tmali - economic theory with reference to african development

CAPE01L – Assignment 1 Donavine Phukuile 78327911 #1

THABO MBEKI AFRICAN LEADERSHIP INSTITUTE

(TMALI)

ECONOMIC THEORY WITH REFERENCE TO AFRICAN DEVELOPMENT

MODULE CAPE01L - 2014

ASSIGNMENT 01

SUBMITED BY : DONAVINE PHUKUILE

STUDENT NUMBER : 78327911


Comparative advantage in the context of African commodity trade

The notion of comparative advantage alludes to the ability of one nation’s ability to produce a

commodity over another, giving it a cost advantage of trade. Investopedia’s definition places

emphasis on the realization of stronger sales margins as a result of comparative advantage:

The ability of a firm or individual to produce goods and/or services at a lower

opportunity cost than other firms or individuals. A comparative advantage gives a

company the ability to sell goods and services at a lower price than its competitors and

realize stronger sales margins.i

In the African context, this expected “advantage” is lost, due to the tariffs imposed by wealthy

countries, on imported goods from developing countries. According to an International Trade

Policy article in the World Savvy Monitor, US tariffs on Least Developed Countries (LDCs) are

“three to four times higher than those imposed on developed nations. The poorer the LDC, the

more the disparity; US tariffs on the poorest of the LDCs can be ten times higher than those

imposed on [Organization for Economic Co-operation and Development] countries”.

The article further suggests that not only is global competitiveness in the market negatively

impacted by the above, industrial development and the resulting poverty eradication or in the

very least unemployment reduction effects are negatively impacted:

African goods tend to be determined on an escalating scale that increases the tariff or tax

along with the amount of processing involved in producing the good. This makes raw

African cotton cheaper to import than African clothes and discourages the development

of garment and textile manufacturing (which is more lucrative than raw cotton) in Africa

itself.

A similar situation exists between Europe and Africa with respect to cocoa and

chocolate. The EU places a 1% tariff on raw African cocoa, but a 30% tariff on

processed cocoa in the form of chocolate, discouraging the processing of cocoa (again,

where the money is made) in Africa. Escalating tariffs essentially recreate a

mercantilistic arrangement similar to that which existed in colonial times – raw materials

shipped out of Africa and most processing (the adding of value) done abroad.


The satirical notion of free trade

In an online Guardian article titled “Free trade is not what Africa needs Mr Cameron”, Nick

Dearden emphatically states that “African prosperity relies on a wholesale rejection of the

western "free trade" model”.

It means protecting industries, developing alternative and complementary means of

trading, control of food production and banking, progressive tax structures, controlled use

of savings, and strong regulation to ensure trade and investment really benefits people.

Stan Sorscher, writes in the Huffingtonpost, that free trade has neither ever been free, nor trade. iiHe finally adds, “it doesn’t work”. Though his argument is framed within the North American

context, the same rings true for Africa. Free trade encourages the exportation of raw materials or

commodities, thereby stifling the development of manufacturing, the creation of employment

and the reduction of poverty.

Sorshcers’ argument that free trade is not trade, embodies the premise of trade in the context of

“each country [making] things of value for exports and [getting] comparable things of value for

imports”. Given the appetite globalization has placed on African commodities, Africa exports

raw materials in abundance, to the Rest of the World (RoW) at low costs set by the West; and

imports finished and processed goods at a premium.

This extensive integration of Africa into the RoW through globalization is a deliberate product of

colonialism. Africa’s dependency on the RoW for the import of finished or processed goods –

and the foreign currency required - drives exports, which drives mass production of commodity

extraction.


A recent case study of Ghana’s cocoa processing has been delivered to an African Center for

Economic Transformation workshop in Senegal, during November 2013. The statistics depicted

in Figure 1: overview of ghana's cocoa sector are typical of the balance of trade issue within

Africa.

Moreover, also a product of colonialism has African countries trading more with countries in the

RoW than with it’s neighboring countries on the content.

FIGURE 1: OVERVIEW OF GHANA'S COCOA SECTOR


The RoW needs Africa more than Africa needs the RoW

The Economist first published in an article the map in Figure 2, depicting the “true size of

Africa”. The Daily Mail (UK) published that Africa “really [is] as big China, India, the United

States AND most of Europe put together”.

FIGURE 2: THE TRUE SIZE OF AFRICA


More astounding than the true size of Africa, is the true wealth of the continent:

Africa’s wealth of natural resources boasts “12% of the world's oil reserves, 40% of its gold, and

80% to 90% of its chromium and platinum”. In addition, Africa has vast timber resources, and

holds 60% of the world's “underutilized arable land”.iii

Commodity exports have fuelled the continent’s economies of the last decade and a half. In

Figure 3, which looks at the World’s 10 fastest – growing economies; the Economist depicts the

parity between the “simple unweighted average of the economic growth rates in Africa and Asia”

(between years 2001-2010). The report further forecasts that for years 2011 to 2015, “Africa is

likely to take the lead”.

FIGURE 3: WORLDS 10 FASTEST GROWING ECONOMIES (2010 ESTIMATE)


Figure 4 below, taken from the Economic Report on Africa 2013 by the Economic Commission

for Africa and the African Union, depicts the staying power of the African economy, largely due

to the demand for natural resources. Africa’s dependency on the rest of the world for economic

wellbeing is alarming. As stated by Florence Udoh : “No country survives by exporting only raw

materials”.

FIGURE 4: GDP GROWH 2008-2012iv


Despite the astounding economical growth of Africa, poverty and unemployment remain rife.

