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Africa in the Global Crisis and Trade Dis-Order

Africa in the Global Crisis and Trade Dis-Order
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MD Ramesh forwarded this insightful report on Africa in the Global Crisis and Trade Dis-Order

The Evian Group and the German Marshall Fund convened a two-day meeting at IMD, Lausanne, with the aim of getting the measure of some of Africa’s prime
concerns in a rapidly changing world economic context. This multi-stakeholder meeting – attended by North American, European and African representatives from academia, international organisations, government, civil society and the business community – focused primarily on trade related issues, business leadership, domestic governance and transatlantic policy responses. The meeting falls within an ongoing series of initiatives that propose to evaluate the priorities of African nations in the processes of international integration and their representation in global economic
institutions.

The following short summary attempts to synthesise a cross-section of the spirited debates and contradictory propositions expressed during the closed meeting. The roundtable themes included: Africa’s standing in the global economic crisis; the role of agricultural reform in promoting entrepreneurship and trade; African business and transatlantic multinational leadership perspectives; a report from the WTO review meeting on aid for trade; regional integration and trade facilitation; and Africa in the 21st century trade regime.

Although no explicit policy recommendation can be made on the basis of the divergent suggestions proffered during the discussions, a number of common concerns and areas of investigation can be identified. The first touches upon national governance and the developmental state; the second relates to the role and effectiveness of aid; the third focuses on the agrarian sector; the fourth attends to the expectations of regional integration and African leadership; and the fifth is the impact of China on the continent and established transatlantic partnerships. Africa has been hit hard by the global crisis. All forecasts indicate that per capita GDP will decline on the continent in 2009, with a considerable impact on poverty, fiscal positions and debt sustainability. The central issue that emerges is what will happen in the subsequent years: will the slump drag out or pre-crisis economic growth.

In spite of the limitations of the approach, this summary report, in line with the broad nature and general intent of the roundtable discussions, will largely confine itself to treating the African continent as an entity. It is to be inferred that there are showcases and basket cases and that the processes of international integration, the nature of transatlantic relations, and the regional repercussions of the global economic crisis are extremely diverse.

promptly resume and how long will it take for Africa’s creative potential, backed by its vast resources, to be fully released? Most, if not all, African nations face an underlining employment challenge that one way or another needs to be dealt with in order to secure stability and prosperity. Building the capacity to trade in an equitable global environment will be an important part of the solution. Assorted prescriptions, moving away from a discourse of need to one of possibilities, will reside in a mix of international measures and national policy responses, although success will largely be contingent on strong domestic foundations. Two recurrent expressions that spotted the discussions were equal partnerships and coalitions for growth. The one consensual policy consideration to emerge from the meeting is that transatlantic trading partners should shun protectionist measures, including nefarious export subsidies, which stifle Africa’s prospects and aspirations.

National governance

The undue vulnerability of the African continent to the effects of the financial crisis has called into question the credibility of the West as guarantor of sound global economic governance. By general consent, many African nations have undergone a marked improvement in stabilising political environments and improving their overall economic and business climate over the past few years. Yet there was a sense at the meeting that the persistent proselytising of ‘good governance’ without creating the conditions for reforms that are actually possible and conducive to positive change may have reached the stage at which potent strategies can deteriorate into poor implementation or outcomes. Two lines of attack can be distinguished in these perspectives on national governance.
The first contends that the biggest challenge for Africa to surface from the global crisis is not the direct impact of non-uniform channels of exposure (commodity prices, trade flows, FDI, remittances, ODA) but the postponement or reversal of necessary reforms. The second insists on the opportunity provided by the financial crisis to consolidate the economic and political reforms initiated during the last decade, with the aim of further improving global competitiveness, domestic institutions and policy orientations.

