3. Sub-Saharan Africa’s Engagement with Emerging Partners: Opportunities and Challenges
- International Monetary Fund. African Dept.
- Published Date:
- October 2011
INTRODUCTION AND SUMMARY
The chapter finds that
A fast-paced reorientation toward new markets is underway, with nontraditional partners now accounting for about 50 percent of sub-Saharan Africa’s exports and almost 60 percent of its imports. This reorientation is driven mostly by the large economies of Brazil, India, and China (BICs), but also by a substantial increase in trade with partners within sub-Saharan Africa. The rise of emerging partners is broadly homogeneous across the various sub-Saharan African country subgroups. A similar reorientation is also taking place in investment flows, with China now accounting for 16 percent of total foreign direct investment (FDI) flows to the region; other emerging countries are also making considerable investments in sub-Saharan Africa.
This reorientation and associated trade expansion has the usual benefits of greater international trade, including gains from comparative advantage, economies of scale, and dynamic effects through exports, but should also boost long-term growth by reducing output volatility. Although exports to BICs have been largely limited to enclave activities (for example, oil, gas, and minerals), exports to other emerging partners are more diversified. FDI also includes activities with more linkages to recipient economies (for example, infrastructure, agriculture, manufacturing, financial services, and telecommunications).
The emergence of new partners raises a number of opportunities and challenges, requiring decisive policy action in several areas:
Opportunities.Engagement with emerging partners could foster higher-value-added activities in sub-Saharan Africa, lower the cost of inputs/capital and consumption goods, and transfer technology to low-income countries. Intraregional integration could increase the economies of scale of the region, thus increasing its industrialization, competitiveness, and attractiveness for FDI. Challenges.On the other hand, managing the high concentration of sub-Saharan Africa’s exports to BICs in raw commodities and sectoral changes could be the most important challenges posed by this reorientation. Policy issues.These opportunities and challenges emphasize the need for sub-Saharan African countries to improve natural resource management, emphasize policies that are sector neutral, strengthen economic flexibility and safety nets, promote regional integration, negotiate better market access, and assess carefully their involvement in the growing number of special economic zones (SEZs) financed by emerging partners.
REORIENTATION ON SUB-SAHARAN AFRICAN COUNTRIES TOWARD NEW MARKETS
A few stylized facts
Figure 3.1.Sub-Saharan Africa: Total Exports and Imports by Partner
Source: IMF, Direction of Trade Statistics.
Figure 3.2.Sub-Saharan Africa Non-Oil-Exporting Countries: Total Exports by Partner1
Source: IMF, Direction of Trade Statistics.
1Excludes Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria.
Fast-paced.Between 1990 and 2010, the share of sub-Saharan Africa’s exports to advanced economies2 declined from 78 percent to 52 percent, and the share of sub-Saharan Africa’s imports from those countries declined from 73 percent to 43 percent.3 Most of this reorientation has occurred during the past 10 years, as the share of both sub-Saharan Africa’s exports to and imports from member countries of the Organization for Economic Cooperation and Development’s Development Assistance Committee (DAC) declined from about 70 percent in 2000 to approximately 50 percent in 2010.4 Faster than in other regions.Although trade in Latin America and the Caribbean (LAC) and the Middle East and North Africa (MENA) has also reoriented toward other developing countries, the degree of reorientation in sub-Saharan Africa has been faster than in these regions. Although the shares of DAC countries in total trade in LAC and MENA countries declined between 1990 and 2010 by 14 percentage points and 19 percentage points, respectively, the decline in sub-Saharan Africa was approximately 30 percentage points.5 The magnitude of the reorientation in sub-Saharan Africa’s trade was not determined solely by oil-related trade, as non-oil-exporting sub-Saharan African countries also saw the share of DAC countries in their total trade decline by an amount of the same magnitude. Driven mostly by the large emerging economies of Brazil, India, and China.By 2010, the share of sub-Saharan Africa trade with Brazil, India, and China reached approximately 3 percent, 6 percent, and 17 percent, respectively, rising from negligible shares in the 1990s (Figure 3.2). The share of the next-five-largest trading partners (Indonesia, Malaysia, Saudi Arabia, Thailand, United Arab Emirates), which refer to as the “Group of Five,” in sub-Saharan Africa trade increased from below 2 percent to about 5 percent between 1990 and 2010. Associated with expanding intraregional trade.Other important emerging trading partners for sub-Saharan African countries are their own regional partners, because intraregional trade now accounts for about 14 percent of sub-Saharan Africa trade compared with only 7 percent in 1990. By 2010 South Africa had become an engine of trade within the region, accounting for 4 percent of total imports from the rest of sub-Saharan African and for 6 percent of total exports. Largely homogeneous across the various sub-Saharan Africa groups of countries(Figure 3.3). Although there is significant country-by-country variation in the degree of reorientation to emerging partners, all sub-Saharan African subgroups (oil exporters, low-income countries, middle-income countries) are exporting a lower share of their products to traditional DAC partners than they were in 1990, and all are now exporting more to China (Figure 3.4). Except for oil-exporting countries, all subgroups have also seen an increase in their share of trade to other sub-Saharan African countries. On the other hand, the reorientation toward Brazil and India appears more heterogeneous across subgroups. In regard to imports, all subgroups of sub-Saharan African countries have seen a considerable reduction in their imports from traditional DAC partners, and all are increasingly relying on Chinese and intraregional imports. Figure 3.3.Sub-Saharan Africa: Change in Ratio of Exports to Non-DAC Countries to Total Exports, 1990–20101
Source: IMF, Direction of Trade Statistics.
