A View from UNCTAD
- I. Patel
- Published Date:
- December 1992
Exports account for nearly one third of gross domestic product (GDP) in Africa. Obviously, such a regional figure masks substantial differences among countries in the region but is an important index of external trade dependence. On the other hand, Africa’s share of world exports has dropped by a third, to less than 2 percent in the past thirty years. Meanwhile, dependence on one or two primary commodities for a large share of export earnings continues. Except for a few countries, there has been little real progress with diversification. The coexistence of high export dependence and low market shares indicates little influence on international trade and high exposure to changes transmitted through the global trading system. The region’s vulnerability to external shocks is further exacerbated by its high dependence on a limited range of primary commodities as exports. The experience of the 1980s demonstrates the risks associated with such exposure.
Among the most significant features of this experience was the loss of foreign exchange earnings by many countries in the region resulting from the collapse of commodity prices. Neither the oil exporting nor the non-oil exporting countries were spared drastic falls in foreign currency receipts at various periods. The balance of payments difficulties associated with such developments and the reluctance of commercial lenders to permit roll overs of existing loans or to grant fresh ones created enormous reserve management problems. The average level of international reserves declined by half from 1980 to the equivalent of three months of imports in 1988. The distribution of international reserve holdings differed among countries, but even countries (such as Côte d’Ivoire and Kenya) that had been hailed in the late 1970s and early 1980s as models of prudent economic management were not spared the devastating effects of the collapse in commodity prices. Part of the income loss arose from reduced market shares, but, by and large, commodity price falls were the culprit for the difficulties faced by most African countries.
Loss of reserves, stagnating real resource flows, and mounting debt service forced many countries to resort to import compression. Reduction in imports affected not only equipment imports and important replacement parts, but in some cases even basic requirements, such as fertilizers, hospital supplies, and educational materials. Capacity utilization and output declined. Similarly, physical infrastructure in many distressed countries suffered neglect as trade-generated resources declined. In these circumstances, economic management in most countries was reduced to addressing problems of day-to-day existence with little scope to develop a long-term perspective on growth and development.
Stabilization, Adjustment, and Trade Expansion
Attempts to cope with external and internal shocks have taken various forms, ranging from price and earnings stabilization schemes to the use of market-based instruments. Lately, countries have also initiated a number of policy reforms under IMF- and World Bank-supported structural adjustment programs to correct some of the distortions in their economies and to promote trade expansion. Some of these efforts are discussed below
Given the supply and the price problems of primary products, it is no surprise that earnings variability has been a critical preoccupation of producers. Several multilateral initiatives have been pursued to mitigate the consequences of earnings fluctuations.
Stabilization of Prices and Earnings
Four main kinds of response to export earnings variability have been pursued. The first attempts to stabilize markets through intervention schemes, which, in their fullest versions, are embodied in international commodity agreements. The second utilizes available market instruments, particularly futures markets, to hedge against sharp price movements. The third and fourth mechanisms rely on outside institutions to provide compensatory financing when pronounced shortfalls of earnings actually occur.
The thrust of intergovernmental efforts has been toward international commodity agreements. At times, these have functioned reasonably well. Indeed, producers and consumers have in the past been able to agree on price ranges, financing of buffer stocks, exports quotas, and occasionally joint measures to improve market intelligence. But in recent years cooperation has waned. The severe difficulties of both the international cocoa and coffee agreements, covering two products of critical importance to Africa, highlight the problems inherent in such arrangements.
The establishment of the Common Fund for Commodities provides an avenue for promoting commodity measures (other than stocking), such as research and development, quality and productivity improvement, and market development, as well as local processing efforts and new uses for commodities. While stabilization measures are an important component of the Common Fund, they can be activated only when interested international commodity organizations elect to negotiate satisfactory terms to obtain financial support for their buffer-stocking operations. Nevertheless, the other measures mentioned above could make a vital contribution to broader programs of structural diversification of commodity-dependent economies in Africa. In this respect, the critical issues will be the extent to which the resources of the Common Fund (direct and through leverage) will be sufficient to finance suitable projects, the conditions that will govern the submission of projects, and the likely costs of operation.
