IV. Sub-Saharan Africa’s Emerging Export Pattern
- International Monetary Fund. African Dept.
- Published Date:
- April 2007
The share of SSA in global trade (exports plus imports) has declined from about 4 percent in 1970 to about 2 percent at present (Figure 4.1). This long-term decline is traceable to such factors as macroeconomic instability, high and cascading tariff structures, and unfavorable cost structures due to poor business environments, small domestic markets, and high indirect costs (Gupta and Yang, 2006).
Figure 4.1.Share of World Trade by Region, 1970-2005
Source: IMF, Direction of Trade Statistics.
However, the region’s export prospects have improved with the recent commodity boom. Because it is well endowed with natural resources, SSA has benefited from the boom, which has reoriented its exports toward rapidly growing economies. Continued rapid growth in Asia offers SSA opportunities to reverse the long-term decline in its trade share. Since most domestic markets in SSA are small, exports to Asia give SSA producers opportunities to vastly expand their markets. There is some evidence that SSA firms become more productive when they export (“learning by exporting”), so an upturn in exports could help lay the foundation for sustained growth (Bigsten and Söderbom, 2006).37 In principle African producers may find opportunities for diversification as labor costs in East Asia increase and as demand changes with the growth of the middle class in China and India. Moreover, efforts to improve the business environment in SSA could make it possible for countries there to exploit untapped potential in traditional export destinations.
This chapter analyzes the export patterns emerging in SSA and assesses their implications for policy. While recent studies (World Bank, 2004; Broadman, 2006; Goldstein and others, 2006) highlight the growing trade between SSA and Asia, this study looks at all SSA’s trading partners, including industrial countries. While other studies have treated the countries in SSA as a homogeneous group, this study differentiates between them on the basis of endowments (resource-intensive or not) and location (coastal or landlocked) to assess whether these considerations are relevant to exports. The study also analyzes merchandise exports in terms of product groups that are gaining acceptance in industrial and fast-growing emerging economies and whether in aggregate the region is undertrading or overtrading. It concludes with suggestions for policies that would help SSA to realize its full trade potential.
Evolution of SSA Export Patterns through 2005
Trade patterns by destination
The share of SSA’s exports to developing countries has more than doubled since 1990. As Asia industrializes, its demand for natural resources increases and SSA has responded to the export opportunity. Asia now receives about 25 percent of SSA’s exports. China and India together account for about 10 percent of both SSA exports and imports—25 percent more than the share of these two countries in world trade (Broadman, 2006). Intraregional trade accounts for about 10 percent of total SSA trade; the share has not increased in recent years (Figure 4.2).38
Figure 4.2.Destination of Sub-Saharan African Exports
Source: IMF, Direction of Trade Statistics.
Economic relations between China and SSA have expanded enormously in recent years (see Box 4.1). In the past 15 years China has emerged as an important destination for SSA exports. In 2005, the latest year for which data are available, SSA exports to China amounted to $19 billion, compared with negligible levels in 1990 and about $5 billion in 2000. Growing by 30 percent annually since 2000, they account for about 20 percent of SSA’s total export growth since then. SSA imports from China have also surged, from US$3.5 billion in 2000 to over US$13 billion in 2005. Nearly all these imports are manufactured products, reflecting China’s emergence as a major exporter of manufactures in recent years.
Box 4.1.China’s Financial Relations with Sub-Saharan Africa
China’s financial assistance to SSA is substantial. Loans and credit lines are estimated at about $19 billion, and in October 2006 at the Beijing Summit China announced assistance of about $5 billion. The beneficiaries of the largest flows are Angola, Equatorial Guinea, Gabon, Republic of Congo, and Nigeria; Angola and Equatorial Guinea together have credit lines totaling about $14 billion. The share of grants is small, but China recently canceled an estimated $260 million in debt for the Democratic Republic of Congo, Ethiopia, Mali, Senegal, Togo, Rwanda, Guinea, and Uganda.
The concessionality of the loans varies widely.1 Some large loans and credit lines have not been fully concessional, although they are on more favorable terms than the market. However, a recent $2 billion credit line to Equatorial Guinea and numerous smaller loans to SSA countries are concessional. The degree of concessionality is also affected by the requirement that only Chinese companies using Chinese products bid for the projects (70 percent of Chinese credit lines in Angola have been used this way). Also, repayment of loans has sometimes been tied, as in Angola, to the supply of oil.
China’s aid to SSA countries is largely aimed at financing projects in energy, telecommunications, and transportation. It is often accompanied by deals to develop mining and energy resources. For example, in return for the right to explore and exploit natural resources in the Republic of Congo, China is helping to build transportation, energy, telecommunications, and water facilities and is providing support for social sectors. However, China’s activities in construction and infrastructure predate its interest in resource-linked investments; construction companies were the first Chinese companies to enter Africa. For example, China was involved with the Tanzania-Zambia railway when it was constructed in 1970.