1 Data for Eritrea are unavailable.
Figure 3.4.Sub-Saharan Africa: Exports by Partner
Source: IMF, Direction of Trade Statistics.
Dependent variable: Exports in U.S. dollars
|SSA||SSA non-oil||SSA||SSA 1990-95||SSA 2005-10||Non-SSA||SSA|
|Log of GDP in U.S. dollars||1.19***||1.26 ***||1.13 ***||1.67 ***||1.21 ***||0.74 ***||1.09***|
|Log of partner country GDP in U.S. dollars||1.07***||0.93 ***||0.97 ***||1.13 ***||0.83 ***||1.01 ***|
|Log of distance||-0.78 ***||-0.67 ***||-0.53 ***||-0.87 ***||-0.69 ***||-0.58 ***||-0.84 ***|
|Existence of common border||0.96***||1.56 ***||0.81 ***||0.55 **||1.26 ***||0.65 ***||0.80 ***|
|Common language||0.24***||0.29 ***||0.90 ***||0.50 ***||0.16||0.39 ***||0.25 ***|
|Log of population||-0.20 ***||-0.36 ***||-0.17 ***||-0.32 ***||-0.24 ***||0.04 ***||-0.14***|
|Log of partner country population||-0.07 **||-0.18||-1.00 ***||-0.02||-0.10 ***||-0.07 ***||0.00|
|Dummy both countries in SSA||1.58 ***||1.44 ***||-1.34 ***||0.64 ***||1.86 ***||1.53***|
|Dummy India||1.14 ***||0.91 ***||-2.35 ***||0.29||1.35 ***||-0.02||1.26***|
|Dummy China||1.01 ***||0.77***||-0.87***||-0.65***||1.15 ***||0.90***||1.07***|
|Dummy Brazil||0.22||-0.98 ***||-0.55 ***||-0.72 ***||0.34||-0.25 ***||0.46 ***|
|Mean tariff of partner||-0.03 ***|
|Number of observations||103,800||84,782||104,348||24,799||33,558||374,326||58,892|
In our main specification, including only sub-Saharan African countries (in column 1), the coefficients of the dummies for China and India are positive and highly significant, as is the coefficient of the intraregional dummy, a result that also holds for the subset of sub-Saharan African countries that are not oil exporters (column 2). The coefficient of the dummy for Brazil is also positive, although its statistical significance is low. The fact that sub-Saharan Africa’s trade with BICs is higher than predicted by gravity variables may be a consequence of the high natural resource intensity in BICs and sub-Saharan Africa’s natural resource abundance.
The mostly positive coefficient of the intraregional dummy would seem to contradict common arguments that sub-Saharan African countries do not trade enough among themselves. However, the coefficient becomes negative when the size of the partner economy is dropped from the specification (column 3), implying that intraregional trade is below what would be expected given population size, distance, common borders, and common languages. It is in this sense that some may consider intraregional trade below expectations.6
The magnitude and significance of the coefficients of the BIC dummies remain almost unchanged if South Africa is dropped from the sample.
As a result of the reorientation of sub-Saharan Africa’s trade toward BICs, the deviations from gravity-predicted levels have widened over the last two decades. Indeed, the coefficients of the BIC dummies in 2005–10 (column 5) are considerably larger and more statistically significant than those in 1990–95 (column 4). The same is true if one compares 2000–10 with the rest of the sample.
The estimates for non-sub-Saharan-African countries (column 6) have a similar magnitude to those in well-known empirical gravity exercises (for example, Bergstrand, 1985; Feenstra, Markusen, and Rose, 2001; Egger, 2002; and Santos Silva and Tenreyro, 2006.7
The estimation results are robust to various modifications to the regression, not all of which are reported here. Landlocked countries as well as partner countries’ trade tariffs reduce exports (column 7). Coefficients are in general robust to the exclusion of South Africa from the sub-Saharan Africa subsample.
Sectoral Composition of the Reorientation
What kinds of products are driving the reorientation of sub-Saharan Africa exports?
The picture is the following:
Sub-Saharan Africa exports to BICs are heavily concentrated in primary products, mainly oil. By 2008 (before the short-lived collapse in oil prices in 2009), oil accounted for about 70 percent of all sub-Saharan Africa exports to BICs, and for more than 80 percent of exports if South African exports are excluded (Figure 3.5). Note that sub-Saharan Africa exports to BICs are more concentrated in oil and gas than exports to DAC countries, as sub-Saharan African countries tend to export more food, beverages, and manufactured goods to DAC countries than to BICs, whether South Africa is excluded or not.
