Development Policy in Africa

Mastering the Future?

G. Kararach

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137360588
• eBook ISBN:
  9781137360595
• Topic: Social Sciences
• Subtopic: Development Economics
• Index: Social Sciences

The author investigates the agenda for transformation in contemporary African development studies: policy studies, strategic studies, international relations and economic diplomacy. With a focus on the capacity dimension, he proposes critical policy and action-oriented recommendations on how to overcome present and future emergencies in Africa.

1

Global Pressures and the Need for Africa to Reposition

1.1 Introduction

The world economy is in flux. Until 2008, a mistaken perception had arisen of a world of ‘fathomless’ capital, born out of globalisation. It soon became apparent that the financial crisis of that year was a product of the weakness engendered by the system’s lack of transparency. There is little understanding of how the financial markets work – not only in the developing world where skills are in short supply – but also more importantly by officials in the OECD bloc, despite the fact that these countries make up 80 per cent of global GDP (EEAG, 2013). Many European Union (EU) countries grew uncompetitive, unprepared for the consequences of the global economic downturn.

The ‘new’ world economy has implications for long-term development and capacity building in Africa – especially relating to new financial regulations, international competition, crisis exit strategies and future technologies. This chapter outlines some of the possible roles that capacity building institutions such as the African Capacity Building Foundation (ACBF) and the African Development Bank (AfDB) may play in moulding the dialogue on African development and supporting the continent’s efforts to reposition itself in the wake of the current shocks (ACBF, 2011, 2012, 2013; AfDB, 2013a).

Both internal¹ and external ‘shocks’ present challenges as well as opportunities for the continent’s development agenda. This calls for African leaders to have a broad perspective that includes responding to shocks as well as the challenges of long-term development. Africa is not homogeneous, and different economies have followed various trajectories for a wide range of reasons including their governance ‘architectures’ and structural characteristics. The human capital base is a major factor in a country’s performance, giving rise to the need for new skills if the continent is to ward off the pressure of global competition. I sketch some of the measures Africa must take in order to reposition itself in the world, and deal with the recent sources of shocks, including attempts at restructuring by the continent’s competitors and partners.

1.2 Recent trends in the world economy and their implications for Africa

The global recession was caused by severe financial instability, widening sovereign-debt problems and high unemployment in industrialised countries as well as a general global imbalance (El-Erain and Spence, 2010; Rato, 2005). Restoring global ‘balance’ will require a collaborative and coordinated international effort to address the underlying causes – especially in cases of financial sector and macroeconomic fragility in the Eurozone (UNCTAD, 2009). The policy measures for addressing these imbalances are generally agreed upon – to either allow markets to work by means of increased deregulation or else address market failures through greater regulation of the world economy;² but the firm implementation of policy measures is lacking. Many financial institutions were once considered ‘too big to fail’. Because of the huge sums paid to bail out the failing financial sector in the United States (US), the pursuit of credible medium-term fiscal consolidation has remained paramount. The continued financing of the large US current account deficit depends on the future attitude of foreign investors towards American assets. To this end, restoring and maintaining investor confidence in the dollar is key to preventing a destabilising depreciation. Most commentators concur on the need for a strong commitment to policy follow-through to reduce and keep sustainable the US fiscal deficit. Firm implementation of this proposal is critical. The dilemma lies in how large should the deficit reduction be, especially given the cyclical nature of modern capitalist economies, and the need to balance that with the importance of lowering government debt ahead of a looming pension crisis.

To return the global economy to a path of sustained recovery, countries such as the US must take measures that restore aggregate demand, as well as instituting structural changes for sustained growth, yet ensuring social inclusion. In that light, the current EU-wide attempt to reduce the deficit is not sufficient to bail out the economy, as the credit market remains tight. Consequently, local authorities are feverishly cutting essential public services and social commitments, with resultant inroads into the social contract.

In the US, exports have fallen since 2008 as a result of the crisis. Yet growth must take place to allow for future cuts in the deficit. Energy security and market diversification are equally important. The role, position and level of global integration of the US economy have grown so significantly over the last 20 years that its knock-on impact on other countries has been more acute in this period of fragility. The 2008–9 crisis originated in the US financial sector. In essence, the financial sector should service the economy and not the other way round. Because the recession was primarily an outcome of the imbalance between demand and supply of funds for investments, this has remained a major negative driver on US recovery. For example, gross fixed capital formation fell by around 18 per cent; and gross capital formation even fell by close to 24 per cent (Bureau of Economic Analysis, 2011).

