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Business News Wed, 14 Jul 2010

IMANI Confers with Leading Global Thinkers on Trade Issues

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Last week, IMANI Ghana Executives participated in the last of a series of high-level workshops jointly organised by GARNET (the Network of Excellence on Global Governance, Regionalisation & Regulation) and the prestigious Evian Group at IMD (the International Institute for Management Development) in Lausanne, Switzerland. They facilitated a number of key seminars and addressed an audience of high-ranking officials, business executives, public intellectuals and academics from across the European Union, the United States, and farther afield. IMD (www.imd.ch) is widely reputed to be the foremost business school in Europe.

IMANI’s participation was within the context of the award-winning Accra-based think tank’s multi-year partnership with the Evian Group aimed at promoting the importance of open trade policies to global stakeholders, especially those in Africa.

Other participants of note included: the Secretaries General of the World Customs Organisation (WCO) and the United Nations Conference on Trade & Development (UNCTAD); Vice Chancellor – level Academics from top ten universities in the UK; a Vice President of the World Bank; an Executive Director of the French International Aid Agency (AFD); a Chief Economist of the World Trade Organisation; a former President of the International Chamber of Commerce; and a rich array of heads of leading global think tanks, top journalists, and c-level executives of Fortune 500 companies.

The event was convened to examine the interrelations of trade, development and governance in an ever-complex world. It came in the wake of growing concerns among global stakeholders about the challenges of mobilising grassroots support for trade in a time of increased scepticism about the contributory effects of trade on sustainable development and inclusive economic growth.

As Professor Jean-Pierre Lehmann, Founder of the Evian Group, noted there is nearly no dissent amongst commentators about the growth-fostering effects of open trade policies. The scepticism arises in connection with the precise characteristics of this type of trade-led economic growth. Does it benefit only specific sectors of the economy? At the expense of – usually more socially critical – other sectors?

Does it only enrich an elite class of merchants to the disadvantage of “workers”? Is it insensitive to the special needs of vulnerable and marginalised groups, such as women, youth, minority ethnic groups and the disabled? Does it favour unbridled speculation, “paper wealth”, pyramid schemes, bubbles and other such “get rich schemes” leading thus to a hollowing out of “true production” in the world economy?

And are the beneficiaries of open trade – such as certain East Asian economies – only effective because they are, paradoxically, the endgame beneficiaries of earlier protectionist strategies (especially in relation to their “infant industries”)? And, at any rate, are such “benefits” only the products of self-serving evaluations by orthodox methods that underestimate the social implications of their environmental, cultural and equity costs?

No wonder then that since 2001 the quest to develop an inter-governmental (“multilateral”) agreement to manage key aspects of global trade through the intermediation of the World Trade Organisation has stalled. This particular process to develop said agreement, known as the Doha Development Agenda, had sought to more explicitly tie the above concerns about sustainable development and inclusive economic growth to the direct and indirect drivers and outcomes of world trade.

Yet many cracks have since emerged, chief of which is the inability of the old economic powers (the transatlantic alliance of the Europe and the USA, primarily, but to a certain extent, also the Pacific powers of Japan and Australia) to see eye to eye with the rising bloc of new economic powers, led by China, Brazil, South Africa and India. Note that there are also countries like Russia, which are systematically significant to the global trading system but are yet to fully accede to the WTO and thus participate more directly in the negotiations.

Though the fractures in the multilateral trading system, as evidenced by the recent lack of progress on the Doha Development Round (DDR), are largely the result of a range of specific trade barrier negotiations mainly related to tariff level concessions, especially in the area of agriculture, but also harder to nail down issues in emerging trade dispute areas such as services. Nevertheless, the “soft” issues of “who benefits and who loses from trade”, as briefly alluded to above, clearly influences the “moral mood” in which these rather technical trade negotiations are undertaken.

A world-renowned economist at the Lausanne event was of the view though that much of the commentary about the “give and take” of trade is dramatically uninformed. “Listening to how trade is discussed in the mass media, you might be forgiven for thinking that the evidence show that ‘imports are bad’ and that ‘exports are good’, even though all good economics suggest the contrary” he said wearily.

Perhaps, in no context is the popular conversation about trade more relevant for us in Africa than in relation to the import of food and basic consumables, such as textiles, into countries like Ghana. All the woes of the poultry industry in Ghana, for instance, are blamed on cheap, unfairly dumped, imports. Rice and other semi-staples such as flour and cooking oil have also been cited in the same context. As hinted above, a connected argument is the “infant industry” - protection one.

The case is usually made that most of the successful transition economies of today have arrived at their middle-income status by shielding wide swathes of their economy from external competition. Countries confronting the sharp growing pains of development are therefore often counselled to learn from these experiences.

The evidence though is that over the same period that these apparently protectionist countries were experiencing their fastest growth, most African countries, Ghana certainly included, were crouched behind tariff barriers far higher than anything pertaining in the said protectionist countries. It is definitely the case that African countries like Ghana, counted among the “least developed states”, continue to maintain some of the highest tariff barriers in the world.

For many years now Ghana, for instance, has maintained an average tariff rate roughly double that of the USA, and for many agricultural products, it levies the full 20% rate. In the early 1980s, Ghana’s average tariff rate was more than four times Malaysia’s. Even today, the West African country maintains a rate more than double the Asian economic tiger’s own. The picture remains the same even after accounting for such factors as trade-weighing which may distort the true level of protection in relation to tariffs. Interested readers may mine the rich data available here for 3 decades’ worth of insights: http://go.worldbank.org/LGOXFTV550.