Chinese state-owned companies often enter into joint ventures with SSA state-owned companies for resource-based projects. The Chinese company SINOPEC has invested $3.5 billion in a partnership with the Angolan Sonangol to pump oil from recently auctioned offshore blocks. SINOPEC has also announced its intention to build a $3 billion refinery in Angola. In Gabon, the CMEC/Sinosteel consortium—financed by the Chinese Export-Import Bank—is investing about $3 billion in exploiting iron ore deposits; it is constructing a railway, a port, and a hydroelectric power station in return for exclusive rights to develop the mine. And a subsidiary of the China National Offshore Oil Corporation (CNOOC) recently signed a production-sharing contract with the National Oil Company of Equatorial Guinea (GEPetrol). However, joint ventures in construction are rare.Note: This box was prepared by Volker Treichel.1 Loans are generally considered concessional if they have a minimum grant element of 35 percent based on reference commercial interest rates published by the OECD.
While Asia’s importance to SSA has been increasing, the European Union and the United States are still its largest trading partners (Figure 4.3). Although SSA exports to China have grown rapidly—by 260 percent cumulatively between 2000 and 2005—and China is now SSA’s single largest trading partner in Asia, there has also been substantial growth in exports to traditional SSA destinations. Exports to the EU1539 grew by 66 percent between 2000 and 2005, and those to the United States grew by 112 percent. Merchandise exports to China of about $19 billion in 2005 are dwarfed by exports to the EU15 of $56 billion and to the United States of $52 billion.40 The share of the United States and the European Union in SSA exports is still 2½ times that of Asia and almost 6 times that of China (Figure 4.4).
Figure 4.3.Total Merchandise Exports by Destination, 1985 and 2005
Sources: UN Comtrade.
Figure 4.4.Destination Shares of Sub-Saharan African Exports, 1990 and 2005
Sources: UN Comtrade; IMF staff calculations.
Export Patterns by Product
Fuel explains much of SSA’s export surge in value terms (Figure 4.5). Total SSA exports rose by just over 75 percent between 1985 and 2000—an annual rate of about 5 percent. They have since grown by another 75 percent, tripling the annual growth rate for 2000–05 to nearly 15 percent. Oil exports alone increased by over $20 billion between 2004 and 2005. Of the total increase in export values between 2000 and 2005, fuels accounted for 65 percent, manufactures 24 percent, and food and raw materials about 5 percent each. Since manufactures include processed natural resources, the extent to which SSA’s export boom is resource-driven is obvious.
Figure 4.5.Exports of Major Merchandise Categories, 1985-2005
Source: UN Comtrade.
There is limited evidence of product diversification in the export pattern. In fact, the share of fuels has risen to over half of total SSA exports (Table 4.1), with annual increases of over 40 percent in both 2004 and 2005 (Table 4.2). Food and beverages and raw materials have seen long-term declines, though the share of manufactures has grown since 1985; the upward trend is obscured in 2005 by the large increase in oil exports.
|Food & beverage||18.3||16.1||20.1||12.5||11.3||9.1|
|Manufactures & chemicals||18.6||26.0||28.6||29.6||31.0||26.4|
|Food & beverage||1.6||7.1||−1.9||12.2||3.3||−1.7|
|Manufactures & chemicals||14.4||3.9||10.1||8.4||30.5||4.2|
The emergence of China as an important trade partner for SSA is most pronounced for fuels and raw materials (Table 4.3). From small amounts in 1990 China’s share increased to one-fourth of raw materials and one-sixth of fuels in 2005. The share of SSA fuel exports to the United States also rose by a few percentage points. The increases came from a reduction in the EU15 share. Export patterns for food and beverages hardly changed between 1990 and 2005.
|Food and beverage|
|Manufactures and chemicals|
Asia’s share in SSA manufacturing exports grew only moderately, by about 8 percentage points, mainly in response to Chinese demand. The share of the United States also increased somewhat because of the AGOA. Again, the EU15 share declined, though Europe still accounts for over half of SSA manufacturing exports, followed by the United States and industrial Asia; exports to other Asian partners are small.
The dependence of SSA nonfuel exports on agricultural commodities has declined, and exports of certain resource-linked manufacturing products have increased (see Appendix I, Table A3). Manufactured exports accounted for nearly 60 percent of all nonfuel exports in 2005, up from 37 percent in 1985. Within manufacturing the major categories are precious stones, the share of which has more than trebled since 1985, and silver and platinum, the share of which has nearly doubled. Iron, aluminum, clothing, and vehicles are the other major product categories. By contrast, the share of most nonmanufacturing categories, especially coffee and cocoa, declined. Among the exceptions are fruit and nuts and fish, but together these account for just over 6 percent of nonfuel exports.
The evidence is mixed on whether recent growth in SSA is associated with higher exports, including manufactures. Between 2000 and 2005 SSA’s oil importers on average saw an increase in annual growth of about 2 percent and in the exports-to-GDP share of around 2 percentage points,41 but the relationship is weaker at the country level. While fast growers like Tanzania, Zambia, Ethiopia, and Kenya have higher export shares, countries like Ghana and Namibia have grown even though their export shares declined. Furthermore, some countries (e.g., Lesotho and Swaziland) have seen sizable increases in export shares without any surge in growth. Similarly, there is no clear relationship between growth and an increased share of manufactures in total exports. Several countries (mostly in southern Africa) have registered large increases in the manufactured export share, but others (Ethiopia, Tanzania, and Uganda) are growing rapidly with shares of 15 percent or less.
