Chapter

A View from Africa

Editor(s):
I. Patel
Published Date:
December 1992
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The topic on which I have been invited to comment combines three development issues of great complexity, namely, trade, investment, and growth.

Theoretical Tenets

Trade, thanks to the time-honored Ricardian theory of comparative advantage, has had pride of place in the economic literature in being described as the “engine of growth.” Simply stated, the theory maintains that under free trade assumptions international trade conducted according to comparative advantage increases the welfare of all trading partners.1 Of course, reality is generally more complex than theory. For one thing international trade, especially in recent years, is anything but free. As you know, the contemporary international trade scene is plagued by a plethora of tariff and nontariff barriers of one sort or another. As a result, the ongoing Uruguay Round of trade negotiations shows all the signs of foundering on the issue of protectionism, especially in the area of agricultural commodities.

Turning to concepts regarding investment, we observe that investment is a major determinant of growth along with other factors, such as natural resources and technology.2 Investment or capital formation, as it is sometimes called, is essentially a function of savings, domestic and foreign, that in turn depends upon income, current and expected. Although the magnitude of investment as indicated by the investment/GDP ratio is important in determining the rate of growth, equal importance should be attached to the productivity of capital (as may be measured by the capital/output ratio), to the sectoral distribution of investible resources, and to the synchronization of investment decisions. Further, in analyzing investment issues in the African context, the sources and terms of investment financing should also be taken into consideration, especially as nonconcessional foreign loans all too often give rise to debt and balance of payments problems.

The last of the trio of development issues in my comment is growth—the ultimate goal to which the first two contribute in a very significant way. Most economists agree on the various factors that constitute the sources of growth, such as natural resources, the quality of population, capital, technology, cultural values, and the like, but as to which of them is decisive or all important is controversial. For example, capital investment was considered to be the most decisive factor of growth, especially in the 1950s and in the 1960s. Current thinking, on the other hand, accords no less importance to the issue of human resource development. Similarly, in the wake of the relative success of export-led growth strategies, the existence of a growing external market for the products of a developing country has also increasingly become the focus of attention for many development theoreticians and practitioners alike.

As nearly always in economics, there is inevitably another school of thought that holds the opposite viewpoint. Export pessimism nurtured by the resurgence of protectionism, the secular nature of the terms of trade deterioration for developing countries, and the persistence of impediments to the transfer of technology has lent credence to the advocacy of a development strategy that is essentially inward looking and relies on internally located sources of growth, such as import substitution. In reality, there is no such thing as a purely export-led or a purely import-substitution growth strategy. The question is really one of degree rather than of exclusiveness. The issue can also be seen as a question of what priority to accord to alternative avenues of growth in any given historical period of a country’s socioeconomic development.

With this rather brief sketch of some of the theoretical considerations that enter into the discussion of trade, investment, and growth, I would like to examine in very general terms Africa’s performance in these areas in the recent past before attempting to put forward some ideas regarding the prospects for the foreseeable future.

Africa’s Experience

The record of Africa’s growth performance in the 1980s is well known and is generally quite bleak. Caused by natural, internal, and external factors alike, massive setbacks struck the economies of Africa, particularly those of sub-Saharan Africa. The average annual rate of growth of gross domestic product (GDP) of sub-Saharan Africa during the period 1980–87 was a minuscule 0.5 percent. Agricultural GDP grew by only 1.3 percent and industrial GDP actually declined by an average rate of 1.2 percent against an annual population growth rate of over 3 percent. As a consequence, output per capita dropped by 2.8 percent a year. As averages usually mask individual differences, there were some exceptions to these broad trends: A handful of countries, such as Cameroon, Botswana, and Mauritius, did manage to attain growth of output in per capita terms during the 1980s. But the fact remains that 13 African countries (comprising not less than a third of the region’s population) are reckoned to be poorer now than at the time of independence.3

The foreign trade picture of sub-Saharan Africa was equally dismal. During 1980—87, exports declined annually at a rate of 1.3 percent and imports by 5.8 percent. Similarly, the terms of trade in 1987 were estimated to have deteriorated by about 16 percent compared with 1980. Large current account deficits plunged the continent into a deepening external debt crisis. Sub-Saharan Africa’s total external debt stood at $134 billion by 1988 and was equal to the region’s gross national product (GNP). The debt-service ratio rose pari passu to a high of 47 percent. Debt arrears are now a common feature of the external economic profile of sub-Saharan Africa.

The record on the investment front was also unfavorable. During 1980–87 gross domestic investment fell at the rate of 8.2 percent a year, bringing the investment ratio down to 16 percent from 20 percent in 1980. The ratio of gross domestic savings to GDP also dropped from 22 percent in 1980 to 13 percent in 1987. As important as the decline in the relative magnitude of investment was its falling productivity.

In identifying the major causes behind the generally dismal economic performance of Africa during the past decade, one must not get bogged down in the question of whether domestic factors were more important than external factors, or vice versa. I believe both, within a reasonable margin of error, contributed to the worsening situation. Drought, unfavorable terms of trade, protectionism, inadequate concessional resource inflow, high oil prices and global recession at the beginning of the decade, exchange rate instability, intermittently high world interest rates, etc. were all external causative factors over which the continent had virtually no control. On the other hand, internal factors, such as uncontrolled population growth, inefficient public enterprises, uneconomic public investment projects, poor macroeconomic management reflected in fiscal indiscipline, price distortions, overvalued currencies, excessive monetary expansion, and the like, had a direct negative bearing on overall economic performance.

