Africa’s industrialisation should precede free trade. Value chains and some production phases of large corporations from richer states in the continent must include Africa as a matter of priority to avoid calamity.
Most nations grapple with too many challenges in a world that increasingly shows less kindness and love towards the weak and poor. The gap between nations, and within the states themselves, shows that solutions to eradicate poverty and helping millions of people get out of their desperate state will not be found at any time soon.
Talk within and outside countries has generally focused on a number of interventions that are either driven by the state or provided with a strong influence of the private sector. Some people advocate for a mixed economy where both the state and private capital can simultaneously play an active role to attain specific development outcomes. Others favour extreme positions where the state has complete control, or no control at all.
In this regard, the rise of South Korea from being a subsistent, agricultural economy as well as a relatively weak state just over 70 years is often cited as a good example for others to follow, particularly in Africa and the rest of the developing world. South Korea is now a significant global economic player and ranks among the world’s richest top 20 economies.
South Korea leads and is fully integrated in global trade not as a consumer but as supplier of high-tech goods. It is also a mover in the raw materials space and competes on an equal footing with traditional powers. Termed as the ‘miracle of the Han River’, the rise of then insignificant and peripheral South Korean economy and its ‘chaebols’ like Hyundai, LG and Samsung is a story that will be narrated to many generations to come. The only niggling point is that many people do not know how exactly South Korea got to the point where they are now.
In the African setting, focus is on repeating the ‘South Korean miracle’ through the integration of markets with the belief that free trade will improve the economic fortunes of the fifty-five countries, from Drakensburg in the far south to the Atlas Mountains in the north. In March 2018, for instance, African heads of state gathered in Kigali, Rwanda to sign a continent-wide free trade agreement.
# Regional economic integration and intra-African trade
Labelled as the largest free trade area since the formation of the World Trade Organisation (WTO), the African Continental Free Trade Area (AfCFTA) seeks to boost intra-African trade as the underlying motive. In addition, it is hoped that the agreement will fast track industrialisation and also facilitate attainment of unprecedented high growth rates. At a global scale, it is said that the trade instrument will help African countries to move up the global value chains by relying less on commodities.
The argument is that the goals of the AfCFTA can be achieved. A comparison is made with India, which has made impressive strides in developing its country in the past decade. Africa is in a comparable position as India 10 years ago – it has similar population (1.25 billion) and economic size (U$D3.52 trillion). These efforts are buoyed by the World Bank’s forecast that most African states will achieve ‘middle income’ status as early as 2025. But, it is unclear if African nations have prepared the ground for a vibrant economy to exist within the continent.
Assuming that the required threshold of 22 countries would ratify the agreement by the end of 2018, that includes South Africa for that matter, the work is cut out for the fractious and easily distractible Africans. Be that as it may, there are so many issues start to come to mind when the topic of intra-African trade and cooperation comes up.
Firstly, as things stand African economies vary in terms of not only size and wealth, with the likes of South Africa, Nigeria, Kenya and Egypt leading the pack one can almost imagine why they embrace the idea of the continental free trade agreement. The regional giants probably see an opportunity for taking over other markets without being asked too many questions. These large economies also hope to export what Jesse Jackson calls “economic apartheid” – where a small minority enjoy more wealth and a large majority is expected to share remains in the dustbin.
Secondly, besides South Africa the majority of economies depend on a single commodity like oil or mineral endowment (e.g. diamonds) and lack a robust manufacturing sector. This raises the question, what exactly do African countries hope to achieve with the trade agreement if there is barely nothing exchange among themselves? This question is applicable to Mauritania and Lesotho as it does to South Africa, Egypt and others.
Thirdly, it is unclear how the big players within and outside the continent perceive issues of regional economic integration and intra-Africa trade. Do the likes of South Africa hope to take advantage of other countries without contributing anything? Mind you, a well-developed trade relationship ordinarily removes tariffs and circumspectly deals with issues of rules of origin and other barriers.