The Stabex system for compensating unexpected falls in export earnings has been a constant feature of successive Lomé conventions. In principle, the entire eligible shortfall is to be covered through grants, but in practice the fixing of a total allotment with annual installments in each five-year convention period has meant that funds have not always been available. On three occasions during the 1980s, funding was inadequate despite additional efforts by the European Community (EC). The coverage of Stabex includes all African, Caribbean, and Pacific States (ACP); whereas the recent Swiss scheme of compensation in grant form has focused on the less-developed countries (most, though not all, of which are African countries). Under the Swiss program, shortfalls in the value of exports of a commodity to Switzerland can be accumulated over a few years to reach the prescribed minimum size for assistance. Subject to mutual agreement, the grant then made by Switzerland is treated as a supplement to a structural adjustment loan under World Bank-International Development Association auspices.
For several years, the IMF has had a compensatory financing mechanism designed to provide bridging facilities to help individual countries cope with a temporary shortfall in earnings. But this mechanism is not easy to employ. First, the need for relatively quick disbursement of foreign exchange is not usually met. Second, governments do not know in advance how large a drawing can be made. Third, if a country is experiencing a balance of payments disequilibrium independent of the shortfall, then the IMF makes the drawing of compensatory finance conditional upon reasonable assurance that adjustment measures will be undertaken. Fourth, any finance obtained bears a service charge and must be repaid according to strict schedules. The monetary and other costs of the facility, taken together, have made it less attractive to African countries.
Partly in response to this deterrence, a new compensatory and contingency financing facility (CCFF) was set up in August 1988 and was designed to help members of the IMF maintain Fund-supported adjustment programs in face of unforeseen external shocks. The basic features of compensatory financing were otherwise maintained although access limits were reduced. No African country has negotiated the inclusion of a contingency element in its IMF short-term assistance, and therefore no country has been eligible to draw under the contingency heading. Access is in any case complicated by the statistical conditions that have to be met. The recent events in the Persian Gulf area have led to temporary improvements in the CCFF, which are most welcome. These temporary improvements remain constrained, however, by quotas and give rise to market-related charges and relatively short repayment periods.
Structural Adjustment Programs and Trade Expansion
Economies in Africa face formidable constraints in their efforts to achieve adjustment with growth and concomitant export expansion. In countries facing acute macroeconomic disequilibria over extended periods, these efforts have helped to remove inefficiencies and to encourage export expansion up to a point; however, the scope for increasing exports quickly by a combination of cuts in consumption expenditure and devaluation—the principal policy measures usually recommended by major financial institutions—has tended to be narrow in most African countries. The scope for export expansion has generally been circumscribed by rigidities in domestic consumption and production patterns and by external demand factors. For many products, the domestic market remains the sole or main outlet. Where production could be switched to foreign markets, export supply capabilities have often proved inadequate for various reasons. One has been a neglected productive apparatus, owing to the lack of foreign exchange to buy imports of spare parts and new machinery to maintain the existing capital stock or to operate it at reasonable utilization levels. Also, reduced demand has resulted in idle plant and subsequent declines in production.
Furthermore, resource mobility across sectors—required to enlarge the production of tradables at the expense of other goods—is particularly low in African countries where sectors are highly disparate on account of the uneven and incomplete introduction of modern techniques and where the degree of product and market diversification is limited. Poor infrastructure and high transport costs to major overseas markets also continue to hamper export expansion and export market diversification.
The experience of African countries has demonstrated the acute difficulty of reconciling payments balance with other major policy objectives, namely, price stability, growth, and social peace, simply through devaluation and expenditure reduction. In fact, there are no short-term solutions, whatever the policy mix applied. It is the longer term that provides greater scope for increasing export supply capabilities through growth-oriented structural adjustment.
The level of new investment clearly has to play a commanding role in the process of the restructuring of output patterns required to strengthen export supply and external balance. Moreover, acquisition of technology at an accelerated pace, broad-based development of human resources, and rehabilitation and improvement of essential infrastructure are indispensable prerequisites for a growth-oriented adjustment process. Hence, sufficient external finance must be available, on terms and conditions conducive to the enlargement of production capabilities. Development aid and meaningful debt and debt-service reduction will be crucial as commercial borrowing capacity to finance increased imports beyond export revenue is constrained by debt problems for most of the African countries—and will continue to be so for some years. If, on the other hand, long-term adjustment is postponed for want of foreign exchange, economic stagnation will be inevitable and many African economies will remain trapped at a low level of income.
