The Myth of Regionalization
“Regionalization without prudent economic policy is meaningless”
Regionalization of markets used to be an attractive economic option or still is among some economists. It was hyped to the extent that it would wipe away all of Africa’s economic woes by engendering economics of scale. Dambisa Moyo, in her classic “Dead Aid,” reechoed the age-old assumption, citing Kenya, Tanzania, and Uganda which together could generate a market force of 100 million people, with the potential benefits of free-trade and single-currency.
This is what Collier referred to as convergence and cited the European Union as a good example. “The countries that were initially the poorest members, such as Portugal, Ireland, and Spain, have grown the fastest, whereas the country that was initially richest, Germany, has grown slowly, and so the states that make up the European Union have converged. That is partly why relatively poor countries such as Poland and the other countries of Eastern Europe have been keen to join, whereas the countries that are richer than the European Union, Norway and Switzerland, have refused to do so. Convergence is also working on a global scale: the lower income countries are, on the whole, growing faster than the developed countries. People in the developed world are starting to get worried that China is converging so fast.” So the development equation itself does not simply imply that the developed countries would want to see the developing countries developed, as they pose a threat to their areas of economic dominance as pointed out salary increases in my previous article (XVI).
With the European Union example, the obverse is applicable, too. If it was about population or numbers to dispel the small market myth, the over 140 million Nigerians, half the size of the West African Sub-region, would have fulfilled that precondition. In spite of its huge population, Nigeria remains a mass of (un)-productive horde working hard but not smart. With a single currency and a market size about half the population of the United States, “Nigeria has been in a political and economic deep-freeze for most of her independent years,” in the estimations of Collier. Going back to the Chinese convergence, it is not simply the population or market size advantage that bestow on her economic growth and increasing political clout. There is a fundamental shift in her economic processes. Production and manufacturing are high-tech, reducing manual labor, cost of production, man hours at the mill, while at the same time increasing production multifold. China went further to undervalue her currency, thought to be a bad precedent in international trade, which makes her products comparatively cheaper to that of other manufacturing and producing countries on the international market. This is why a Chinese synthetic of Ghanaian traditional clothes will be cheaper and of higher quality than the original Ghanaian textile, pushing the Ghanaian textile manufacturer out of business. “Holland,” in apparent reference to the prized Ghanaian traditional cloth made in Holland and Ghana Textile Print (GTP), were the pride of many Ghanaians. However, traders soon realized the option that the Chinese option is not only cheaper in price; the quality is even getting better. This simple example can be extrapolated to the electronic industry and other manufacturing sectors of the global economy.
Before globalization gave huge opportunities to China and India, they were poorer than many of the countries that have been caught in economic traps. But these two countries broke free in time to penetrate global markets, whereas countries, such as Ghana and some Sub-Saharan African countries, that were initially less poorer did not. It is a common mantra to hear the Ghanaian politician rant about how Ghana was initially at the same economic pedestal with South Korea, Singapore, Taiwan or even better than some in terms of GDP. The answer is while Ghanaians are praying and snoozing at the wheels, the Malaysians took the first seed of their palm kernel from Ghana, nursed it, and turned it into an industrial product which feeds her automobile industry, while the produce is still largely tendered by village women and children, squeezing palm juice out of it by trampling on it in a manual fit – a sixth century technology for 21st century markets, right?
The theory of convergence in some of these emerging economies may even be considered as a form of Foreign Direct Investments (FDIs) on the back of the famous, perhaps now infamous, word: outsourcing. While most African governments including Ghana are still scouting for FDIs and its attendant opportunities, sometimes spending huge sums on flights and champagnes which outweigh the economic returns, the sad truth is that FDI is still a long way away from reality in African countries including Ghana. Despite the abundance of cheap labor as in the case of India and China, countries that have used similar inducements to attract FDI into their economies to turn their fortunes around, disincentives to FDI are still ever present in many African countries: man-made problems - widespread corruption, bureaucracy, a highly regulatory legal environment and endless streams of red-tape; and physical problems - roads, telecommunication, power supply, etc. Calderisi cautions that “the first investors to be cautious were Africans themselves. Like anyone else, they used simple litmus tests: what did nationals of a country do with their savings? Did they splurge on fancy cars, invest at home, or stash money away in Switzerland or France? If laws were well-drafted, how were they applied and were the courts reliable, efficient, and honest? Did police and customs officers conduct themselves properly, or did they ask for bribes? If governments gave their word, what was it worth? Investors found that, while some other developing countries were trying to become lean and nimble, like Greco-Roman athletes, African economies were becoming bloated, like Sumo wrestlers, confined to competing in a limited space according to strict rules.”