Currently, a large company like Shoprite, Vodafone or Dangote Cement moves in and dominates the market with less regard for local players, who could easily become suppliers of input materials or managers. As a result, the topic of multinational corporations is highly charged because they are seen to be destroying economic wealth of local communities. Large corporations are also accused of disrespecting their hosts, MTN problems in Nigeria can be understood along these lines.
Fourthly, introducing a trade agreement will disrupt ‘economic sovereignty’ of countries. For recipients of investments, the AfCFTA would mean loss of revenues from tariffs and other mechanisms emanating from importation of goods. Furthermore, the countries will struggle to implement economic policy programmes aimed transforming their economies, such as ’indigenisation’ in Nigeria and black economic empowerment in South Africa and Namibia.
# Integrated industrialisation policies
Evidence suggests that no country can develop without consistent economic policies, especially a solid industrial policy. It is fair and good to changing all aspects of economic policy to make countries ‘investor friendly’ but the industrial policy is an overall catalyst to kick-start economic development. This will in turn ensure that at least countries will benefit from a trade relationship.
These days it is hard to separate free trade and protectionism. Developed nations use free trade agreements to protect their economies from external competition such as provision of incentives and subsidies for their agriculture and automotive sectors. As a result, this makes competition difficult for foreign goods and small players. Conversely, big players use economies of scale to dominate world markets and leave countries without any home-grown industrial champions.
Essentially, it is not only China that use state resources to amplify its economic prowess but most large economies engage in ‘non-market economy’ practices. So, free trade in Africa cannot easily take place if stronger economies take a similar posture as the European Union, Japan, China, etc.
The same argument goes for African-born multinationals like MTN, Zenith Bank, Naspers and Attijariwafa Bank. These companies should not be allowed to squeeze as much from countries while at the same time engaging in endless battles against competition. This means a company will do everything it can like screwing its employees, customers and suppliers to become a regional champion at the expense of others.
To illustrate this point further, the Cape-based citrus company Fruitree, for example, cannot simply export processed and packaged juices to Malawi, Comoros and Niger and call it ‘free trade’. The company needs to support industrialisation efforts in these countries by relocating some of its productive capacities to other parts of the free-trade area.
# Motivation for SA and its companies to help Africa industrialise
Former minister of trade and industry in South Africa Alec Erwin commented recently that it would be to the country’s interest to assist the continent to industrialise. Not only will this make intra-Africa trade meaningful for all signatories of the AfCFTA, but this help to reduce political tensions resulting from possible resistance of exportation of finished goods, say, by South African companies.
Putting aside other structural issues characterising the South African economy, without assisting Africa to industrialise South Africa will continue to grow at 2% or 3%, and internal pressures will mount. The South African economy has the capacity to do help Africa industrialise. South Africa is also integrated to the international global trading system perhaps more than fellow African countries for historical reasons. This experience can come very handy as the continent pushes towards economic integration, intercontinental free trade and industrialisation.
It is accepted that countries experience differing trade patterns. For example, Africa produces minerals that are in demand in industrialised economies. The continent imports finished products. South Africa isn’t different from others but it leveraged on its position of a pariah state due sanctions as well as on its high-demand minerals. Its mineral endowment set South Africa on an industrialisation path.
However, it was industrialisation policy and linkages with Europe that were crucial for its development. Large companies like Sasol, Iscor, Eskom, etc. were born directly from this combination of forces. German Fischer-Tropf technology, for example, was key in developing liquid fuels from coal. And, the French company Areva beat sanctions to give South Africa technology for the Koeberg Nuclear Power Station in the 1970s.
South Africa’s industrialisation journey is not at unique and therefore did not depend on ‘market friendly’ policies nor on geniuses of one particular race. The same goes for South Korea. Western powers played a key role in ceding some of their productive capacities out of sheer political interest and economic reasons. The Korean miracle and its chaebols would not have seen a light of day if America had no immediate interests in the Korean Peninsula at the end of the Second World War.
