Trade Doesn’t Provide Panacea for Africa

(BUSINESS INTELLIGENCE BRIEF) It appears that there are two dominant schools of thought when it comes to the prospect of economic growth in Africa. There are the optimists who assert that Africa is on the verge of becoming the next big thing as far as development is concerned. They point out that Africa now has a total population that rivals that of China and assert the urbanization that has been taking place for the past decade has allowed the African population to provide the critical mass needed to bolster business. There are several politically stable African states that have been sporting growth rates that rival those of the Asian states. Additionally, Africa remains a destination where developed nations go for raw materials and exceedingly cheap labor. Pessimists are ready with a laundry list of challenges.

Their pause comes from the reality that more than a dozen wars being waged on the continent to the fact that almost half the population of the continent is in abject poverty, living on less than five cents a day. They also point to the low education level, ongoing health crisis -- including AIDS, cholera, typhus, malaria, etc. - and rampant government corruptions that leaves some nations generally too weak to defend their positions when there is genuine investor interest.

Both positions are correct as far as they go. Africa is a place of stunning contrasts, and there is both opportunity and threat for the global business community. One of the key differences between Africa and the other developing parts of the world is the focus of intense efforts to perfect development and there has been a battle here as well. There are the forces of aid and the forces of trade, and they are often at loggerheads with one another.

The more traditional approach to African development has come from the aid community and they have been active for decades, funneling billions of dollars there. The notion is simple enough - provide monetary and tangible assistance to the impoverished nations so that they can advance with the basic building blocks of society - an educated and healthy population that is lifting out of the mire of pure poverty. Unfortunately a great deal of that assistance has been wasted as governments have either fallen prey to corruption or they just lack the capacity to handle the aid. Critics of the aid approach have asserted that this builds a kind of welfare state dependency that is akin to what happens with individuals who get stuck on the dole and can never seem to break the cycle.
The problems of aid based assistance gave rise to the theory that what Africa needed was trade based assistance. If the Africans were encouraged to get engaged in global trade, they would be able to emulate the success of the Asian states that have used the export as their ticket to economic growth. Both Europe and the United States tried to encourage trade with Africa by reducing tariffs for goods made in these nations. It worked in a fashion, but the impact has been far less than anticipated as there is much more to participating in global trade than being able to dodge some tariff barriers. The first rush of business to come to Africa after the United States reduced these barriers was in the textile trade and that didn't really work out the way planned. The Asian clothing makers simply shipped in the cloth and used the local African workforce for assembly work on cheap items that were then sent to West. It didn't do much for the development of the African states, and it allowed the Asian manufacturers to avoid the duties that had been imposed in the US and Europe to control their exports. U.S. companies were further damaged by the cheap competition while the African nations that had been the intended target for assistance got little.

The ultimate solution is for the African states to develop their own domestic economies to the point that they can sustain the populations. This will take additional aid in many cases, and it will require additional export activity but moist of all it will require an environment that supports the entrepreneur. That may yet be the single biggest barrier as the majority of states in Africa are still judged to be the most difficult environments for starting a business in the world due to heavy regulatory burdens, inefficient bureaucracy and taxation that is uneven and capricious. Add to this a lack of solid banking and business security, and the challenge intensifies.

Chris Kuehl PhD, of Armada Corporate Intelligence, is NACM's Economic Advisor

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