THE FANTASTIC Recession and the fantastic trade collapse
This sharp economic depression worldwide has resulted in an immense contraction in international trade.
- African export volume growth is likely to decrease to 4% in ’09 2009, from a buoyant rate of 11% in 2008, translating right into a 45% loss in export value. 1
- The largest slump is for middle-income countries, as their exports depend heavily on commodities (e.g. oil and gold and silver coins) whose prices and demand has been severely hit; their manufactures exports also have suffered.
- Oil and gold and silver coins were affected mainly by a slump in global commodity prices, while manufactures suffered because of contraction popular as the true sector in key markets shrunk.
- Low-income countries show some resilience, due to the fact their exports are in “soft” commodities – such as for example tea, coffee, etc. – which didn’t experience a drastic decline in prices or demand on the global market.
This chapter discusses the trade situation in Africa in key global markets and the impact of the global overall economy on different income groups and sectors. Furthermore to advertise access issues, the paper highlights the need for initiatives such as for example “Aid for Trade” in assisting African countries realize the entire gains from trade liberalization.
Trade collapse amid the financial meltdown in major markets
The slowdown in major trading partners, in conjunction with Africa’s undiversified exports has severely affected the continent’s trade. That is exemplified by the drastic fall in exports to the united states, which fell by a lot more than 50% between August 2008 and August 2009, from $8,525 million to $4,017 million (Figure 1).
Figure 1 African exports to the united states, January 2007-August 2009 ($ million)
Source: US Department of Commerce.
The fall in US demand for African products has especially affected oil exporters (Nigeria, Angola, Chad, Equatorial Guinea, Republic of Congo, Gabon, Côte d’Ivoire, Cameroon, and the Democratic Republic of Congo). The collapse in oil exports makes up about the sharp swing in growth rates in these countries, with Angola, for instance, going from a double digit growth rate in the last years, to a projected zero growth in ’09 2009.
Table 1 presents the trends in exports from middle-income African countries to the primary global markets (EU, US, Japan and China). The main element points are:
- Algeria, Egypt, Morocco, Nigeria and South Africa experienced the sharpest deterioration in exports, starting in the fourth quarter of 2008, when the impact of the financial meltdown on the true sector became evident.
- South Africa suffered a sharp decline in manufacturing products and gold and silver coins, such as for example gold and platinum. With the increases in the price tag on gold and platinum of around 14% and 19% respectively, in the first quarter of 2009, the sector has started showing signs of early recovery.
- As an exporter of mainly agricultural products, Tanzania was spared, with a rise in exports of 12.13% in the next quarter of 2009.,
Table 1 Middle-income countries’ exports to EU, US, Japan & China, 2007Q1 to 2009Q2 (% change)
Source: ITC calculations predicated on National Government Statistics
For low-income countries the biggest contractions were experienced in Angola, Rwanda, the Seychelles, Sierra Leone and Uganda. Table 2 demonstrates:
- Oil importing countries, such as for example Angola, were hit the most in comparison to countries that are mainly exporters of agricultural products.
- Angola’s exports (mainly oil) declined by 59.3% in the next quarter of 2009.
- Countries such as for example Burundi and, somewhat, Ethiopia, experienced substantial growth in exports through the financial meltdown, with exports in the next quarter of 2009 growing at 94.5% and 8.3% respectively.
Table 2 Low income countries’ exports to the EU, US, Japan and China, 2007 Q1 to 2009 Q2 (% change)
Source: ITC calculations predicated on National Government Statistics.
Figure 2 implies that the effect on African exports becomes evident as global markets entered a recession in 2008 Q3. And in addition, manufactured goods from Africa contracted by 36% as consumers’ demand shrunk, because of declining incomes and expectations of a worsening global economic condition. Likewise, mining exports also followed with a decline of 25%. The impact lessens in the next quarter of 2009, with mineral exports showing resilience as the purchase price began to rebound for key products such as for example oil and gold. The agricultural sector was minimal directly suffering from the financial meltdown.
Figure 2 Exports of African countries to major global markets
Source: ITC calculations predicated on National Government Statistics
The tentative recovery of African trade shouldn’t distract global leaders from the duty of locking in long-term progress by completing the Doha Development Agenda (DDA).