Export Patterns by SSA Country Groupings
It is often argued that the trade pattern is influenced by geographic characteristics, as are growth prospects more generally (Gallup and others, 1998). Here, following Collier and O’Connell (2006), countries are classified as resource-intensive, with subgroups oil and non-oil; and non-resource-intensive, with subgroups coastal and landlocked.42
While the destination of exports of SSA’s oil producers is changing, those exports have become even more concentrated in fuels (Appendix I, Table A4, top panel). Since 1990 the share of fuels in total exports of SSA OPCs has increased by about 12 percentage points, to almost 90 percent. The EU15 share in oil exports fell by more than half, to about 20 percent; Asia expanded its share to 23 percent, and the United States share rose to 58 percent, an increase of more than 5 percentage points. For other product groups the EU15 is still the single largest destination, although its share has declined in favor of the United States (mainly in manufacturing and food and beverages) and Asia (mainly in raw materials43 and, though less so, in manufactures).
Coastal countries are highly dependent on exports to the EU15, particularly of manufactures (Appendix I, Table A4, middle panel), which since 1990 have risen to about 60 percent of total exports. The EU15 is still the dominant destination for all export categories, though increased Asian demand for manufactures and raw materials has reduced its share and that of the United States. Except for South Africa, coastal countries are even more dependent on the European Union and export nearly as much food and beverages as manufactures; for this group, since 1990 the share of manufactures is up by only 4 percentage points.
Landlocked countries also depend on the European Union, but Asia is becoming more important to them (Appendix I, Table A4, bottom panel). Compared with coastal countries, they export fewer manufactures but substantial amounts of raw materials and food and beverages; shares of the latter two categories are steady or higher since 1990 while the share of manufactured exports has declined. The United States in recent years joined the EU15 as a dominant export destination for manufactures because of growing textile imports under the AGOA. China and other Asian countries replaced the European Union as the main destination for raw-material exports, mainly cotton. The export pattern for coastal and landlocked countries is still strongly influenced by the traditional mode of exporting raw commodities to industrial countries. The global trade regime features much less tariff escalation than in the past, due in part to extensions of the Generalized System of Preferences, such as the AGOA and the EU’s Everything But Arms (EBA) initiative. However, because various constraints mitigate the impact of these liberalizing measures, the historic export pattern persists (see the section on Making Trade an Engine of Development).
A Closer Look at SSA’s Manufacturing Exports
Across all country groupings SSA’s exports of manufactures are confined to a few product categories (Table A5). Seven industries44 account for 75–80 percent of SSA’s manufacturing exports; nonferrous metals and nonmetallic mineral manufactures (mainly diamonds) each account for about 30 percent of the total. Transport equipment (10 percent) and clothing (8 percent) are the fastest-growing categories and are the only two not strongly linked to processing of resources.
While Europe is still the dominant destination for manufacturing exports, Asian destinations are becoming more important for the manufactures of OPCs and coastal countries. Asia is the fastest-growing destination for the manufacturing exports of oil producers, which tend to be raw material-based, such as wood and leather; however, these exports are a tiny proportion of total OPC exports (Appendix I, Table A4, final column). For coastal countries, the EU15 is usually the largest destination in the four main manufacturing categories, although industrial Asia is dominant for nonferrous metals. The manufacturing exports of some landlocked countries also reflect the commodity boom, but the most pronounced development is the surge in exports of clothing.45 Exports of nonmetallic mineral manufactures dominate for countries rich in resources other than oil.46
Sub-Saharan Africa’s Emerging Export Pattern
South Africa and other southern African countries dominate most SSA manufactured-export categories (Table 4.4). Eleven product categories account for 84 percent of all SSA manufacturing exports. For eight of the categories the EU15 constitutes the largest destination, and for seven South Africa is the dominant supplier. The products where South Africa is not in the top two suppliers reflect resource endowments (diamonds in Botswana, copper in Zambia, and hydroelectricity in Mozambique) and the emergence of a significant textile industry in some SSA countries (Mauritius and Madagascar).47
|Industry||Value||Growth 2000-05||Market 1||Market 2||Supplier 1||Supplier 2|
|Veneers, plywood boards, and other wood||791.1||21.1||EU15||Ind. Asia||South Africa||Ghana|
|Pearls and precious stones||9,174.5||15.4||EU15||USA||Botswana||South Africa|
|Raw forms of iron||3,031.2||22.3||EU15||Ind. Asia||South Africa||Zimbabwe|
|Iron ingots||645.3||17.6||EU15||Dev. Asia||South Africa||n.a.|
|Sheet iron||940.9||39.0||EU15||China||South Africa||n.a.|
|Silver and platinum group metals||5,518.6||7.8||Ind. Asia||USA||South Africa||n.a.|
|Copper||890.6||33.5||China||Dev. Asia||Zambia||South Africa|
|Aluminum||2,632.0||23.4||EU15||Ind. Asia||Mozambique||South Africa|
|Nonelectrical machinery and appliances||1,542.7||EU15||USA||South Africa||n.a.|
|Road motor vehicles||2,358.5||23.1||Ind. Asia||EU15||South Africa||n.a.|
|Clothing (except fur)||2,401.4||7.5||USA||EU15||Mauritius||Madagascar|
The levels of clothing exports reflect the positive impact of the AGOA and the mixed impact of the elimination (under the WTO Agreement on Textiles and Clothing [ATC]) at the end of 2005 of remaining bilateral quotas on textiles and clothing and trade. While this had a negative effect on some countries, the ATC has not eliminated SSA’s textile industry.48 Besides Mauritius and Madagascar (see Table 4.4), textile exports are also important for Lesotho and Swaziland. Textile exports under the AGOA—which has been extended to 2012—have duty and quota-free access to the United States even when the clothing uses third-country fabric.49 Even for exports to Europe, where the AGOA incentive does not apply, Asian firms have sought to diversify their production base by locating in Africa, partly because “excessive” penetration of European markets by Asian firms has been a sensitive issue since ATC quotas expired. Madagascar’s textile industry has performed well since then by graduatingto higher-value-added exports to Europe. Similarly, Mauritius records the highest value-added among SSA textile exporters to the United States.50
Benchmarking SSA’s Trade Performance
Many studies have investigated whether regions or countries undertrade or overtrade relative to a benchmark for trade flows.51 Gravity models are commonly used for setting this benchmark; they derive the level of bilateral trade (exports and imports) from natural determinants. In its simplest specification, trade between any two countries is expected to be directly related to their economic size (GDP) and degree of development (GDP per capita) and inversely related to the distance between them. When the observed level of trade exceeds the model’s prediction, the country pair is considered to overtrade; when it falls below, the countries are said to undertrade.