Figure 3.5.Sub-Saharan Africa: Exports to BICs by Product Composition 1
Source: United Nations, Commodity Trade Statistics Database (Comtrade).
1 Sub-Saharan Africa excludes South Africa.
Exports to emerging partners other than BICs have a higher share of products with higher local value added (Figure 3.6). Exports to the Group of Five include higher shares of food and live animals and manufactured goods, whereas the share of oil and crude materials is only about 30 percent of total sub-Saharan Africa exports.8
Figure 3.6.Sub-Saharan Africa: Exports to the Group of Five and Intraregional Exports by Product Composition 1
Source: United Nations Commodity Trade Statistics Database (Comtrade).
1 Sub-Saharan Africa excludes South Africa.
Intraregional exports also have a large share of products with higher local value added, and South Africa is a major source of trade in these products. In 2009, manufactured exports accounted for more than 10 percent of intraregional exports, with South Africa accounting for 55 percent of total intraregional manufactured exports, followed by Kenya, accounting for 11 percent. Exports of food and beverages account for about 10 percent of intraregional exports, with Madagascar, South Africa, and Zambia being the main exporters of these products. Yet fuel is the dominant intraregional export, with Nigeria accounting for 84 percent of fuel exports.
What products are the main drivers of the reorientation of imports?
They are largely machinery, chemicals, and manufactured goods, although there is some heterogeneity across trading partners (Figure 3.7). Sub-Saharan African imports from BICs are actually more concentrated in manufactured products—especially from China—than is the case with imports from DAC countries, the latter being more focused on imports of machinery. Imports from India are more concentrated in machinery and fuel (refined oil), and imports from Brazil are most concentrated in food and live animals. Imports from the Group of Five are quite diverse, with significant shares for food and live animals, animal and vegetable oils, manufactured goods, and machinery.
Figure 3.7.Sub-Saharan Africa: Imports by Product Composition
Source: United Nations Commodity Trade Statistics Database (Comtrade).
As this reorientation toward emerging partners takes place, a related issue is the degree and evolution of the sophistication of sub-Saharan African exports. Few countries in the world have enough natural resources to attain high welfare merely by trading them in raw state with other countries, and therefore the economic development of most countries hinges on increasing the value added of their exports and overall production. As mentioned in Box 3.1, some studies find that higher export sophistication may be associated with higher growth. The box shows that although the generally static sophistication level of sub-Saharan African goods exports continues to reflect its relatively low income per capita, export services are becoming increasingly more sophisticated. Several sub-Saharan African producers are moving up the value chain, in both goods (high-quality coffee in Rwanda, fresh mangoes in Mali, apparel in Lesotho, frozen fish in Uganda) and services (business processing outsourcing in Ghana and Kenya).
Figure 3.8.Sub-Saharan Africa: Inflows of FDI from China
Source: United Nations Commodity Trade Statistics Database (Comtrade); and IMF, Statistics Department, International Financial Statistics.
Figure 3.9.Composition of FDI Stocks in SSA from BICs, 2006
Source: United Nations Conference on Trade and Development (UNCTAD) Foreign Direct Investment Database.
Figure 3.10.Sector Composition of China’s Investment in Africa by end-2009
Source: Chinese authorities.
Note: The figure covers both sub-Saharan and north Africa.
Box 3.1.How Sophisticated Are Sub-Saharan African Exports, and Does It Matter for Growth?1
A growing literature has argued that sophistication of a country’s production, especially its exports, matters for growth (for example, Hausmann, Hwang, and Rodrik, 2007). Products with greater knowledge spillovers have a greater potential for backward and forward linkages and learning-by-doing, thus offering an easier path to other products with such characteristics. Ultimately, some products are more “sophisticated,” in the sense that they are associated with higher productivity levels, and those countries that latch on to such products will typically perform better in terms of growth.
Does export sophistication matter for growth?
Empirical estimates indicate that export sophistication helps drive growth in developing economies. Initial export sophistication, of both goods and services, is associated with subsequent output growth, even after for financial development, human capital, and external liberalization are controlled for. As estimated in Anand, Mishra, and Spatafora (forthcoming), a 1-standard-deviation increase in the sophistication of goods or services is associated with, respectively, a 0.11-percentage-point or 0.13-percentage-point increase in the average annual growth rate. Based on these estimates, if sub-Saharan Africa were to increase its goods sophistication or services sophistication to the level observed in, respectively, China or India, its growth rate would increase by, respectively, 0.23 percentage point or 0.17 percentage point.
How sophisticated are sub-Saharan African exports?
