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Fundamentals of International Economics for Developing Countries: A Focus on Africa

Volume I: Trade Theory and Policy

Alemayehu Geda Addis Ababa University & African Economic Research Consortium

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Fundamentals of International Economics for Developing Countries: A Focus on Africa Volume I: Trade Theory and Policy

Alemayehu Geda, PhD Professor of Economics Department of Economics Addis Ababa University, Addis Ababa, Ethiopia & African Economic Research Consortium (AERC), Nairobi, Kenya © Feb, 2009 Visit www.Alemayehu.com for more on this book.


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Chapter 1: Introduction: The Pattern of Trade in Africa Alemayehu Geda

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To Tom, Mimi and Tigist (for unreserved love they gave me)

To Dani, Abe, Alem, John and Njuguna (for unreserved intellectual support they gave me)



Table of Content

I. Trade Theories: A Focus on Africa

Chapter 1 Introduction: An Overview of African Trade in the World Economy Context

Chapter 2 The Classical Model: The Smith and Ricardian Models Appendix A2: Formal Treatment of the Classical Model

Chapter 3 The Heckscher-Ohlin-Samuelson Model & Its Critique in African Set-up

Appendix A3(a) Formal Treatment of the HOS Model and Its Generalization

Appendix A3(b): Critique of the Classical & HOS Model in African Set-up Chapter 4 Imperfect Competition & Technological Gap Models with their

Implication to African Economies Appendix A4 The New Trade Theory & Relevance of Realism of

Assumptions Chapter 5 Global Commodity Markets I: Non-Orthodox Models, Trade

in Primary Commodities & Commodity Modelling Appendix A5: Commodity Modelling

Chapter 6 Global Commodity Markets II: An Introduction to Global Commodity Markets: Futures, Options & Derivatives

II. Trade Policy and Practice: A Focus on Africa

Chapter 7 Trade Policy I: The Political Economy of Protection: Tariffs, Subsidies, and Strategic Trade Policies

Appendix A7: The Optimality of Imposing Tariffs in Imperfect Competition Models of Trade

Chapter 8 Trade Policy II: Theories of Custom Unions & Economic Integration in Africa

Appendix A8: The Gravity Model and The African Context Chapter 9 Trade Policy III: Trade Liberalization, Globalization, Poverty and

Inequality in Africa Chapter 10 Trade Policy IV: East Asia’s Trade and Industrial Policy and the

Lesson for Africa Chapter 11 Trade Policy V: The World Trading System in Practice: Africa,

Issues of WTO and the Impact of the Emerging Chinese Economy Chapter 12 The Impact of China and India on Africa: Trade, FDI and The

African Manufacturing Sector: Issues and Challenges.




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PART I Trade Theory: A Focus on Africa

About the Author Alemayehu Geda is Professor of Economics at the Department of Economics, Addis Ababa University. He is also a research associate of the University of London (SOAS, London), the UN Economic Commission for Africa (ECA, Addis Ababa), African Economic Research Consortium (Nairobi), International Food Policy Research, Addis Ababa, The Kenyan Institute for Public Policy Research and Analysis (KIPPRA, Nairobi), The Central Bank of Kenya, and Economic Policy Research Center (EPRC, Kampala). He has worked as a consultant and advisor for a number of international organizations including the UN ECA, The UNDP, the World Bank, SIDA, DIFD as well as the governments of Ethiopia, Kenya, Uganda, Tanzania, and Zambia. He has thought Macroeconomics, Macroeconometric Modeling and International Economics at the University of London, Addis Ababa University, Alemaya University and the African Economic Research Consortium. He has widely published on African and Ethiopian Economy in major international journals including a bestselling book on Trade and Finance in Africa by Pallgrave-Macmillan (2002) and a forthcoming book on Applied Time Series Econometrics for Africa (2009), and Reading on Ethiopian Economy (2009).



PART I Trade Theory: A Focus on Africa




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CHAPTER 1 Introduction: An Overview of African Trade in the World Economy Context

1.1 The Historical Origin of Africa’s Economic Linkage with the Now

Developed Countries (The North)1 Following Amin (1972), African economic history may be classified into: (i) the ‘pre-mercantilist period’ (from pre-history to the beginning of the seventeenth century); (ii) the ‘mercantilist period’ 2 (from the seventeenth century to 1800), characterized by the operation of the slave-trade; (iii) the ‘third period’ (from 1800 to 1880) characterized by attempts to set up a European dependent African economy; and finally, (iv) the ‘period of colonisation’ in which the dependent African economy became fully established (Amin, 1972:106). This section will not attempt to discuss the details of Amin’s periodisation. Rather, after briefly reviewing the economic history of the other periods, it will focus mainly on the colonial period, during which time Africa’s economic structure in general and its trade pattern in particular, inherited at the time of independence, became established. 1.1.1 Pre-colonial Trade in Africa African interactions with the rest of the world, and especially Europe, date back many centuries, before culminating in fully-fledged colonisation in the latter part of the nineteenth century.3 During the first part of this period, Africa had autonomy in its linkages with the rest of the world 4 (Amin, 1972:107-110). However, during the sixteenth century, African trade centres moved

1 Refer to Alemayehu (2002) and the reference therein for details. 2 See Amin (1974), Chapter Two, on the mercantilist period. 3 Amin (1972) has termed this the Pre-mercantile period. 4 Wallerstein characterizes the trade of the period as trade in "luxuries", with such trade being undertaken between external arena and not in an integrated world economy framework. Wallerstein and Amin define luxuries as those goods, the demand for which comes from the part of the profit that is consumed. Suraffa defines luxuries as goods, which are not used in the production of other goods. He, however, took it as trade/exchange in which “each can export to the other what is in his system socially defined as worth little in return for the import of what in its system is defined as worth much”. Or, in Alpers’ phrase “Trade from which each side believed itself to be profiting” (Wallerstein, 1976:31 and footnote 3).




from the savannah hinterland to the coast, in reaction to changes in European trade, which shifted increasingly from the Mediterranean to the Atlantic (Hopkins, 1973:87). Various studies have documented how pre-colonial Africa was characterized by production of diversified agricultural products (see for instance, Rodney, 1972: 257, Brooks 1993, Hopkins 1973, among others). The internal trade of the continent was distinguished by regional complementarities, with a broad natural resource base. Thus, a dense and integrated network was set in place, dominated by African traders, which included, inter alia, trade among herdsmen and crop farmers, supply of exports and distribution of imports. This was dominated by trade in salt, West African spices, perfumes, resins and kola nuts, of which the latter was the most important (Amin, 1972:117, Hopkins, 1973: 51-86; Neumark, 1977:128-130, Vansina, 1977: 237-248, Austen, 1987:36). Brooks’ account of the economic conditions prevailing in this period provides an impressive insight into African trade at the time (Brooks, 1993). Specifically, one is struck by: (a) the extent of local and long distance trade; (b) the range of goods traded; and, (c) the degree of processing of commodities (for instance in textile manufacturing, dyeing and metal working), particularly in West Africa. According to Brooks’account, the major commodities traded among West Africans in pre-colonial times included salt, iron, gold, kola, malaguetta pepper and cotton textiles. Of these, Kola and malaguetta pepper were important, not only in West Africa, but also in the trans-Saharan trade. Indeed, this trade was so extensive that Europeans were able to obtain malaguetta pepper at inflated prices from Maghreb5 middlemen from at least the fourteenth century onwards (Brooks, 1993: 51-121). Moreover, in this period, Europeans were able to purchase cloth from Morocco, Mauritania, Senegambia, Ivory Coast, Benin, Yorubaland and Loango for resale elsewhere (Rodney, 1972:113; Hopkins 1973: 48). (It is curious to note that, in a geographic and economic sense, North Africa was then connected to rather than separated from other parts of Africa by the Sahara 6.) It is also worth noting that the quality of many of these processed goods was quite comparable with products originating in other parts of the world. For example, the level of manufacturing of textiles in pre-colonial West Africa was so sophisticated that these textiles were not only traded in West, North and Central Africa but also in the European market (See Hopkins, 1973:48 for details). Moreover, none of the goods brought by Europeans supplied any of the basic or unfulfilled needs of African societies. Indeed, similar commodities and/or substitutes were obtainable through West African commercial networks. Specifically, African artisans of the time manufactured high quality iron, cotton, textiles, beers, wines and liquors (Brooks, 1993:56). Austin argues that this trade, sometimes referred to as the ‘Sudanic economy’, represents “an ideal African development pattern: continuous and pervasive regional growth with a minimum of dependence upon foreign partners for provision of critical goods and services” (Austen, 1987: 48). However, this autonomy in traditional industries was to be undermined by subsequent events (Konczacki, 1990:24). The early development pattern of Africa varies between regions. In contrast to West Africa, East and Southern Africa (ESA) were characterized by a well-established economic interaction with

5 Maghreb refers to North Africa. 6 This stands in sharp contrast to the current categorisation of North Africa as geographically and economically distinct from sub-Saharan Africa. For justification of this view see Sommers and Assefa (1992) and various World Bank/IMF classification schemes for Africa. Surprisingly, the ECA, which is supposed to be an African organisation, also classify Sudan in North Africa.




