Using trade to boost Africa’s industrialization

Deliberate trade policies could lead to growth
From Africa Renewal: 
Factory workers package products at Decorplast, a manufacturer and regional exporter of injectionmoulded plastic goods in Ghana. Panos/ Nyani Quarmyne
Factory workers package products at Decorplast, a manufacturer and regional exporter of injectionmoulded plastic goods in Ghana. Panos/ Nyani Quarmyne

Sanusi Lamido, a former governor of the central bank of Nigeria, once railed against his country for spending “huge resources importing consumer goods from China that should be produced locally.”

Nigeria, Africa’s biggest economy and most populous country, is also the continent’s largest crude oil producer, but imports most of its refined oil. Exporting raw commodities and then spending vast sums of money on manufactured imports is hardly unique to the Nigeria-China trade relationship. Most African countries are in similar situations with China, the European Union, the United States or other overseas trade partners.

Although China has set up mining operations across Africa and is heavily involved in building infrastructure, much of its activities on the continent involve imported equipment and labour and no skill transfers, Mr. Lamido observed. “So China takes our primary goods and sells us manufactured ones,” the former banker wrote in an op-ed for the Financial Times, a UK-based financial daily.

Mr. Lamido’s views are shared by many African experts. Indeed, the case for industrialization in Africa has long been recognized among those specialists who argue that the continent’s economic transformation is unlikely to happen without greater industrialization. The United Nations even dedicated the two decades from 1980 to 2000 to promoting industrialization in Africa. In 1989 the UN General Assembly proclaimed 20 November as Africa Industrialization Day to mobilize “the commitment of the international community to the industrialization of Africa.”

“The lack of competitiveness of African manufacturing and the extent to which the scope for domestic value addition is left untapped are epitomized by the region’s trade in cotton,” says the UN Economic Commission for Africa in its annual Economic Report on Africa publication. For example, while Africa accounted for about 16% of global cotton exports in 2012, only 1% of these exports, or about $400 million, was cotton that had been processed into fabrics. During the same period, the continent imported $0.4 billion worth of cotton and $4 billion of cotton fabrics.

“In other words,” says the report, “The region was trading raw cotton for cotton fabrics, missing a huge opportunity to add value domestically and industrialize.” Some of the main cotton exporters include Benin, Burkina Faso and Mali. Such skewed trade patterns could result in a situation in which whatever revenue Africa generates from exporting raw materials is offset by imports of manufactured goods.

Nigeria offers a classic example of what has been happening to many sub-Saharan African countries that have concentrated on exporting raw commodities while paying scant attention to processing some of the commodities into finished goods as part of a deliberate policy on industrialization. For example, in 2012 Nigeria exported $89 billion of crude oil, according to the ECA report, but imported $5.5 billion of refined oil because its refineries have all but collapsed due to neglect. Deliberate trade policies and practices consistent with African countries’ development goals could lead to industrialization, which in turn could help transform and strengthen their economies.

Insufficient growth

Over the past two decades Africa’s economic expansion has been remarkable, with a few countries registering double-digit rises. Because much of the growth is fuelled by high demands for mineral and agricultural resources, the World Bank projects a slowdown in 2015 to about 4.4% due to weaker prices for oil and other commodities. However, growth is expected to pick up again in 2016 and 2017.

Yet as in the past, this growth will likely not be enough to lead to significant changes needed to reduce poverty by creating jobs and providing social services. Overall, “the current merchandise export structure, dominated by raw and unprocessed commodities, is not conducive to the envisaged level of development,” says Carlos Lopes, the ECA head, in his foreword to the ECA’s report, the focus of which is “Industrializing through Trade.” By favouring the export of raw materials over processing goods, sub-Saharan Africa denies itself the opportunity to add value through manufacturing, which would provide more jobs and generate additional revenue.

In 2013 the ECA argued that African countries could transform their economies through commodity-based industrialization. A year later, its report “Dynamic Industrial Policy in Africa” concluded that the continent needed to set up stronger institutions and adopt effective measures to enhance structural transformation. This year the commission is saying that deliberate and smart trade policies and practices could lead to the much-delayed industrialization of Africa.

This year’s report is making the case that African countries can use trade to achieve industrial development and structural transformation, but advises against the traditional pattern of trading, which so far has meant exchanging raw commodities for manufactured goods.

“A successful trade-induced industrialization should be interactive and coherent with a country’s national development strategy; it should be evolving and highly selective,” Hopestone Chavula, one of the authors of the report, told Africa Renewal.

Smart protectionism

The notion of “highly selective” trade policies seems to imply that African countries are being asked to implement some kind of protectionism or special treatment for certain sectors that would be justified by the overall need to advance national development goals. To this end, the crafting of national development strategies has to be the starting point towards industrialization, says the report. But unlike in the past, such deliberate trade policies may be difficult to implement under the rules of the World Trade Organization. The WTO is unlikely to give the nod to countries trying to shield selected industries, nascent or fragile, from competition, even when doing so would protect their national interests.

Still, Mr. Lopes from the ECA is convinced “smart protectionism” works, telling Africa Renewal last year that “all countries that have industrialized started with some degree of protectionism.” But he quickly concedes that Africa cannot practice crude protectionism anymore. “If we have to make the rules work for Africa, that basically means smart protectionism.”

In pursuing industrialization through trade, sub-Saharan Africa would not be treading untested paths. Experience from Japan, the East Asian tigers and China all show the effect of deliberate trade policies, including the role of central governments in making the right choices to advance national development goals.

While the role of governments may be important, the report says, policymakers must understand global trade dynamics and use regional and international trade negotiations to pursue their industrialization agenda.

Trade policies alone will not jump-start African industrialization, the report finds, but they will provide “a robust framework for African countries to reassess their trade policy.” This will give those countries the opportunity to identify the best routes to structural transformation and tailor trade policy to achieve the desired goals.