Spring - 2013 Ness1

Published on June 12th, 2013

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How Africa can Benefit More from the Globalization of International Trade

By Petter Aune Næss

In an increasingly globalized world it is becoming more and more important to have a clear strategy of how to benefit from this globalization. This analysis will look at Africa’s part in international trade, and consider if the continent is benefitting from the globalization of trade today and how the continent can increase their total part of trade.

 

The classical theory of international trade

The classical theory of international trade states that different countries benefit from international trade because it increases the market for different products. If a country produces more than it needs of a specific commodity, it can export the surplus and make more money than it would if only the domestic market was available. A country can export both raw materials and already manufactured products.

The classical theory also states that international trade will improve the division of labor, and therefore increase the productivity in each country. Critics of this theory has claimed that this trade is hurtful to the economic development of lesser developed countries, since these countries normally export raw materials and import already manufactured products, and the price of raw materials is lower than that of already manufactured products.

The critics also claim that this is the cause of the uneven distribution of international trade. The classical theory also states that a specialization towards international trade involves a fundamental change in how a country utilizes its resources, and is therefore not easily reversible. Theory about specialization is interesting because many companies involved in international trade have started to specialize towards this, which gives them a number of advantages, especially in the development of new technology to boost the production.

 

Africa in globalization

It can be said that Africa has lost out because of the new way big companies are organized and the way trade is carried out, because African companies lack important competitive advantages. Because of this it is important that African companies renew themselves to adapt to the new way international companies are organized, and thus benefit the most from international trade. Today, Africa as a continent faces a lot of challenges, the biggest one being poverty.

How to solve this problem is therefore an important question, and Africa has to ask itself if it best can be solved by taking a larger part in globalization, or by isolating itself from globalization. The best way to battle poverty is through economic growth and this is one of the reasons why many believe that Africa should take a greater part in the international economy.

African countries have historically led an isolationist and protectionist policy, and this is one of the main reasons why many countries still have a weak economy. A more liberal and open economic policy will generate greater economic growth for African countries, according to the theory.

However, since the early 1980s African countries have increasingly liberalized their agriculture. There are many reasons why this has happened, among others changes in the export and a drop in the prices of agricultural products. Critics of this development state that if many countries liberalize one industry at the same time they will increase the amount of goods being exported so much that the prices will plummet, hence putting themselves in a worse situation than before.

 

Africa in international trade

In the period 1989–99 Africa increased both its imports and its exports steadily, but despite this the continent still imported for more than it exported for in 1999, and its total share of international trade fell in this period. After 1999 this trend changed. In 2005 Africa had almost doubled its exports since 2000, and the continent exported for about $50bn more than it imported. In this period Africa also increased their total share of international trade with a notable part, about 0.5 percentage points in exports, and now stands for about 3% of the total exports globally.

This is a big change in such a short time, and shows an encouraging trend for the continent, especially since it shows that trade in Africa is developing faster than in the rest of the world. It is, however, important to note that in the 1960s Africa stood for over 5% of the total exports globally, so compared to this their share of international trade have decreased a lot. This may indicate that Africa struggled to adapt to globalization in the beginning, but now have started to reverse this trend.

The reasons why Africa struggled so much in the beginning can be many. For example, when the liberalization of the agricultural industry started in the 80s this industry may have struggled to adapt to the international market and it is possible that African companies have not been as organized as other international companies, and therefore have lost out in the international market. The point that probably has the most explanatory power however, especially based on the theory, is that African countries generally have exported raw materials and imported already manufactured products. The price of raw materials is usually lower than the price of already manufactured products, so countries who only export raw materials will therefore struggle to benefit much from international trade.

 

How Africa can benefit more from international trade

The positive development Africa has had recently in international trade is a good starting point to benefit even more from trade. There are a number of measures which can be put in to secure this. First of all it is important that African companies start specializing even more than they do today. According to the theory specialization is one of the most important advantages to benefit from international trade. This can also increase the technological development on the continent, which is much needed in Africa.

With a big technological development more African countries can base their exports to a larger degree on already manufactured products, and less on raw materials, which will increase their incomes. If African countries can manage this, they may also be able to decrease the great poverty on the continent. This, in turn, can also help Africa benefit more from international trade.

Decreasing the poverty will involve getting a larger percentage of the population into labor, and this labor can then be directed towards the exporting industries, and thus increase the incomes. If Africa manages to do this the future of the continent can be very prosperous, but the road there is long and demands a clear plan of action. In conclusion, there is reason to be positive for the future of Africa, if the leaders start implementing these measures.

 

Further reading:

Ajayi, S. Ibi (2001) “What Africa Needs to Do to Benefit from Globalization”, Finance & Development, 38(4).

Myint, H. (1958) “The «Classical Theory» of International Trade and the Underdeveloped Countries”, The Economic Journal, 68(270): 317–337.

Whitin, T. M. (1953) “Classical Theory, Graham’s Theory, and Linear Programming in International Trade”, The Quarterly Journal of Economics, 67(4): 520–544.

 

*Cover photo by Ana Cotta, Uganda photo by World Trade Organization, tobacco plantation photo by Chris D., man with glasses photo by Future Challenges.

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2 Responses to How Africa can Benefit More from the Globalization of International Trade

  1. Jon says:

    I`m of the opinion that specialization can be a dangerous route. Hyperglobalization as well. A compelling argument against the basic point of this article is proposed by Eric S. Reinert: It is far more beneficial for a nation to have an ineffective industry in comparison to no industry at all. Credit due to the author of the article to put an emphasis on moving towards manifactured products vs raw materials.
    Even so: Africa needs to industrialize and protect internal markets from international competition BEFORE they gradually open up for globalization. The IMF`s(and others) eagerness to implement strategies beneficial for already developed nations have to hold their share of the blame for the last decades of decline in the African economy. Developing nations should emphasize on economic history before they start to lean on the various modern hypes in economic theory.

  2. M. Clark says:

    “Africa needs to industrialize and protect internal markets from international competition BEFORE they gradually open up for globalization”.

    An important point. If one considers industrialization in for instance East Asia all evidence points to the countries passing through a period of protectionism before their industries being capable of handling international competition. These states initially depended on huge public funds being invested in R&D, industrial upgrading and credits targeting strategic industries. Industrialization through merely “opening markets”, regardless of economic advancement, is not a recipe for anything. Except maybe in academic theories of trade liberalization.

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