To underscore this assertion, in a recent interaction with Ghana’s Minister of Trade at Ghana’s Mission in Washington, DC, when a collaborator with a foreign investor with a financial portfolio worth US$40 million raised the issue of how they have had to travel to Ghana three times in a year but faced unnecessary barriers from uncooperative officials bent on taking “their share” under the table, the minister’s response was the usual defensive syndrome rather than taking up the issue to investigate and eliminate the bottleneck. The fact is that private investment capital, as opposed to aid, is scared by corruption and all the other man-made disincentives. So even though returns on investment may be 10% in emerging-markets elsewhere (India and China, the handy examples), they may not be 10% on the African continent, in view of all the disincentives. Therefore, the investor may move to other more competitive emerging-markets, where the risks are minimal than outsourcing to Ghana.
Assuming that even the rest of the West African sub-region opens up their borders to create the anticipated free market zone today, it definitely would erase the custom barriers and ease some of the impediments in the mode of travel of people, goods, and services. Beyond that, however, it also has the potential to converge poverty. The weight of countries that are lagging behind or are just recouping from long years of civil war, of which there are many, have the potential to tilt the scale against the star performers - the term is used relatively to Ghana, Nigeria and Cameroon, the only three West African countries within the ranks of medium human development countries, but also at the bottom of the league. Twelve of the sixteen countries in the West African sub-region converge at the bottom of the unenviable low human development category, being 50% within that category and making the region paradoxically rich in natural resources but the poorest in the world in material and human progress. In this sense, commerce or free movement of goods and services are just an infinitesimal part of the economic equation which might impoverish its customs officers for the reason that they may not extort money from poor traders travelling across the borders as travel restrictions are eased.
As evidenced in the United States, the market size argument has been played for years. But when the United States shipped all her jobs to India and China and now has to depend on them for even toothpick, the Chinese did not waste time in adopting and appropriating the technologies and in turn expanding their own production and manufacturing base. That has left huge gaping holes in the American economy, with unemployment and debt threatening to bring down the once buoyant economy. Her market size advantage is now tapped by China and not the United States.
These are the precise reasons Botswana, South Africa, Tunisia, Libya, Egypt and a few of the middle income countries on the African continent would not open their borders in the name of African Unity or Union. They do so at their own perils, as they may get overran by the mass of unemployed people from their neighboring countries. The chaotic border crossings at Beitbridge and Messina in Zimbabwe and South Africa, after the meltdown of the former’s economy are typical examples. Others are the attempts by many Africans migrating via the Gibraltar straits to Europe and elsewhere.
Most emerging economies drive their progress through technology and prudent financial policy. Production and manufacturing are at the base of their development and not just a population advantage or market size. China had the population advantage for many years but that did not automatically turn her economy into prosperity. Not until the fundamental shift in her economy occurred and she embraced what had kept Western countries at commanding heights of the global political economy for centuries – technology – China was simply one of those mass of poverty-stricken countries.
But generally, “even without convergence, all countries benefit from the growth of their neighbors: growth spills over. The global average was that if a country’s neighbor grew by an additional 1%, the country grew at an additional 0.4%,” Collier points out. This may be the precise reason the Ghanaian leader, John Evans Atta-Mills must have decided to chicken out of a planned military intervention in the Cote D’IVoire when the incumbent Laurent Gbagbo refused to leave office after losing the 2010 election. Having played host to refugees fleeing civil strife in war-torn countries across the sub-region - Togo, Sierra-Leone, Liberia and the others – over the years, obviously a new civil strife in La Cote D’ Ivoire would impact on Ghana’s economic and political stability. But this decision also has its repercussions, too, as it did not stop the human displacement. Refer to the sub-section “a test to AU and ECOWAS” for a fuller discussion of La Cote d’Ivoire.