The overall level of sophistication of sub-Saharan African goods exports has been generally static, whereas that of the region’s services has improved significantly (Figure 1). To assess the degree of sophistication of sub-Saharan African exports, we construct a measure of export sophistication for sub-Saharan African countries using the methodology developed in Hausmann, Hwang, and Rodrik (2007). This measure captures whether a country’s export basket consists primarily of products typically exported by high-income economies (and viewed as relatively sophisticated) or by low-income economies (viewed as relatively unsophisticated).
Some sub-Saharan African countries are moving up the value chain for existing products or entering new and more sophisticated market segments.
Kenya and Ethiopia’s exports of cut flowers and other horticultural products require sophisticated technology and modern services—breeding and cloning new plant varieties, transportation and logistics, real-time monitoring of markets, and modern organization and management methods.
Rwanda has successfully moved up the value chain by exporting branded coffee and has also broken into the U.S. handicrafts market.
Other countries that have successfully broken into new export areas include Mali (fresh mango exports to Europe), Lesotho (apparel exports), and Uganda (frozen fish). It is noteworthy that all these countries managed to break into these areas despite being landlocked. In Mali, the key innovation was to overcome obstacles by developing a multimodal transport system (road, rail, sea) as an alternative to air freight, while meeting quality and phytosanitary requirements.
In services, Kenya and Ghana have been leading exporters of business-processing outsourcing, including call center services. Kenya has also become a regional hub for professional services such as accounting and computer-aided design. It has taken advantage of information and communications technologies—enabled services because of cost advantages, investment in enabling infrastructure (notably fiber-optic cable), and a reasonably well-educated and urbanized workforce. Although it has yet to meet export success, Kenya’s M-PESA—an electronic payment and store-of-value system accessible by mobile phone—has been a resounding technological innovation. M-PESA now processes more transactions domestically within Kenya than Western Union does globally and provides mobile banking facilities to more than 70 percent of the country’s adult population.
Service exports have been growing fairly strongly in sub-Saharan African countries, even though not as fast as in emerging partners (Figure 2). However, the growth rate of modern services has lagged that of traditional ones. Modern services are those that require little face-to-face interaction, can be stored and traded digitally, and generally are characterized by higher, and faster-growing, productivity levels.
Figure 1.Export Sophistication over Time for Goods and Services
Source: Anand, Mishra, and Spatafora (forthcoming).
Note: HIC = high-income-countries.
Figure 2.Traditional and Modern Service Exports Recent Growth Trends, 2000-07
Source: Anand, Mishra, and Spatafora (forthcoming).
It is noteworthy that high-growth sub-Saharan African non—oil exporters have taken better advantage of the globalization of services than their neighbors (Figure 3) by increasingly exporting a greater share over time.2
Figure 3.International Tradability of Services
Source: Anand, Mishra, and Spatafora (forthcoming).
This box was prepared by Rahul Anand, Saurabh Mishra, Nicola Spatafora, and Montfort Mlachila. It draws on Anand, Mishra, and Spatafora (forthcoming).
High-growth sub-Saharan African non—oil exporters inlude Botswana, Cape Verde, Ethiopia, Mauritius, Mozambique, Rwanda, Tanzania, and Uganda.
|Average Monthly Cost|
|Output per Worker||of Unskilled Workers|
|Country||(U.S. dollars, 2008)||(U.S. dollars)|
|Other developing Asia|
ECONOMIC IMPACT OF SUB-SAHARAN AFRICA’S ENGAGEMENT WITH NEW PARTNERS
Box 3.2.Chinese FDI Flows to Sub-Saharan Africa1
Chinese FDI to sub-Saharan Africa comes in various forms and through various financing mechanisms. Many actors are involved, ranging from individual private entrepreneurs to very large state-owned enterprises. Many investment projects in natural resources are packaged investments involving related infrastructure projects. The financing arrangements also range from private financing to loans from the Export-Import Bank of China or other state-owned banks. The China-Africa Development Fund has also played an increasingly important role in providing private equity financing for joint ventures.
Although the natural resource and infrastructure sectors attract the biggest share of Chinese FDI to sub-Saharan Africa, investment in manufacturing is increasing. In general, large state-owned firms tend to have a strong focus on resources and infrastructure, whereas private firms tend to concentrate on manufacturing and service industries. Therefore, although resource and infrastructure investment likely is the largest sector in value, the number of private projects in other sectors is high and growing, and likely well over 2,000.2 A major non-natural-resource-related Chinese investment in sub-Saharan Africa is the US$5.4 billion purchase of a 20 percent stake in South Africa’s Standard Bank by the Chinese Industrial and Commercial Bank.
There are some indications that Chinese companies are seeking growing domestic and regional markets in sub-Saharan Africa or taking advantage of preferential trade treatment of sub-Saharan Africa exports in advanced economies. For example, China’s financing (FDI and loans) in non-resource-rich Ethiopia is driven primarily by a large and growing market (with more than 80 million people, the second-largest population in sub-Saharan Africa) and opportunities for involvement in large public investment projects, rather than by a search for resources. In fact, the manufacturing sector accounts for the largest amount of Chinese FDI in Ethiopia (Figure 1), attracted by low-cost labor and large-scale land leases, in addition to Ethiopia’s market size. Some southern African countries have also attracted FDI in the apparel sector from China thanks to the U.S. Africa Growth and Opportunity Act, which gives eligible sub-Saharan African countries duty-free access to the U.S. market (Broadman, 2006; UNCTAD, 2010). Even in resource-rich countries, Chinese FDI is not necessarily concentrated solely in the resource sector, as seen in Zambia (see Table 1).