Undertrading is influenced by all barriers to trade, including structural and policy-induced impediments. The difference between actual and predicted trade—the residual—is the unexplained portion of bilateral trade flows. The estimate includes as many as possible of the natural determinants of trade flows. In addition to the core variables of size and distance, they include geographic characteristics (e.g., landlocked versus coastal), participation in customs or currency unions, and historic linkages between trading partners. The residual then captures the impact of trade policy and such impediments to trade as infrastructure, trade facilitation, and business climate when benchmarked against the impact of the included variables on the “average” country. Overtrading probably reflects structural aspects not captured by the gravity model, such as the emergence of intra-industry trade (see below).
An IMF study of global trade in the late 1990s found modest overtrading for SSA (IMF, 2002).52 It estimated a gravity model for bilateral flows from 1995 through 1999. East Asia overtraded by over 40 percent relative to the model’s prediction and SSA by about 5 percent. In contrast, developing countries in the Western Hemisphere undertraded by about 10 percent and South Asia and Middle East–North Africa (MENA) by about 40 percent. Moreover, while SSA’s overtrade globally may have been a modest 5 percent, the overtrade became 50 percent when both partners were from SSA.
A gravity model was estimated covering the period of the recent African trade boom. The specification and data for estimating the model are an extension of those in Rose (2002). For new estimates, the macroeconomic variables wereupdated to 2005 from the IMF Direction of Trade and World Economic Outlook databases, deflated to 2000 U.S. dollars.53
New estimates for 2000–05 find substantial changes in regional patterns of undertrading or overtrading (Table 4.5). While confirming the conclusion of IMF (2002) and others that East Asia is a large overtrader, they show that the extent of overtrading has almost doubled since the earlier study. SSA switches on average from modest overtrading to undertrading by over 20 percent. In intraregional trade SSA’s performance has improved but is only now at the predicted level.
|Latin America & Caribbean||0.03||0.43|
|Middle East & North Africa||0.40||0.04|
The results confirm the continuation of trends identified earlier. IMF (2002) supplemented the analysis of 1995–99 by benchmarking trade performance for five-year periods from 1980 through 1999. This demonstrated that SSA’s tendency to overtrade was in sharp decline, from nearly 30 percent in 1980–84 to just 5 percent in 1995–99. East Asia’s overtrade declined in the 1980s to 19 percent before increasing again, while South Asia’s undertrade was diminishing. The new results confirm that these trends are continuing and are supported by robustness checks using alternative econometric techniques.
The new results are partly attributable to the stronger role that the degree of development plays in explaining trade patterns. The new estimates find a smaller role for GDP and a larger role for per capita GDP than IMF (2002). As the 2002 study explains, global trade patterns are increasingly driven by the fact that demand for product variety rises with economic growth, and specialization is the most efficient cost structure. Thus, consumers in rich countries demand an ever-wider variety of products, which are produced by vertically integrated structures spread across many countries. This link between product demand patterns and trade probably lies behind the rising influence of per capita incomes in the model. The systematic regional differences indicate that regions are differently placed in their ability to take advantage of this kind of trade. For trade within SSA, however, the variation in development is not as dominant; because most countries are lower-income, trade values come much closer to prediction.
Landlocked countries within SSA have reduced their shortfall from the benchmark in the past two or three years, but coastal and resource-intensive groups have been large undertraders since 2000. The gravity model can be used to analyze changes in trade relative to the benchmark over time. These calculations suggest that the performance of landlocked countries trended upward from 2000 through 2005, moving from undertrading (consonant with the other groups) in 2000 to overtrading by nearly 10 percent in 2004 and 2005. No change is evident for the other groups, for whom year-by-year gaps hew to the average. The shortfall shows no sign of having narrowed during the commodity export boom, which indicates that much of the growth in trade values can be explained by global factors and pre-existing country characteristics (e.g., whether the country exports fuels).