The DDA is a chance to improve global growth prospects that all economies and societies can benefit. Most of all, trade negotiations provide a opportunity for African countries to meet up with their competitors by:
- Locking-in domestic or unilateral reforms; and
- Obtaining the advanced economies to start with their markets, thus levelling the playing field for Africa regarding its key competitors.
Failure of the DDA to meet up its objectives can not only undermine the need for the WTO, but may also jeopardise the trade and growth prospects of developing economies; should this happen, Africa – using its reliance and commodity exports – will be between the biggest losers.
As agricultural issues are central to the successful completion of the DDA, Africa should continue steadily to push for more progress on agriculture’s three main contentious issues: (i) agricultural tariffs; (ii) trade distorting, domestic support supplied by developed countries with their farmers; and (iii) export subsidies. The leadership of developed countries is crucial in ensuring progress on these issues.
Gains from a Doha success
The economic gains that Sub-Saharan Africa stands to reap from the DDA are large – although their exact magnitude remains a conjecture. Studies also show that:
- Sub-Saharan Africa would visit a modest $5,000 million upsurge in merchandise trade (some 1.1% of the region’s GDP);
- Agriculture would take into account 78% of the total gain;
- African cotton farmers will probably enhance their exports by $1,900 million.
A far more ambitious target of full merchandise trade liberalisation, with a supportive domestic policy environment, is estimated to bring about gains of around 5% of income in developing countries, which would lift some 300 million people out of poverty by 2015.
As long as they accrue, such benefits will be unmatched by those from all the types of international economic cooperation, including credit card debt relief and official development assistance. Hence, it is critical that developed countries have a leadership role and invest in making certain these potential gains are realized. The DDA should be concluded.
Going beyond market access: Championing the Aid for Trade initiative
In this current economic environment, the Doha Round, if concluded promptly, will provide a chance for African countries to create strategic decisions to improve economic performance, which is crucial for recovery.
It is crucial, however, for the international community to identify that market access alone isn’t enough; supply-side constraints must be addressed so as to enable developing countries, especially Least-Developed Countries (LDCs), to benefit from trade opportunities. Coordinated efforts by all of the key stakeholders to recognize and address supply-side constraints – especially both “hard and soft infrastructure”, such as for example roads, ports, rail networks, one-stop border posts, harmonisation of custom systems, training of customs officials and simplification of regulations and documentation – are very important. These reforms will demand adjustment financing, that countries rely heavily on Aid for Trade.
Aid for Trade can be an initiative which has emerged from the Doha Round of trade negotiations. The initiative, however, isn’t dependent on an effective conclusion of the Doha Round. This is a mechanism by which the development community can help developing countries, especially LDCs, to benefit from trade opportunities by enhancing market access and helping these countries alleviate structural supply-side constraints.
Beneath the leadership of the WTO, significant progress has been manufactured in mobilizing Aid for Trade, with the clear commitment of the international community. In line with the Aid for Trade instantly 2009 by the OECD, Aid for Trade commitments risen to $25.4 billion, a growth of $4.3 billion from the baseline period 2002-2005. However, it’s important that Aid for Trade be not merely driven by donors and the international community, but that African countries remain proactive in designing a coherent group of policy options targeted toward their own development objectives. The Aid for Trade initiative must complement and strengthen Africa’s regional integration efforts, particularly via an upsurge in intra-African trade. This leaves a clear role for regional institutions, like the African Development Bank, the African Union Commission and the US Economic Commission for Africa, in addition to regional economic communities (RECs), to aid the regional integration agenda.
Regional distribution of Aid for Trade
Aid for Trade to Africa stood at $9.5 billion (37.5% of total Aid for Trade) in 2007, while commitments to Asia and the Americas amounted to $10.7 billion (42.2%) and $2.2 billion (8%), respectively (Table 3). For Africa, this represents a rise of 23% from 2006 and 49% from the baseline of 2002-2005 (Figure 3), which may be the largest increase in accordance with other regions. The 5 major recipients of Aid for Trade in Africa in 2007 were Kenya, Ghana, Mali, Uganda and Egypt. When it comes to sector distribution of Aid for Trade flows, economic infrastructure dominated, accounting for 62% of total flows to Africa (Figure 4). The areas that the African Development Bank has financed include building productive capacity, agriculture specifically, and also trade policy and regulation.
