My Ten Cents

Tuesday, June 5, 2012

GLOBALIZATION: WHY AFRICA IS ECONOMICALLY BEHIND

From time to time, one comes across articles in newspapers, periodicals, and magazines that cause one to scratch one’s head in curiosity and wonder as to the truth of claims and assertions made in such articles. If so, could there have been preferable alternative; and if such alternatives exist, why were they not pursued? Such were my feelings and questions, after reading the piece, Africa – Missing Globalization Rewards?, in the 2010 Globalization and Monetary Policy Institute’s report of the Federal Reserve Bank, Dallas.
I do not intend to repeat, verbatim, the details of the article, since it is easily accessible on the Reserve’s web; but just the few points and revelations that pricked my curiosity. However, it is important to point out that the article in question deals on how and why Africa has not been a major factor in the economic globalization process in the past, twenty, or so years.

With greater capital flows and freedom of capital movement, resources more effectively move to their most productive locations, contributing to rising living standards.
This is generally true in open-market economies of industrialized nations, and Third-world countries keen on pursuing, or transforming their economies into capitalist or open-market ones. Unfortunately, over the years, African governments have either deliberately ignored, or refused to buy into this simple economic principle. They have not only continued to restrict flow of capital within the productive sectors of their economies, but have diverted most of the available capital, through back channels as private investments, back to its sources of origin.
Going by available information, before the current global economic recession, Africa’s real GDP grew on an average of over 5% from 2000 to 20007; and real GDP per capita grew an average of 3.1% during the same period. These performances were attributable to increase in global business – imports & exports – which grew to over $1.04 trillion dollars in 2007, from a mere $211 billion in 1990. In the same period, Africa’s share of world trade grew from 2.7% in 1990 to 3.28% in 2008; not much of an increase given the level of technological advancement, accessibility to investment capital, and to markets in developed economies. The continent’s overall contribution to world trade of a paltry 3% remained far below those of their counterparts in Asia, which accounted for 19% of the world’s GDP, and Latin America which produced 7%.

Though Africa still depends on Europe and North America for the bulk of its trade with the international community, it is making inroads into the markets of the BRIC nations of Brazil, Russia, India, and China. Its trade with these countries raked in a total of $300b in 2008, as against $21 in 1990. However, at the same time, its trade with traditional partners of Europe and North America increased from $144b to over $600 in 2008. Intra-African trade also witnessed a bump during the same period under review; from $37b in 19990 to $115b in 20008. Sadly enough, the increases in trade volumes have not really translated to substantial economic expansion and globalization, so as to attract more trade and investment capital which is expected to, eventually, further diversify the economy and improve the Human development Index (HDI) of its people.

Compared to its trading partners, Africa is, glaringly, lacking in infrastructural development, which contributes to economic expansion and attracts international investments. Take Asia, for example; its share of trade with Africa increased from 14% in the period between 1995 and 2000 to 20%, between 2000 and 2008. This jumped to 28% in 2009 – an 8% increase in one year. This share increase is, partly, due to technological improvements in manufacturing, which resulted in reduced production cost and lower prices to consumers, making the products more accessible to African consumers. The same explanation can be made for China’s increased trade with the continent, even though its main focus is on raw materials in short supply in China, and other primary products the country will need in the future to meet the needs of her increasing population.

The disadvantage to Africa is that most of its trade commodities are primary products, which suffer from frequent price volatilities. Even oil, the cash cow of most African countries, suffers the same fate. These primary products accounted for about 82% of Africa’s exports in 2008, with crude oil taking the biggest chunk. On the flip side, manufactured products, which rarely suffer price fluctuations, accounted for 67% of the continent’s imports; with most of the goods coming from China. It is expected that, unless Africa diversifies its economy from dependence on primary products, it economic future looks bleaker than it is now. With increased innovation and production of substitutes for most of the primary products imported from Africa by industrialized nations, the continent’s market share for such products as cocoa, coffee beans, crude oil, banana, etc will further shrink,  while its appetite for manufactured products from trading partners will continue to increase; further resulting in an increased unfavorable trade balance. To fend off this impending economic disaster, African economies need to embark on trade diversification towards value-added manufactured products.
Undoubtedly, Africa has been slow in joining the march to industrialization, due to the following: 

