisation in manufactures, enhanced by the WTO non-agricultural market access (NAMA) agreement, has also undermined African industrialisation.
Limited African market access to affluent country markets has been secured through preferential market access agreements rather than trade liberalisation. Mkandawire noted trade liberalisation would entail losses for Africa with the end of European Union preferential treatment under the Lome Convention.
Hence, the likely overall impacts of trade liberalisation on Africa were recognised as mixed and uneven. The economic welfare of SSA – without Zambia, South Africa and members of the Southern African Customs Union – was supposed to rise after a decade by three-fifths of one per cent by 2015!
The Doha agreement envisaged then emphasised manufacturing trade liberalisation. Despite gains for some developing countries, SSA minus South Africa would lose $122 billion as SAPs accelerate deindustrialisation.
SSA minus South Africa would lose $106 billion to agricultural trade liberalisation due to poor infrastructure, export capacities, and ‘competitiveness’. Hence, partial trade liberalisation – and subsidy reduction – have uneven and mixed implications.
Fraudulent Policy Advice
With more realistic assumptions, SSA gains from trade liberalisation would be more modest. As economic growth generally precedes export expansion, trade could help foster virtuous circles but cannot enhance productive capacities and capabilities on its own.
UNCTAD has long emphasised growth’s importance for trade expansion, especially the weak investment-export nexus. This accounts for many countries’ failure to expand and diversify their exports.
Rapid resource reallocation is much more difficult without high growth and investment rates. For Gerry Helleiner, “Africa’s failures have been developmental, not export failure per se”. Dani Rodrik argued Africa’s ‘marginalisation’ is not due to trade performance.
Africa’s export collapse in the 1980s and 1990s involved “a staggering annual income loss of US$68 billion – or 21 per cent of regional GDP”. Former World Bank economist Bill Easterly blamed these lost decades on SAPs.
Nonetheless, “Africa overtrades compared with other developing regions in the sense that its trade is higher than would be expected from the various determinants of bilateral trade”.
Trade liberalisation has significantly reduced trade, industrial, technology and investment policy space for developing countries. Unsurprisingly, food security and manufacturing have been especially badly hit.
I recall reading in Bad Samaritan how it was only by ignoring free trade that developing economies managed to build an economy. South Korea, as featured in that book, broke all the rules (trade restrictions, tariffs, capital controls, and more) and is now regarded as a success story.
comparative advantage is pure rubbish. this is what comparative advantage really is, how far will a country allow the rape and pillage of the country and its peoples.
there has been no reduction of poverty under free trade, the exact opposite has happened. poverty and indebtedness is exploding.
china made internal reforms before the W.T.O. so the premise that free trade benefits the poor, is pure rubbish that should be treated as such.
so muddy up the waters by saying lost income from tariffs is because of trade liberalization, what that really means is a loss of sovereignty due to ‘FREE TRADE’.
bill clinton pretty much locked the world into a straight jacket called free trade, and in case any government does not know this, he provided a example called yugoslavia.
free trade generates wars.
its time to call free trade what it is, its “FASCISM”, and we need a world wide PERCURA COMMISSION, TRUMAN COMMISION, NUREMBERG WAR CRIMES TRIALS, all wraped up into one. drag every free trader into the docket, get to the bottom of who their advisors were, and financiers were.
they are responsible for the deaths and suffering of untold millions, they have dragged the world’s environment to the point of collapse, they have dragged the world into a possible WWIII, which means the end of everything.
every country, big or small must be as self sufficient as possible. buy what you have to, sell what you can, barter, take other currencies, barter currencies, set up a clearing house for this, use a small transaction fee for insurance.
use tariffs, excise taxes, duties, capital controls to slow down parasitical behavior, and help finance a countries ability to stay out of debt.
any country that allows the rich to rule them, ends up in chaos. free trade is the quickest route to chaos.
I suspect that comparative advantage and all the rest came about in order for the English merchant class to one up the landed gentry in parliament once and for all.
Going back to Ricardo and the origins of comparative advantage it’s important to remember the assumptions that were built into the theory. Both labor and capital were assumed to be relatively immobile. Ricardo laid that out explicitly, pretty much every economist since has neglected that assumption, intentionally or not. (there are a few other assumptions but I never remember them off hand)
This critique of free trade was the whole point of my textbook, Trade, Development and Foreign Debt, tracing the history of the protectionist/free trade controversy (controverting the latter).
My Super Imperialism made the same criticism of the World Bank: to deter other countries from feeding themselves, so as to remain dependent on US grain exports.
I’m currently urging that Global South countries repudiate their dollar debt because it has been the result of this bad advice.
And regarding transfer pricing cheating oil and minerals exporters, that was a point that I emphasized in my interview with Shaxson on his book.
I have notice Jeffrey sach is still giving economy’s advice to third world countries, you would think they would learn from what Sach did to Eastern Europe economy’s in the 90s. He must have strong backing but i dont know from who
And then you get people like Magatte Wade, sponsored by the Atlas Network preaching that the problem w Africa is that it’s not enough of a Free Market.
It was calculated back in the 1990s that the single biggest damage to African development were US agriculture subsidies and protections. Sugar, cotton, and cereals are all subsidized and exported at prices small growers can’t compete with. Same thing happened after NAFTA when Mexico was forced to drop its protections against US agribusiness. Cargill profits exploded and millions of campesinos were impoverished, which fueled the surge of illegal immigration to El Norte. Once again Washington helping the .1% at the expense of the rest of us, especially poor farmers in 3rd world countries.
Washington Consensus, indeed.
Surely governance plays a role in this sad drama. When the white farmers were chased out of Zimbabwe and their land given to Mugabe’s cronies, was this the sinister work of the IMF? Sooner or later the post-colonial governments of Africa have to accept some responsibility. Singapore, once a colonial backwater, has flourished and has a higher per-capita GDP than the UK. Cuba and Venezuela have both been harmed by outside sanctions and interference, but the most damage to their economies was done by the “leadership” of incompetent ideologues and their sycophants.