Stronger growth in Europe and Japan is a critical prerequisite for correcting the existing imbalances in the world economy. Specifically, world economic expansion has been largely driven by Brazil, India and China.³ In the Eurozone and Japan – with nearly one-quarter of global output – economic performance has been relatively weak (EEAG, 2013).

The EU economy was largely depressed during the period 2008 and 2009/10. Low growth prospects and rocketing debt in many of the EU’s 27 nations in 2010 through to 2013 alarmed financial markets, causing stocks to slide and the Euro to fall sharply in value against the US$. Compared to their share of pre-crisis GDP (that is, in 2007), the primary deficit in both the Euro zone and the European Union increased by 4.4 percentage points in 2009, increasing from, respectively, 1.3 and 1.5 percentage points in 2008 (see Table 1.1 overleaf). The differences between countries in the two crisis years are substantial. Whereas the governments in Spain and Ireland stimulated their economies in 2008, those in Finland and the United Kingdom became more active in 2009. In Italy and Germany, government actions were more conservative. In 2010 Italy shaved-off an estimated euro 24 billion from state spending in an effort to reduce its debt – then the largest in the EU. Other Euro zone countries such as Spain, Portugal and Ireland sharply curbed budget spending to try and get mounting debt under control amid loss of market confidence in the euro and the ability of Euro zone states to pay their bills. Britain, which does not use the euro, also announced about 6 billion pounds (US$8.7 billion) in budget cuts – evidence of the ‘contagion’ effects of the crisis.

Over the years, the political economy of Sub-Saharan African relations with Europe and the US have focused primarily on granting access to international markets in the assumption that the ability to trade and take advantage of these markets would follow automatically. Strengthening Sub-Saharan Africa’s regional markets has not yet received the attention given to other African development issues, despite the power of these markets and regional systems to move goods, services, people and information.⁴ Aside from the Economic Partnership Agreements (EPAs), European and US market access for Sub-Saharan Africa has been governed mainly by preferential and unilateral market access programmes based on historical neo-colonial ties.⁵ These programmes have had limited success. This is partly due to product carve-outs and complex rules of origin and is compounded by complicated standards and trade-limiting policies in sensitive industries like agriculture that intersect with the preference programmes (Kuhlmann, 2010. Also see Mackie et al., 2009).

Table 1.1 Trends in EU deficits 1999–2012

In an economic context, with financial crises, food price shocks and climate threats, it is arguable that EPAs are part of the problem, not part of the solution. Since 2008, it has become increasingly evident that EPAs in their current form are not fundamentally concerned about development at all. Instead, they further the interests of European companies and enhance neo-colonial ties. Indeed, African countries have been so concerned at the direction the negotiations have taken that the majority of them have not signed or initialled any form of EPA at all. Regional integration has been undermined because, under intense pressure from the EU, a few have signed or initialled interim or final EPAs whereas their neighbours who may belong to the same regional integration arrangements have not; yet integration can be good for growth (see te Velde, 2008a and te Velde and Bezemer, 2006 for discussions of these issues).

Although the current global crises have their origins in the rich industrial countries, African countries may suffer the worst effects. The crises are likely to devastate economic activity in African countries as traditional export markets and ODA as well as remittances continue to shrink, sweeping away small businesses, jobs, revenues and livelihoods, compounding existing challenges and undermining poverty eradication and social development programmes. In particular, the crises have highlighted the continued dependence of African countries on the export of a narrow basket of primary commodities, and on the import of most other products, including food and manufactured goods (te Velde, 2008b). EPAs would unnecessarily lock Africa in to this traditional primary commodity trade model because countries would lose the policy tools to develop infant industries and services as well as have flexibility in trade policy to deal with any subsequent shocks.