The SSA groups on average overtrade with East and South Asia and undertrade with Latin America–Caribbean (LAC) and MENA (Table 4.6). The results reflect the earlier analysis in that the regions with general overtrading—South and East Asia—tend to overtrade with SSA subregions as well; the converse is true for undertrading. Not surprisingly, since the two groups have similar endowments, resource-intensive SSA countries have large undertrades with MENA. The large overtrade between coastal countries and South Asia may partly be explained by the presence of ethnic Indian communities in several SSA countries in eastern and southern Africa.
|Latin America & Caribbean||−1.20||−0.98||−0.44|
|Middle East & North Africa||−1.07||−0.78||−1.32|
The boom in SSA trade has done little to offset the region’s lack of integration into global trade. Relative to the global pattern, the surge in exports from SSA’s resource-intensive countries has not closed their shortfall in trade compared with countries with similar characteristics in other regions. Nor have SSA’s coastal countries been able to exploit their advantages of lower transportation costs and shorter distance to global markets.
Making Trade an Engine of Development
SSA seems to be performing below its export potential. Its export growth derives from both fuels and manufactures, but the latter is confined to a few resource-based products and is concentrated in southern Africa. While the trade of landlocked countries measures relatively well against the benchmark, that of coastal and resource-intensive countries falls short. Outside of fuels and manufactures, most SSA countries are dependent on primary exports the value of which has grown very sluggishly.
Evolution of export patterns and income growth outside Africa
Experiences in other parts of the world demonstrate that a variety of export pattern trajectories can lead to income growth. Six economies whose resource endowments early in their development resembled SSA countries were chosen to indicate how SSA’s export patterns might evolve. Argentina and New Zealand have large agricultural sectors, Chile has a dominant extractive industry, and Thailand, China, and Indonesia participated in the East Asian manufacturing trade boom and thus may offer guidance on how SSA could make the transition to labor-intensive manufacturing.56Figure 4.6 presents evolving export patterns from 1985 to 2005 for these countries; more detailed figures are given in Appendix I.
Figure 4.6.Selected Economies: Major Product Category Shares of Total Exports
Source: UN Comtrade.
Increasing per capita income does not necessarily depend on a transition to predominantly manufacturing-based exports. None of the three non-Asian countries has seen a manufacturing export surge. While the manufacturing share is higher in Chile than in Argentina or New Zealand, this is partly because in Chile the copper sector is included in manufacturing. In Argentina and New Zealand, where agriculture is still important, manufacturing accounts for about one-third of exports, up only modestly since 1985. Nevertheless, as Johnson, Ostry, and Subramanian (2007) emphasize, growth in manufactured exports is a key characteristic of rapid growers in East Asia. This may reflect complex linkages between institutional development, the export pattern, and pro-growth policies; in particular, the impact of the export pattern on growth will depend on the quality of institutions, which itself changes as the economy grows.
Natural resource–based exports are significant in several middle- and upper-income countries. Agriculture can be a major component of exports even in middle- and upper-income economies. In 2005 food and beverages were still 40 percent of total exports in Argentina, 50 percent in New Zealand, and 20 percent in Chile. Chile is unusual among the six because there the export share of raw materials has increased since 1985 from a quarter to nearly a third of total exports. Though the share has declined in other countries, it remains around 10 percent in Argentina and New Zealand.
In East Asian countries manufacturing has come to dominate exports. In 1985 food and beverages accounted for nearly half of exports from Thailand, and fuels accounted for a third of exports from China and nearly 70 percent of exports from Indonesia (Appendix I, Figure A1). The manufacturing share of exports from East Asia has since grown extremely rapidly; it nearly doubled in Thailand and tripled in Indonesia and China. By 2005 it had in fact reached nearly 90 percent of China’s total exports.
The success of East Asia is based on facilitating the accumulation of capital and skills, reducing trade protection, and reducing transport costs (Martin, 2005). Improvements in the education system can facilitate the accumulation of skills, but skills are only productive when complemented by capital. FDI has helped, but a domestic pool of savings and an effective financial sector are also important for fostering private investment. Trade liberalization promotes manufacturing exports not least because modern manufacturing networks often involve importing and exporting of related products (Jones, 2000).
Constraints on Manufacturing in SSA
Poor infrastructure and lack of economies of scale in domestic markets are common constraints to expanding trade. SSA markets are often characterized either by a relatively large number of small, high-cost, localized firms or by just a few firms that have significant domestic market power and thus feel little pressure to become more efficient. Local firms are also hampered by such well-documented indirect costs as poor quality of electricity and telecommunication, limited access to finance, and deficient governance. Data from the World Bank Investment Climate Assessments suggest that such indirect costs account for over 20 percent of total costs in Mozambique, Zambia, Eritrea, Tanzania, Kenya, and Ethiopia, compared with less than 10 percent in China, Nicaragua, and Bangladesh (Eifert, Gelb, and Ramachandran, 2005). Since tackling these constraints all at once is difficult, countries have sometimes tried to get around them by establishing export processing zones (EPZs); however, these cannot be protected from a poor business climate, and they can become magnets for rent-seeking—besides eroding the country’s revenue base.