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Arabian and Asian countries, long before the arrival of the Europeans. More specifically, this part of Africa supplied a range of products, such as gold, copper, grain, millet, and coconut to the Middle East and Indian Ocean economies. There also existed a dynamic caravan trade and commercial plantations long before the onset of European colonial rule. According to Austen, the towns in this part of Africa degenerated into little more than entrepôts for raw material exports and manufactured imports, rendering them dependent on the external economy (Austen, 1987:67-74). However, as documented by Kjekshus, during the mid-nineteenth century, prior to the onset of the colonial period, the interior of what is now mainland Tanzania carried an estimated four and a half million head of cattle. Indeed, the entire coastal region also supported a rich agricultural and pastoral economy (quoted in Leys, 1996:111). Further, Nzula et al (1979)7 argued that the region was characterized by peasant production, which was mainly a natural and closed economy, with a substantial number of people leading a nomadic existence (Nzula et al, 1979: 38). The existence of an independent and autonomous economy, dating back to antiquity, is also well-documented in Ethiopian history8. Amin also notes that the African societies of the pre-colonial period developed autonomously (Amin, 1972: 107-108). Thus, one may reasonably conclude that, although its economy was not as complex as that of West Africa, the ESA region, nevertheless, had some degree of autonomy in its economic activity, and, therefore was not as dependent on the export of commodities, in particular, to Europe. To sum up, there would appear to be a long history of integrated and autonomous economic activity in most regions of Africa with local and long distance trade playing a linking role. This is not an attempt to paint a ‘golden past’ for Africa. Rather, it is meant to underline the fact that Africa had a healthy and fairly independent economic system, before colonialism intervened to force a structural interaction with Europe. 1.1.2 The Formation of a Commodity Exporting and External Finance Constrained

Economy The period leading up to the industrial revolution, and the 16th and 17th centuries, in particular, witnessed the beginning of the shaping of the African economy by European demand. A clear example is the pressing demand for gold coins in Europe, and the subsequent search for gold in West and Central Africa (WCA)9. Indeed, demand for labour, required in the American gold

7 The original work was written in 1933. 8 The commonly argued case that, since Ethiopia was not colonized, it represents a ‘counter factual’ for how other parts of Africa might have developed, in the absence of colonialism is a very weak one. Firstly, a good part of the history of Ethiopia has been a history of wars under the ideology of either religion, region, nationality or a combination of these. This has created a serious crisis in the agricultural sector (See Gebrehiwot, 1917, Alemayehu, 2005). Secondly, Ethiopia’s history has been characterized by two clearly distinct antagonistic classes: the landed aristocracy and the peasantry, with corresponding state structures (see Gebru, 1995). Given the history of conflict, which characterizes Ethiopia’s history, the main preoccupation of the landed aristocracy and church has been to maintain its power. Thirdly, colonialism in the rest of Africa had the effect of disrupting the dynamic caravan trade, which linked the Southwest parts of Ethiopia to the rest of the East African region. And, finally, Ethiopian independence was basically a besieged one. The fact that it was encircled by hostile and powerful colonial forces naturally had an influence on the political and economic structure of the country. More specifically, Ethiopia developed as a militaristic nation, with a dependent economy based on the export of commodities and import of manufactures (especially firearms). 9 First by the Portuguese, and later by the British, Dutch, Germans and Scandinavians.




search, was instrumental in the formation of the European slave trade (Rodney, 1972:86-87). Thus, the shaping of the African economy by Europe began, even before the onset of the formal colonial period. With the onset of the industrial revolution in Europe, Africa lost its remaining autonomy and was reduced to being a supplier of slave labour for the plantations of America (Amin, 1972 :107-110). The European slave trade, and the so-called ‘triangular trade’, both of which are beyond the scope of this book, are widely discussed issues in the economic history of Africa. Any resistance to the slave trade was silenced, not only by the co-opting of local chiefs, but also by sheer force. Such use of force has been documented in what is now Angola, Guinea and various other parts of the continent (Rodney, 1972:90-91. See also Bernstein et al (1992) for a brief summary of the triangular trade). Moreover, this era witnessed a widespread expansion of European control. This expansion was undertaken with the dual aims of: a] incorporating new areas under primary crop production, using African land and labour (which were priced below world market prices); and, b] increasing the level of production of existing primary commodities. On the import side, cheaper and purer iron bars, and implements such as knives and hoes were made available, displacing some of the previous economic activities undertaken by local blacksmiths. This had knock-on effects in terms of a reduction in levels of Iron smelting and even a decline in the mining of iron-ore (Wallerstein, 1976: 34-36; Baran, 1957:141-14310). Within the ESA region, cloves grown in Zanzibar and Pemb islands, for export to the Asian and European markets, were the first cash crops successfully produced prior to European colonialism. Mainland estates, dominated initially by Arab and Asian traders, were involved in externally oriented production through sales of copra, sesame seed and oil-yielding materials, for which France was the principal market (Munro, 1976: 55). Following colonisation, peasant cash cropping developed in East Africa. However, unlike the WCA region, this was mainly as a consequence of a combination of political injunction and regulation. Such imposition from above was usually resisted, the Maji-Maji uprising, in today’s Tanzania, being a case in point. In other instances cash cropping simply failed to take hold, as in the case of a cotton scheme proposed for Nyanza province, Kenya (Munro, 1976: 116). However, in spite of these initial setbacks, eventually the colonial powers were successful in implementing their policy of introducing cash cropping to the region. As described above, there existed a reasonable degree of trade linkage with Europe in the pre-colonial period. Leaving aside the slave trade, the main feature of this trade was the export of primary commodities by African nations to Europe. Thus, even before the onset of the colonial era, the seeds of Africa's subsequent role (as a supplier of raw materials and foodstuffs for Europe, and a market for European manufactures) as well as its dependence on external finance

10 In describing the impact of underdeveloped nations’ interaction with Western Europe Baran noted " [the population of these nations] found themselves in the twilight of feudalism and capitalism enduring the worst features of both worlds. Their exploitation is multiplied, yet its fruits were not to increase their productive wealth; these went abroad or served to support parasitic bourgeoisie at home. They lived in abysmal misery, yet they had no prospect of a better tomorrow. They lost their time-honored means of livelihood, their arts and crafts, yet there was no modern industry to provide new ones in their place. They were thrust into extensive contact with advance of the West, yet remained in a state of the darkest backwardness" (Baran, 1957:144). Perhaps we should not be surprised that Baran’s description, written nearly four decades ago remains relevant today.




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had already been sown11. Or, to take a slightly different perspective, a move from the production of primary products to processing of these products (by Africans and in Africa) was interrupted. This represents the first pre-designed attempt to articulate African economic activity to the requirements of the outside world. This development was vigorously followed up during the colonial period as a consequence of: (i) the so called imperial self sufficiency in raw materials scheme; (ii) the impact of the first and second world wars; and, (iii) financing requirements for the creation of public utilities designed to serve (i) and (ii). i) The Imperial Self Sufficiency Scheme As noted above, the export structure associated with colonialism did not arise by accident. Rather, it was preceded by various experiments to produce agricultural products demanded by the developing European industries. A French experiment to produce crops similar to those produced in America, the establishments of plantations in Senegal, during the 1820s, British experiments with ‘model farms’ in Niger, during the 1840s and cotton experiments12 in Senegal, Nigeria and the Gold Coast (Ghana) all represent cases in point (Hopkins, 1973:137). In Germany, Bismarck, initially reluctant to create a colonial empire, was persuaded by German commercial interests that overseas territories could provide raw materials for German industries, as well as markets for their products (Longmire, 1990: 202). This growing demand for raw materials, the search for a market for finished products from Europe, inter-European competition, and a number of other factors conspired to form the basis upon which colonialism was to evolve.13 During the colonial period, one of the main phenomena, which strengthened primary commodity exports from European colonies in Africa, was the so-called ‘imperial self sufficiency’ scheme. Thus, British, French and Belgian textile industries sought to obtain cotton from Africa, and invested accordingly. A similar scheme was also developed for tobacco. This was administered both by colonial governments and by some European based companies (Munro 1976: 128-137) and resulted in an expansion in colonial trade. With the onset of colonialism, the centre of African trade shifted from the hinterland to the coast, and the composition of this trade also changed in response to the demands of the increasing external orientation of the economy (Amin, 1972:117). For example, expansion in the production of palm products and groundnuts in Africa was directly linked with increased demand for inputs required in soap and candle factories, lubricants (particularly for the railways) and European economic growth in general (Hopkins, 1973:129). At the same time, the processing of such primary products in Africa, except in white settler colonies was actively discouraged. Indeed, this was the case even when factories were owned by

11 Imports of palm oil by Britain, groundnuts by France, palm kernels (for cattle cake) by Germany (and for the manufacturing of margarine) by the Dutch represented the main items traded during the 19th century, prior to the onset of formal colonialism at the end of that century. (For a description of this, see particularly Chapter 4 of Hopkins (1973) 12 These were prompted by the so called ‘cotton famine’ in Europe, following the American civil war. 13 The motives underlying colonialism represent a widely debated topic. For instance, Austen (1987) argues that “within [the] general context of intense multifaceted international competition, the economic rational for African colonisation was to a considerable extent pre-emptive -designed to assure access to potential rather than actual markets and commodities as well as trade routes... to Asia” (Austen, 1987:116).