The crisis also resulted from decades of domination by neo-liberal market orthodoxy and deregulation, as shall be discussed with respect to macroeconomic issues in Chapter 2. EPAs would bring more of the same. Although the crises have brought new pressures to bear in the global economy and on Africa, the original imperative to put EPAs in place no longer applies. The official EU line is that EPAs were initiated because some Latin American countries complained at the WTO about preferential access for bananas, which put their own banana exports at a disadvantage. This dispute has been resolved, and since 2008, no county has complained about the trade arrangements between Africa and the EU. The negotiations should now focus on development. However, a critical reading of EPAs (Meyn, 2008) discerns four tendencies: (i) the intention of the EPAs is that they replace the trade element of the colonial-based ACP system, (ii) they involve reciprocal free trade agreements with the EU on an asymmetrical basis with LDCs – where many of the LDCs are already members of regional trading systems – SADCC, ECOWAS, etc., (iii) they are based on attempts to bolster EU trade hegemony rather than enhancing the LDCs’ trading position and (iv) they switch EU responsibility for LDC trade matters away from the EC Development Directorate-General (DG) and into the Trade DG (reducing the ‘development’ focus of LDC trade matters).

Africa’s leaders need to show vision and act responsibly and strategically, putting in place policies to counter the effects of the on-going crisis, maintaining the space and flexibility to use those policies and looking towards current and future developmental needs. In this regard, Africa should step back from EPAs and put them on hold while prioritising its own needs for development and regional integration (an issue I return to in Chapter 9).

There are a number of lessons to be drawn from these experiences. First, it is now generally accepted that the best policies are those that are the least complicated and allow markets and other economic relations to develop organically. The expansion of trade between China and Africa in the 21st century, which has not required an EPA-type framework, provides a good example. Constructing markets through complicated political compromises, or forcing choices before markets have actually developed, limits opportunities rather than creating them (Kararach, 2011). For example, under the Africa Growth Opportunity Act (AGOA),⁶ apparel manufacturing has blossomed in some areas, but value added investment along the supply chain has proven to be difficult to encourage without addressing the underlying conditions that have prevented integrated markets from developing. Under the EPAs, market choices have been required before markets have actually developed (Dowlah, 2004). Despite the laudable goal of regional integration, the overlapping regional mandates of Regional Economic Communities (RECs) have actually limited rather than promoted regional trade and may have created narrow, entrenched African lobbies and interest groups that will make future growth and socially inclusive development difficult (ACBF, 2007).

Second, policy predictability is essential, and needs to be an underlying principle of all preferences as well as broader development programmes. Setting short expiration dates for preferences created a disincentive for sustainable, long-term investment. For example, when AGOA was enacted in 2000, it came with an expiration date, both for the programme and for its special apparel rule of origin (the third country fabric rule). This has been extended over the years, but without complete certainty that the benefits would continue. This uncertainty has caused instability for both existing and potential investment, and politically it has led to a dynamic that is focused on preserving the status quo, with longer-term gains often pushed to the side (Kuhlmann, 2010; Mackie et al., 2009).

Third, those sectors providing the greatest economic opportunity need to be the centrepiece of preference programmes. Under the various multilateral trade regimes, African agricultural products remain subject to the complicated system of quantitative restrictions that govern commodity trade in a number of products, including sugar, dairy and peanuts, and subjects very poor countries to miniscule or non-existent quotas and very high out-of-quota tariffs that approach several hundred per cent. Although the policy debate has often focused on developed country agricultural subsidies as the main barrier to developing country agricultural trade, these non-tariff barriers can be more of an impediment to trade than subsidies (Dowlah, 2004). The European experience has shown that competitive producers of these products can see immediate gains once open market access is granted. For example, as a direct result of Europe’s announcement of its Everything But Arms programme, which granted LDCs duty-free, quota-free access to the European market, Mozambique’s sugar trade with Europe went from zero in the year 2000 to over 130,000 metric tons in 2008, with steady increases each year (Kuhlmann, 2010).

Fourth, as we shall see in detail in Chapter 5 on food security, agriculture is the backbone of Africa’s economy, yet African governments have only a few policy tools to support their agriculture and generate an income for public spending. Tariffs on imports remain a major tool. EPAs will requ...

Table of contents

• Cover
• Title
• Introduction
• 1 Global Pressures and the Need for Africa to Reposition
• 2 Macroeconomic Policy Challenges in Africa
• 3 Migration, the Youth Bulge and Population Dynamics
• 4 Infrastructure and Connectivity
• 5 Food Security and African Development
• 6 Energy Security, Poverty and Development Policy in Africa
• 7 Climate Change and Environmental Sustainability in Africa’s Development
• 8 R&D and Innovation
• 9 Integration for African Development: The Numbers Count
• 10 Institutions, Incentives, Adaptability and Development
• Notes
• References
• Index