This may be referred to as the concept of good neighborliness. “While landlocked Switzerland has Germany, France, Italy, and Austria as its market, [a country such as] Uganda has Kenya, which has been stagnant for nearly three decades; Sudan, which has been embroiled in a civil war; Rwanda, which had a genocide; Somalia, which completely collapsed; the Democratic Republic of Congo, with a history sufficiently catastrophic for it to change its name from Zaire; and finally Tanzania, which invaded it,” Collier. The economic and political instability of these countries must have had their cumulative negative impacts on the Ugandan economy despite its relative stability and economic performance.
Similarly, political instability in Togo through the 1990s clearly impacted cross-border trading activities between her and Ghana. With its duty-free policy by which goods and services being ferried through her ports did not attract import duties, Togo was a hub for many importers across the West African sub-region. However, with hostilities between the Togolese government and the Ghanaian government on suspicion of the latter harboring Togolese dissidents who were fuelling civil strife in Togo, the borders became unsafe for importers and traders. Although the magnitudes of its effect on trade in quantitative terms are not easily estimated, there is no doubt about its economic effects based on the concept of good neighborliness.
It will be a mirage to think Ghana can be an economic success without attracting citizens from her neighboring countries. It is why the economic freedom of Ghana is meaningless until it is linked with the economic wellbeing of its neighbors.
Ghana must have been fortunate that while Togo was unstable in the 1990s, the other two of her neighbors – Burkina-Faso in the North and La Cote’ Divoire in the West – enjoyed relative stability. But instability in Liberia and Sierra-Leone and later the drawn-out political stalemate in the Cote’ d’Ivoire implied interruption in economic activities between Ghana and those countries, even as Ghana played host to the tens of thousands of refugees fleeing those countries.
The concept of good neighborliness can be linked directly to the idea of being landlocked. It is believed that being landlocked clipped around half a percentage point off growth. Therefore countries such as Burkina-Faso, Mali, and Niger, among others who depend on their neighbors for their imports and exports stand to benefit a great deal from regionalization and, to a large extent, good neighborliness in the absence of regionalization.
Although this assumption has been challenged by Jeffrey Sachs, who points to Switzerland, Austria, or Luxemburg - or, in Africa, to Botswana, for a long time the fastest-growing country in the world, the concept of good neighborliness and prudent economic policies are what set Botswana apart from most African countries. For instance, Luxemburg has Germany, France, and Belgium as its neighbors. It would be absurd to think that imports from those countries to Luxemburg would attract bribes at checkpoints, increasing the market cost of goods in Luxemburg. On the other hand, South Africa, Zimbabwe, and Zambia, Botswana’s neighbors are countries that have been stable for a long time. Not as we have seen in the case of Uganda. The stability in the region and prudent economic policies in Botswana have set it apart from the rest. Therefore, even though Botswana is landlocked, it has other areas of strength which offset the weakness of being landlocked.
With 38% of the people living in the so-called bottom-billion societies in countries that are landlocked, there is evidence that landlocked countries are hostage to their neighbors. The transport costs for a landlocked country depended upon how much its coastal neighbor had spent on transport infrastructure. There is an additional cost of bribes paid in traveling through countries with seaports that cumulatively increase the overhead cost of exports and imports of landlocked countries.
A good example is the price of cement for building in Ghana. The price of cement in northern Ghana is between 5 percent and 10 percent higher than in the southern regions of Ghana. Paradoxically, these are the most deprived regions of the country. The south with more economic opportunities and activities pay less for most of the goods and services than one would in the north, and if this is happening even within the same country, one may imagine what cost it is to foreign haulages going through her territory.
Still on regionalization, Moyo argues for the idea of African countries forming regional coalitions to access the international bond market as Ghana has done. While this sounds laudable, it can only be considered a mirage. The irony is that while Moyo commends Ghana and Gabon for venturing into the international capitals market - where Ghana issued US$750 million 10-year bonds in September 2007 - as a model for the rest of the continent, a new regime in Ghana stretched the begging-bowl to the IMF in less than 6 months after assuming office, for US$600 million. The question then arises: what had happened to the financial interest Ghana generated in the international capital market leading to the oversubscription of her bonds to the tune of US$5 billion of unmet investor demands, if in less than two years the country had to return to the IMF for an economic rescue package of lifeline, instead of returning to the same bond market to tap the goodwill that was generated by a previous political administration two years earlier?
