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Africa: Massive aid, debt write-offs, and change in trade rules advocated

by Chakravarthi Raghavan

Geneva, 11 Sep 2001 - Africa enters the third millennium with highly fragile economy, and facing greater marginalisation and no hope of reducing poverty, unless there is a major reorientation of international aid, debt, adjustment and trade policies, and complimentary domestic policies to enable Africa to grow faster and more equitably, the UN Conference on Trade and Development said Tuesday.

Africa, says UNCTAD, needs an additional $10 billion a year in official flows (aid or highly concessional loans) to reduce dependency in future, a once-and-for-all exit solution from the debt overhang than that offered by the HIPC initiative, by setting up an independent body (selected by debtors and creditors) to assess debt sustainability and write off debt deemed unpayable.

In terms of the international trading system from which Africa is yet to draw significant benefits, all current arrangements and practices need to be reviewed and existing preferential and special and differential treatment and translate them into explicit obligations, and reviews of the agreements on TRIPS, TRIMS, Subsidies.

And, key shifts in domestic policy are also needed to ensure growth and poverty reduction - including focus on a new poverty alleviation and reduction strategies founded on a careful and frank assessment of effects of macro-economic and structural adjustment policies of the last two decades on growth and income distribution. Merely redirecting public spending on health and education would not suffice - so long as policies in agriculture, trade, finance, exchange rates, enterprises, deregulation and privatization do not succeed in raising growth and bettering income distribution.

Mr. Yilmaz Akyuz, UNCTAD’s chief economist who is in charge of its Division on Globalization and Development Strategies, and chief author of the annual Trade and Development Reports, said that the adverse terms of trade problems of developing countries now extended beyond primary commodities to manufactures. The overall deterioration in the terms of trade of developing countries was thus not only due to primary commodities but manufactures. It was not realistic now to advocate stabilization of commodities prices through commodity agreements. While in some commodities like coffee there was over-production due to increase in productivity, it was not so in many others. As for manufactures, the adverse terms of trade were due to competition among developing countries concentrating on resource-based or labour-intensive manufactures.

The UNCTAD calculations of additional external resources needed for Africa took account of the terms of trade losses due to the system. There is a consensus in various other studies - including by the World Bank and the Economic Commission for Africa - on the amount of additional external resources needed by Africa, said Akyuz.

Asked how any of these problems of Africa, or other developing countries, that originate in the rules of the trading and financial systems could be resolved without major changes in the rules, UNCTAD Secretary-General Rubens Ricupero agreed that major changes were needed in the trade rules.

“I agree,” said Mr. Ricupero, “that the system and its rules are full of imbalances and unfairness”. While there had been a few success stories in Africa of some diversification, as a whole the external conditions constrain possibilities of success. While agriculture, and the high tariffs and barriers facing exports of the developing countries in that sector, was one example, the imbalances extended across other sectors, making the current system “extremely and negatively biased”.

Exporters of manufactures, including in areas like electronics, now faced problems arising from fallacy of composition, he said.

“The imbalances in the system have to be redressed, and there should be an end to the kind of advice given to the developing world from the financial system,” said Mr. Ricupero.

It is wrong to advice and provide conditionalities for the developing countries to reduce tariffs and liberalise unilaterally, when the system is based on bilateral, reciprocal tariff reductions on a product-by-product basis. The international financial institutions should refrain from giving advice for unilateral liberalisation that effectively places countries in a more disadvantageous position in negotiations in the trading system. Such an advice may be good in economic theory, but the world being what it is, unilateral liberalisation is not the appropriate advice or condition to impose.”

In a sombre report, “Economic Development in Africa: Performance, Prospects and Policy Issues,” prepared for the UN General Assembly and the Trade and Development Board discussions on African Development, the secretariat makes clear that while the domestic policies of the African countries have contributed to this, the major responsibility lies with the international economic institutions, in particular the Bretton Woods Institutions through their aid conditionality, stabilization and adjustment programmes, including the latest versions of Poverty Reduction Strategies and programmes; the WTO and the outcome of the Uruguay Round of multilateral trade negotiations; and the bilateral aid and market access policies of the major industrial countries.

