Africa’s Boom Is Over

Africa’s Boom Is Over

04/01/2015

 

Africa was never going to get far without manufacturing — and it can’t do so under today’s trade and investment treaties.

 

 

In recent years, economists and popular publications alike have argued that Africa was on the threshold of an economic boom. Pointing to a decade of high growth and increased foreign investment, this argument held that the continent was finally on track to leave its long years of poverty and under-development behind. Some even said that Africa could become the next global economic powerhouse, following in the footsteps of East Asia.

 

This view never went entirely unchallenged, of course. In 2013 I argued that Africa’s growth would not be real, lasting, or beneficial for its people until it was based on industrialization rather than exporting raw commodities. Rather than focusing on the hype of mobile phones and African billionaires, I urged advocates of the “Africa Rising” argument to look at some basic development indicators: Was manufacturing increasing as a percentage of GDP? Were the goods African countries exported becoming more valuable — finished products rather than raw materials? In 2011, a U.N. report looked into these very questions, and found that most African countries are either stagnating or moving backwards when it comes to industrialization, quite unlike the East Asian experience.

Today, I’m sorry to say, it looks like the skeptics were right. Oil and commodity prices are plunging, China’s purchases are slowing, and GDP growth rates across the continent are in steep decline. Reflecting these trends, the IMF has cut its 2015 projection for growth in sub-Saharan Africa from 4.5 to 3.75 percent, concluding that the decade-long commodity cycle that had raised African export revenues “seems to have come to an end.” With a population boom on the horizon, experts now worry about how the continent will produce enough jobs for its people.

Africa’s plight is reflected by developments in its two leading economies, Nigeria and South Africa, which together account for 55 percent of the 48 sub-Saharan African nations’ GDP, and which have both been particularly hard hit by falling mineral and oil prices. Nigeria’s growth rate has slumped to 2.4 percent in the second quarter, the slowest pace in at least five years, while South Africa’s economy contracted by an annualized 1.3 percent as power shortages curbed output. The fall in commodities prices has hit other oil producers, too, such as Angola and Ghana, while Zambia, the continent’s second-biggest copper producer, has suffered as copper prices have plunged to a six-year low.

Without the commodities boom, the actual failure of Africa’s development has now been laid bare. In November, the Economist finally came around, noting with sudden distress that “many African countries are de-industrializing while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.”

But like most free market champions, it got it wrong when analyzing why Africa has not been industrializing, citing the conventional lack of the “basics” — infrastructure, skills and institutions.

In fact, Africa has had difficulty industrializing because its leaders drank the Kool-Aid of free markets and free trade proffered by the World Bank, the IMF, and the best university economics departments over the last 30 years. Of particular harm has been the insistence that African countries forswear the use of industrial policies such as temporary trade protection, subsidized credit, preferential taxes, and publically supported R&D. As a result, African countries have abandoned these key tools, which they could have used to build up their domestic manufacturing sectors.

Free market advocates told African countries that such “state intervention” in the economy usually does more harm than good, because governments shouldn’t be in the business of trying to “pick winners,” and that this is best left to the market.  Africans were told to simply privatize, liberalize, deregulate, and get the so-called economic fundamentals right. The free market would take care of the rest.

But this advice neglects the actual history of how rich countries themselves have effectively used industrial policies for 400 years, beginning with the U.K. and Europe and ending with the “four tigers” of East Asia and China. This inconvenient history contradicted free market maxims and so has been largely stripped from the economics curriculum in most universities. By now, two or three generations of students have unlearned it.

To be fair, critics of industrial policies were correct to cite some historical cases where the policies had badly misfired in developing countries, particularly in Africa and Latin America in the 1960s and 70s. But these critics were often selective in their criticisms, ignoring successful cases and neglecting to explain why they worked so well in the United States, Europe and East Asia while failing so badly in Africa and elsewhere. In Africa and Latin America, industrial policies often failed because they were focused inward on small domestic markets. Companies were often given support based on corruption or nepotism, rather than their efficiency. On the other hand, the successful East Asian countries focused on international markets, and they instilled discipline in companies by cutting off support to those which failed to improve. But this says more about how to do industrial policy — not whether it should be done.

But a strange thing happened in the wake of the 2008 financial crash and global economic slowdown: industrial policies have made somewhat of a comeback. Harvard’s Dani Rodrik said, “industrial policy is back.” In 2010 even the Economist could not ignore “the global revival of industrial policy.” Both the U.S. and the EU have adopted new industrial policies in recent years, and even in Canada industrial policy “need not be taboo,” according to a public policy think tank. The London School of Economics’ Robert Wade noted that, by the way, industrial policy never really went away in the rich countries, even if the U.S. refuses to acknowledge its own federal programs such as the Defense Advanced Research Project Agency (DARPA), the National Institutes of Health (NIH), or the National Institute of Standards and Technology (NIST), as “industrial policy.”

Africans, too, have taken notice. Recent annual meetings of African finance and development ministers, the African Union, and the U.N. Economic Commission on Africa have been raising the issue in a high-profile way. The ECA has begun promoting what it calls “smart protectionism,” suggesting that trade policy in Africa should be “highly selective,” with special treatment for certain sectors to advance national development goals.

But if industrial policy is making a comeback, its not likely to be so easy for those in Africa. Many African countries have foolishly signed on to World Trade Organization rules that have clearly restricted their “policy space” for using such policies. And while WTO rules still afford them some limited provisions, this is not the case under a raft of other
newer and further-reaching regional free trade agreements and bilateral investment treaties promoted by rich countries over the last 15 years. And even more are on the way: Some of the biggest deals on the immediate horizon are the Trans-Pacific Partnership (TPP), the Trade in International Services Agreement (TiSA), and the EU’s free trade deals with several African regions, known as Economic Partnership Agreements.

So, even as we are seeing a renewed appreciation of industrial policy, trade negotiators from the rich countries are twisting arms, cajoling developing countries into signing new treaties and agreements that will restrict their use of industrial policies. Many developing country leaders either buckle under such pressure or willingly sign on in the hope that they can export more of their primary commodities into rich country markets in the short-term, even if this means foregoing long-term industrialization.

Given this situation, the logical conclusion is still seldom spoken in polite company: African leaders who are serious about pursuing industrialization will have to back-track, renegotiate, and re-design their previous international trade commitments, and refuse to sign new ones that put them at a disadvantage. Offending more powerful trading partners and big foreign investors would likely invite serious short-term consequences, including lawsuits, threats to cut off foreign aid and trade preferences, and possibly lower foreign investment. But the longer-term consequences of not doing so may be far worse.

In Johannesburg, I recently asked the Chairperson of the African Union, Nkosazana Clarice Dlamini-Zuma, how Africa could expect to industrialize if it signs on to the European Union’s Economic Partnership Agreements. Her reply: “We’re going to have to renegotiate some of them.”

By Rick Rowden
Foreign Policy