External impediments to trade have considerable effect but are difficult to quantify. Among them are the costs of searching for and verifying business opportunities, setting up marketing channels, and having access to communications and logistics systems for receiving and delivering orders. Informal means of relieving these, such as the use of ethnic networks and personal contacts, have been important for Indian firms in SSA; Chinese firms have traditionally relied more on government-to-government links or targeted investments in the natural resource sector, but for them ethnic networks are of increasing importance.57
Poor transport infrastructure and multiple border crossings and administrative checkpoints significantly deter trade. For example, an Indian firm operating in Ghana found that the transportation cost per container from Accra to Lagos ($1,000) was so high that it was better to invest directly in Nigeria than to export to it (Broadman, 2006). Limão and Venables (2001) find that transportation costs to landlocked countries are in excess of those that would be predicted by ground distance alone, suggesting that border delays, logistics, and transit fees are putting these countries at a further disadvantage.
Elements of trade policy in many SSA countries were inimical to the development of manufacturing exports. The historic emphasis on import protection shifted relative prices against exporting sectors, discouraging their production. Tariffs on imported intermediate inputs raised the cost of producing exportable goods, and regional trade agreement (RTA) incentives to source inputs regionally in compliance with rules of origin placed exportable products at a cost disadvantage on world markets. Tokarick (2006) presented export-tax equivalents of tariff barriers in various countries (based on 2001 data) and found that the tariff structures of Tanzania, Mozambique, and Malawi imposed an effective tax on their exports of about 10 percent.
Integration into global production networks could help boost SSA’s nonprimary exports. Global trade patterns reflect the growing importance of intra-industry trade because production can now be more dispersed than in the past (World Bank, 2004; Broadman, 2006). Supply chains can be classified into two types: producer-driven (directed from upstream) and buyer-driven (directed from downstream). Buyer-driven networks may be better suited for SSA because they require less vertical integration, are less capital-intensive, and are often interested in areas where SSA already has some capacity, such as tourism and the production of clothing, food, and furniture. Yet in SSA the process of integration into production networks tends to be led by foreign, not domestic, firms. For the most part, the constraints on integration into global production networks are the same as the constraints on business development generally.
Attempts to build the textile industry in SSA have revealed structural constraints that often offset comparative advantages. As a cotton producer, SSA has potential to move up the value chain in textile production. The global trade regime provided incentives to the industry through the AGOA and the decisions of Asian producers to relocate production to SSA to circumvent industrial country quotas. Yet the textile industry in SSA still struggles with high production costs (transport, electricity, etc.); the limited supply and higher cost of domestically produced yarn; and restrictive rules of origin. Even when use of cheaper Asian yarn is allowed, as under the AGOA, the industry, as in Lesotho, has an extremely fragile cost base that is vulnerable to exchange rate appreciation.
Coastal countries are best placed to participate in the global manufacturing export boom, but except for South Africa they have made little progress.58 The manufacturing that does take place is often linked to resources and cannot be viewed as emerging intra-industry trade, though it is not surprising that SSA’s manufacturing base would be linked to its comparative advantage in resources. Landlocked countries depend on agriculture and raw material exports; transportation to ports is a significant burden on the development of manufacturing. And while resource-intensive countries have been the biggest beneficiaries of the global commodity boom, the result has been to lessen their product diversification even as regional trade has diversified.
The current orientation of the global trade regime limits the ability of SSA as a whole to benefit from preferential trade arrangements, but SSA’s own external trade policies do not help. The tendency toward regionalism in global trade has led to “hub and spoke” trading patterns in which SSA countries are at best one spoke for a large global trade partner (Yang and Gupta, 2005). The key preferential trade arrangements—the AGOA and EBA—limit their full benefits to SSA’s least developed countries. While these countries in principle thus face no export restrictions to the United States and the European Union, they also have the least capacity to build significant manufacturing capability. The restrictive rules of content in the trade arrangements (except for the AGOA’s textile provisions) make it difficult for a beneficiary country to partner with a low-cost provider of inputs (likely to be an Asian country) that has more manufacturing capacity but is not eligible for the AGOA or EBA. This makes SSA countries less attractive as an exporting base for supply chains that include countries ineligible for trade preferences; such operations would thus face a more unfavorable trade regime (e.g., tariff escalation and tariff-rate quotas) that impedes the growth of their manufacturing and processing sectors.59 As agricultural exporters SSA countries bear the costs of agricultural protection and subsidies, which restricts their market access and depresses the price of export commodities like cotton. However, the restrictive external trade regimes of African countries, including high tariffs and other trade barriers, contribute to the undertrading the section on Benchmarking SSA’s Trade Performance.
Most countries in the region have neither managed to achieve a labor-intensive manufacturing export surge nor climbed up the value chain of their commodity-based exports. But certain policies could help improve their prospects.
Keeping the economy stable, building high quality infrastructure, and reducing the cost of doing business are universally essential to promoting growth and trade. They would also help the region gain a share of the growing outsourcing of services by industrial countries (see Box 4.2).
Box 4.2.International Service Outsourcing to Sub-Saharan Africa
International service outsourcing (ISO) refers to companies procuring services in foreign countries (Amiti and Wei, 2004). It is estimated that ISO generates $160–200 billion a year, and its annual growth rate exceeds 20 percent (Bartels, 2005). ISO ranges from relatively low value-added data coding and customer service (call centers) to more sophisticated business processing (billing services, claims processing) to high value-added information technology and professional services (accounting, healthcare, engineering).
ISO to SSA has so far been marginal. It is concentrated in just a few countries and in low-value-added activities. Call centers in Ghana, Kenya, and Senegal employ several thousand people(Day, 2005; Lacey, 2005). South Africa as the regional leader has more than 30,000 call center jobs, but that is still only 0.5 percent of such jobs worldwide (Lacey, 2005).