It thus makes sense for South African capital, both private and public, to be utilised in Africa’s economic development. In 2007, former president Thabo Mbeki also suggested that finances of state pension funds from several African countries could be deployed to creating the Pan African Infrastructure Development Fund, a Nepad project. This was long before China ran rounds with its cheap loans. South African pension funds are in any way wasted on building malls and other low yield investments.
# The ‘Korean miracle’
Almost engulfed by communist China and the Soviet Union, the United States “wanted to keep it capitalist.” The end of the Korean War in 1953 not only split the country into two but also meant an opportunity for the US to create a state that was going to be economically strong enough to stand up to communism. As a result, Washington “pumped money to South Korea to encourage its growth, and make sure it stayed loyal and capitalist.”
The US was least concerned about democracy-building and did not put any conditions for the economic relationship to happen, as we note them today.
A dictatorship under General Park Chung Hee was pivotal in South Korea’s economic development and transition to becoming a developmental state. This means that the US did not mind to be associated with an authoritarian regime to helping South Korea to industrialise. Nonetheless, at the centre of the economic development strategy of General Park’s government was cooperation with big companies to intervene in the economy. Its five-year economic developmental plan ensured that General Park and his lieutenants had tight grip on economic policy and strategies.
In 1963, the Federation of Korean Industries was created to provide a platform for chaebols where they could in essence work with government to plan the economy as well as push for technological advancement and investment in infrastructure. China could be missing the point by overloading African countries with debt – its loans could well be used to transform the African economy for its long-term benefit. Should Africa play its cards right from now on, China will throw a ‘Trumpesque’ tantrum to bully the continent.
The US used its money to reconstruct Western Europe as well as to develop South Korea and the so-called Asian tigers. It was also important for the West to collaborate with the likes of South Korea, Japan, apartheid South Africa and military juntas in Latin America to contain the spread of communism in the world. The condition for democratic reform to qualify for loans was never an issue at all.
# Creating mutually beneficial economic relations
The proposal for South Africa to help other African states comes at a good time when trade volumes no longer show bias in favour of just developed economies. China is now Africa’s trading partner; thus it makes sense for South Africa to increase mutually beneficial economic relations with African countries.
This will be achieved through coherent industrial policies. And without a desire to share some of its industrial success, South Africa will face hurdles as the other countries will easily source finished goods from elsewhere. These goods will then make way to South Africa due border-less trade arrangements.
Africa’s industrialisation programme should precede free trade. Value chains and some production phases of large corporations from richer states in the continent such as South Africa, Nigeria, Kenya and Egypt must include Africa as a matter of priority to avoid calamity. In any case, South Africa, for example, knows this too well – its trade relations with Germany is heavily reliant on vehicle manufacturing and parts. Spare parts are made in Germany for assembly plants in Rosslyn (Pretoria) and Uitenhage (Port Elizabeth).
Expanding on the Fruitree example above, the company can therefore harvest its fruits in the Western Cape and export them to plants in The Gambia, Chad and Tanzania. Alternatively, and or simultaneously, the Agricultural Research Council can help Kenya’s Happy Valley to plant oranges and grapes to supply the plants in East Africa.
Such grand programmes will not take place without change in the socioeconomic structures of the majority of countries in the continent. Economic wealth, education and skills must be opened to all citizens. Infrastructure needs to be extended to cover mostly rural parts of the continent to ensure inclusiveness and spread of economic opportunities as well as to minimize risks associated with an influx by foreigners.
Africa should slow down on accelerating mind-numbing policies such as free movement of people at its present form, especially in these early stages of continental integration, because it can lead to problems associated with unplanned migrations. Free movement should be gradual and not shock the populations.
African governments cannot go alone in implementing the integration project, deeper consultations and commitment will have to be obtained from citizens to avoid a calamity. The continent cannot afford complaints about ‘democracy deficit’ long before the trade agreement gets into motion.
Regional economic integration that is not based on justice and fairness can end as a huge disappointment. The solution therefore lies with African countries seeking what Ghanaian political economist George Ayittey calls, “African solutions to African problems”.