Europeans. For example, in Senegal, the proportion of groundnuts, which could be processed, prior to their export to France, was strictly controlled (Fieldhouse, 1986: 48; Fyfe quoted in Wallerstein, 1976:36; Onimode, 1988:177). In Angola the Portuguese prevented the operation of flourmills, with the country exporting wheat to Portugal and importing wheat flour back (Konczacki, 1977:81). According to Austen, the fact that colonial governments, (with the possible exception of the Union of South Africa), saw themselves primarily as representatives of the ‘mother’ (colonial) country, which was benefiting from the existing pattern of trade, explains why they pursued policies which were directly and indirectly designed to block efforts at local industrialisation (Austen, 1987: 133). Thus, as argued by Acemoglu et al (2001), the need to establish developmental institutions (such as non-extractive industries) was strictly linked to whether the African colony is conducive for white settlement or not. In order to achieve these dual objectives, of inducing the colonies to be suppliers of inputs, and markets for manufactured goods, various methods of coercion were employed. Africans were forced, by superior firepower, to abandon small scale manufacturing industries and trade with rival European nations (Dickson, 1977:142). At the same time, large European firms were encouraged to concentrate on growing and trading in agricultural products. This was easily achieved for a variety of reasons. Specifically, African peasants moved into cash cropping: (a) to ensure access to European goods, to which they had become accustomed, in a limited way, in the pre-colonial era; (b) to earn cash, which was required to pay various taxes; and, finally: (c) as a result of force14. In other cases, Africans were simply exterminated to pave the way for settlers15. In other parts of Africa Europeans directly controlled the production of commodities such as cotton, sugarcane and tobacco. (Amin, 1972: 112-113). Indeed, in areas such as British East Africa the law required that farmers grow a minimum acreage of cash crops. However, these peasants were not wholly dependent on cash crop production. Rather, they also produced food for own consumption, this being in the interests of the big firms, since it enabled them to pay only minimal wages, which did not have to cover maintenance of the labourer and his family (Rodney, 1972 :172). Nevertheless, the colonial authorities ensured that the extent of such food production was not large enough to ensure self-sufficiency. For instance, in British Guinea it was a criminal offence to grow rice (at a time when it was imported from India and Burma) because it was feared that rice growing would lead to the diversion of labour from the sugar plantations (Frankel, 1977:236). Thus, in this manner, Africa’s economic role, basically as a producer of primary commodities, continued to be shaped to serve Europe's industrial and commercial interests. ii). The First and Second World Wars (W.W.I and II)

14 There are many examples of Africans being forced into cash crop production. This occurred in Tanganyika (today’s mainland Tanzania), in the Portuguese colonies, in French Equatorial Africa and French Sudan (today’s Mali). In Congo Brazzaville the French enforced cotton cultivation by banning traditional agricultural activities. These policies of coercion were resisted to the extent possible. The revolts in Tanganyika and Angola represent cases in point (See Rodney, 1972:172-181, Austen, 1987:140-142). 15 This was the policy followed by Germany in what is now called Namibia. Indeed, the extermination of the Africans was so extensive that, when they discovered diamond, the Germans had to look for migrant labour for mining from other regions (See Longmire, 1990:203-204). This perhaps could partly explain the current pattern of labour migration in that part of the continent.




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The impact of The First World War on African colonies was devastating. Although trade was disrupted during the period, nevertheless African colonies were forced to supply commodities to finance the war. The end of the war was followed by a surge in major commodity prices and hence high export earnings for the African colonies (Munro, 1976: 119-23). Similarly, The Second World War also resulted in an increased demand for primary commodities, and especially those with military strategic importance such as vegetable oils, metals and industrial diamonds (Ibid. 170, Burdette, 1990:84.). This had the effect of reinforcing the commodity producing and exporting role of the European colonies in Africa. In addition to the direct effects of the war, the post-war reconstruction of Europe, rising levels of European incomes and removal of restrictions on consumer demand and commodity stockpiling, engendered by the outbreak of the Korean war in 1950, resulted in the price of African exports surging to unprecedented heights (Munro, 1976: 177). Thus, when war erupted or was expected to erupt in the colonizing countries, commodity production and exports by African colonies was boosted by non-price mechanisms. Further, the end of the war was usually also followed by a commodity price boom and associated increase in the level of the commodity exported, this time through the operation of the price mechanism. In the process, the specialisation of European colonies in Africa as producers and exporters of primary commodities became firmly established. iii) Financing Public Utilities and Commodity Exports In general, in the pre 1929 international financial order, which was dominated by government bonds (i.e. portfolio investment), Asian and African colonies had little choice in relation to the nature of their involvement in international financial systems. Political considerations were at the heart of regulating access to capital markets (Bacha and Alejandro, 1982: 2-3). Besides, such inflows to Africa were generally negligible (UN, 1949: 26-28). Capital inflows from W.W.II onwards increasingly came in the form of Foreign Direct investment (FDI). There was a moderate flow of such capital from the United States and Britain to Africa. However, such investment that did come (especially that originating in the United States, which was the largest supplier) was concentrated mainly in South Africa, Egypt and Liberia, the latter relating to the introduction of a shipping line by the United States (UN, 1954: 15-16). In almost all cases the investment went into plantations and mineral extraction (UN, 1949: 32-33). The colonial period also witnessed a flow of loans and grants from European centers to the African colonies. In almost all cases these funds were spent on public infrastructure development such as railways and roads to link ports to export production sites, and, to a lesser extent, on schools and health facilities. This was undertaken with the aim of developing the primary commodity exporting capacity of the colonies (see UN, 1954: 32-33). In some circumstances the colonial powers were also motivated by military-strategic considerations. It is estimated that, from the mid 1940s to 1960 only 15 to 20 per cent of such inflows were allocated for social and production sectors, while the rest went into infrastructural development (Munro, 1976:183). The nature of these financial flows to the colonies also differs before and after W.W.II. In general, it can be said that the pre-W.W.II flows came mainly in loan form, while the post W.W.II flows, and especially those from France, increasingly incorporated a grant element (See also Austen, 1987:197-202 for details). However, the repayment of this debt by colonial administrators created serious difficulties.




These financial difficulties were exacerbated by instability in the world commodity market and the vulnerability of the African colonies to this. Indeed, various analogies may be drawn between the current debt crisis and the situation in this period. For instance, after the great depression (1929-1932), African exports declined by about 42 per cent. The depression also resulted in contraction of credit flowing to the colonies. These events led to a serious incapacity to service debt owed to the ‘mother’ (colonizing) country. Since colonies were not in a position to default on these debts, there was effectively no way out for them. This had repercussions for every African economy, with widespread Bank failures, retrenchment programs in colonial administrations and liquidation of businesses (See Munro, 1976: 150-53 for details). Setting in place a vicious cycle, the financial difficulties being experienced by colonial governments forced the colonies to vigorously follow a policy of producing export commodities, at the expense of other alternatives (Munro, 1976: 155, Austen, 1987:127). Peasant cropping, with its attractive minimum cost for colonial governors, was chosen as a convenient vehicle to address this problem. This, the so called the ‘peasant path’ to financial solvency, became a universal phenomenon throughout the colonies, and especially in the present day WCA. It was attained by forced involvement of ordinary peasants in the primary commodity export sector. Indeed, this coercion was sometimes so harsh that the ordinary peasants were paid not in cash, but in bills of credit to the administration’s head tax (Munro, 1976:156). In the British colonies of East Africa a similar emphasis to the ‘peasant path’ was also followed (Ibid. 156-57). In summary, through the process discussed above, the foundations for the existing economic structure of African countries were laid during the colonial period. This was achieved through two channels. Firstly, by directly contributing to the expansion of an enclave of primary commodity exporting economies. And, secondly, by bringing about a situation of indebtedness, it further accentuated the importance of these activities as sources of foreign exchange required for settling of this debt. Although this general pattern was applied throughout the African colonies, some variations existed across the regions. The following section addresses this issue. 1.3.3 The Three Macro-Regions of Colonial Africa: The Amin-Nzula Category Although colonialism shaped the production structure in a similar way across Africa, nevertheless one may observe certain variations in this general pattern between different macro regions. Leaving aside North Africa, Nzula et al (1979),16 and Amin (1972) divide the continent into three distinct regions, based on their colonial structure. Firstly, Africa of the labour reserves (Nzula et al 1979) label this ‘East and Southern Africa’). Secondly, Africa of the colonial economy (Nzula et al 1979 label this the region ‘British and French West Africa’). And, thirdly, Africa of the concession-owning companies (Nzula et al 1979 label this ‘Belgian Congo and French Equatorial Africa’). The fundamental distinction between these regions is derived from the manner in which the colonial powers settled the ‘land question’(Nzula et al, 1979: 36). In West Africa, commodity production did not take a plantation form. Besides, until quite recently the mineral wealth of the region remained largely untapped (Amin, 1972: 115). The 16 The English translation appeared in 1979.