SSA has considerable disadvantages in building the ISO sector, but it has some advantages over better-known ISO locations. The challenges it must confront are formidable: high telecommunication costs, unreliable supplies of electricity, poor transport infrastructure, lack of skilled workers, and relatively high wages (Zachary, 2004). Yet countries in SSA benefit from falling phone rates due to a new fiber-optic connection to Europe and European time zones. And South Africa in particular can draw on a reservoir of business skills from its mature insurance and banking sectors (McLaughlin, 2004; Farrell, 2006).
The key to attracting ISO to SSA is public investment in infrastructure and education. Good infrastructure reduces set-up and operating costs for most businesses and is of particular importance for ISO, an industry that depends heavily on reliable communication links. Local employees who possess the necessary skills are also crucial. Since countries in SSA often lag behind countries elsewhere in providing infrastructure and education, public investment in these areas would benefit not only the outsourcing industry but also the economy as a whole.Note: This box was prepared by Dmitry Gershenson.
SSA countries should proceed with trade liberalization through a gradual but substantial reduction in most-favored-nation (MFN) tariffs around the region and in the external tariffs in RTAs.60 This will improve resource allocation while limiting the incentives to circumvent customs. It will also reduce the risk of trade diversion in RTAs and the EU Economic Partnership Agreements (EPAs).
RTAs should seek to broaden their product coverage to all goods and services. They should also promote liberal rules of origin, because requirements for high domestic or regional value-added are difficult for SSA exporters to meet. Current RTAs in the region are too small and undiversified to produce most of the inputs SSA firms require, so high import costs reduce their competitiveness and have created a tilt toward inward-looking trade. The EPA now being negotiated with the European Union may be a way to address nontariff barriers in RTAs. Policy reforms that help draw more firms into the formal sector are essential for boosting exports, because the logistical requirements of exporting are difficult, if not impossible, for an informal-sector firm to meet (Krueger, 2007).
Reducing total shipping costs is an important objective for SSA. Although direct global shipping costs have declined over time and are the least constraining element on SSA’s trade linkages, there are indirect costs related to infrastructure and institutions, such as port charges, customs clearing, and internal freight. These, which often far exceed international freight costs, are a major source of relative cost differentials between countries (Martin, 2005). Moreover, a global reduction in shipping costs does not necessarily translate into an equivalent reduction for SSA because the East Asian trade boom has reoriented fleets toward the Pacific Ocean. One study (Hummels, 2001) estimates that each extra day of shipping time adds 0.8 percent to ad valorem costs—an important consideration when picking up cargo in an SSA port requires a detour from a regular shipping route. Djankov, Freund, and Pham (2006) use the World Bank’s Doing Business data to estimate that each additional day’s delay before shipping reduces trade by 1 percent. Delays are particularly costly for time-sensitive perishable goods of the type that SSA is likely to be exporting.
Coastal countries should work to make themselves more attractive to global supply chains. That means tackling the domestic portion of such indirect costs as transportation and logistics, especially bottleneck areas like customs clearance. Trade liberalization can help attract firms whose operations are spread throughout the world. Liberalizing their trade with neighboring landlocked countries can help coastal countries become regional hubs for distribution or assembly. RTAs help, but the emphasis should be on deepening agreements through progress on nontariff barriers rather than adding new RTAs.61 Improved regional infrastructure will also expand market size, but it will only be effective if border and other checkpoint procedures are rationalized. Since international trade networks are increasingly involved in services as well as goods, improvements in telecommunications are also critical.
Landlocked countries should work on reducing transportation costs and deepening regional integration, in particular with coastal countries. That would help add value to their traditional exports and allow them to better exploit their preferential access to the European Union and the United States. While it may not be currently feasible for these countries to build major manufacturing capacity, they could expand domestic processing of agricultural and raw materials in line with the experience of higher-income countries that still specialize in agriculture.
For example, tea and coffee have declined to minor shares of SSA exports, even though they are sold as premium products in industrial countries. Beverage exporters could capture more value by packaging, branding, and grading these exports, but they will need assistance from partners to build up their capacity.62 Promotion of manufacturing should be based on existing advantages and should focus on enhancing local capacity rather than on interventions like subsidies or export taxes. For example, domestic production of cotton yarn would lessen the burden of rules of origin in preferential trade agreements and mitigate uncertainty about the renewal of the AGOA, with its more liberal rules of origin. However, efforts to expand yarn production within the public sector have not been successful and the record shows that export taxes on raw cotton penalize cotton growers.