1.      lack of adequate technology transfer,

2.      limited investment capital,

3.      poor or inadequate infrastructure,

4.      high cost of doing business in the continent

5.      limited investment in human capital and education

6.      volatile political & security climate, and

7.      Inability to take advantage of economies of scale.

All of the above reasons are well-known and well-documented in every government of every nation in the continent since independence, yet none, including the new-breed leadership class –young, upward mobile, and well-educated have been able to address, at least one of,  these problems.
 Aside from the above mentioned problems, which severely restrict foreign direct investment (FDI) into the continent, the failure to reinvest profits derived from the little that comes in, into improving the manufacturing sector, further hamper’s Africa’s efforts to divest its economy from primary products, and hasten its significance in the international economy. It is common knowledge that frequent, and unabated, regional conflicts have affected the flow of foreign direct investments, which peaked at 27% in 2006. By 2009, it had fallen to 19%. The only regions of Africa which have seen an increase in FDI, except for South Africa, have been the ones with an acceptable level of political stability and security. Though countries like Kenya, Nigeria, Egypt, and Uganda have made efforts to ease FDI restrictions and boost capital inflow, others like Zimbabwe and Algeria have, in recent times, adopted measures designed to restrict FDI. However, the few favorable policies have been slow in coming, and slower in impacting the continent’s economic growth. While foreign investments in Africa rose to 30% from 2006 to 2008, compared to Latin America and the Caribbean which saw a 94% growth, it still attracted the least investment capital when compared to other regions in its category.

 In 2009, Africa’s share of global foreign direct investment stood at a little over 5% - a reflection of its slow progress in diversification of its product base, and subsequent expansion of market base. Without the stimulating effect of FDI, which comes from openness to trade, promotion of technology transfer, and enhancement of economic growth, Africa will continue to deprive itself of the benefits of a globalized economy, and deny its citizens access to a variety of goods and services at lower prices, better-paying jobs, improved healthcare, and an overall higher living standard commensurate with what obtains in other regions of the world today. The living standards of an average African have changed little from independence, compared to their counterparts in Asia and Latin America. This disparity is very obvious in the comparison, drawn in the said article between Ghana and Malaysia; the two countries are former British colonies; they both gained independence in 1957, and both started off with a good measure of natural resources, the same economic, educational, and legal structure. In 1958, Malaysia’s Gross National Product was $200, while Ghana’s stood at $178. Now, fast-forward to 2000; while Malaysia’s GNP jumped to $3884 per person, Ghana’s managed to creep up to $285. What happened?

Simple; while Malaysia pursued and industrialization policy, Ghana remained dependent on primary products exportation; while Malaysia eased investment restrictions and export promotions, Ghana pursued import substitutions and restrictions; while Malaysia improved security and invested on infrastructures to attract foreign direct investments, Ghana was mired in political insecurity, corruption, which hampered infrastructural developments; while Malaysia was investing in human capital, Ghana was slaughtering and repressing its human capital. Ghana’s is just a mirror of the same image typical of every independent African country, from Algeria to Zimbabwe. Even countries who started on a sound footing from independence, like Nigeria, Namibia, Zimbabwe, Cameroun, Ethiopia, Liberia, etc, have all fallen so backward that the UN, and many other international organizations, have expressed strong concern that Africa will be more dependent on foreign handouts in the future than it is getting now. There are only a few African countries today where one can point at a significant progress in infrastructural, educational and security progress in the past twenty years. Focus has been largely on retaining political power at all cost, instead of investment on economic growth and diversification, and improvement of human development index. African leaders spend investment capital on fueling and sustaining intra-regional conflicts, on programs with little or no re-investible profit, and on increasing their personal fortunes.
It is, and has been, common knowledge among African governments and economic policy-makers that foreign direct investment promotes technology transfer, industrialization through re-investment of profit, and globalization through access to free markets; it is, also, common knowledge that investments of all kinds go to areas with political stability, improved safety and security, business-friendly laws and stable regulations, good infrastructure, democratic governments with sustainable fiscal policies and stable exchange rates. There is documented evidence, spanning various regions of the globe, that countries which implement these policies and principles have witnessed tremendous economic growth and diversification; yet, African countries still maintain their old ways of doing business with the rest of the world, when it is well-known that those ways have not worked for the continent in decades. Why maintain the status-quo?

 African leaders like to maintain absolute control over every aspect of the lives of their citizens, and expanded economic freedom will dilute such control. They see their citizens as serfs in their private fiefdoms and, to them, it is easier to enrich a few who will assist the leadership in repressing the many. Globalization comes through open-market economies, which will mean too much freedom for the serfs and that is considered “un-African”. The typical African president or head of government would prefer to hold on to power for as long as possible, than implement economic programs and policies that will increase the fortunes and improve the lives of their citizens. That is why dictatorships like Zimbabwe, Uganda, Egypt, Tunisia, Niger, Congo and democratic pretenders like Nigeria and Ghana are where they are today; the same place they were HDI-wise 30 years ago, and getting worse. Because of the economic policies of Africa’s leaders over the decades, the continent is not in any way near meeting the United Nation’s Millennium development Goals by the target date of 2015; these same policies will continue to prevent it from taking its rightful place in a globalized economy for decades more to come.
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