But to be fair to the critics of open trade, tariffs are hardly the only device suited for effective protection. Many will mention the use of quotas, preference erosion, licensing, export subsidies, local content rules, public procurement measures, as well as non-tariff barriers such as standards and intellectual property piracy. The truth though is that since independence, African countries have known about these protectionist measures and have applied them with the fullest rigour. Yet, the widely shared feeling remains one of trade’s inability to contribute to Africa’s benefit, much less the much coveted “economic emancipation”.

What is instructive to note is that to the extent that African countries have underperformed, they have done so as much in connection with imports as with exports. And as Franklin Cudjoe, Executive Director of IMANI, noted, regional trade in Africa, with respect to which liberalisation has been often promoted as positive and in compliance with economic nationalism by even the most ardent sceptics of global trade, has not fared well either.

Thus, the barriers that we have encircled our countries with in Africa have certainly not crumbled under the torrents of globalisation as is often speculated. They are clearly effective in keeping out trade from neighbouring countries, and are relatively ineffective against trade from some of the more dynamic emerging economies in Asia only because like all trade barriers that do not function as total blocks they are permeable to overwhelming price power. Clearly, in many instances, the paradoxical effect is to stifle our industries. That is why even though substandard goods are more expensive over the medium term markets in our part of the world struggle to under-select them.

Take security printing for instance, which is a niche area very suited to local entrepreneurship but reliant on imports for roughly 90% of its inputs. High tariffs clearly do not help such an emerging sector. Government’s response, rather than address the fundamental issues afflicting the industry, has been to compel telecom companies to print their recharge cards locally, which, belatedly, the companies have expressed an interest to do, but only because they are switching to electronic distribution alternatives anyway.

Moreover, because tariff exemptions for industrial inputs are very hard to administer (since many such inputs may serve both as intermediate inputs as well as consumables, especially in the case of embryonic industries) the obvious effect is to kill off many niche industries even before they have found their feet.

Pro-trade commentators tend to worship at the altar of “comparative advantage”. Even educated observers, especially in Africa, are however wont to confuse comparative advantage with absolute advantage. Their understanding of this principle – the only one in economics conceded by Milton Friedman to be both interesting and non-trivial (as recalled by a participant at the workshop) –standing behind most arguments about the soundness of open trade is that it is anchored solely on mutually exclusive specialisation. So I specialise in oranges and you specialise in mangoes, and because I can sell you oranges for cheaper than you can grow them yourself, and you can sell me mangoes for cheaper than I can grow them myself, we both save money and increase our mutual welfare by trading.

In actual fact, even were it the case that you can grow both mangoes and oranges cheaper than I can (in response to the argument that some countries are so deficient in capacity that they struggle to be competitive in any area), the fact still remains that by specialising in certain items you can make one better than the other and thus sell more of same, retaining thus your incentive to buy certain things from abroad, and therefore to trade. An economist at the event, with extensive experience working for international agencies, illustrated the logic by asking the rhetorical question: “should Picasso paint his own house rather than hire a painter?”

What this all means in practice is that provided sufficient attention is shown to important details, countries can always open new trade corridors to connect them with other countries with which they can relate on the basis of complementary comparative advantages.

Perhaps the issue lies in the ascertainment by countries of where their comparative advantages lie. This is highly non-trivial, since unlike “absolute advantage” the whole notion of “comparative advantage” is based on complementarities. Therein, obviously, lies the difficulty many countries in Africa have had wherever and whenever they have opted to treat the matter as one of seeking out some notion of an *absolute competitive advantage*. There surely can be no such thing, at least not in practical terms. The complementarity and mutuality requirements of comparative advantage necessarily entail much exploration and experimentation “in the actual course of endeavouring to trade”.

To quote IMANI’s Kofi Bentil: “peoples trade with peoples and not countries”. A gem of insight that was elaborated upon at the Lausanne event by another IMANI affiliate, Bright Simons. He identified SMEs (small & medium enterprises) as particularly suited for this type of experimentation since they tend to be leaner, more flexible, and more receptive to risk than larger, well-established, companies that pride themselves on standardisation and consistent management rather than innovation.

The issue of course is that SMEs shall be hard put upon to compete in traditional export markets where “economies of scale” still remain an abiding virtue. But it is precisely for this reason that the *new economy*has been so instrumental in the emergence of new trading powers. By unbundling global supply chains, it has allowed the participation of SMEs at multiple nodes in a vast array of global, integrated, value chains. Furthermore, the emergence of novel distribution routes, such as the internet; the shift from basic to complex inputs in many product delivery systems; and the rapid ultra-segmentation of markets, have actually disrupted the economic model which once placed a strict emphasis on economies of scale.

Naturally, countries where entrepreneurship, especially in high-churn transitional niches, flourishes stand a better chance of identifying trading partners with whom they can engage on the basis of comparative advantage. Such countries tend to boost both their exports and imports, and consequently experience rapid growth. The proliferation of SMEs in several critical frontline tradable sectors should, if properly complemented by holistic domestic policies, lead to more and diverse employment opportunities and from there to economic empowerment.

What economic history, most poignantly in recent times, have shown is that economic empowerment necessarily leads to greater consciousness about environmental and social issues (yes, even in China and Vietnam), a re-emphasis on individual and communal rights (including those of marginalised groups), and to greater peace and prosperity at national and international level.

The rest, as they say, shall sort themselves out.

Accra, Ghana

*Courtesy of IMANI Center for Policy & Education, a think tank ranked 5thfor intellectual influence in Africa by Foreign Policy Magazine in 2009, and AfricanLiberty.org, an independent, pan-African, analysis platform.*

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