Resource-intensive countries should strive to boost productivity in export-processing industries. Many of SSA’s resource exporters have small populations, which limits their ability to diversify their economies, but they often lack the capacity to add more value to their resource endowments. Diamonds are shipped from southern Africa to Europe (and, increasingly, India) for grading and polishing. Oil is exported in raw form for refining in a third country and then re-imported for retail sale. Metals and ores leave the region immediately after extraction for use in manufacturing processes in other parts of the world. Experiences outside SSA show that it is possible to be relatively specialized in resource-based exporting at higher income levels, but this is contingent upon moving up the value chain. However, attempts to encourage local processing using export taxes or controls on raw commodity exports have not been successful: some of the burden is borne by domestic suppliers, and the implicit subsidy to the processing stage gets dissipated in rents. An in-depth diagnostic study of current impediments and costs and benefits of suggested interventions should guide policy choices, especially as the costs of more aggressive interventions are often opaque.63
SSA countries will need help to boost their capacity to compete in global export markets, and especially to meet international product standards. Many of the hurdles to exporting derive from technical and quality standards needed for entry into certain markets; this is especially true of attempts to move up the value chain in processing primary products. SSA countries would benefit from cooperation with partners in industrial countries in building this capacity, and they can push the process by adopting international standards for the broadest possible range of goods and services. The scope for seeking out partnerships with Asian firms is significant as their home labor costs rise, especially given their success in entering Western markets; nevertheless, SSA will only be an attractive base for these firms if the general environment for doing business improves. Regional harmonization of standards could also reduce trading costs and expand the effective market for otherwise segmented SSA firms.
See also Mengistae and Pattillo (2004). However, there is little evidence that the textiles export boom in SSA under the United States AGOA led to increases in productivity (World Bank, 2004); the learning-by-exporting effect may need supporting factors to be effective. See also the discussion in Section IV.
Because Japan is classified as an industrial country in Figure 4.2, the sum of the Asian countries shown does not add to Asia’s total share of SSA exports. Also, IMF Direction of Trade data do not include Taiwan Province of China.
The EU15 comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
While it would be useful to break down the growth in export values into price and volume components, this task is extremely complex because it would require disaggregated price data for each exporting country.
The calculation compares average growth and export shares in 2004–06 with 1999–2001, to smooth out single-year fluctuations in 2000 and 2005.
Examples of crude materials exports are cotton, flowers, and wood.
Based on two-digit Standard International Trade Classifications (SITCs).
While clothing exports from landlocked countries have grown strongly since 1990, the large growth rate indicated in Appendix I, Table A4 for this category is exaggerated by the fact that the South African Customs Union (SACU) countries have only reported separate data to Comtrade since 2000; thus, for example, Lesotho’s exports would be included in 2005 but not in 1990. See Appendix II.
The industries, selected from all manufacturing two-digit categories, are those that accounted for at least 10 percent of manufacturing exports and did not experience a large decline between 1990 and 2005.
Some studies define the manufacturing sector to exclude SITC category 68, which covers mining activities such as copper extraction. However, this classification reflects processing of raw ore (albeit with minimal added value in some cases), which arguably represents the starting point of manufacturing industry in resource-intensive countries.
The ATC was the transitional agreement for phasing out the Multifiber Arrangement.
Mattoo, Roy, and Subramanian (2003) show that the AGOA undercuts some of its more liberal provisions with restrictions in its product coverage and application of quotas to the total amount of U.S. textile imports that can receive relief.
This is based on the ratio of the value share to the volume share of textile exports from SSA countries to the United States.
Rose (2002) deflates direction-of-trade data to constant 1982–84 dollars and his GDP data were taken from the World Bank’s World Development Indicators 2000 or the Penn World Tables 5.6 (Heston, Summers, Nuxoll, and Aten, 1995) when the necessary figures were missing from the former. Baldwin and Taglioni (2006) emphasize that the impact of an inappropriate deflator is magnified in long-horizon regressions.
The regression is based on logarithms of trade and GDP. Thus multiplication by 100 approximates the percentage difference between actual and predicted trade.
Coe and Hoffmaister (1999) also found that the degree of SSA’s overtrade was falling over time. Limão and Venables (2001) find that much of the estimated undertrading in SSA can be attributed to deficient infrastructure. Carey, Gupta, and Jacoby (2007) estimate additional gravity models that take account of data selection and country effects; the results are broadly consistent with the reported analysis here.
Chile, China, Indonesia, and Thailand are included in the list of sustained growers identified by Johnson, Ostry and Subramanian (2007), i.e., they are countries that in about 1960 had incomes and institutional quality similar to SSA today and therefore might be indicative of SSA’s growth prospects.
Access to ethnic networks may explain why firms controlled by minority entrepreneurs tend to outperform those controlled by majority entrepreneurs in eastern and southern Africa (Ramachandran and Shah, 1999).
Collier (2006) argues that SSA’s coastal countries should have entered labor-intensive manufacturing in the 1980s, when East Asia was beginning to transition to this mode of exporting. Entry into the sector now is much more difficult because the agglomeration effects reaped by East Asian countries are difficult to replicate when competitors are already in place.
The rules of origin for the AGOA, EBA, and the EU’s Cotonou Agreement, i.e., determining how much third-country content is admissible while retaining preferential access, are complex and differ in important ways. Cotonou has quite liberal rules of origin but in other respects is more restrictive than the EBA or AGOA; this complexity imposes an additional compliance burden on beneficiary countries.
The average tariff in SSA is still the highest among developing regions, though it has fallen from 22 percent in 1997 to 15 percent in 2006. The average masks large variations between countries and commodities.
Hinkle and Newfarmer (2005) note that the negotiation of EPAs with the European Union will require clarification of conflicting obligations under existing overlapping RTAs of which a country may be a member.
Foreign partners are already helping to raise productivity in cotton growing, where firms like Dunavant and Dagris run research and extension programs for farmers.
For example, a targeted training program for workers in a processing industry may well be preferable to an export tax on the raw commodity.