This illustrates even how within the same country, a change of government can change the economic directions in a short span of time. The implication is that if physical regionalization has not materialized after all these years of efforts at harmonization, it is only prudent to consider the more complex idea of regional coalitions for the sole purpose of accessing the international bond market as an illusion.
There are many other practical considerations with economic implications which would militate against the idea of a coalition for the purposes of accessing the international bonds market. These are political and economic instability in a member country as the case of La Cote’ d’Ivoire would suggest that members of this coalition must bear the negative consequences that a member state might transmit to the credit rating of the rest by virtue of being a member. Second, corruption in a member state leading to the misapplication or misuse of proceeds from the bond in a member country must be a disincentive to other members from even considering the idea of this coalition to access bonds. The issue of how Ghana’s bond was applied is still in a question with suggestions that its disbursement, like all other government transactions, was heavily laden with corruption. What about French speaking West Africa with financial decisions in those countries intricately linked to France and could even be seen as already a coalition with the former colonial power? This and many more questions would arise.
Historical evidence suggests that the status quo with regard to regionalization might prevail in the foreseeable future. In spite of ECOWAS provisions for the free movement of goods and services within the West African sub-region, the reality is the opposite. Calderisi makes light of this in his book, “The Trouble with Africa,” when he pointed out that “markets are small, and weak transport links discourage internal trade. But Africans have been trading –or smuggling—goods across borders for decades and have been migrating to jobs wherever they can find them, at a pace that makes a mockery of official efforts at African Unity.” But however well unofficial trade may be doing, there are barriers to official trade. For all practical purposes, until recently, there was a ban on Ghanaian goods on the Nigerian market. Inter-country rivalries and lack of harmonious economic or trade policies form the cornerstone of discussions at annual sub-regional and inter-country conferences year-in year-out, but sadly do not engender the intended results.
Even in an ideal situation, where markets are converged and physical borders removed, ethnocentrism instead of being a positive cultural heritage has become a diabolic attribute that must be exorcised. Rwanda, Kenya, the Democratic Republic of Congo, and Sierra-Leone are countries that come to mind. The xenophobic explosions in South Africa and attacks on foreigners in countless African countries anytime things go wrong also point to the unpreparedness of Africans to put their intra-ethnic and inter-country rivalries aside for the so-called greater economic good of the continent. The point is that African countries are not yet ready for that integration. Readiness for integration must be exhibited at all fronts – internally toward fellow countrymen and externally toward next door neighbors of regional neighbors.
This subsection has sufficiently demonstrated that perennial adjustment of salaries of civil servants, which concomitantly leads to similar adjustments in the private sector and increases in the price of goods and services does not necessarily translate into the improvement in the quality of life for a people neither does the recalibration of a country’s currency. For a country to improve the quality of life, spreading across its wide sections of society, the magic wand remains transformation in its production base. Myriad of global as well as local examples have been employed to underscore these assertions. Similarly, loans and natural resources have an even greater potential to undermine economic development and impede the democratic process if anti-corruption measures are lacking. And finally, the phantasmal belief in regionalization, as in the case of ECOWAS, may not after all be a chute out of poverty without the accompanying investments and the prudent economic policies that are needed in transforming the economies that converge; the anticipated convergence may only end up converging widespread poverty. This is noticeable even at the global level. As the economies of the world converge, Africa is rapidly diverging from the global trend. The geographical label is described as “Africa +,” with the + being places such as Haiti, Bolivia, the Central Asian countries, Laos, Cambodia, Yemen, Burma, and North Korea.” And they are collectively heading down, not up, and diverging from the rest of the world and Ghana is no exception. It would take prudent economic policies to improve the lot of Ghanaians and not just regionalization, loans, and salary increases, and the repetition of tried and failed policies.
Keep tuned in…
The above-title is serialized into 30 articles covering issues of politics, corruption, education, migration, the economy (Ghanaian economy), unemployment, land tenure, dearth of policy innovation, and stories from the frontlines – Cote d’Ivoire, Kenya, ECOWAS and the AU. The series are syndicated and media houses/outlets interested in enriching the national debates in Ghana for the 2012 are free to publish all the series.
By: Prosper Yao Tsikata