Furthermore, in an environment of extreme poverty, the effectiveness of economic policies in promoting structural change and sustained growth rests, in large part, on their social acceptability. Specific targets for improvements in the human condition, however, have not been featured in any of the stabilization and adjustment programs, although more recently there have been indications of greater attention being paid by adjustment efforts to mitigating social conflict. In the past, cuts in subsidies for basic necessities, in real wages, and in real health and education expenditures have had high social cost; poorer groups who have little, if any, access to safety net provisions have particularly suffered.
Liberalization generally promotes a more efficient allocation of resources, but little consensus exists on the optimal phasing and sequencing of market liberalization measures. Considerable uncertainty remains as to what outcome can be expected, in particular, for those many African economies at early stages of industrialization that have insufficient resources of human capital and an inadequate or debilitated infrastructure. Successful liberalization depends crucially on closely coordinated liberalization measures and industrial policies and, more particularly, government programs for the promotion of individual production sectors. The timing and phasing of reductions in protection would need to take account of the degree of competitiveness reached by individual industries and the seriousness of constraints on the further development of their competitive strength. Hence, the lowering of protection should provide an additional stimulus to improving efficiency, but its pace would have to be adjusted so as to allow sufficient time for government assistance and efforts of entrepreneurs to develop international competitiveness. As many African economies are still highly uncompetitive, rapid and indiscriminate liberalization could disrupt, rather than promote, economic development.
Finally, even relatively minor external shocks can easily threaten modest gains. The impact of the Persian Gulf crisis could have adverse effects for most of the African countries that are dependent on oil imports, income from migrant workers, and tourism and could seriously compound their existing difficulties in implementing structural adjustment programs and expanding export supply capabilities. Many countries in Africa are likely to suffer major losses in export revenue if the recessionary tendencies already evident depress world demand for their products. Moreover, more stringent austerity measures, including a fresh wave of reductions in imports of intermediate and capital goods, may become necessary in a larger number of non-oil exporting economies. Renewed retrenchment would further constrain investment and thwart efforts to build up competitive supply potential. For many countries in Africa the setback could be dramatic.
Diversification and Market Access
Structural adjustment programs have emphasized the improvement of supply conditions in order to maximize returns from commodity production. This is predicated on the assumption that the central problem is the inability of African output to maintain its market share, both in quantity and quality, vis-à-vis other producing regions. Even if that premise is accepted uncritically, it is essential that the international trading environment should not undermine the efforts of Africa.
Exports of commodities from Africa have traditionally been directed to Western Europe much more than to other markets. In 1988, the EC alone absorbed more than 60 percent of exports for many commodities. Intra-regional trade was less than 6 percent of the total. Although allowance for unrecorded trade may well increase that proportion considerably, it is less than the corresponding figure (15 percent) for Latin America’s intra-regional transactions and way below the figure for Asia (43 percent). The concentration on Western Europe has generally been considered an advantage for Africa in the sense that a very large share of its exports enjoys duty-free access, even when sales from other developing countries face tariffs. This is because almost all relevant products, which would otherwise be most-favored-nation dutiable are covered by the Lomé convention and bilateral EC agreements with non-ACP countries, such as Algeria, Egypt, Libya, Morocco, and Tunisia. Nevertheless, the market access issue requires more careful assessment.
Preference margins that Africa currently receives are small because its exports are items facing low most-favored-nation rates. In terms of their practical value, the Lomé preferences can be examined by dividing Africa’s exports to the EC into three broad groups. The largest of these, accounting for over 70 percent of the value of such exports, enters the EC duty free but would do so even without the Lomé convention. The second group refers to items on which both most-favored-nation and Generalized System of Preferences rates are positive and which do not compete directly with European production. Here, African states do receive a genuine preference over third-party exporters to the EC; coffee is an example of such a product. The third group is the smallest in terms of African export value and consists of goods produced within Europe for which European suppliers obtain substantial protection. Key examples are items falling under the Common Agricultural Policy (CAP) and the Multifiber Arrangement (MFA). Here, Africa’s preferences are valuable in that they shield the region’s exports from competition by other third-party suppliers and allow the region to benefit from the artificially high prices in the European market brought about by the restriction of supply. Nevertheless, it is in just these areas that nontariff barriers severely diminish the value of tariff preferences.
