Opinion
Africa needs Trade not Aid
By Paul Frimpong
DEAD AID: Why TRADE facilitation is necessary but not AID
Indeed to realize the potential of Africa, there is the need to develop means to facilitate trade across borders and this means major investments in transport infrastructure including roads, ports, internal container depots, inland water ways and railways.
In the post-independence period, trade has being a core element of the development strategy of African countries and despite claiming regional trade as a strategic objective, African countries have yet to reach their trade potential particularly, when it comes to trading with each other.
The importance that African countries attach to regional trade has been reflected in the high number of trade schemes and policies on the continent and this trade agenda is geared towards empowering Africa to take its rightful position in the global economy.
Continental Free Trade
Free trade is a policy by which a government does not discriminate against imports or interferes with exports by applying tariffs to imports or subsidies to exports or quotas. According to the law of comparative advantage, the policy permits trading partners’ mutual gains from trade of goods and services. It is also a means of enjoying goods and services that one has a disadvantage in producing due to the level of discrepancies in resources endowments of the various countries. That is, through trade one country can have access to goods and services produced in other countries. Free trade is also a system in which goods, capital, and labor flow freely between nations, without barriers which could hinder the trade process.
According to the United Nations Economic Commission for Africa (ECA), only 10 percent of trade in Africa occurs between African countries but stands at 60 percent with the rest of the world.
The Aid for Trade initiative has been identified as a means of robust economic development. Foreign aid has been and is still heavily considered by foreign development partners as the way forward. In the past 50 years, more than US$1 trillion in development-related aid has been transferred from western economies to Africa, however, the following question arises – has this assistance improved the lives of ordinary Africans?
There is mounting evidence that suggests that across the continent, the beneficiaries of this aid are not better off as a result of it, but much worse. The aid model has failed – there has been no resultant growth as a result of this aid.
Total foreign aid to Africa amounts to a little over US$50 billion dollars a year.
Aid to Africa is and has always been a band-aid and not a long-term solution since aid does not aim at transforming Africa’s structurally dependent economies. If donors aim to make long-term sustainable impact, aid should target transcontinental projects such as highways, telecommunications and power plants.
Development aid promotes a “dependency syndrome” as it creates the impression that emergence from poverty depends on external donations rather than on people’s own efforts and motivation, the more reason why Africans should focus on trade and not aid.
Dambisa Moyo, a global international economist argues in her famous book “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa” that the notion that aid can alleviate poverty is a myth since aid has been and continues to be, an unmitigated political, economic and humanitarian disaster’ for most developing countries.
She argues that the vicious cycle of aid is one that chokes off investment, encourages dependency and facilitates corruption, adding that this cycle “perpetuates underdevelopment and guarantees economic failure” in economically poorer regions on the globe. In her book, Moyo also touches on “the paradox of plenty”, insisting that aid has in the past instigated many of the conflicts in Africa.
Dr. Moyo therefore suggests a low-aid market-based development financing model that encourages trade and investment from both foreign and domestic sources.
This is her formula: 5 percent from aid, 30 percent from trade, 30 percent from foreign direct investment (FDI), 10 percent from capital markets and the remaining 25 percent from remittances and harnessed domestic savings.
While provocatively drawing a sharp contrast between African countries that have rejected the aid model and prospered with African countries that have become aid-dependent and seen poverty increase, Moyo illuminates the way in which over-reliance on aid has trapped developing nations in a vicious circle of aid dependency, corruption, market distortion, and further poverty, leaving them with nothing but the ‘need’ for more aid.
Therefore for Africa to take its rightful position in the world’s global economy, then it must dream of becoming borderless in terms of doing business and not being dependent on aid. If we can create a single economic space, eliminate the regulatory and administrative physical barriers, then we will be on the path to taking our rightful position in the global economy and facilitate our efforts to reduce poverty.
The boosting of intra-African trade requires the adoption and implementation of trade policies at the national, regional and by extension continental level, which should be geared specifically towards the ease of business, flow of capital and human resources across geographical borders on the continent.
For regional markets to operate efficiently there is the need for strong regional and domestic framework regulations on trade related issues of intellectual property rights; competition policies; investment, government’s role; procurement; trade and the environment.
Non-tariff barriers which work to increase transaction costs, complex immigration procedures, limited capacities of border officials, costly import and export licensing procedures and lack of investments in trade association should at best be eliminated or reduced.
Trade is an engine of growth and if Africa is to sustain the current growth momenta which currently stand at averagely more than 6 percent, we should ensure that we increase the volume of trade and business within the continent.
The investment in Africa which is currently taking place in many jurisdictions and regions, will positively impact on intra-African trade. Poor infrastructure has in the past increased the cost of doing business – the average impact of transportation to businesses in Africa amount to approximately 40 percent – a cost that is usually passed on to the consumer. While this cost continues to come down with improved roads and rail systems, Africa still remains uncompetitive globally. Improved infrastructure will bring in an additional US$ 34 billion of trade annually.
This will in turn help Africa’s booming informal trade transform into the formal economy, which means more jobs for Africa’s 400 million young people, increased global competitiveness and a significantly reduced reliance on the struggling economies of the west.
Trade Challenges
A number of challenges have been recognized as hampering the continental free trade zone agenda. These include un-diversified and underdeveloped production structures, inadequate infrastructure, and prevalence of non-tariff barriers and lack of trade governance structures. Increased intra-African trade will enable the continent create a large market of close to one billion people as well as encourage the diversification of economies. In the post-independence period, integration has being a core element of the development strategy of African countries.
Unclear policies also hamper trade across the continent. For example, goods from Togo may be left at border in Nigeria with the reason that they do not satisfy Nigerian requirements. A trader may purchase their grain at the Burkina Faso border only to find out that a ban on exports has been imposed. The leadership in Africa must continuously work to implement current policies and legislation that helps to reduce the challenges hampering trade.
Trade facilitation will provide important opportunities for Africa by increasing the benefits from open trade, and contributing to economic growth and poverty reduction. However, the quest for more open trade is not an end in itself but rather driven by the experience that open trade provides more economic opportunities for people. Producers can offer their goods and services to more customers, and consumers have more choice, lower prices, and access to innovations. Open markets increase prospects of producing and selling new ideas and products locally, regionally and in global markets, which leads to more income opportunities and the improvement of living standards on the continent.
Africa needs Trade not Aid.
Paul Frimpong is an African Affairs Analyst and Emerging Markets Strategist. He is also a Chartered Economist, and his area of interest includes macro-economy and global affairs.