There is a shared sense that international trade has great potential to contribute to growth and poverty reduction. There are several examples of countries in which integration into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that trade opening does not automatically bring growth.
The question therefore arises why the effects of international trade have been so different among countries. If the developed world is dependent on the developing world for raw materials for manufacturing, how is it that the developing world is still poor and cannot compete in international markets?
To make real profits from raw materials, poor countries need to develop processing industries. In the words of former World Bank chief economist Justin Lin, all countries that remain poor have been unable to diversify away from agriculture and the production of traditional goods into manufacturing and other activities.
So an increase of trade openness is a growth opportunity for a country only if local resources can be deployed in adequate quantities to produce goods for the external market.
Domestic production capabilities have to be already in place to respond to international competition, improve technology and exploit trade opportunities from increased liberalisation. In other words, differential patterns of structural change (and industrial production capabilities) account for the bulk of the differences in the extent of countries’ economic prosperity and success.
Structural change is the key to significant and sustained growth, and opening up a country to international trade does not in itself lead to such change.
The relative success East Asia has achieved in terms of export growth and structural change is a reflection of the pronounced complementarity between the government’s proactive policies to attract foreign direct investment and equally proactive policies in support of the development of local firms’ capabilities.
Numerous studies have shown that one of the major differences between the success stories of East Asia and the experiences of Latin America has been that the East Asian economies have made the transition to knowledge generation, whereas Latin America is lagging behind in this respect.
As pointed out by Augusto de la Torre, the World Bank’s chief economist for Latin America: “After the Second World War the East Asian economies linked up to Japan and in the process of getting connected they created the ‘Asian Factory’.
“It became a virtuous circle. The better they connected to the world, the better they connected to each other.”
Latin America’s post-war experience has been the reverse: “We were connected to the most important growth centre, the US. But instead of the ‘Latin American Factory’, we got dependency theory, structural adjustment and a lot of disappointment,” he said.
Similar trends are evident in Africa. The continent has 12% of the world’s oil reserves, 40% of its gold and between 80% and 90% of its chromium and platinum, according to the 2013 report from the UN Conference on Trade and Development.
It is also home to 60% of the world’s underutilised arable land and has vast timber resources. Yet together African countries account for just 1% of global manufacturing, according to the report
It is also home to 60% of the world’s underutilised arable land and has vast timber resources. Yet together African countries account for just 1% of global manufacturing, according to the report.
This creates a cycle of perpetual dependency, leaving African countries reliant on the export of raw products and exposed to exogenous shocks.
Ivory Coast and Ghana produce 53% of the world’s cocoa. But the supermarket shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerland and the UK.
Ethiopia, Ghana, Nigeria, Rwanda, Senegal and Tanzania each produce more than 250,000 tonnes of fruit a year, but they do not add value to a large share of output through processing. Although Nigeria had imposed an import ban on single-serve or consumer-size juice products to promote value addition, it is difficult to disentangle how much of the growth has involved manufacturing juice versus repackaging bulk juice manufactured elsewhere.
African coffees of the Arabica variety are among the best in the world, with the highest-graded Kenyan and Ethiopian coffee trading for many multiples of the price of “standard grade” Arabicas. But the continent has only a marginal role in processing and adding value. The region’s imports of oilseed products are broadly reflective of global flows of processed oilseeds into the continent that farms them.
Africa’s abundant labour and low wages make it potentially competitive in the export of labour-intensive manufactures. But since labour productivity is low relative to China and other East Asian countries, abundant low-wage labour does not necessarily translate to low labour costs in production.
Consider Ethiopia and Tanzania. Wages for producing polo shirts and wooden chairs range from about a tenth to half those in China. But polo-shirt workers in Ethiopia and Tanzania finish half the number of shirts workers do in China.
Africa’s abundant labour and low wages make it potentially competitive in the export of labour-intensive manufactures
For wooden chairs, they produce one or two for every 100 in China, pushing Tanzania’s costs to 19 times those in China and Ethiopia’s to 26 times.
The young and growing workforce in Africa can be a global competitive advantage and a great asset in driving industrialisation if it is healthy and has the right skills.
African exporters now import most of their fabric. But the region has the potential, with additional progress on regional integration, to develop a more integrated textiles and clothing industry. West African countries such as Burkina Faso and Mali are significant producers and exporters of raw cotton, but they lack the industrial infrastructure of some of their neighbours.
Successful industrialisation in Africa requires bold leadership and strong policies. Of the many factors that have contributed to China’s industrial and technological rise, government policy has been critical.
Many African economies are small and have to import most inputs in order to manufacture. They also lack a large domestic market that would provide natural protection.
These challenges are ultimately surmountable through becoming competitive on global export markets. But at the early stages of industrial development, they make it more difficult for domestic firms to compete against foreign firms.
Harmonised policies through regional integration and suitable institutional arrangements can help countries overcome these challenges and advance on economic transformation.