The dynamics of tariff preferences are particularly important at the moment. Prospective changes emanating from the current Uruguay Round would reduce or even eliminate preferential margins and could, therefore, be quite costly to African exporters. Elimination of EC duties on all unprocessed tropical commodities plus significant reductions on processed items could well reduce the export earnings of sub-Saharan Africa. African countries would undoubtedly respond by changing their production patterns and improving their competitiveness. In the end, it is not entirely clear that they would lose in the long run. Indeed, some observers hold that developing countries will gain in the long run, especially from liberalization of agricultural products.
The second major aspect of the market access issue refers to the definition and application of the rules of origin that any product must satisfy before it can qualify for preferential treatment. These rules are particularly relevant to items that embody inputs from non-EC and non-ACP countries. The EC recognizes African origin if the inputs from third parties have been sufficiently processed so as to warrant a change of the four-digit tariff heading. In practice, what happens is that simple assembly is excluded; for manufactures a maximum share for nonoriginating materials of 40—50 percent is set; for textiles and clothing, the starting material for transformation is defined as yarn, and for fishery products they must be taken from the sea by ships registered in the EC or Africa and be at least 50 percent owned by nationals of those states. These criteria are exceptionally restrictive for countries in early stages of industrialization.
Although the EC has offered derogations from these origin rules, the procedures for examining cases are laborious. Even if a derogation is granted, the maximum period is three years (renewable for a further two years for the less-developed countries). After that, the African exporter must conform to the normal rules of origin. The complexity of interpreting origin rules and then applying for derogations from them is unquestionably costly for the African entrepreneur. While recent evidence of a few applications for derogation is interpreted by the EC as a positive sign, a more likely explanation is that the administrative procedures involved reduce the value of these concessions.
The third problem with market access is the prevalence of nontariff barriers. These apply to processed items and increase sharply with the degree of processing for certain products, such as vegetable oils and tropical fruits. Commodities from Africa that compete with European production, such as those covered by the CAP, along with goods falling within the MFA, face a battery of variable import levies, countervailing duties, quotas and, voluntary export restraints. For some commodities this array of control instruments is supplemented by regulations that permit access only at certain times of the year. In still other instances, such as with beef, the terms of the Lomé convention provide only partial remission from import duties and even then require that the exporting country impose a tax on its own sales abroad. As commodities move up the processing chain and are qualified as manufactured goods, the EC imposes a number of nontariff barriers against imports. Although some of these measures have yet to impinge directly on African producers, they have been invoked against other ACP states. That fact certainly influences foreign investor perceptions of the prospective opportunities that the Lomé trade system may offer; by introducing uncertainty, it does not encourage optimism about new export-oriented investments.
One obstacle to trade comes from the barriers affecting products in their primary state; another is the escalation of barriers against processing of these items. On the whole, developing country exports of manufactured goods face 50 percent more nontariff barriers than do such commodities traded among industrial countries themselves. The obstacles often extend to such simple operations as packaging, which are among the means whereby low-income countries try to capture a little more of the value added.
Many African countries are not yet seriously affected by these barriers simply because they do not produce and export the processed items concerned in sufficiently large quantities. But the position may alter as they move closer to the trading frontier in a significant way. This point is of particular interest with regard to the MFA. Its application and, in particular, the great stress laid on controlling market channels have unquestionably restrained the rate of growth of exports from developing countries. Their share of the apparel and clothing market has fallen in recent years, at a time when the market as a whole has grown quite quickly. For African countries, much will depend on the extent to which future arrangements in this area encourage greater investment in production. Even so, the existence of these barriers must be regarded as a long-term constraint on expansion of export earnings.
