Trade Negotiations Insights • Volume 8 • Number 3 • March 2009

Africa, trade, and the crisis

A stimulus package for Africa

by Dominique Njinkeu

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The current global downturn is a crisis emanating from advanced economies rather than from bad policies on the part of Sub-Saharan African (SSA) countries. African economies will nevertheless be affected through a variety of international trade-related channels, including reduced commodities prices and exports receipts, foreign direct investment and equity flows, exchange rate fluctuations, and remittances. Trade is already shrinking, growth declining, and unemployment rising. The associated losses for SSA countries are forecasted at over USD 50 billion in 2008-2009. Unless appropriate solutions are identified and swiftly implemented, the crisis risks undermining the achievements of three decades of policy reform, thus further reducing the possibility of achieving the Millennium Development Goals. Fortunately, such solutions exist that could even turn the crisis into opportunity for African countries.

This article reviews the critical trade-related challenges facing African countries as a result of the global financial crisis and shows how these relate to the multilateral trading system. It then identifies the trade-related threats and implications for African countries’ sustainable development and suggests priorities for the G20 leaders’ deliberations. It concludes by presenting global trade governance priorities where assistance from G20 leaders is essential.

Critical challenges

African development is hampered by a four-component poverty trap. First, inadequate access to markets and growth poles is a major deterrent to growth and poverty alleviation. Landlocked countries face greater transport costs and are dependent on the transport infrastructure of their coastal neighbours. Secondly, poor governance nurtures an unfriendly business environment and is fertile ground for violent conflicts. Thirdly, Africa’s natural resources have been of interest to many non-OECD Development Assistance Committee (DAC) members in recent times. China’s interventions have especially been a source of concerns as its aid and loan allocation could lead to new debt build-up, which could undermine the broad long-term development objectives of the aid recipients. Fourthly, climate change and environmental security are sources of concern. Spill over of the global financial crisis could worsen poverty on each of the above dimensions. The financial crisis therefore presents Africa with several challenges.

The first challenge is to sustain interest among African countries in market-friendly reform at a time when they see developed countries introducing inward-looking protectionist policies. The stalled World Trade Organization (WTO) negotiations further complicate the situation. While trade reform was assuming centre stage in public policy discourse, particularly with respect to the Economic Partnership Agreement (EPA), with the global financial crisis, the incentive for continued reform of the last three decades or so could diminish or disappear; the momentum for proactive participation in multilateral negotiations risks dying out.

The second challenge relates to the competitiveness agenda. An important development challenge for Africa is the high transaction costs of doing business. Governments need to bolster their supplyside capabilities, diversify production, and add value before exporting. The global financial crisis weakens the vulnerable financial positions of African countries, making it impossible to finance such a competitiveness agenda.

Third is the reduced attention to macroeconomic stability. One of the key achievements of policymaking in Africa over the last three decades has been the steady improvement in the macroeconomic framework, which is the foundation for growth that can reduce poverty. The current financial crisis is fuelling domestic inflation pressures. As such, one challenge is to maintain competitive exchange rate regimes and single digit inflation. Macroeconomic policies need to be co-ordinated with policies on the real side of the economy with due attention to possible spill over effects at the regional or sub-regional levels, especially for those countries for which monetary, trade, and exchange rate policies are regional. Developments in the multilateral system, particularly from the WTO and the International Monetary Fund (IMF), could have a direct impact on these challenges. In particular, concluding the Doha Round with due attention to the interest of African countries will create a conducive environment for continued reform.

Trade-related threats

The global financial crisis poses serious trade-related threats to African development. Firstly, the crisis threatens the consensus among monetary and other policy authorities. On monetary policy, limited shifts in policy regime is required since problems originating, for example, from the real estate sectors or stock markets in developed countries are only marginally transmitted to African economies. The situation is however different in other areas including trade-related issues, such as remittances and other external finances. Secondly, there has been discussion on reconsidering government ownership of assets in major economic sectors, or delaying/ reversing privatisation of publicly owned enterprises. Thirdly, households in African countries are much more vulnerable. The negative impacts will spread to the entire economy and the poor who have the most limited access to safety nets will suffer tremendously. The situation is further complicated by the low institutional capacity of Sub-Saharan African governments to provide timely assistance to vulnerable groups.