The conversation has begun amongst thought leaders of the African Renaissance; on how to

develop a collective conscious map toward sustainable development and economic emancipation

for the continent. Some of these schools of thought are discussed briefly in the next section –

which aims to strike a balance between the demands of Globalization and Sustainable Economic

Development

Striking the balance between globalization and sustainable development

Jekwu Ikeme in his article on “Sustainable Development, Globalisation and Africa: Plugging the

holes“, has indicated that Globalization is characterized by issues of Rights and freedoms to

TNCs who dominate the market; Letting free markets reign; No environmental controls, or

protection; and Reduction / cancellation of state regulations on market.

By contrast, Sustainable Development is characterized by Consensus seeking policies which

incorporate the needs of all countries; Partnerships where the strong help weak; Integrated

environment & development concerns; and finally State and international communities control of

market forces to ensure social equity, and sustainability

With globalization and sustainable development at distinct loggerheads, within the African

context - the latter calls for adherence to the Constant Capital Rule (CCR).

As defined by Ikeme:

CCR amounts to each generation leaving the next generation a stock of productive

capacity, in the form of capital assets and technology, that is capable of sustaining utility

or well-being per capita than that enjoyed by the current generation, or at the very least,

equal to that enjoyed by the current generation…


Sustainable development requires that the stock of natural, man-made, social and human

capital should not decline, or depreciate, below the present level”... but rather, ideally, be

increasing.

Against the backdrop of CCR within the context of comparative advantage in Africa, commodity

export trade is not sustainable, due to the resulting “decline of natural capital”. Ikeme elaborates

on the two forms of natural capital depreciation, namely natural resource depletion and

environmental degradation:

Natural resource depletion is associated with the extraction and consumption of natural

capital such as gold, oil, timber, coal, columbite, etc. Environmental degradation, on the

other hand, is the loss of environmental quality associated with production of goods and

services. This takes the form of air pollution, water pollution, land degradation, etc.

There is an urgent need for stricter trade laws – to limit extraction quantities or non-replenishable

resources; and protect the environment. Through supply and demand, this limitation will drive up

the prices of commodities – and possibly allow for Africa to develop brands in this space.

Africa also needs to be able to decide on pricing for commodity exports out of Africa.

Furthermore, Africa will need to be sure to “replenish the good within the land to maintain

integrity / quality” by applying green initiatives and conscious extraction and replenishment

cycles.

Multinationals on the continent are to be responsible corporate social citizens in the operations;

provide value in knowledge and skills transfer, and infrastructure investments toward sustainable

development.

Public and private partnerships on the continent should work together toward an African Dream,

of environmental and social protection, with policies and incentives to support the same.

Finally, on the comparative advantage issue, Africa must unite, to create an Industrial revolution

– and add value to raw and unprocessed commodities. These finished goods or processed

products can first supply the needs of the continent cost-efficiently, and sold to the RoW at a

premium, reversing the dependency of Africa on the RoW for imports.


In closing, proceeds from the commodity and processed product trade in Africa must be

reinvested in Africa, to build infrastructure, technology, human capital, and economic

investments in order to maintain natural capital and diversify sources of economic growth and

development for the continent.


REFERENCES

Investopedia. 2013. Comparative Advantage Definition. [ONLINE] Available at: http://www.investopedia.com/terms/c/comparativeadvantage.asp. [Accessed 14 March 14]. Mulangu, F, 2013. Optimal Agro-Industry Policy: A Case Study of Ghana Cocoa Processing. African Centre for Economic Transformation, AGRODEP Workshop Dakar, Senegal November 19, 2013, [Online]. 1, 6. Available at: http://www.agrodep.org/sites/default/files/annualmeeting/2013IR_Maiga_E_final.pdf [Accessed 14 March 2014]. Worldsavvy. 2013. International Trade Policy. [ONLINE] Available at: http://worldsavvy.org/monitor/index.php?option=com_content&view=article&id=345:international-trade-policy&catid=143:tools&Itemid=544. [Accessed 14 March 14]. HuffingtonPost. 2008. Free trade was never really free. [ONLINE] Available at: http://www.huffingtonpost.com/stan-sorscher/free-trade-was-never-real_b_3427477.html. [Accessed 14 March 14]. Nick Dearden. 2011. Free trade is not what Africa needs Mr Cameron. [ONLINE] Available at: http://www.theguardian.com/global-development/poverty-matters/2011/jul/19/david-cameron-africa-free-trade. [Accessed 14 March 14]. African Centre for Economic Transformation. 2013. Optimal Agro-Industry Policy: A Case Study of Ghana Cocoa Processing. [ONLINE] Available at: http://www.agrodep.org/sites/default/files/annualmeeting/2013IR_Maiga_E_final.pdf. [Accessed 14 March 14]. WILLIAM TURVILL. 2013. True size of Africa. [ONLINE] Available at: http://www.dailymail.co.uk/news/article-2445615/True-size-Africa-continent-big-China-India-US-Europe-together.html. [Accessed 14 March 14]. ECONOMIC REPORT ON AFRICA. 2013. Making the Most of Africa’s Commodities: Industrializing for Growth, Jobs and Economic Transformation. [ONLINE] Available at: http://www.uneca.org/sites/default/files/publications/unera_report_eng_final_web.pdf. [Accessed 14 March 14].


AllAfrica Leadership. 2012. Nigeria: No Country Survives By Exporting Only Raw Materials - Aganga. [ONLINE] Available at: http://allafrica.com/stories/201212101530.html. [Accessed 14 March 14]. Jekwu Ikeme. 1999. Sustainable development, Globalization and Africa: Plugging the holes. [ONLINE] Available at: http://www.afbis.com/analysis/Jekwu.html. [Accessed 14 March 14]

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