Many African countries are too limited in market size, resources, infrastructure, or geographical conditions to be economically strong and viable on their own. While the Lagos plan of Action sets the blueprint for the necessary cooperation at the regional level, progress toward the attainment of its objectives has been limited. Efforts to integrate markets at the subregional level have been hampered by a combination of exogenous and endogenous (mainly structural) constraints. African economies are generally characterized by little differentiation owing to their low level of industrialization, and little complementarity owing to their similar commodity-based production structures. This characteristic limits the extent to which economic interaction can take place and the prospects for sustaining trade expansion over the long term.
The economic crisis and the macroeconomic imbalances that have afflicted the African economies and the consequent adjustment measures applied during the 1980s have also affected their capacity to cooperate. These influences diverted attention away from long-term development and economic integration goals to short-term macroeconomic policy considerations. Moreover, instead of adopting common positions and joint measures to resolve pressing economic problems, member states of economic communities have had to resort to purely national measures that have often undermined their obligations to their subregional communities. As a result, the intratrade of all subregional economic communities declined significantly between 1981 and 1985, although by 1988 a slight improvement had been recorded; and the volume of transactions channelled through the subregional clearing and payments arrangements was drastically reduced.
Yet there is little doubt that economic cooperation and integration, in the long-term, is crucial to the economic development and survival of African countries. Indeed, very few of them possess the resource and market size necessary for viable industrialization and accelerated development. Fewer still can participate on their own in the rapid technological revolution that is sweeping the world today.
One development that will have major implications for the economic integration process in Africa, and which has its origins in the Lagos Plan of Action, is the decision of the Organization of African Unity (OAU) heads of states and government summit in July 1990 to establish an African Economic Community by the year 2025. This decision was based on the summit’s conclusion that intra-African cooperation is crucial to the economic survival of the region in the coming years. In the same resolution, the OAU summit agreed to merge the proposed Community with the OAU into a single organization with one secretariat.
The Association of African Central Banks with its subregional branches aims to promote exchange of views on policies relating to trade finance, macroeconomic policies, and harmonization of policies in relation to these areas. So far, given the diversity of currencies, trade links, different levels of development and variances in policy stances, cooperation among African central banks has been good but cautious. Meanwhile, attempts to promote an African Monetary Fund have stalled. Most central banks regard the idea as somewhat premature in view of the very disparate levels of performance and policy stances of member states.
In the area of multilateral clearing and payments arrangements, the performance of the three established clearing arrangements has also been poor. One of the arrangements has been suspended, and the volume of transactions cleared through the two operational clearing arrangements has been minimal. Recently, a fourth clearinghouse was established by the Economic Community of Central African States. Almost half of the African countries, however, do not participate in these arrangements and are not members of similar operational arrangements. The operations of the subregional clearing and payments arrangements have suffered from the small volume of cleared transactions, which is directly associated with weaknesses in the intratrade of subregional economic communities; restrictions on the type of trade to be cleared, which has generated asymmetry in the trade exchanges of member states; payments difficulties manifested by persistent debtor-creditor patterns leading to unsustainable accumulation of arrears; and the avoidance of the clearing system on account of foreign exchange problems.
In brief, specially renewed efforts will be required to implement the main ideas embodied in the Lagos Plan of Action. Regional cooperation efforts would also have to take account of the vast potential of South Africa and the evolution of the political process there. If the best expectations are realized, and a democratic South Africa emerges in which all its citizens have the same rights, duties, and opportunities, the region will be confronted with an important economic and industrial power at its southern tip with which it will wish to have normal economic relations.
Foreign Direct Investment
Since the onset of the debt crisis, African countries have made considerable effort to improve the policy environment for foreign direct investment. Like other developing countries, they have sought to expand rapidly the role of foreign direct investment as a means of redressing the imbalance between debt-creating and non-debt-creating flows, but also to compensate for the virtual cessation of commercial bank lending to the region. New flows of foreign direct investment would also substitute for low and declining domestic savings and rapidly deteriorating investment stocks, and contribute to the reactivation of the declining export sector.