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amount of African peasant land expropriated was also negligible (Nzula et al 1979). However, in spite of this, the control and growth of the commodity sector was governed by European interests, while land remained in the hands of small peasants. The mechanisms for this control were as much political as economic (Amin, 1972: 115). Hopkins lists a number of reasons why plantation-based production never became fully established in West Africa. Firstly, some traders were opposed to plantations for fear that they might compete with the export sector for scarce capital. (Such objections were voiced, for example, by businessmen such as Lever and Verdier). Secondly, a few plantations, which were established, failed because of lack of capital and ignorance about tropical conditions. The third, and perhaps most important, reason why plantations failed to became fully established in West Africa was that small African peasants had already succeeded in forming an export economy by their own efforts. Moreover, establishing plantations would have created conflicts with traditional land rights. Indeed, some crops, such as groundnuts, would not have been suited to plantation agriculture (Hopkins, 1973: 213-214). Finally, it is worth pointing out that it was not necessary to develop formal plantation agriculture, since it was possible to influence the nature of production and control the export supply of peasants through monopolistic trading practices, customs restrictions, fiscal controls and appropriate credit arrangements (Nzula et al, 1979:38).17 In much of today’s Central Africa, and part of Southern Africa, concessionaire companies, usually supported by their European state, dominated the entire economic structure through their involvement in mining, fishing, public works and communication, and even taxation (See Seleti, 1990:40). In these regions, the indigenous population were reduced to semi-slavery, and exploited by open and non-economic forms of coercion on the plantations and mines (Nzula et al, 1979: 37, Austen, 1987:140-142). The establishment of such concessionaire companies was further facilitated by the indigenous population fleeing and seeking refuge in the more inaccessible parts of the region. Discouraged by this population exodus, the colonial authorities encouraged adventurer companies to ‘try to get something out of the region’ (Amin, 1972: 117). The activities of these companies were organized in line with demand in the 'mother country’. One example of this was the demand for raw materials required in the European war effort. Thus, the mining companies, in co-operation with colonial officials, designed and determined the nature of their enclave activity to meet the increased demand for copper and other base metals required by the European war industries. (Burdette, 1990:84). In Southern and Eastern Africa both systems referred to above were intricately interwoven with a number of specific features (Nzula et al, 1979: 36). In this region the extraction of mineral and settler agriculture was accompanied by the creation, often by force, of a small, and often insufficient, reserve of labour comprising land owning peasants and the urban unemployed. This was undertaken with the labour demands of mineral extraction and settler agriculture firmly in mind (Amin, 1972: 114, Nzula et al, 1979:37). This labour was further supplemented by inter regional migration. Other economic instruments, such as taxation, were also used to create reserve labour for European plantations and mining (Seleti, 1990:34; Konczacki, 1977:82). The reduction of the cost of labour in such regions to mere subsistence levels rendered the exports of the colonies competitive, in comparison to similar goods produced in Europe. Clearly, the

17 See also Amin (1972) for a political and social analysis of how the region’s commodity production and exports were controlled.




formulation of such a structure was 'as much political as economic' 18 (Amin, 1972:115; Seleti, 1990:47). However, since the focus of this book is on the economic, we do not go further into such political considerations here. Rather, we would simply observe that, during this period, an economic structure was set in place, characterized by the export of primary commodities. By the end of the colonial period, what had been achieved in all these macro-regions was the creation of a commodity exporting economy and virtual monopoly of African trade (both import and export) by Europe (see Hopkins, 1973: 174). The commodity export-led strategy was vigorously followed during this period. As a result, not only did production for overseas markets expand at a high rate, but also several new items (especially foodstuffs) began to appear on the import list (Hopkins, l973 :178). In some cases, European business interests were so pervasive that they created a protected market, on which to dump their manufactured goods19. Summarizing the stylized facts in the colonial period, Konczacki described the economic pattern of what is called ‘matured’ colonialism20 as having three distinct components. Firstly, both imports (which were mainly manufactured goods), and exports (mainly raw materials), were fixed with the 'mother' country. Secondly, capital investment in the colony was determined by the trading interest of the 'mother' country, and concentrated in exporting enclaves. Finally, a supply of cheap labour was ensured through a variety of mechanisms (legal, monopolistic employment and through other economic instruments.) (Konczacki, 1977:75-76). Indeed, it is worth noting that this pattern has not changed fundamentally, even today. Another important characteristic of this period relates to technological change. For example, if one focuses on cotton production, during the colonial era, Africa ‘...was concentrating almost entirely on export of raw cotton and the import of manufactured cotton cloth. This remarkable reversal [compared to the pre-colonial period] is tied to technological advance in Europe and to stagnation of technology in Africa owing to the very trade with Europe" (Rodney, 1972:113). Colonialism further exacerbated this situation. Thus, as Amin notes, when we speak of the exchange of agricultural products against imported manufacture (i.e. the terms of trade), "the concept is much richer: it describes analytically the exchange of agricultural commodities provided by a peripheral society shaped in this [colonial] way against the product of a central capitalist industry (imported or produced on the spot by European enterprises)" (Amin, 1972: 115). To sum up, it has been shown that African nations were in possession of an integrated and autonomous economic structure prior to their intensive interactions with Europeans during the colonial period. It is hard to speculate what the future of such a structure might have been, in the absence of colonialism. However, it goes without saying that it would not have been what it is now, since clearly the present is the result of specific historical process. More specifically, historical interaction with today’s developed countries has shaped the structure of the economic

18 Pim places this at the center of his investment analysis and argues that the main investment was in areas with extensive mineral wealth, plantation possibilities and a mass of unskilled labour. This involved heavy expenditure in communications, which required an expansion of the export sector for its finance. The latter, in turn, required a large labour supply, which was secured by direct and indirect compulsion, affecting every aspect of native life (Pim, 1977:229). 19 France was in possession of such a protected market in West Africa. The protectionist policy was the result of pressure from French metallurgical, textile and chemical industries, which had difficulty competing with Britain (Hopkins, 1973:160). Portuguese industrialists had also created such protected markets in Africa, especially for their textile industry (Seleti, 1990:36). 20 Portuguese colonialism does not qualify as ‘matured’ in his analysis.




13

activity of African nations, particularly in the areas of international trade and finance. Indeed, economic domination, accompanied by colonisation, has further cemented this structure. Thus, given such historical process it is not surprising to find that almost all African nations had become exporters of a limited range of primary products, and importers of manufactured goods, by the time of independence, in the 1960s.21 This was further accompanied by a demand for external finance, when export earnings were not sufficient to finance the level of public expenditures required for maintaining and expanding the commodity exporting economy. This structure has not changed in any meaningful way in the post-colonial era as can be read from the next section22. 1.2 Openness in Africa: Recent Pattern of Trade and Finance Defining openness and coming up with reasonable indicators is a difficult task (See Fosu 2000 for such discussion). Various measures are used in the literature. These include: exchange rate overvaluation, relative price distortions, tariffs and quotas, share of trade in GDP, the parallel market premiums rate, etc. According to Fosu’s survey the most comprehensive measure of openness appears to be the one used by Sachs and Warner (1995). For the latter, an economy is deemed open if (1) average tariff rates are below 40%; (2) average quota and licensing coverage of import is less than 40%; (3) a parallel market exchange rate premium is less than 20%; (4) no extreme controls (taxes, quotas, state monopolies) on exports exist; and (5) the country is not considered a socialist country (See Fosu, 2000: 3-4). However, these measures are largely arbitrary and there is no rigorous criteria used to determine the cut-off points in the Sach’s and Warner formulation. Rodrigues and Rodrik (2000) for instance noted that that some of the widely used openness indicators serve as a proxy for a wide range of policy and institutional differences, and that they could give biased results to the implication of trade and trade policies. Although the data limits us to compute all these indicators, it is possible to judge the openness of Africa from the information given in Tables 1 and 2. Table 1 shows that exports and imports account for about 60 of Africa’s GDP (equally divided between exports and imports). Africa’s financial integration in the world economy is limited as can be read form the share of FDI in GDP which is about one percent in the last decade or so. The share of aid (and hence debt creating flows) in the total budget of most African countries is significant, however (see below). Neither Africa could be taken as interventionist in the light of the share spending on subsidies in total public spending (which is about 3.5 percent and the share of taxes on international trade as the share of revenue excluding grants during this period). Table 2 offers an elaborated version of the openness indicator, together with the average growth of individual African countries, for the period 1990-2001. The Table shows a positive correlation between openness and growth (with a correlation coefficient of about 0.30). Table 1: Some Indicators of Openness in Africa (Average for the period 1990-2001)