Many African states are often over-reaching but they are also fragile. As a result, businesses can evolve in a policy vacuum with loose regulatory frameworks open to considerable abuse or patronage. Strengthening the capability of the state through the acquisition of skills and stronger institutions that can drive development in a consistent and coherent manner were presented as ongoing priorities. In response to the crisis, countries in a position to do so can implement domestic fiscal and monetary measures, but they also have the long-term responsibility of enhancing the distribution of public goods, building and creating markets with effective business environments, making headway on infrastructure, diversifying export markets, increasing intra-regional trade, exploring the possibilities of sourcing investment from new regions, and pushing for a global trade deal. Under the over-arching imperative of creating productive employment, governments could seize the opportunity to form domestic growth coalitions, both with the business  sector and civil society. It was suggested that this could take the form of a new developmental state that animates growth within a regional context with energy as a key focus of the development drive, thereby capturing the global transition to a low carbon economy. Africa remains an untapped continent in many ways in terms of energy use and could represent a reservoir for the world. The underlining presumption behind this line of reasoning is that the employment challenge, in the context of rapid urbanisation and the need for proactive agricultural strategies (more on the subject later), calls for a structural transformation of the whole economy that goes beyond the state versus market debate; one that places inflection on development governance and genuine partnerships (preferably sanctioned democratically).

In terms of the action points to emerge from these discussions on domestic governance, some of the main suggestions include letting broadband and
communication technologies unfold as they have the potential to bring about positive change; endow landholding rights that will give tangible asset value while creating the base of a tax system; change aid channels by making governments more accountable to their populations; and public-private partnerships to tackle important issues in the provision of health, education and infrastructure. On this last point, the importance of institutionalising collaboration was underlined so that future generations of management and government are professional co-operators: leaders with the ability to make compromises and sacrifices, which is what collaboration, partnership and leadership should presumably be about.

The aid debate

The effectiveness of aid that accompanies transatlantic relations with Africa proved to be one of the most divisive and sensitive issues in the roundtable discussions. Dambisa Moyo’s argumentation in her book ‘Dead Aid’ of the corrosive effects of aid in securing sustainable long-term growth has sparked a virulent debate to which the meeting was not immune. It was suggested that this report should show a unanimous view among African participants that aid will not develop Africa, a complete rejection of the aid approach model, although this standpoint was tempered by discrepant opinions. The aid debate is so complex that it is difficult to incorporate its constituent parts. The evidence is that fifty years of development aid has not produced the results that justify the inputs and one of the premises of traditional aid has been a dependency model worldview of development that has not worked. There is a need to redefine the aid debate and the priorities between donors and beneficiaries: aid flows as presently dispatched, often attached to foreign policy and security considerations, do not appear to sufficiently drive the issues attendant to development.

A word of caution was introduced in that one must avoid falling into the dichotomous trap of pitching black against white as in the state versus market debate. The philosophy behind aid is called solidarity due to the extreme inequalities in the world and the economic rationale is to help attract investment. It is a question of how governments can work with the private sector by leveraging government finance to promote business, employment creation and economic growth. If we continue with our aid mentality along current principles, many of the problems will continue to be fuelled and the accountability gap between governments and their populations will continue to be an issue. There are nevertheless governance models that match donors with recipients in equal representation. Aid will play a role in the future, albeit hopefully differently, better targeted, less distortionary, demand rather than donor driven, and to greater effect on the ground.

Aid for trade

The initiative on aid for trade – a non-binding issue instituted in Hong Kong 2005 as an aftermath of the WTO Doha negotiations – has triggered considerable enthusiasm. The roundtable included a report and discussion from the aid for trade review meeting held in Geneva. At its incipience, the aid for trade initiative had two distinct purposes: first a recognition that trade liberalisation and market access would not automatically translate into poverty reduction or growth and that aid was predominantly directed at social services rather than the productive sector; secondly it was about taking the theory seriously attendant to securing the global public good of a multilateral trading system with aggregate gains yet net losers. It was recognised that some countries would need capacity assistance to supplement trade agreements and it was further recommended that the WTO, although not a development agency, be given a facilitating and coordinating mission in this endeavour. The general sense to be conveyed from the review meeting was that it had been a success in maintaining the subject high on the political agenda, reminding donors of their responsibilities as well as beneficiaries of the importance of mainstreaming trade in their development
strategies.