Encouraged by international financial institutions and bilateral donors, the result of these efforts has been a net improvement in the investment climate in the region. Many African countries have seriously pursued the liberalization of their investment regimes and introduced new incentives and other programs such as debt-equity swaps and privatization, to attract foreign direct investment. Although these changes have coincided with an upsurge in worldwide flows of foreign direct investment, the volume of net foreign direct investment flows to African countries in real terms was still, by the end of the 1980s, only about half the level reached before the eruption of the debt crisis. Indeed, at the best of times the volume of these flows to African countries has never been more than modest. This has now dwindled to a mere trickle, or about $0.7 billion in 1989. Debt-distressed African countries have been particularly hard hit. Although most of them have introduced the necessary policy reforms, the debt crisis has continued to stifle foreign direct investment by feeding the general perception of high risk, diminished profitability, and poor prospects for growth. An expansion of these flows would undoubtedly alleviate some of the financial problems faced by debt-distressed countries. But as long as the debt overhang persists, it will continue to dampen foreign direct investment, as well as other private flows to these countries.
The comparative unattractiveness of African countries to foreign investors is also a reflection, however, of weaknesses in their basic economic structures and institutions. Though the region is endowed with substantial natural resources and abundant cheap labor, most domestic markets are small; technological and managerial bases are weak; and the labor force is largely unskilled. These deficiencies are often compounded by geographical and climatic problems and by inadequate administrative and juridical processes.
At the global level, depressed commodity prices during much of the 1980s and overcapacity in a number of industrial sectors, including petrochemicals, also contributed to the fall in net foreign direct investments flows to Africa. Innovations in labor-saving technologies, new materials, and techniques aimed at the reduction of energy and raw materials consumption have also had adverse consequences on foreign direct investment in commodity-exporting African countries. The risk factors of the 1980s further encouraged investors to rely increasingly upon risk-averting techniques, such as joint ventures and licensing agreements, which allow firms to earn attractive returns even in troubled countries while minimizing equity participation and exposure to the commercial and political risks associated with traditional foreign direct investment. Recently, cross-border investment opportunities within countries of the Organization for Economic Cooperation and Development (OECD) have been expanding, supported by improved economic performance, financial deregulation, and intensified business competition in view of the unified EC market after 1992.
Such problems, including the pervasive negative perception of foreign investors concerning Africa, combine to create an unpromising situation. Nevertheless, the picture is not altogether dismal for, as the recent liberalization efforts demonstrate, there is an increasing will on the part of African leaders to improve the prospects for foreign direct investment, in a region where the opportunities for sound investment are not inconsiderable. Not only are there good opportunities for investment in the traditional resource-intensive sectors but also in the rehabilitation of existing industries, debt-equity swaps, the privatization of state-owned enterprises, and the flexibility of techniques, such as joint ventures, production and profit-sharing arrangements, franchising, leasing, and commodity-linked securities. Equity markets are also regarded as promising avenues for foreign investment in developing countries and African countries have begun to establish stock exchanges, although the current possibilities in Africa are rather limited.
While there is need for African countries to continue to improve their policy environment for foreign direct investment (and other non-debt-creating flows), for instance, by reassessing the remaining barriers to it, especially in those sectors with substantial export potential, they can also seek ways to minimize the possible negative effects of bidding against each other. Improved cooperation among African countries through stronger and more stable regional common markets could provide additional incentives for both African and foreign entrepreneurs. Regional and multicountry investment funds, like the African Enterprise Fund (AEF) and the Commonwealth Equity Fund (CEF) could also provide a more stable and attractive framework for investors.
If efforts by African countries are to be successful, they will need to be complemented by adequate and timely action by multilateral financial institutions and countries exporting foreign direct investment. OECD countries could consider putting in place special guarantee arrangements to encourage their investors to locate in Africa. In this regard, France’s recently established guarantee fund to protect French investments in Africa is a welcome initiative. Nevertheless, OECD countries should examine the possibility of strengthening such initiatives by the elaboration of a comprehensive framework involving trade, investment, and debt-reduction incentives, backed by adequate financing. Such initiatives should aim, inter alia, at strengthening the role of regional institutions, especially the African Development Bank and the African Enterprise Fund.