21 In virtually all African countries, one to three commodities account for 50 to 90 per cent of total exports. Indeed, in the period 1982-86, in 13 African countries 1 product, in 8 countries 2 products, in 6 countries 3 products, and finally, in 8 African countries 4 products accounted for over 75 per cent of export earning (see Adedeji (1993) and the next section in this chapter for detail). 22 . It is worth noting in passing that when one examines the financial (debt) problems of Africa (which I am arguing relate to its role as a primary commodity exporter) one is, compelled to conclude that these problems are a direct outcome of the historical process described thus far (see Alemayehu 2003, 2002).




Region (X+M)/GDP XGNS/GDPFDI/GDP Subs/Expr TaxInt'l/ RevenueEast and Southern Africa 52.9 25.8 0.6 1.3 9.3 North Africa 60.9 31.7 1.1 6.8 12.1 West Africa 69.8 34.8 1.9 2.5 19.7 Sub Saharan Africa 57.8 28.5 1.0 1.6 12.2 All Africa 58.1 29.0 1.0 3.5 12.2

Source: Based on World Bank’s African Development Indicators (2003)

Table 2: Openness & Growth in Africa, 1990-2001 (Openness is defined as value of imports and exports as percentage of GDP)

Open Growth Open Growth Open Growth

Algeria 57.2 1.8 Equatorial Guinea

157.2 18.4 Mozambique 60.3 6.0

Angola 134.8 1.4 Ethiopia 38.9 4.0 Namibia 108.4 4.1 Benin 53.6 4.7 Gabon 94.8 2.7 Nigeria 87.9 3.2

Botswana 94.4 5.6 Gambia The 120.0 3.7 Rwanda 33.1 2.8 Burkina Faso 47.9 4.2 Ghana 71.2 4.2 Sao Tome and

Principe 124.0 2.0

Burundi 43.8 -0.8 Guinea 45.6 3.9 Senegal 75.0 3.7 Cameroon 52.9 1.1 Guinea-Bissau 60.6 2.3 Seychelles 149.1 1.1 Cape Verde 72.9 5.2 Kenya 64.2 1.9 Sierra Leone 35.1 -2.8 Central African Republic

43.2 1.4 Lesotho 131.2 4.1 South Africa 43.3 1.6

Chad 54.7 2.7 Madagascar 56.1 2.2 Swaziland 163.3 3.4 Comoros 59.8 1.4 Malawi 85.9 3.5 Tanzania 50.2 3.5

Congo 132.1 1.7 Mali 61.3 3.0 Togo 79.0 1.4 Congo, Democratic Republic

73.8 -5.4 Mauritania 96.0 3.6 Tunisia 89.7 5.1

Cote d Ivoire 72.7 2.0 Mauritius 124.2 5.3 Uganda 33.4 6.4 Egypt. Arab Rep. 47.8 4.4 Morocco 59.2 2.9 Zambia 73.8 1.0

Zimbabwe 73.1 1.3

Average 78.0 0.3

Source: Based on African Development Indicators (World Bank), 2003. 1.2.1 Openness in Africa: The pattern of Trade Table 3 shows the deceleration of the growth of the volume of exports in SSA from about 15 percent per annum in the early days of independence to about 3 percent now, with negative growth in early 1980s. The current level of growth of exports in SSA is far below the average for other parts of the world. The share of sub-Saharan Africa in the total world export values has also steadily declined. This share has declined by more than half in the period 1980 to 2001 (see Table 4 ).




15

Table.3 Growth of Export Volume by Region Region 1965-73 1973-80 1980-86 1993-02 Industrial Countries 9.4 5.4 3.5 6.2 Developing Countries 4.9 4.9 4.4 7.1 SSA* 15.0 0.1 -1.9 3.1 Source: Based on World Bank, World Development Report 1987 for the period 1980-86 and World Bank, Global Economic Prospects 2003 for 1993-02 * the figures for 1993-02 include South Africa Table.4 Percentage Shares of Africa’s Export Values in the World total Regions 1970 1975 1980 1985 1990 1995 2000 2001

Developing Countries 22.9 27.5 30.1 25.1 19.7 19.9 23.0 23.5

SSA (of World total) 2.0 2.1 2.2 1.6 1.0 0.8 0.8 0.8

SSA/Developing Countries 8.6 7.4 7.4 6.2 5.2 3.8 3.6 3.5

Source: Based on World Bank, World Development Indicators, 2003. The structure of African export is characterized by dependence of its exports on primary commodities. Such dependence is making African countries vulnerable to the global economy because such commodities are characterized by low income elasticity of demand, volatile and secular declining prices and generally come form sectors where the scope for technical progress is limited (see, among others Prebisch,1950, Singer 1950, Alemayehu 2002). ( see figures 1 and 2, and Annex 1a ).

Source: Based on World Bank, World Development Report, Various Issues.

Figure. 1. Structure of Merchandise Export Receipts of SSA

0

10

20

30

40

50

60

70

80

90

100

1965 1970 1980 1990 2000

P er i od

Feuls, Minerals and metals

Other Primary Commodit ies

Tot al Primary Commodit ies

Manuf act ured Export s



Chapter 1: Introduction: The Pattern of Trade in Africa Alemayehu Geda Note: Other primary commodities include Food and Agricultural raw materials. Where the category ‘Food’

comprises the commodities in SITC sections 0 (food and live animals), 1 (beverages and tobacco), and 4 (animal and vegetable oils and fats) and SITC division 22 (oil seeds, oil nuts, and oil kernels); ‘Agricultural raw materials’- comprises SITC section 2 (crude materials except fuels) excluding division 22, 27 (crude fertilizer and minerals excluding coal petroleum, and precious stones), and 28 (metal ferrous ores and scrap) (World Bank, World Development Indicators, 2003).

For those African countries whose data is reported in UNCTAD’s Handbook of International Trade and Development Statistics and Commodity Year Book, more than half of their export earnings come from only three principal primary commodities during the period 1997-99 (Table 6 and Fig. 2). For most small mineral exporting countries this figures rises over 80 percent. Only 8 countries out of 43 (i.e. Djibouti, Gambia, Lesotho, Liberia, Mauritius, Sierra Leon, Sudan and Swaziland) have a relatively diversified export structure. These in general, except The Sudan, are small and island economies. Thus, SSA as a whole depends for about 70 percent of its total export receipts on three major commodities.

Source: Based on World Bank, World Development Report, various issues and World Development Indicators, 2003).

As can be read from Table 5, African countries are also highly dependent on a few developed countries as destination for their exports. The average share of these developed countries, for the period 1955-2002, is about 80 percent (it however shows declining trend). Of the developed regions/countries, Europe is the dominant trading partner with an average share of about 60

Figure 2 Dependence on Three Principal Com modities by SSA Countries (1997-99)

Angola

Benin

Botsw ana

Burkina Faso

Burundi

Cameroon

Cent. African Rep.

Chad

Congo

Cote d'Ivoire

Congo (ex. Zaire)

Djibouti

Equatorial Guini

Ethiopia

Gabon

Gambia

GhanaGuini

Guini-Bissau

Kenya

Lesoto

Liberia

Madgascar

Malaw i

Mali

Mauritania

Mauritius

Mozambique

Namibia

Niger

Nigeria

Rw anda

Senegal

Seychelles

Siera Leone

Somalia

Sudan

Sw aziland

Tanzania

TogoUganda

Zambia

Zimbabw e

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

0 5 10 15 20 25 30 35 40 45 50

Prer

cent

to T

otal

Exp

ort R

ecei

pts




17

percent. Thus, although the share of African trade in world trade is limited (as shown, say in Table 4 above), what happens in the rest of the world, in particular in the developed countries, has an enormous impact on Africa (see Alemayehu 2002).