Figure 1.Cumulative Chinese FDI to Ethiopia by Sector, 2003–09
Source: Ethiopia Investment Agency.
|(Millions of U.S. dollars)|
|Of which: LICs||47||126||139||262||767||598||943||412|
|LICs in Latin America||6||1||3||21||63||13||9||17|
|LICs in Asia||42||97||118||231||820||917||1,202||489|
|LICs in Middle East||3||161||128||81||194||145||77||113|
|(Percent of total Chinese FDI)|
|Of which: LICs||2.8||4.4||1.6||2.4||6.0||3.6||4.6||3.6|
|LICs in Latin America||0.3||0.0||0.0||0.2||0.5||0.1||0.0||0.2|
|LICs in Asia||2.5||3.4||1.3||2.1||6.4||5.5||5.9||3.9|
|LICs in Middle East||0.2||5.7||1.4||0.8||1.5||0.9||0.4||1.5|
Some evidence shows that private sector particiption in Chinese investment in sub-Saharan African countries has increased. The Export-Import Bank of China estimated that of the 800 Chinese companies operating in Africa in 2006, approximately 85 percent were privately owned and were small or medium-sized enterprises (SMEs). The bank’s survey suggests that most of these firms began their engagement with Africa by trading, leading to investment to tap into local markets. Because local supplies are often weak, these firms tend to get most of their parts and equipment from China and other countries (notably South Africa). Most of the private SMEs have received little state support. Those firms have usually brought their own financial resources, and targeted local markets.
The links of Chinese FDI firms with local economies appear weak in the construction sector but are often stronger in manufacturing. ACET (2009) notes that Chinese firms win contracts on the basis of low cost and quick delivery, although there is a tendency to hire relatively little local labor. In the manufacturing sector, however, it seems that once Chinese firms are committed to establishing local operations, most of the employment is drawn from the local labor force. A survey by Gu (2009) in Ghana, Nigeria, and Madagascar shows that this is especially true for labor-intensive manufacturing.
|Angola||X||--||--||Telecommunications||Housing, roads, railways||Light vehicles|
|Chad||X||--||--||--||Roads, power plant||--|
|Ethiopia||--||X||--||Telecommunications, electricity, water||Construction||Garments, shoes/leather|
|Gabon||X||X||Port, railway, power plant|
|Ghana||--||--||Poultry||Small-scale trading, import/export||--||Garments, shoes/leather|
|Mali||--||--||Cotton||Electricity, water||Construction||Food processing|
|Nigeria||X||--||--||Telecommunications, technical services||Construction||Agro-processing|
|Mauritius||--||--||--||Small-scale trading, import/export||--||Garments, textiles|
|Uganda||--||X||Cotton||Telecommunications, electricity||Construction||Electronic goods, agro-processing|
|Zambia||--||X||Cotton||Financial, telecommunications, tourism||Construction||Garments, textiles, agro-processing|Box 3.3China’s Special Economic Zones in Sub-Saharan Africa 1
China is building several special economic zones in sub-Saharan African countries under its “going-abroad” strategy. Five SEZs are currently under construction in four sub-Saharan African countries (see Table 1) and one in Egypt, with US$250 million in Chinese investment by end-2010.2 This development is part of a commitment made at the 2009 Forum on China-Africa Cooperation, which pledged that three to five of the 50 Chinese overseas SEZs under its medium-term plan would be in Africa.
|Country (SEZ)||Planning Initiated||Status as of|
|Copper and cobalt processing; garments, food, appliances, tobacco, electronics|
|Transportation equipment, textile and light industries, home appliances and telecommunication. Possible oil refinery.|
|Construction materials and ceramics, ironware, furniture, wood processing, medicine, computers, lighting|
|Manufacturing (textile, garment, machinery, hi-tech), trade, services (tourism, finance, education)|
|Electric machinery, steel and metallurgy and construction materials|
Chinese enterprises generally take the lead in developing SEZs and promoting manufacturing clusters. The locations of the SEZs currently under construction were determined through a formal bidding process, with proposals from both state-owned enterprises and private companies in China. Those companies also negotiated with sub-Saharan Africa host governments over particular incentives and responsibilities. Most of the zones are governed by standard packages without special additions. Chinese developers (or a joint venture owned by a Chinese developer and its sub-Saharan Africa partners) will construct the infrastructure inside the zones, and host governments will provide connections to electricity, water, gas, roads, and so forth from outside the zones. The overall goal of the SEZs is to attract further investment from manufacturers (mostly Chinese firms, but some zones are also open to local and non-Chinese foreign investors) and to create synergies in industry clusters.