One of the messages to come out of the WTO meeting was that the crisis, contrary to expectations, has not engendered a decrease in aid for trade flows and there does not appear to have been a diversion of resources from ODA. In terms of moving forward, some of the highlights include the importance of demonstrating impact beyond donor input, better engaging the private sector and civil society at the regional and local
level so that their priorities and aspirations are taken into account, creating regional economies of scale to counter market fragmentation, ensuring that resources will not be scaled down in the future, and developing national strategies with broad based
approaches that include neighbouring countries.

Private sector involvement in aid for trade strategies is critical at various levels: advising governments on trade policy reform, infrastructure development needs, and technical assistance. Providing feedback on the effectiveness of aid for trade programmes is paramount in assisting the local private sector to develop its productive capacity while creating a supportive environment for trade investment

A new EU “vulnerability flex” instrument set up with the intention of assisting ACP countries in a precarious fiscal state and worst hit by the global downturn was presented at the meeting. The stated aim is to offer a quick response in the form of grants to support counter-cyclical measures more focused on aid priorities (salaries, safety nets, public works, infrastructure) The criteria include a 1 percent drop in GDP, a slump in foreign reserves to 2 months equivalent of imports, and a fiscal defici  deterioration with budget support to ensure the capacity to absorb. It was suggested that in the past decisions by donors provided the basis for cooperation, whereas this new tool enshrined commitments and appropriation from beneficiary countries. The central issue remains: does this approach correspond to Africa’s needs?

(legal security, predictability, tax regimes, suitable infrastructure, customs administration, telecommunications). In the past, ODA tended to focus more on
infrastructure projects, essential for trade, but there has to be the productive capacity to exploit these physical structures. This requires technical assistance for better scope and professionalisation as well as support to reach EU and US standards perceived as
barriers to trade.

A number of valuable critiques of the aid for trade approach were brought forward in the discussions. The first raises doubts as to whether the WTO should be involved at this scale and whether the initiative will crowd out the real institutional focus of market access. The second argues that integrating aid with trade agreements too closely could call into question the reciprocal motivations behind signing deals; a carrot and stick policy. The third questions in whose interest this development objective is being devised and whether aid for trade will succumb to the same political dynamics as traditional aid models. Capacity building must have a sustainable impact while trade training coming from the EU or the US is rarely neutral. The fourth is more systemic in that it queries whether the aid for trade debate, especially in light of the present crisis, is being framed in a competitive model in which the market remains the core barometer of our actions; essentially asking Africa to be competitive when there is a real problem in the pricing and inordinate volatility of energy and food, the two traditional commodities on which much African production and foreign trade is based.

And finally, a serious caveat related to food security issues of particular relevance to many African nations: the reality is that the international market for agriculture is extremely distorted (access, subsidies, border restrictions, SPS, food aid, export bans, distribution rents). Unless these structural measures are addressed, aid for trade could make very little difference in terms of trade corridors and harnessing Africa’s
comparative advantage.

Agricultural dilemmas

After years of urban bias and relative neglect in national development strategies, agriculture is now being prioritised as key to the continent’s economic revitalisation and drive towards industrialisation. Agriculture accounts for over two-thirds of the continent’s employment, 40 percent of its exports, and 35 percent of total economic output. The employment, labour absorption and productivity dimension of growth strategies was underlined at the meeting with agricultural discussions hinging around increased farm yields and access to jobs for released labour. Participants disclosed that yields stood at similar levels to four decades ago and that the continent was still witnessing an incremental rise in under-nourishment. Food security, essentially a poverty issue, remains a huge challenge for much of Africa. For the most part, the smallholder agricultural model was dismissed as deficient in that peasants and their dependents were doomed to poverty revenue while emphasis should be laid on exit strategies, capacity building (the interface between farmers and markets including land-holding rights, extension services, technology transfer, rural infrastructure, trade facilitation) and promoting urban pool capacity. It should also be recalled that there is a gender and empowerment dimension to this debate as many African farmers are women pushing for development.