If account is taken of the effects of aid and debt and debt-servicing, long-term decline in real prices of primary commodities exported by Africa, the terms of trade (for agriculture and simple labour-intensive manufactures) and adverse market conditions coming in the way of diversification, Africa which contains a large chunk of the poorest developing countries, today is providing a net transfer of funds to the rest of the world.

After undergoing all the policy reforms and the conditionalities that went with trade and aid, and despite a brief recovery in the second half of the 1990s, “economic conditions in Africa remain highly fragile,” says UNCTAD, in calling for

        a doubling of aid flows, to achieve at least $10 billion more a year, to end future dependency;

        a bolder approach to debt relief, including a standstill on debt repayment and an independent assessment of debt sustainability;

        a full review of all current agreements and practices in the international trading system to remove any impediments to growth and development in Africa, and to enhance Africa’s exports; and,

        change in growth and macro-economic policies to ensure rapid economic growth and reduce income inequalities and disparities.

The report perhaps should have come before the just concluded UN Conference against Racism at Durban. It presents facts and analysis, in sober and unemotional language, that show that not only have Europe and America to ‘apologise’ and acknowledge their shameful roles in that era, but must face up to and compensate Africa, for the unjust international economic system and rules imposed on the developing world, and more so under the neo-liberal policies enforced through the IMF, World Bank and now the WTO.

For, even if the industrialized world in North America and Europe can avoid being blamed for the after effects of slavery and colonialism, the UNCTAD report shows how the working of the international system since decolonization of Africa - from the mid-60s to early 70s, with some colonial pockets ended in the 80s and 90s - and more so after the neo-liberal economic policies forced by the centres on the rest of the world, has sent the continent reeling from one economic crisis to another, and continues to impoverish and marginalise the people.

Despite some recent upturns, per capita income in Sub-Saharan Africa (SSA) in year 2000 remains ten percent below the level reached in 1980; the gap is even larger compared to that attained three decades earlier. Economic growth is well below the targets set in the United Nations New Agenda for Development of Africa in 1990s (UN-NAFED) of 6% per annum. Only two countries in the region, Uganda and Mozambique have met this target.

And the growth rates needed to achieve the target of reducing African poverty by half by 2015 is even higher than the UN-NAFED targets which, on basis of current trends, are unlikely to be achieved.

Industrial growth in SSA has also fallen behind since 1980, with a process of de-industrialization in some African countries associated with policies of trade liberalization and decline of state-owned enterprises (forced on the countries by the IMF and World Bank programmes and conditionalities), which in many of these countries had constituted the major segment of large scale industry.

As things stand now, Africa depends more and more on agricultural growth, either through backward linkages or through demand originating from rural population.

Agriculture figured slightly better, with output growth rates in SSA above the population growth rates, but below in North Africa. However, cereal output fell behind population growth rates in both SSA and North Africa.

The report finds “a very weak relation between agricultural policy reforms and output growth”, with deregulation of agricultural markets failing to trigger expected supply responses in most countries. There were some improvements in agricultural output in mid-1990s, associated with improved terms of trade which also played a role in improving overall growth in the second half of 1990s.

However, with adverse weather conditions towards end of that decade, and with worsening terms of trade after 1997, the current situation in Africa is again precarious, particularly for food crops. Droughts, prolonged dry spells and floods in 2000 and 2001 have undermined optimism and raised doubts about sustainability of rising crop yields, resulting in much lower agricultural and especially cereal output in the continent.

On the terms of trade front, and overall trends and effects, the report notes that after enjoying an upturn in terms of trade during the commodity price booms of 1970s, Africa has experienced a downward trend from early 1980s. The levels of terms of trade for SSA and North Africa at end of 1990s were 21 and 24 percent respectively below those attained in 1970s. And the overall trend, since 1980s has been downward. While there was some upward trend after 1993, contributing to SSA’s economic recovery, this lasted just three years, and the terms of trade of SSA in 1998 was 15% below the peak of 1996.