The Chinese government, on the other hand, typically provides some financial and networking support for the zone developers. For instance, each zone developer can access RMB 200-300 million (US$29-44 million) in government grants and RMB 2 billion (US$294 million) in long-term loans. Developers can also apply for subsidies to cover up to 30 percent of certain preconstruction costs. The Chinese government also organized marketing events to promote the SEZs and has helped developers find solutions to project delays in Mauritius and Nigeria.1 This box was prepared by Hui Jin, mostly based on Brautigam, Farole, and Tang (2011).2 These are officially known as “economic and trade cooperation zones.” See China’s State Council Information Office (2010).
Benefits of trade expansion
Impact from diversification of partners
Figure 3.11.Sub-Saharan Africa: Export Partner Concentration and Volatility
Source: Authors’ calculations.
Figure 3.12.Sub-Saharan Africa: Average Contribution to Export Growth
Source: IMF, Direction of Trade Statistics.
Impact of foreign direct investment
Impact on sub-Saharan Africa’s terms of trade
Figure 3.13.International Commodity and Manufactures Price Indices
Source: IMF, World Economic Outlook database.
Figure 3.14.Sub-Saharan Africa: Terms-of-Trade and GDP Growth, 1990–2010
Source: Authors’ calculations.
Benefits of regional integration
Attract more FDI that targets the regional market, with consequent benefits in technological transfer and productivity growth. According to China’s historical experience, for example, a large share of FDI into the country looks to profit from access to the sizable Chinese market.
Foster competitiveness in the region by promoting a more efficient allocation of regional factors of production. Thus, regional exports could be produced at lower costs through a vertical integration of production across countries, which could include trade in inputs and machinery, as well as labor mobility. Again according to China’s historical experience regarding the latter point, migration of labor within China has helped subdue wage pressures amid rapid economic growth.
OPPORTUNITIES, CHALLENGES, AND POLICY ISSUES
Figure 3.15.Sub-Saharan Africa: Estimated and Projected Exports by Partner 1
Sources: IMF, Directions of Trade Statistics; and authors’ estimates and projections.
1Projections are based on projected GDP of SSA countries and their trade partners and the elasticity of SSA countries’ exports to their own GDP and that of their partners, resulting from the gravity analysis of exports.
Outsourcing of economic activities to sub-Saharan Africa.Rising wages in Brazil, China, India, and other countries could prompt them to further outsource their economic activities to sub-Saharan Africa, especially in light manufacturing. The BICs are increasingly moving up the value chain (for instance, China and India in manufacturing, and Brazil in biofuels) with the potential to outsource these activities to sub-Saharan Africa. Global rebalancing between advanced and emerging economies could accelerate this process, with more rapid industry upgrading in China and India, as suggested in Yang (forthcoming). Low-cost inputs and consumption goods.As argued earlier in the chapter, sub-Saharan Africa stands to benefit from imports available at a much lower cost from emerging partners than from traditional partners. Low-cost capital goods boost the productivity of sub-Saharan Africa’s producers, whereas low-cost manufactured imports benefit consumers and producers (through lower wage pressures and cheaper inputs).17 Access to more appropriate technologies.Through intensifying trade and investment relationships with other developing countries, countries in the region also have access to cheaper and less-sophisticated technologies that may be more appropriate for their level of development. Economic benefits from intraregional integration.Intraregional integration, as argued earlier in the chapter, could also boost growth by promoting horizontal FDI, creating economies of scale and improving the allocation of factors of production within the region.
Natural resource curse.Because the region’s trade relationship with larger emerging partners is overwhelmingly concentrated on exports of raw commodities, inadequate management of natural resource wealth could lead to many of the economic problems commonly associated with natural resource dependence. Sub-Saharan African countries have experienced these problems for decades: crowding out of higher-value-added activities, procyclical macroeconomic policy, an unsustainably rapid depletion of resources, and high volatility in terms of trade. Transitional costs.Increasing trade with new partners has resulted in a reallocation of factors of production and consequent transitional costs, such as failing businesses and higher unemployment. For instance, noncommodity sectors such as manufacturing or food processing can be negatively affected by lower-cost imports from other countries (for example, manufactured products from China or processed food from Brazil) and from currency appreciation resulting from higher commodity exports.18 Rapid structural changes.The growing engagement of sub-Saharan African countries with emerging partners and their ongoing economic rise will most likely continue to bring substantial changes to the supply of and demand for sub-Saharan African products. High economic growth in emerging economies may further boost commodity prices, and higher wages in manufacturing and services in emerging partners may prompt them to outsource some of their activities to sub-Saharan Africa. At the same time, new technologies may affect the integration of production processes between sub-Saharan Africa and emerging partners. Such changes may be as strong and far-reaching as the recent commodity prices boom and could prove very hard for sub-Saharan Africa entrepreneurs and governments to anticipate.
