Côte d’Ivoire and Ghana produce 53% of the world’s cocoa. But the supermarket shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerland and the United Kingdom.
There is a shared sense that international trade has a strong potential to contribute to growth and poverty reduction. There are several examples of countries in which integration into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that trade opening does not automatically engender growth.
The question arises: Why have the effects of international trade on countries been so different?
If the developed half of the world is dependent on the developing half to get their raw materials for manufacturing, how is it that the developing half of the world is still poor and cannot compete in international markets?
To make real profits from their raw materials, poor countries need to develop processing industries. In the words of the former chief economist of the World Bank, Justin Lin, all countries that remain poor have been unable to diversify away from agriculture and the production of traditional goods into manufacturing and other modern activities. So an increase of trade openness is a growth opportunity for a country only if local resources can be deployed in adequate quantities to produce goods for the external market. Domestic production capabilities have to be in place to respond to international competition, improve technology and exploit trade opportunities from increased liberalisation. In other words, differential patterns of structural change — and industrial production capabilities — account for the bulk of the differences in the extent of a country’s economic prosperity and success.
Structural change is the key to significant and sustained growth and opening up a country to international trade in itself does not lead to such structural change. The relative success that East Asia has achieved in terms of export growth and structural change is a reflection of the pronounced complementarity between the government’s consistently proactive policies to attract foreign direct investment and coherent and equally proactive policies in support of the development of local firms’ capabilities.
Numerous studies have shown that one of the major differences between the success stories of East Asia and the experiences of Latin America has been that the East Asian economies have made the transition to knowledge generation, whereas Latin America is lagging behind. As pointed out by Augusto de la Torre, the World Banks’s chief economist for Latin America: “After the Second World War the East Asian economies linked up to Japan and in the process of getting connected they created the ‘Asian Factory’. It became a virtuous circle. The better they connected to the world, the better they connected to each other.”
Latin America’s post-war experience has been the reverse: “We were connected to the most important growth centre, the United States. But instead of the ‘Latin American Factory’, we got dependency theory, structural adjustment and a lot of disappointment.”
Similar trends are very much in evidence in Africa too. The continent possesses 12% of the world’s oil reserves, 40% of its gold and between 80% and 90% of its chromium and platinum, according to the 2013 report from the United Nations’ Conference on Trade and Development.
It is also home to 60% of the world’s underutilised arable land and has vast timber resources. Yet together, African countries account for just 1% of global manufacturing, according to the report. This creates a cycle of perpetual dependency, leaving African countries reliant on the export of raw products and exposed to exogenous shocks.
Côte d’Ivoire and Ghana produce 53% of the world’s cocoa. But the supermarket shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerland and the United Kingdom, countries that do not farm cocoa. Ethiopia, Ghana, Nigeria, Rwanda, Senegal and Tanzania all produce more than 250 000 metric tonnes of fruit a year, but they do not add value to a large share of output through processing. Although Nigeria had imposed an import ban on single-serve or consumer-size juice products to promote value addition, it is difficult to disentangle how much of the growth has involved manufacturing juice versus repackaging bulk juice manufactured elsewhere. African coffees of the Arabica variety are among the best in the world, with the highest graded Kenyan and Ethiopian coffee trading for many multiples of the price of “standard grade” Arabica’s. But the continent has only a marginal role in processing and adding value. The region’s imports of oilseed products are broadly reflective of global flows of processed oilseeds into the continent that farm them.
Africa’s abundant labour and low wages make it potentially competitive in the export of labour-intensive manufactures. But since labour productivity in the region is low relative to China and other East Asian countries, abundant low-wage labour does not necessarily translate to low labour costs in production. Consider Ethiopia and Tanzania. Wages for producing polo shirts and wooden chairs range from about a tenth to half those in China. But polo shirt workers in Ethiopia and Tanzania would finish half the number of shirts that workers do in China, eroding half the wage advantage. For wooden chairs they would produce one or two for every 100 in China, pushing Tanzania’s costs to 19 times those in China, and Ethiopia’s to 26 times. The young and growing workforce in Africa can be a global competitive advantage and a great asset in driving industrialisation if it is healthy and has the right skills.
African exporters now import most of their fabric. But the region has the potential, with additional progress on regional integration, to develop a more integrated textiles and clothing industry. West African countries such as Burkina Faso and Mali are significant producers and exporters of raw cotton but they lack the logistics and industrial infrastructure of some of their coastal neighbours such as Côte d’Ivoire, Ghana, Nigeria and Senegal.
Successful industrialisation in Africa requires bold leadership and strong policies to support it. Of the many factors that have contributed to China’s industrial development and technological rise, the role of government policy has been critical. The government of China developed a group of enterprises, called “pillar industries,” namely, automobile, machinery, electronics, petrochemical and construction, and invested directly towards these strategic areas. In addition, foreign investors were invited to help foster domestic industries by expanding the domestic capital base and advancing the state of domestic technology. Support to domestic industries had to be carried out in the framework of globalisation. A poor performer was not supported even if it was in a targeted industry. There was monitoring and evaluation in place to constantly review whether the strategically-supported industries’ productivity performance proved better than those in non-strategic sectors. By helping small Chinese enterprises grow into medium and large enterprises, the country has avoided the shortage of medium firms. The government has thus played a critical role in facilitating the creation of input and output markets around which industrial value chains and clusters have evolved.
Many African economies are small and have to import to manufacture. They also lack a large domestic market that would provide some form of natural protection for their manufacturers. These challenges are ultimately surmountable through becoming competitive on global export markets. But at the early stages of industrial development they make it more difficult for domestic firms to compete against foreign firms that have the advantages of scale and dense industrial clusters.
Harmonised policies through regional integration and suitable institutional arrangements can help countries overcome these challenges and seize opportunities to advance economic transformation.
Dr Moses Obinyeluaku is chief economist at the International Trade Administration Commission of South Africa, writing in his personal capacity