One of the critical issues to be raised at the meeting is the manner in which the employment effect of agricultural reform, technological change and productivity
increase will be dealt with on the road to modernisation. A poverty reduction strategy that does not provide safety nets (cash transfer programmes, employment guarantees) and incentives to released rural labour in the transition to productive employment elsewhere, as has been the case in Asian growth models, runs the risk of failure. Where will the pull factor to absorb this labour come from? Rapid urbanisation entails different food marketing structures and in the absence of an agricultural organisation capable of providing for these new structures, essentially capital intensive and non labour-abundant production, foreign suppliers will supplant local African producers. Export markets as an outlet are constrained by barriers and sanitary cordons but also factor endowment situations. There is also a much larger issue of water security and irrigation. Bio-energy, for example, is a capital intensive, technology rich and labour saving process, which is precisely the reverse of what much of Africa needs. On top of this the carbon market has proved difficult to enter for Africa due to the onerous
nature of CDM regulations to get access to the schemes. Having taken stock of these challenges, some of the policy prescriptions to emerge from the discussions were larger agricultural systems, devising alternative models for pooling the resources of rural areas and the urgent restructuring of statal and para-
statal institutions. It was also suggested that governments should stop taxing agriculture and make a serious push in the direction of developing regional markets by getting rid of barriers. Agriculture and food security remains an intensely political arena in which the management of domestic interests often takes precedence over judicious long-term strategies. Regional integration and leadership

Although the situation is improving, economic borders within Africa remain thick. Shoring up regional integration and expanding intra-regional trade, which currently stands at 10 percent of the continent’s trade flows, have long been proclaimed strategies that have largely failed to materialise. There has been a wide discrepancy between the expressed desire and the numbers on the ground in part due to the absence of a vibrant constituency, including the private sector, willing to drive this integration process forward. There also appears to have been a lack of clarity as to the model that should be applied, thereby creating hollow institutions, with little practical impact, established for political rather than technical reasons. Unrealistic unions have too often infused regional initiatives rather than practical and incremental structures that move forward on deliverable outcomes. To further compound the problem, many regional initiatives have been buttressed or shaped by donors with miscellaneous interests, thereby reinforcing concerns surrounding constituency, coherency and
legitimacy of process.

The recent controversies over the EU-South Africa EPA, accused of undercutting a regional integration project (SACU) that has been inching forward on issues such as rules of origin, for example, was discussed. This was presented as an unacceptable template that underlines the deleterious impact external powers can have in shaping regional dynamics to the disadvantage of home regions. Integration efforts in Africa are partly corroded by a salad bowl of different types of technical assistance (PRSP, Integrated Framework, bilateral efforts each with different evaluation processes), not to mention multifarious preferences and a viscous tangle of rules of origin, which make setting out business and government strategies extremely difficult. To counter this, it was suggested that there is an urgent need for a well-functioning machinery of government, with better inter-ministerial coordination, while building the capacity of administrators for indigenous growth. Participants conveyed that there have been articulate and assertive African leaders for this agenda, yet not enough has been achieved in terms of coherence and political will.

A homegrown solution that was presented with some conviction was NEPAD, although the process is still in its relative infancy and subject to multi-layered criticism. NEPAD, drafted by Africans, was a strategy built on a vision that withdrew from pessimism and a mentality of blame. The aim is to develop bankable and shovel- ready projects along the many potential corridors that exist throughout the continent. It focuses on agriculture as one of the main drivers of growth as this is where capital is most needed. The essence of NEPAD is to try to engage with development partners in a collaboration based on mutual responsibility and accountability. Signatory responsibility included getting government structures right, the African Peer Review Mechanism was created (an unprecedented institutional development), and progress was made towards stronger political and economic governance. One of the first issues to be discussed at NEPAD was the tenuous link between the government and its people, in itself a governance breakthrough, from which partnerships with the private sector and civil society were built in. A second layer consisted in redefining relations with the North and finding a new way of sustaining supportive partnerships. Whether NEPAD will succeed in facilitating regional growth and cooperation is an open question but it is to be hoped that it is a viable step in the right direction.