Improving natural resource management.Demand for fuel and minerals from fast-growing emerging countries is likely to raise commodity prices and incomes for sub-Saharan African countries in the medium to long term. This would require: Responsible macroeconomic managementto avoid major distortions (for example, overvalued exchange rates, unsustainable fiscal positions, restrictive trade regimes) and the resource curse, as a number of advanced economies have done (for example, Australia, New Zealand, and Scandinavian countries) and many developing countries are doing (for example, Azerbaijan, Botswana, Chile, Indonesia, and Peru). Using resource revenues to foster local productivity.De Feranti and others (2002) describe how successful natural resource exporters (for example, Australia, Canada, New Zealand, Scandinavian countries, and the United Sates) have effectively used resource-related revenues to improve general education and lifelong learning, finance research and development incentives, strengthen information and communications technology, provide high-quality public infrastructure, and strengthen institutions. Sub-Saharan African countries should similarly use commodity revenues to finance projects and reforms needed to boost competitiveness, such as those described in the first pillar of the World Bank’s (2010) strategy for Africa. Increasing productivity is particularly important considering that sub-Saharan African countries may face competition from other fast-growing LICs, such as the next wave of Asian tigers. Emphasizing policies without favoring specific sectors.Considering the unpredictability of future structural changes that may result from engagement between sub-Saharan African countries and emerging partners, governments should emphasize policies promoting higher productivity and poverty reduction, regardless of which sector is favored at the time by the rapidly evolving global economy. Therefore, sub-Saharan African countries should aim to improve the overall productivity of their economies in a number of areas in which they currently lag compared with other regions, including education, health, overall trade liberalization, infrastructure, and other investment climate-related areas. Strengthening economic flexibility and safety nets.Given the large transitional costs, specific sectors may face rapid structural changes in emerging partners. It is important that sub-Saharan African governments implement policies that allow for adjustment and safety nets that protect the most vulnerable. Such policies could include implementation of retraining programs for labor reallocation and promotion of financial deepening to facilitate access to credit for the reallocation of capital to competitive sectors. Implementing effective transfer programs to alleviate poverty is also important.19 Promoting regional integration. The unique economic opportunities that regional integration could provide to sub-Saharan African countries require their governments to continue the process of intraregional trade liberalization, institutional integration, and intraregional infrastructure development. The potential benefits of upgrading the intraregional infrastructure can be large. For instance, Buys and others (2010) find that an investment of US$20 billion for an initial upgrading of sub-Saharan Africa transport infrastructure, followed by US$1 billion annual spending for maintenance, could expand overland trade among sub-Saharan African countries by about US$250 billion. Negotiating better market access, particularly for products with high value-added.The level and structure of trade barriers in many of the main emerging partners deters export growth and sophistication in sub-Saharan Africa. As shown in Table 3.3, many emerging partners have more restrictive regimes, and some of them have very high tariff escalation.20 This should be at the forefront of bilateral, regional, and multilateral trade negotiations. The objectives should be to reduce overall protection in emerging partners, minimize tariff escalation, and broaden duty-free access beyond low-value and lightly processed African goods.21 Because agriculture continues to employ the poorest deciles in sub-Saharan Africa, negotiations should emphasize the reduction of trade barriers to exports from this sector.22
|MFN applied tariff|
|Top emerging partners (simple average)||13.1||37.6|
|Turkey||4.1||−35.3|Better leveraging special economic zones.Governments should keep in mind that SEZ are second-best solutions compared with economy-wide reform. Although SEZs can help promote manufacturing in many countries, experience in Africa has been mixed (Farole, 2011). However, the substantial and more recent investments from China in SEZs in sub-Saharan Africa seem to be well-funded schemes that are associated with a secure demand from Chinese companies. Thus they are more similar to the successful Indian investment in Mauritius’ SEZs than those in most sub-Saharan African countries, which were typically launched and fully financed by domestic governments. Should sub-Saharan African countries decide to promote SEZs, fiscal costs should be minimized, and the impact of FDI on sub-Saharan Africa’s growth maximized by facilitating the transfer of know-how and technology, increasing local linkages, and diversifying into new sectors without relying on discretionary tax and financial concessions or direct project financing by the government.
This chapter uses trade data by trading, from the IMF’s Direction of Trade Statistics and the United Nations Commodity Trade Statistics Database (Comtrade). The analysis the product composition of trade uses Comtrade data, grouping the ten single-digit commodity categories of Revision 3 of the Standard International Trade Classification (SITC) into seven broader categories: Food and Beverage (including food and live animals, beverages and tobacco, and animal and vegetable oils), Fuel (mineral fuels), Crude Materials, Chemicals, Manufacturing (including manufactured goods, and miscellaneous manufactured goods), Machinery, and Not Classified.
Drawing from the classification of countries commonly used in the Regional Economic Outlook, sub-Saharan African countries are aggregated into four nonoverlapping groups (oil exporters and non-oil-exporting middle-income, low-income, and fragile low-income countries), as well as into other subgroups: resource-rich non-oil, non-resource-rich coastal, and non-resource-rich landlocked (see the Statistical Appendix for a list of the countries that comprise each group and the criteria for their classifications).