This secular decline is an important reason for the marginalisation of Africa in world trade, says UNCTAD. A significant part of the decline of SSA in share in world exports over the past two decades could be explained by declines in prices of African exports to that of the result of the world. If African terms of trade had stayed at the level of 1980s, estimates UNCTAD, its share in world exports now would have been almost twice as high.

According to a recent World Bank study too, the cumulative terms of trade losses of for non-oil exporting SSA countries, between 1970 and 1997, amounted to 119% of regional GDP in 1007, and 51 and 68 percent of cumulative net resource flows and net resource transfers to the region respectively.

“If these numbers are combined with leakages from capital inflows into outflows and accumulation of reserves (by offsetting financial transactions),” says UNCTAD, “it turns out that in the past two decades SSA has not received any net transfer of real resources from the rest of the world.”

It can be estimated that for each dollar of net capital inflow to SSA from the rest of the world, some 25 cents went back as net interest payments and profit remittances abroad, more than 30 cents leaked into capital outflows and reserve build-up, while 51 cents made up for terms of trade losses.

“These figures indeed imply a net transfer of real resources from SSA to the rest of the world.”

Such resources losses have been a major factor in the poor economic performance of the region in the past two decades. If such resources had been available for domestic use and invested productively, African growth during the past two decades could have been much faster, and its current levels of income much greater.

On the problems of manufactures, the report says that according to recent empirical research, the expansion of manufacturing exports from the developing countries have also been associated with a downward trend in terms of trade - a trend much more pronounced with respect to exports of labour-intensive manufactures than skill- and technology-intensive products. This poses an additional problem for Africa.

The report cites studies that show that in terms of manufacturing terms of trade of the EU with five groups of countries - LDCs, ACP, Latin American, Mediterranean Basin and East Asian NIEs, while net barter terms of trade of developing countries as a whole declined at an average rate of 2.2 percent per annum from 1974 to 1994, the decline was largest for LDCs and ACP countries - 5.7 and 4.7 percent respectively. In the case of the LDCs, the deterioration in manufacturing terms of trade was more than the decline in their primary commodity terms of trade.

According to another study on manufacturing terms of trade of the USA with developing countries, between 1981 and 1997, the net barter terms of trade of manufacturing exports of developing countries to the USA declined by 15.6 per cent or almost 1.1 per cent per annum.

This, the report underlines, is bad news for Africa trying to diversify from dependence on primary commodities and their exports.

On the question of market access, the report says that there is now a consensus emerging among Africans, that while the continent gained little in terms of market access, African governments are facing extremely heavy multilateral obligations. And the competitive edge enjoyed by many African countries under the Lome and GSP schemes is undergoing substantial erosion. The already weak and insufficient provisions on special and differential treatment for some of the African economies have been eliminated, in many cases, by the conditionalities imposed by the Bretton Woods institutions and creditors.

As things stand, African countries face a number of extremely serious barriers in terms of access to Northern markets, says the report and points to another UNCTAD study that total transfers by consumers and budgets to agriculture and highly protected industries in the OECD countries may be estimated at about $470 billion in 1997. Developed countries could save 2.2% of their GDP annually on subsidies, corresponding to almost 10% of GDP of developing countries.

The total subsidies of developed countries amount to more than a half of developed country imports from the developing countries and 10 times their concessional ODA. And in the context of SSA, the annual transfers amount to the equivalent of 241% of the region’s combined GDP.

Peak tariffs and quotas, anti-dumping and countervailing duties imposed (at times arbitrarily) on imports, unjustified sanitary and phyto-sanitary import restrictions, export subsidies for agricultural and industrial products, various production and investment subsidies for both agricultural and industrial production, and the anti-competitive practices implemented by TNCs are the measures that not only generate distortions against African and other developing country exporters but also have adverse effects in the domestic markets of these countries, says UNCTAD.

While the net impact of elimination of all distortions operating against developing country producers in exporting and domestic markets have not yet been estimated, according to more limited estimates, the gains to SSA economies from elimination of agricultural protection in OECD countries is estimated to be $6 per capita.

And duty free access for LDCs in the Quad countries, covering only the tariff peak products (i.e. those with tariffs higher than 15%) will result in a 11% increase in LDC exports. – SUNS4964

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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