Table 5 African Exports by Destination (% share to total exports)

Period

Developed Market Economies Developing countries & Territories*

Former Socialist countries Europe USA Japan

Other Developed

Total Developed

1955 70 10 1 3 84 12 4 1960 67 8 1 3 79 13 8 1970 70 7 4 1 82 10 8 1980 49 31 2 1 83 14 3 1990 57 19 1 2 79 17 4 1995 51 18 2 3 74 22 4 2000 43 23 2 3 71 25 4 Average 58.1 16.6 1.9 2.3 78.9 16.1 5.0

Source: UNCTAD Handbook of International Trade and Development, various issues * By 2006, the African patter of trade began shifting towards Asia (Chain and India in particular), China alone

accounting for about 10% of the continents trade (see below). The negative impact of dependence on primary commodity exports is reflected in three interdependent phenomena: a decline in terms of trade, instability of export earnings, and absolute decline in levels of demand and supply. This is shown in Tables 6a and 6b. Table 6a shows that Africa suffers from export price instability. Table 6b shows the secular decline in Africa’s terms of trade in the recent past, the last two years showing some trend of bouncing bank. This secular decline in Africa’s terms of trade is not a recent phenomenon. It is rather a pattern that persisted from mid 1970s (See Alemayehu 2002, 2003).

Table. 6a Price Instability23 and the decline in price of Selected Primary Commodities

Price Instability Commodity 1962-1980 1982-1990 1991-1994 1998-2001 1977-2001 All Non-Feul Prim. Com. 15.2 8.8 5.0 4.1 11.6 Food 24.4 13.5 3.7 7.2 15.7 Tropical Beverages 25.5 14.1 20.6 5.1 20.8 Cocoa 27.7 15.1 10.2 15.8 18.6 Coffee 28.4 16.8 29.8 8.0 26.0 Agric Raw Materials 16.6 5.7 4.6 4.4 11.7 Minerals, Ores, Metals 12.3 13.0 6.9 5.8 14.0

Commodity Growth in 1980 Constant Dollar Prices, unless otherwise stated 1962-1980 1982-1990 1991-1994 1998-2001* 1977-2001*

23 The measure of price instability is

( )[ ] 100*)(ˆ/)(ˆ)(11

∑=

−n

ttytytY

n

Where, Y(t) is the observed magnitude of the variable, )(ˆ ty is the magnitude estimated by fitting an exponential trend to the observed value, and n- is the number of observations (UNCTAD, 2002).




All Non-Fuel Prim. Com. 1.1 -3.1 2.9 -2.1 -2.8 Food 1.0 -2.5 2.6 -0.1 -2.6 Tropical Beverages 2.9 -11.0 15.0 -17.5 -5.6 Cocoa 5.7 -11.7 5.9 -12.6 -6.9 Coffee 2.9 -10.3 17.1 -21.6 -5.1 Agric Raw Materials 0.5 -1.9 2.3 -0.7 -2.0 Minerals, Ores, Metals -0.5 0.3 -3.1 3.4 -1.9

*In 1985 Constant Dollar Prices Source: UNCTAD, Commodity Yearbook, Different Issues; and Handbook of Statistics 2002

Table 6b: The Deterioration of the Terms of Trade Terms of trade (GNFS from SNA) index, 1995=100

East and

Southern Africa

North AfricaWest Africa Sub Saharan Africa

All Africa

1990 101.1 104.4 122.1 108.3 106.9 1991 98.4 114.3 114.4 104.1 107.5 1992 96.1 108.9 106.2 99.6 102.7 1993 95.7 102.2 100.2 97.3 99.0 1994 98.4 98.1 98.6 98.5 98.4 1995 100.0 100.0 100.0 100.0 100.0 1996 100.2 103.6 120.8 106.9 105.7 1997 96.5 103.3 109.6 101.0 101.6 1998 92.4 93.5 91.4 92.2 92.4 1999 94.4 97.3 101.5 96.9 96.8 2000 102.5 115.5 133.5 112.4 113.3 2001 99.5 115.7 125.7 107.8 110.4 Average 98.0 104.7 110.3 102.1 102.9

Source: Based on World Bank’s ‘African Development Indicator’, 2003. 1.2.2 Openness in Africa: The Pattern of International Finance Flows A. FDI, Other Private Capital Flows and Capital Flight Africa’s share of world FDI, notwithstanding its recent good economic performance, is extremely low. It evolved from an annual inflow of $1.9 billion in 1983-87, to $3.1 billion in 1988-92. It was mere US$ 5.5 billion in 1996, representing only 1.5 percent of the global investment flows. During this time, however, inflow FDI to developing countries has quadrupled from $20 billion in 1981-85 to $75 billion in 1991-95 (UNCTAD 1999). UNCTAD (1999) noted that this declining share is partly attributed to a negative image investors have about Africa. The data also masks great variation in performance across countries in Africa. The distribution of FDI in Africa is also extremely skewed, with the main recipients being Nigeria, Egypt, Morocco, Tunisia, South Africa, Algeria, Angola, Ghana and Cote d’Ivoire who accounted for over 67 percent of FDI flows to Africa in 1996. Between 1991 and 1996 ten countries (Nigeria, Morocco, Tunisia, Angola, South Africa, Ghana, Tanzania, Namibia, Uganda and Zambia) received almost 90 percent of such flows with Nigeria alone absorbing a third of this flows.




19

The main sources countries for FDI flows to Africa are France, UK, Germany and US; while the favorite sector are oil, gas, metals and other extractive industries (ADB, 1998). In general, by the second half of the 1990s, the average share of FDI in GDP was not only very small but also was declining. Whenever it has a positive trend it is largely related to investment in countries with new resource discovery. Thus, recently, there is a surge of FDI in some countries (Kasekende et al 1995, Fernandez-Arias and Montiel 1996, Bhinda et al 1999, Alemayehu 2003b). For all of Africa, the share of FDI in GDP rose from 0.29 per cent (US$1.3 billion) in 1990 to 0.56 per cent (US$2.7 billion) in 1995 and 1.2 per cent (US$6.3 billion) in 1998; and US$ 15 and 29 billion in 2003 and 2005, respectively (See UNCTAD, 2006; Behinda et al 1999).. Econometric studies reveal that relative market size, the existence of mining activity and the historical pattern of FDI are the main determinants of the flow of FDI to Africa. (see Alemayehu 2002, Bhattacharya et al 1997). Bhattacharya et al (1997) grouped the African FDI recipients into three categories: (a) countries which are long term recipients (Botswana, Mauritius, Seychelles, Swaziland and Zambia), (b) countries that recorded large increase in the 1990s (Angola, Cameroon, Gabon, Ghana, Guinea, Lesotho, Madagascar, Mozambique, Namibia, Nigerian and Zimbabwe) and finally (c) countries that have low and/or declining level of FDI but with encouraging turnaround, the best example being Uganda. Other private capital flows such as portfolio flows, bank flows and bonds does also shows the openness of African economies. During the late 1970s and early 1980s private capital flows (FDI, private equity flows and private loans, the later in turn comprising bank, bond and other flows) to SSA were about 9 percent of total private flows to developing countries. This has declined to 1.6 percent in the period 1990-95. This sharp fall is attributed chiefly to the sharp deceleration in private loans starting from mid 1980s (See Bhattacharya et al 1997). Based on case study of South Africa, Zambia, Tanzania, Uganda and Zimbabwe, Bhinda et al (1999) has noted, however, that this trend and perception is changing. South Africa has received higher than all four countries taken together (90 percent of total SSA since 1992) in absolute terms. However, relative to GDP, the other countries have received levels (10 - 15 percent) that are as high as the fastest growing Southeast Asian and Latin America countries, while South Africa received only 4 percent (Bhinda et al 1999). Portfolio equity flows, though insignificant in magnitudes (except in South Africa), are also growing in recent past. From 1994 to 1997 more than 12 African-oriented funds have been setup with a total size of more than US$ 1 billion. The operation of these funds is expanding from the initial focus on South Africa to Botswana, Cote d’Ivoire, Ghana, Kenya, Mauritius, Zambia and Zimbabwe (Bhattacharya et al 1997). Recent information shows three important equity funds with SSA exposure: (a) ‘Pan-African funds’ with an exposure of US$ 692.9 millions, (b) South African dedicated funds with an exposure of US$ 8.057 billion and (c) emerging market global funds with an exposure of US1.5 to 3.5 billion (4 to 10 percent of world total is in SSA). Thus, making the total SSA portfolio investment stock in the range of US$ 10.3 to 12.3 billion since 1995. (See Bhinda et al 1999 for details). Bank flows in general are not really picking except in South Africa and to some degree in Tanzania. This is partly attributed to lenders’ preference to change exposure following economic trends, the rapid increase of foreign exchange holding in Africa following financial