Key global trade governance priorities for Sub-Saharan Africa

The legitimacy of the G20 leaders will depend on the extent to which they can integrate the interests of non-G20 members. They should collaborate with Africa to create the conditions for swift recovery and even higher growth. Focus could be on increasing policy transparency and stability and enhancing policy credibility that in turn will make the region attractive to domestic and foreign investors. They should ensure the Doha Round is completed in a timely manner with the interests of African countries properly reflected in the final agreement. A related priority is to conclude the EPA negotiations in a manner that eases the integration of African countries in the international trading system.

Research at the London-based Overseas Development Institute and the National Institute of Economic and Social Research shows that the road to African recovery depends on the size and focus of the stimulus. Debt relief would be helpful but have no direct effect on demand and hence growth and poverty. If the stimulus is spent to cushion the impact on the vulnerable it will have short-term positive impact on growth as it helps smooth income losses. In case the emphasis is on productive investment it will have a short and long-term impact by preserving the pre-crisis growth prospects. Finally in case the stimulus finances investment in infrastructure, Africa would see growth in productivity that can nurture long-term growth beyond pre-crisis growth potential. The same research shows that growth in Africa will in turn contribute to swift worldwide recovery, especially in countries with significant trade links with Africa such as Europe and China.

African countries need a stimulus package to mitigate the contagion of these internationally originated problems. The stimulus shall have properly integrated sets of trade, monetary, and fiscal measures. It could provide assistance to facilitate economic adjustment and nurture investments in human and physical capital, such as to minimise long-run costs. The stimulus should support appropriate safety nets for those most vulnerable and most exposed to the crisis; it should be consistent with long term sustainable levels of indebtedness. The private sector and particularly the Small and Medium Enterprises (SMEs) that will be creating wealth necessary for poverty reduction should receive particular attention.

Unfortunately, African countries cannot internally mobilize the necessary resources. Various proposals have been floated recently. One example by the World Bank is to devote 0.7% of the stimulus of developed countries to a “Vulnerability Fund for Africa.” This Fund could finance projects that would help mitigate the consequences of the crisis, including safety nets programs, investments in innovation, technological upgrading, and infrastructures that can provide the foundation for future growth.
The Vulnerability Fund for Africa would also undertake those actions that governments would have undertaken with funds diverted from current reform program.

Effective implementation Aid for Trade would assist African countries affected by the financial crisis to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalised trade and increased market access. It would help distribute the global benefits more equitably.

So far most of the suggestions have been coming from outside Africa. The G20 leaders could facilitate collaborative efforts aimed at bringing forward a common African response to the crisis through an Africa-led stimulus package that is properly funded, free from un-necessary bureaucracy, and not diverting resources from existing programs.

Author
Dominique Njinkeu is the Executive Director of the International Lawyers and Economist Against Poverty (ILEAP) in Toronto.

Notes
This article was originally featured as part of a compilation commissioned in advance of the G20. To view this publication in full, please see: Carolyn Deere and Ricardo Melendez-Ortiz (eds.), A G20 Agenda on Global Trade Governance: Developing Country Perspectives and Sustainable Development Challenges (Geneva and Oxford: The International Centre for Trade and Sustainable Development, and the Global Economic Governance Programme at the University of Oxford, 2009). This paper can be accessed online at: www.ictsd.net or www.globaleconomicgovernance.org.

One response to “Africa, trade, and the crisis”

Dosso Kasim 1st April 2009 at 07:20
I am thinking about the debt that Africa has to pay back. In my opinion, we should we the people of Africa and brothers and sisters of Africa descent stand against this debts. We are in the post cold war period and we also understand how those so-called loans were taken by papet governments in Africa. I personally believe that I should not be responsible for the debt my country own before I was even born. We must stand against the WTO and the debts must be canceled now.