This chapter loosely considers traditional partners to be those that are member countries of the DAC, as these have accounted for the majority of sub-Saharan Africa’s trade for many decades. They are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, and the United States. The rest of the countries are considered emerging partners and have been further classified into BICs (Brazil, India, and China), the Group of Five (the next-five-largest emerging partners after the BICs, that is, Indonesia, Malaysia, Saudi Arabia, Thailand, and the United Arab Emirates), sub-Saharan African countries (intraregional partners), and others.
This chapter was prepared by Paulo Drummond, Montfort Mlachila, Gonzalo Salinas, Hui Jin, Alexis Meyer-Cirkel, and Teresa Trasino, with input from Kaveh Majlesi and Cleary Haines.
The discussion in this section focuses on trade in goods, because no data are available on the direction of trade in services. Although we cannot extrapolate the analysis for goods to services, it is worth noting that the ratio of total trade in services to total trade in goods in sub-Saharan Africa remained at about 25 percent between 1990 and 2010.
Defined as member countries of the Organization for Economic Cooperation and Development’s Development Assistance Committee.
The share of sub-Saharan Africa trade with traditional partners might be higher if we included services, because they are exchanged mainly with advanced economies.
The magnitude of the reorientation of sub-Saharan Africa’s exports toward BICs is related to a faster increase in the volume of exports and is not purely a result of a change in international oil prices, the product most heavily imported by BICs from sub-Saharan African countries. Indeed, the volume of sub-Saharan Africa’s oil exports to BICs grew about twice as fast as oil exports to DAC countries in 2003–08, the period when most of the reorientation took place.
Between 1990 and 2010, the share of DAC countries in total trade decreased from 70 percent to 56 percent in LAC and from 65 percent to 46 percent in MENA.
An additional exercise was undertaken to test patterns of intraregional trade, this time looking at the subsample of South American countries as exporters. The results indicate that the dummy for the region is negative and significant in specifications including or excluding trading partner’s economic size. This implies that intraregional trade in South America is also lower than would be expected using standard gravity models, a similar outcome to the one observed in sub-Saharan Africa.
Santos Silva and Tenreyro (2006) control for biases that emerge owing to log-linear transformation commonly used and heteroskedasticity of the error term.
If gold is added, which constitutes a large share of the “not classified” category, this share reaches 60 percent, considerably below the share of oil and primary products in exports to BICs.
Only limited data are available on FDI and development financing from emerging partners to sub-Saharan Africa. The United Nations Conference on Trade and Development’s Foreign Direct Investment Database and the Bulletin of China’s Outward Foreign Direct Investment are the sources for FDI from BICs to sub-Saharan Africa, and the World Bank for development financing data from BICs to sub-Saharan Africa.
No bilateral data are available about Indian and Brazilian FDI in sub-Saharan Africa for most of the past five years.
This is in part because of Mauritius’ role as an offshore financial center that is used as a transit point for FDI to other countries, including to sub-Saharan Africa.
See Table 4 in IMF (2011).
Note that this trade expansion is not dependent on increasing oil exports, because trade expansion to emerging partners has also been significant in non-oil exporting countries as mentioned earlier in the chapter.
Using a dynamic multivariate multicountry autoregressive model, the study finds a significant positive effect of BRICs’ demand and productivity on output in sub-Saharan African LICs, as well as in other LICs.
Many empirical studies find a significant impact of exports on learning by doing, including Blalock and Gertler (2004) and Kraay (2002), although it is also worth noting that some studies do not find evidence of such an impact (for example, Clerides, Lach, and Tybout, (1996).
The impact on revenues can be significantly reduced if FDI is accompanied by extensive tax concessions.
OECD (2010, p. 79) illustrates the relative decline of capital goods prices associated with India and China. UN Office of the Special Adviser on Africa (2010) also refers to the benefits of cheaper consumer goods in regard to wage pressure and the suitability of core generic medicines for low-income households.
Several studies have found evidence of harmful effects of such imports on local manufacturing (leading to job losses, worsening income distribution, and increasing poverty). See, for example, UN Office of the Special Adviser on Africa (2010) for evidence on the clothing and furniture sectors and Giovannetti and Sanfilippo (2009) for a study of textiles, clothing, footwear, machinery, and equipment.
See, for instance, the World Bank (2010) strategy for Africa, which focuses on reducing vulnerability and increasing resilience in the region.
In particular, Brazil, India, Malaysia, and sub-Saharan African countries themselves maintain highly restrictive trade regimes, with more punitive trade barriers being applied on imports of manufacturing, and food and live animals. Also note that, except for China, emerging countries have not established preferential trade agreements to aid sub-Saharan Africa development, as traditional partners commonly do.
See, for instance, the 2010 NEPAD study on the prospects for diversification in Africa.
See ACET (2009) for non-tariff barriers for sub-Saharan Africa exports to Chinese markets.