Investment promotion efforts also need to be intensified. African governments could make better use of the services of the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the Africa Project Development Facility (APDF) of the United Nations Development Program (UNDP), and the IFC-initiated African Management Services Company (AMSCO). Indeed, IFC’s capital base should be quickly expanded in order to enable it to increase its operations in developing countries as a whole, and particularly in Africa, and also to enlarge its technical assistance role. The encouraging development that 18 African countries have already joined MIGA (with 11 others in the process of doing so) should enable MIGA to play an increasingly dynamic role on behalf of a larger number of African countries. Finally, a stronger sponsorship role by the World Bank Group on behalf of a larger number of African countries would send to investors an unmistakable signal of confidence in the future of these countries.
In addressing the subject of trade, investment, and growth prospects in Africa, one must start with the high external trade dependence of countries in the region. Although this phenomenon poses difficulties, several countries in other regions, notably Southeast Asia, have turned such dependence to great advantage. They have enjoyed substantial export-led growth in their economies and a significant measure of development by adopting policies that permit flexible responses to shocks in their economies.
In the case of African countries, a major constraint derives from the limited range of unprocessed primary commodities that forms the basis of their high export trade dependence. This has been exacerbated by structural problems and, until recently, by a reluctance to adopt corrective policy measures early, in order to cushion economies against external shocks.
Since the second half of the 1980s, however, many African countries have introduced extensive and courageous measures to correct policy mistakes of the past. Some successes have been recorded, but on the whole the structural adjustment programs under which these measures have been introduced have been too constrictive and have not taken sufficiently into account the structural limitations of the countries applying the programs.
Some of the limitations of these programs now appear to be accepted, and it is to be hoped that a new generation of structural adjustment programs will be broader in scope and more growth and development oriented.
Continued action to strengthen commodity markets—through improved consumer producer cooperation, policies to enhance the competitive position of raw materials vis-à-vis synthetics, and supply rationalization schemes—and to expand and stabilize commodity export earnings—through new or enhanced compensatory financing facilities—is of course necessary to mitigate the effects of the commodity export dependence of African countries. However, the problems associated with dependence on a limited number of commodities—particularly vulnerability to changing market conditions and unstable export earnings—can only be solved in the long term through diversification. African countries need to develop new export products, stimulate the processing of commodities, and increase their participation in, and returns from, the marketing and distribution of their exports.
The diversification efforts of African countries could, however, be severely constrained by market restrictions, especially as they relate to processed goods or even agricultural products of trading interest to the industrial countries. Therefore, it is important that trade restrictions, especially on tropical products of export interest to African countries and in the area of nontariff barriers, be removed. Agricultural trade liberalization deserves every support because the long-run benefits of such liberalization in the context of an appropriate domestic policy environment could be substantial, despite the fact that some African countries might experience short-term welfare losses. Net food-importing countries, in particular, would need to give priority to promoting domestic food production over imports and would need expanded development assistance, including balance of payments support to cope with higher imported food prices.
In addition to trade liberalization by the industrial countries and the improvement of access to their markets, foreign direct investment is essential to Africa’s growth and development. Local investment will not be enough at this stage to promote growth and development. Despite the region’s efforts to create a more attractive environment, foreign direct investment has declined. The catalytic role of IMF and World Bank programs for external resource flows has yet to yield substantial results, nor have the various institutional arrangements put in place to promote foreign direct investment. Meanwhile, the globalization of markets and institutions and the risk, often denied, of Africa’s interests being adversely affected by new regional trading blocks, including major trading partners, threatens to extend Africa’s overall marginalization in trade and resource flows.
To counter these tendencies, African states need to pursue more vigorously their objective of self-reliance and to intensify regional cooperation in trade and development. Cooperation in trade, industry, research and development, technology, and infrastructure development will enable countries to realize the region’s potential more fully, and draw the attention of the rest of the world to the region as a serious partner in global trade, growth, and development. The evolution of South African as a nonracial democracy could offer particularly attractive prospects for cooperation between countries of the region.
In the long run, Africa’s growth and development will have to come through trade expansion, judicious investment policies at the sectoral level, and prudent management of macroeconomic variables at the national level. Africa cannot rely for its future growth solely on external aid. Growth must also be funded from trade-generated resources, and this must be a central consideration in Africa’s economic policies. In the process, regional cooperation, as well as foreign direct investment and market access, must play a more significant part than hitherto.