The deep crisis into which Africa was plunged has prompted a response in many African countries that has produced some encouraging, if somewhat faltering, signs of improvement. Since around 1985, there have been some firm indications of recovery in output, particularly agricultural output, and exports.4 The economic reforms undertaken included macro-economic and structural measures, such as exchange rate adjustment, fiscal austerity programs, control over the growth of money supply, correction of price distortions, a general movement toward liberalization, and the active encouragement of the private sector and restructuring of public sector enterprises. While the reforms have generally been in the right direction and are therefore to be commended, the social costs of adjustment that came in their wake have at times threatened to outweigh their benefits, occasionally forcing reversals. The donor community has responded with increased assistance, albeit still far from adequate, and some measure of debt relief. We should remember, however, that the reforms that have been taken are only beginning to show some positive signs; one does not yet know whether they are sustainable. Therefore, Africa’s social and economic woes of the past decade are far from over.

Africa’s Prospects

Let me begin with Africa’s trade prospects. I am afraid there is no ground here for optimism. Africa’s terms of trade have continued to be unfavorable despite considerable economic expansion in the industrial countries for most of the 1980s. Price forecasts for Africa’s major commodities up to 2000 are not encouraging; they imply no justification for any hope of an improvement in the terms of trade.5 The development of synthetic substitutes and new production techniques for new materials is believed to be an important factor behind the depressed world demand for some natural industrial inputs.

At the same time, the resurgence of protectionism and the rather inauspicious manner in which the problem is being tackled under the current Uruguay Round of trade negotiations do not augur well for the region’s trade with the rest of the world. It is ironic that we in Africa are constantly being told to heed the teachings of Adam Smith and David Ricardo in managing our domestic economies, while those same tenets are being flagrantly flouted on the international trade scene by none other than the leading champions of free competition and enterprise. I submit that there is a case of double standards here.

On the investment front, too, one can hardly be less pessimistic. Population growth and massive debt-service obligations have eroded the saving and investing capacity of the region, and no major revival in the investment ratio need be expected unless incremental resources from the donor community on very concessional terms could be obtained. The problem here is that since the far-reaching changes that took place in the Soviet Union, Eastern Europe, and elsewhere, Africa has had to compete with these regions, which in many ways may be more attractive to the donor and investing world community than Africa, for external assistance and foreign investment. Indeed, it is not without reason that these days the fear of Africa’s marginalization is frequently being echoed.

If trade and investment prospects are not likely to be good, neither are those for overall growth, generally speaking. I must, however, hasten to point out here that we in Africa are pinning great hopes on the structural reforms that we have undertaken. But here, too, the social costs of adjustment and the magnitude of investable funds required to reverse years of decline and stagnation are proving to be beyond the resources of the continent.

The odds do not seem to be very good, but this should not lead to despondency. On the contrary, we should strive to implement economic reform programs with commitment and renewed vigor. In so doing, among other things, emphasis should be given to the following measures in international trade, investment, and growth.

International Trade

  • • Intensify efforts to take advantage of whatever opportunities are available from the existing world trade system or reforms that may be forthcoming.

  • • Expand trade among African countries using mechanisms such as countertading and regional clearinghouses and enhance the trade harmonization processes at subregional levels.

  • • Continue to protect viable infant industries, not only to support Africa’s industrialization program but also to maintain employment.

Investment

  • • Give priority to investments aimed at self-sufficiency, particularly in the area of food crop production and processing.

  • • Establish industrial production facilities based primarily on domestic raw materials and catering for domestic markets, where such markets are of a reasonable size, but also gradually expand the facilities to produce goods for the world market based on the production experience gained in satisfying domestic demand. (Such a strategy may enable African countries to absorb any shocks arising from the failure of the international trade system and to protect jobs.)

  • • Assign priority to manpower development so that African countries will not remain marginalized in the world economic system. (The only guarantee for African countries to continue to have a say in future developments of world affairs, be it economic or political, is to develop skilled manpower that can face the challenges of uplifting African societies from the darkness of underdevelopment. Education and training and health are key areas in this respect.)

  • • Invest in carefully selected export-oriented production facilities to cater to the world market where there is an obvious comparative advantage. (Attracting external capital for this purpose from the private sector will be important.)

  • • Give priority to infrastructural development, such as roads, ports, etc., to create and facilitate internal markets.

  • • Give due consideration to the use of domestic resources and, in particular, to the creation of jobs when selecting technology.

Growth

In addition to the trade and investment measures suggested above, which I think will contribute significantly to overall growth, ongoing and new stabilization and structural economic reform programs in Africa will need to emphasize the following:

  • • Restructuring and rationalizing existing public sector enterprises, with a view to making them more efficient and competitive.

  • • Increasing the efficiency of investment in public sector projects.

  • • Creating an effective incentive system, and generally an enabling environment, in order to promote private enterprise and initiative.

  • • Gradually correcting macroeconomic distortions, such as inappropriate pricing practices and excessive budget deficits.

Some of the steps outlined may appear to be somewhat restrictive and inward looking in nature when viewed from a free trade point of view, but it should be appreciated that these are transitional measures until African economies achieve a level of development that enables them to integrate into the international economic and trade system on a more equitable basis.

Finally, let me emphasize that, however gloomy the trade, investment, and growth prospects for Africa may seem now, the degree to which the problems are going to be alleviated or intensified will, in large measure, depend on whether or not we can muster the will to take appropriate measures and pay the sacrifices that these may entail. I believe that the shape of the final outcome is partly within our control. Hence, although an uphill task, we must be prepared to change the failure of the past decade into success in the 1990s and beyond.

See, for example, Peter Newman, in The East African Economic Review; Vol. 1, New Series 1964, pages 22—23.

Melville J. Ulmer, Economics: Theory and Practice, 2d ed. (Houghton Mifflin Co., 1985), page 102.

World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth (Washington, 1989), page 18.

Ibid., page 35.

Ibid., page 32.

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