sector liberalisation; domestic financials sector problems such as debt overhang and domestic payment arrears as well as the perception of high country risk. These factors resulted either in the decline or increasingly very short-term nature of bank flows. Whenever such flows are increasing they are invariably associated with the dominance of foreign banks. Finally, Bond flows are not only low but also erratic. This is partly attributed to low credit rating of most African countries in global financial markets. (See Bhinda et al 1999 for detail). Recent studies identified various factors behind the recent surge in portfolio flows (the most important component being equity flows followed by bonds, which in African context is taking a form of Treasury bills). These factors can be grouped into: (a) global or push factors – the trend in OECD countries to invest in emerging markets and growing institutional (usually pension) investors faced with low interest rate and slow down in economic activity at home. For such investors SSA is found to be attractive because its yields have low correlation with other emerging markets; (b) perception of SSA by investors, which ranges from a perception of the region as ‘the final frontier’ to negative bias. This is largely determined by investors information about Africa; (c) there are also national factors such as political and macroeconomic stability, good governance, economic growth and regional integration, standardized regional structure of banks and developed stock markets with positive performance, as well as the existence of motivated labour force; (d) finally, in particular, with non-equity flows (bonds and treasury bills), liberalisation of the economies, possibility of holding dollar denominated accounts in local banks and hence low risk nature of such flows, good credit rating, high domestic interest rate and development of capital markets are found to be important (See Bhinda et al 1999: 69-84, Alemayehu 2000, 2003b, Taylor and Sarno 1997, Calvo et al 1993, 1996). Openness also means that Africans now do have a choice, legal or illegal, to hold their assets in advanced countries – capital flight. Notwithstanding the measurement problem associated with capital flight, a recent study using a rather large data set based on 22 countries from sub-Saharan Africa concluded that the continent has the highest incidence of capital flight, exceeding even the Middle East. 39 per cent of private portfolios were held outside the continent. Were Africa able to attract back this component of private wealth, the private capital stock would have increased by around 64 percent (Collier et al 1999). Similarly, Ajayi’s 1997 estimate of capital flight from severely indebted low-income countries of sub-Saharan Africa, which stood at 22 billion, constitutes nearly half of the external resource requirement of Africa estimated by Amoako and Ali (1998) to realize a growth rate of 7 percent per annum for the year 1999/2000 which is consistent with reducing poverty by half in Africa by year 2015.. A review of the empirical literature on capital flight reveals that the high incidence of capital flight from Africa, despite the continent’s capital scarce characteristics, is explained by overvalued exchange rate, the fact that it is rated as the riskiest continent by international investors, and the level of indebtedness of the continent (Collier et al 1999, Hermes and Lensink 1992). The finding about the positive impact of debt on capital flight in these studies is, however, contested in Ajayi (1997) and Alemayehu (2002) who found no relationship between debt and capital flight. Boyce and Ndikumana (2001), Ajayi (1997) and Collier et al (1999) examined the issue of capital flight and pointed out the importance of ‘trade-faking’ (over and under invoicing of imports and exports), problems of political instability (including




21

the abuse of power), unfavorable macroeconomic environment, and lack of economic growth as factors that trigger flight capital (See Ajayi 1997 for details). B. Bilateral and Multilateral Flows and Africa’s External Debt Problem Another channel that shows openness relates to the flow of resource in the form of aid and loan, the latter leading to accumulation of debt. In 2003 net official development assistance (ODA) to Africa reached a record high of $26.3 billion, up from $21 billion in 2002. This has reversed the falling ODA trend since 1990. This is largely deriven by debt relief and emergency assistance. On the other hand aid dependence, measured by total net ODA (excluding emergency aid and bilateral debt forgiveness) as a share of Gross National Income (GNI), varies significantly across African countries. Of 49 African countries, according to ECA (2005) net ODA was more than 10 per cent of GNI for 17 countries in 2003 (see ECA 2005). The total external debt of Africa has increased nearly twenty-five folds from a relatively low level of US $14 billion, in 1971, to more than $300 billion in 2004. The major component of this being outstanding long-term debt (Bilateral flows followed by multilateral one) which generally are obtained on concessional terms. Over period, IMF credits were increasingly used, with ‘Structural Adjustment’ and ‘Enhanced Structural Adjustment’ facilities comprising an ever-important component of financial flows to Africa, making multilateral flows important in the recent past. The accumulation of arrears from these flows is leading to accumulation of debt and its attendant problems. It can also be noted that the debt problem is being aggravated by capitalisation of interest and principal arrears, which constitute nearly a quarter of the external debt burden of the continent (Alemayehu 2003a). Although the share of African debt as a proportion of the total debt of developing countries is low, the relative debt burden born by African countries is extremely heavy compared to their capacity, in particular to their exports. If we exclude grants and net FDI from total inflows to Africa (and hence compute net flows), net transfers to Africa since 1990 have, in fact were negative and rising (i.e., there is a flow of resources from Africa to the developed nations) - such flows increased from US$ 3.6 billion in 1985 to nearly US$ 12.5 billion in 1998. Finally, in the 1990s, nearly 35 per cent of grants to Africa, in fact, went to ‘technical experts’ that usually come from donor countries (see Alemayehu 2003a) The actual size of indebtedness does not usually represent an economic problem in itself, since this debt may usually be mitigated by rescheduling and similar short-term arrangements. However, the size of accumulated debt, relative to capacity, and subsequent impacts on the economy, do represent a serious problem for African countries. In this respect, three inter-related implications of the debt problem deserve mention. First, servicing of the external debt erodes foreign exchange reserves, which might otherwise have been available for purchase of imports. This has led to the ‘import compression problem’ in the past, in which shortage of foreign exchange adversely affected levels of public and private sector investment (See for instance Ndulu, 1986, 1991 and Ratso 1994, Alemayehu 2002) and hence growth and poverty reduction. Second, the accumulation of a debt stock does result in a ‘debt overhang’ problem, which tends to undermine the confidence of private investors, both foreign and domestic. A decline in levels of private investment as a share of GDP, from the late 1970s onwards, may partly be attributed to this factor (See for instance Elbadawi et al 1997, Alemayehu 2002, 2003).




Finally, servicing of debt is placing an enormous fiscal stress on many African nations. This may partly explain the decline in the share of public investment in GDP from late 1970s onwards as well as high level of fiscal deficit in many countries in the continent. Naturally, a reduction in levels of public investment will tend to have adverse consequences for physical and social infrastructure which are vital for social development. This effect is significant in Africa given the that public sector investments, in particular in low income countries of Africa, does crowd-in private investment (See Alemayehu 2002). The performance of African economies, coupled with the mounting debt burden, surely indicates that African countries are incapable of simultaneously servicing their debt and attain a reasonable level of economic growth, let alone addressing issues of poverty alleviation and social development. The HIPIC initiative that was on the table since 1996 is not only besieged by much conditionality, but also doesn’t seem to offer a sustainable solution to Africa’s financial problems. Thus, this is one patter of openness still problematic and may not be solved by mere debt cancellation. This is because the African debt problem is essentially a trade problem (Alemayehu 2002, 2003a). 1.3 The Asian Drivers: China, India and The Changing Pattern of

African Trade The rise of emerging economies in Asia (such as Chain and India) as well as other countries such as Brazil and Russia poses both a threat and an opportunity for Africa. Of the many emerging economies, however, the impact of China and India is significant for Africa. Trade between Africa and China surged from $3 billion in 1995 to $32 in 2005 (estimated to reach $50 billion by the end of 2006). Despite this surge, Africa makes up only 2.3 % of China’s world trade. This constitutes, however, about 10% of Africa’s world trade. This trade is expected to double by 2010. For some African countries exports to China is becoming significant share of their world export (e.g. in 2005: for Sudan 70% which was 10% in 1995, Burkina Faso about 33% which was none before; Ethiopia about 13% which was none before). Thus, the pattern of trade is shifting from African traditional partner, the EU (the EU’s share declining from 44 to 32%), to Asia and the US (The US share has also increased form about 11% to 19% between 1995 to 2005). China is also contributing about $1 billion out of 15 billion the continent received as investment in 2004. For the some countries China’s investment is huge. China promised to invest about $4 billion in Nigeria (in return for oil rights) and offer Angola $4 billion concessional credit – the latter debt being to be paid in oil (The Encomiast, 28/10/06)24.. Table 2.1 shows the extent of African countries involvement in the markets of China and India. For the period 1999-2001 we note that the share of imports of China from African countries in its total imports from developing countries was around 3 to 5 percent, that of India being about 10 percent. These figures are not big when compared to the share of other trading partners of Africa such as the European Union (EU). Among individual African

24 The Chinese and Indian trade and investment in Africa has an impact on governance, distribution of income, industrialisation, as well as on Africa’s relation with the Western countries and multinational institutions.. We are not dealing with those issues in this chapter. An ongoing project on the impact of China and India on Africa which is comprehensive is underway by African Economic Research Consortium (AERC, Nairobi). See www.Aerceafrica.org .