The impact of China

Although not explicitly on the agenda, the roundtable discussions demonstrated the extent to which it is impossible to frame transatlantic policy options with respect to Africa without taking into consideration the formidable force China has become on the continent. China has considerably altered the perception the economic and business world holds towards Africa, now seen through a lens of greater opportunity. China’s overall involvement in the region is shrouded in some controversy, although on the whole it was conjectured that it is a force for good. The challenge is to ensure that African countries develop this partnership to their benefit. China’s multi-pronged agenda appears to be relatively clear (energy, commodities, markets for goods, international organisation support) while African nations may have lacked a strategy that channels this collaboration towards their core priorities. It was suggested that there is a lot of confusion within political and business elites, driven in part by euphoria at emerging power interest, on how to manage this relationship.

One of the effects of the present crisis may be China’s repricing of risk, as it looks more critically at the investments and infrastructure projects being made on the continent. China offers a model that does not distinguish between state and private companies and has set up a sovereign wealth fund, the China-Africa Development Fund, specifically geared at ventures in Africa. It was suggested that this state led investment is creating a level of risk not acknowledged due to the lack of transparency and confusion between public and private interests.

Nevertheless, China is having a huge impact on the continent, one that has probably irreversibly modified the texture of transatlantic partnerships in the region, with many African states rethinking their development models at the elite level as a consequence of Chinese  involvement and investment. An interesting note of historical caution was brought into this discussion under the submission that Chinese investment and aid structures could be little more than a replica of a 1950s and 1960s type dependency model: big infrastructure projects and government to government aid, with strings attached in the form of labour and products, underwriting private interests rather than civil society empowerment. China has triggered competition for Africa, but from an African perspective, one thing that should not be lst is that partnerships need to be
developed on many fronts.

Conclusion

Rather than set out a compendium of prescriptive recommendations on the basis of discrepant advice concerning transatlantic policy options, business leadership, and Africa in the global crisis, it may be better to focus on processes. We are often ignorant of solutions, but a multi-stakeholder approach can help smoothen the edge of economic and social transformations. Bestowing a sense of inclusiveness and ownership in this process is absolutely crucial. It is possible to make policy, including trade policy, more inclusive by rationalising and strengthening consultative fora. The private sector, with privileged access to governments, has the responsibility of fostering internal dialogue to balance interests while reaching out to other stakeholders. There are new business paradigms and partnership models out there that can help address some of Africa’s pressing problems but the process is a long one and should start now. Important domestic reform can offer constituents a sense of empowerment and ownership while, in a quest for development and freedom at the international level,
African states will continue to fight for the right to participate as equal partners. Harking back to the one transatlantic trade deliverable on which most participants at the meeting agreed: certain African states may have been shooting themselves in the foot with lousy policy, but the protectionist device of agricultural export subsidies combined with domestic support was compared to a gun that destroys the productive capacity of a nation.

An assessment of the crisis that found echo at the meeting is that Africa may ironically emerge as one of the final frontiers of the world truly committed to global capitalism. While this analysis may ring as slightly precipitous or tongue-in-cheek, there is no doubt that if redundant policies, investment, or aid models are to change significantly, the crisis may be the optimum occasion to move forward: people will come together in times of adversity and this could represent an opportunity for Africa. There is also a moral dimension to the present crisis driven by an economic model catering to a small percentage of the population. One should hope this will not be lost in corporate strategies and public policy priorities as profits and growth rates inexorably resume.

Africa in the Global Crisis and Trade Dis-Order
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About MD Ramesh

MD Ramesh
Mr Moochikal (Ramesh) has a Bachelor’s Degree in Physics and Masters in Business from University of Bombay and XLRI Respectively. Ramesh has established a distinguished career in the Agri/Food Commodities sector in Africa for the past 20 years. He has lived and worked extensively throughout Africa and is currently responsible for Southern and Eastern African operations. MDR has worked close to farmer groups, worked alongside government programs, set up and run logistics, processing operations and distribution structures in African markets. He is often consulted by banks, government structures, NPO's and by businesses. MDR lives in Durban with his wife and 2 daughters and enjoys weekend Squash and Cricket.

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