Table 3 . Regional distribution of Aid for Trade ($ and % of total), 2007
Source: Calculations predicated on OECD Data
Figure 3. Aid for Trade by region, 2000- 2007 ($ million)
Source: Calculations predicated on OECD Data
Figure 4. Sectoral distribution of Aid for Trade flows in Africa
Source: Authors’ calculations predicated on OECD data
The role of the African Development Bank in the Aid for Trade agenda
The African Development Bank (ADB) also recognizes that market access opportunities in the global market have the potential to provide African countries long-term sustainable income, which may be used to improve unemployment, boost economic growth and reduce poverty. Simultaneously, the ADB acknowledges that any type of trade liberalization through tariff reduction should be expected to trigger a restructuring of activities that can lead to, for example, lack of fiscal revenue, lack of competitiveness and changes in the distribution of employment. Hence, it is the duty of the ADB and policy makers to anticipate these potentially negative economic and social outcomes, thereby making the Aid for Trade initiative a significant instrument in addressing a few of these undesirable effects. The ADB, specifically, through its increased concentrate on both physical infrastructure and private sector development, recognizes its important financing role in Aid for Trade.
The African Development Bank believes it is important for African countries to obtain a good trade deal in the Doha Round, instead of depend on any adjustment funds they might be able to secure by means of Aid for Trade, in case of a bad outcome. Therefore, the ADB’s main obligation is to harness the areas where opportunities for African countries are most expected. This consists of supporting capacity building in trade negotiations along with the critical trade policy areas, such as for example rationalizing the very best tariff structure that accommodates Doha and other trade agendas.
Furthermore, the ADB is supporting trade-related infrastructure (i.e. transport, energy, logistics), financial and capital market development, along with other areas to be able to reduce transaction costs. Promoting improvements in infrastructure and the business enterprise environment is checking opportunities for the foreign private sector, both with regards to trade and of investment. In the end, it’s the private sector that trades. In line with the Aid for Trade data reported by the ADB, new commitments for infrastructure, the biggest sector regarding contribution, amounted to $232 million in 2006 and $831 million in 2007, accounting for 54% and 78% of the ADB’s total Aid for Trade contribution. Within its commitment to the Aid for Trade agenda in the continent, the ADB pledged $600 million to aid infrastructure and other related activities on the North-South Corridor through the April 2009 meeting in Zambia, that was convened by the East African Community (EAC), the normal Market for East and Southern Africa (COMESA) and the Southern Africa Development Community (SADC). The ADB is anticipating that important initiative will be replicated in other regions in Africa. The ADB also plays a part in other types of Aid for Trade, including trade policy and regulation, adjustment and capacity building.
Furthermore, in times of economic distress, institutions including the ADB are asked to aid their regional member countries. At the height of the global financial meltdown in ’09 2009 the ADB responded swiftly and approved the Trade Finance Initiative to the quantity of $1billion to get trade; $500 million came by means of credit lines to African finance institutions to aid trade finance operations; $500 million came by means of the Global Trade Liquidity Programme (that was jointly implemented with other global finance institutions). Trade finance also falls under Aid for Trade.
The recent contraction in international trade clearly implies that trade was among the casualties of the global financial meltdown. Middle-income countries, such as for example South Africa, Algeria and Morocco, were most affected, mainly because of the decline in exports in manufacturing goods and minerals. However, low-income countries, such as for example Burundi, which are exporters of agricultural products, were less suffering from the crisis. Certainly, the global agenda for recovery from the global contraction calls for strong commitments on the international trade front, and concluding the Doha Trade Round ought to be near the top of the agenda.
Furthermore, initiatives such as for example Aid for Trade offer opportunities for the relevant countries to create investments in infrastructure, improve trade policy and regulation along with productive capacity, with the view to expanding trade and therefore to improve economic growth. Therefore, Aid for Trade must involve long-term, predictable aid flows which can be fed into budgeting processes. Moreover, Aid for Trade should be a complement, rather than substitute, for working towards a far more progressive world trading system, which is one which will not prejudice the interests of developing countries. On the recipient side, the success of Aid for Trade may also entail strong political leadership at the united states level, which is vital for the support of regional and national priorities.
1 US (2009), World ECONOMY and Prospects 2009. NY: UNDESA