http://www.Aerceafrica.orghttp://www.pdffactory.com


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countries South Africa, Angola, Gabon and Equatorial Guinea, in the order of importance, are found to be important exporters to China while Nigeria, South Africa and Morocco, in the order of importance, are found to be important trading partners to India. A further analysis shows that, except for South Africa, the other countries are exporting primary commodities (oil in particular) to these countries. Similarly the figures for the year 2003 in Table 2.1 show the importance of these exports destined to China and India for individual African countries. Thus, exports to China constitute 40 and 23 percent of the exports of the Sudan and Angola, respectively; during this period while exports to that of India constitute 13 percent of Senegal’s export and about 10 percent of the exports of Nigeria and Tanzania. Table 7 Imports & Exports of China and India from (and to) Africa (Country shares as % of

total imports from Africa) China India

Imports of China & India from 1999 2000 2001 1999 2000 2001 Developing Countries 74,829.7 111,565 117,312 26,859.2 30,670.1 30,680.7 Africa’s (share of this) 3.11 4.87 3.97 10.32 9.71 9.46 Exports of China & India to Developing Countries 83,219 108,208 116,516 15,521.5 18,745.9 19,967.6 Africa’s (share of this) 3.96 3.84 4.33 10.47 8.64 8.96 Source Alemayehu (2006). As we noted above China and India’s growth is both a threat and an opportunity for Africa. It deserves an in-depth study and analysis. Given the current pattern, we may point out the following major pointers for policy and research. First, China and India’s growth is creating a demand surge for African commodities. However, the continent need not be left worse off, as has been the case historically, once the boom ends. Thus, deals must be made to sustain it, say, through down-streaming linkages and local partnership (World Economic Forum, 2006: 11). What is important for Africa may not relate to the static gain and loss but to future industrialisation of African and the space left by China and India (Kaplinsky et al , 2006; see also Chapter 5 ). In this regard it is important to think and act on the possible impact of the Asian drivers’ trade and FDI impact in locking African countries in the primary commodity sector, especially in the long run. To this end, selected protection might be important and there is also a need for continuous preference access to the markets of the developed countries for Africa (Kaplinsky et al, 2006). Moreover, the demand boom for commodities may lead to problems of management of such resources (such as the Dutch Disease effect and possibly conflict among the political elite) that should be a central policy issue. Second, despite the possible threat alluded above, there is a need to change from defensive mind set about China and India to one that is more embracing, and one in which the Africans determine the terms of engagement (World Economic Forum, 2006: 12). Third, Africans need to develop dynamic capability to scan changing environments, to developing appropriate strategic response and to implement these strategies effectively (Kaplinsky et al , 2006). This may include the possibility of exploiting joint venture with the Asian drivers as well as the need to identify niches for African exporters. There is also the




need to actively seek investment linkages with the drivers as well as locate one’s country to benefit from being part of some industrial supply chains with the drivers. Forth, the distributional implications of trade with China and India are also worth examining. This is because trade liberalisation is generally associated with inequality and change in distribution of income across economic agents. This might have both social and political implications, such as the initiation of conflicts that need the attention of policy makers (See Alemayheu 2006a, 2006b). Finally, despite the general similarity in the pattern of trade and finance among African countries and their integration in the global economy, including the Asian drivers, it is essential to underscore that each country is unique in its own way. Each country has its own unique political, structural, institutional and historical features that distinguish it from others. This underscores the need to make trade and industrial polices, as the case of Asian fast growing economies show, tailored made to suit each African country’s uniqueness. 1.4. African in the Global Context: A World Accounting Matrix

Framework Table 8 shows some indicators of ‘openness’ for Sub-Saharan African relative to other regions in the world. In two reference periods, 1970 and 2000, the share of trade in GDP is the highest in high income OECD countries, followed by Middle East & North Africa and Sub-Saharan Africa. In the year 2000 the share of SSA has increased to about 60%, from the level that was 48% in 1970. The data also shows that SSA countries are highly dependent on international trade as source of government revenue. In sum Table 8 shows that trade (both exports and imports) are a significant part of the GDP of African countries. Thus, although the share of Africa’s trade in the world is extremely low, being about 2 of the world trade, that little amount constitutes a significant proportion, about 60 percent, of its GDP. This is a significant figure compared to that of other regions of the world as shown in Table 8.

Table 8 The global pattern of trade & Africa’s share (1970 and 2000). Year 1970

Trade (X+M) (% of GDP)

Exports of G&S (% of GDP)

Imports of G&S (% of GDP)

Tax on International Trade (% GDP)*

East Asia & Pacific 18.8 9.0 9.7 22.9 High income OECD 26.0 13.1 12.9 2.1 High income None-OECD 97.0 48.5 48.5 7.8 Latin America & Caribbean 19.7 9.5 10.2 22.4 Least developed countries (UN classification)

31.0 13.9 17.1 38.4

Sub-Saharan Africa 47.8 22.5 25.4 39.1 Middle East & North Africa 65.5 41.9 23.6 22.8 World 27.1 13.6 13.4 16.4

Year 2000




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East Asia & Pacific 45.5 42.0 36.2 7.7 High income OECD 174.6 22.6 22.9 0.0 High income None-OECD 37.5 89.8 84.8 1.3 Latin America & Caribbean 51.2 18.0 19.4 8.3 Least developed countries (UN classification)

63.4 21.6 29.6 ..

Sub-Saharan Africa 59.7 31.7 31.7 .. Middle East & North Africa 50.8 34.1 25.6 16.2 World 63.7 25.6 25.3 7.2 Source: Computed based on WDI, 2003 * 1977 and ** 1998 Increasing globalisation could mean, among other things, we could no longer assume that African countries are closed economies that could be assumed to obey to the small country assumption. This has implications for design of macroeconomic policy in general and trade policy in particular in the region. This in turn may entail the need to paint the major macro and trade features of these countries in an open economy macroeconomic framework. In such set-up the total supply of an African economy which is the sum of Gross National Production (GNP, Y) [which is also equals Gross Domestic Production [GDP] plus Gross National Saving (Sn)] and imports of goods and services (M) should be either consumed (both by private economic agents, C, and the public sector, G), invested (I), or exported (X). Thus, Y+M=C+I+G+X [1] Taking the M to the right-hand side and subtracting ‘Net factor payments and Current Transfer’ to abroad (N) – which is analogous to import payment (M)’ we will give us: Y=C+I+G+X-M-N [2] [Note: had N been ‘Net factor payments and Current Transfer from abroad’ it would have appeared with positive sign]. The cornerstone of an open economy macroeconomics accounting framework is the identity that links the internal balance with the external balance that can easily be derived from equation 2 above. Thus, in relation to the United Nations System of National Accounts this is the link between national accounts and the balance of payment. However, one problem in using such an accounting framework, especially for the data before 1993, is lack of institutionally disaggregated and consistent detailed data. This, to some degree, could be resolved by resorting to various multinational data sources . A major macro problem in many African countries, and that of other developing countries in general, is how to finance investment required to attain high rate of growth which is normally above these countries’ saving capacity owing to their desire to grow at a very higher rate. This issue can be handled using the notion of accumulation balance, which may be defined as (See Alemayehu et al 1992, FitzGerald 1993l): I = S + F [3]

Formatted Table




where I is gross domestic investment, S national savings and F net capital inflows. The latter is defined as the net change in assets and liability position of the country, and is equal to the deficit of the current account of the balance of payments (i.e. the external balance), which is given as, F = M - X + N [4] where M and X are imports and exports of goods and non-factor services, respectively, and N is net factor payment and current transfer to abroad – these are variables relevant to understand the international economic interaction. Combining these, disaggregating into public (g) and private (p) sectors and rearranging [3] and [4] yields, (Ig - Sg) + (Ip - Sp) = M - X + N = Fg + Fp [5] This is the basic identity which links the domestic investment and savings gap (the realm of the macroeconomy) with the current account deficit or surplus, and hence the resulting capital inflow or outflow required to finance it (the realm of the international economy). Further disaggregation of each of the variables in equation [5] may then be carried out by consolidating the various multinational sources of data. For instance N and capital inflows may be disaggregated using IMF’s ‘Balance of Payment’ (BOP) statistics and public savings and investment may be derived using IMF’s ‘Government Financial Statistics' (Alemayehu et al., 1992 : 7-14). Equation 5 basically shows how a prototype African country data could be linked with the rest of the world. The right-hand side of equation 5 in fact underscores the importance of ‘International Economic Relation’. Having this formulation, we can now move form National Accounting to World Economic Accounting. An exploration of the right hand side of equation 5 above is fundamental to understand international economic relations which is based on trade and finance. Such relation can be grasped by examining:

a) Global imports and export which need to be equal b) Global

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