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Sub-Saharan Africa needs to step up and move with the times

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Sub-Saharan Africa needs to step up and move with the times

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Fresh from attending the World Economic Forum’s summer Davos in Dalian, China, I feel relatively good to be African. Our traditional European trading partners are undergoing sweeping economic changes and the prospect of sustained declines in standards of living. The US may be on the cusp of a double-dip recession and is mired in a destructive ideological fight over budgets, debt and more. New centres of economic power are engaging with us through trade and investment. Growth in sub-Saharan Africa is rapid in many countries, and likely to be sustained. Yet we cannot be complacent. Two broad, contradictory trends are at work in the global economy.

First, economic globalisation through multinational production networks continues apace. This promotes global economic convergence and integration. Sub-Saharan Africa is largely absent from this process.

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Second, crisis policy responses promote divergence. Associated with this is the threat of a destructive spiral of protectionism. This would have serious consequences for the global economy, particularly the most vulnerable states.

Image, right: Participants at the World Economic Forum's Annual Meeting of the New Champions in Dalian, China, September 13, 2011. Image: World Economic Forum (www.weforum.org)/Doug Kanter

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The globalisation trend centres on what Asians call the “process trade”. This began with Japanese and western multinational companies shifting the labour-intensive parts of their export-oriented production processes to certain east Asian countries; joined later by emerging market multinationals located primarily in the region. China is the latest and most significant beneficiary of these shifts.

As this process gathers pace supply chains are becoming extended, pushing up costs and risks. Structurally high energy prices add to the problem. Those locations that provide the most efficient and cost- effective infrastructure and labour force stand to win from the relocation process under way. Sub-Saharan Africa is still far off the necessary pace. Supply chain risks are being mitigated through a wave of information technology innovations concentrated in the US, resulting in a “deluge of data” that brings creative destruction in its wake. Old IT behemoths such as Microsoft seem like rabbits caught in the headlights.

This wave of technology has unleashed global institutional and political changes, not least in the Arab world. In South Africa we seem to be swimming against the tide with the government’s “secrecy bill”. Many other African governments seem to be far behind the necessary “transparency culture” required to benefit.

With Europe and Japan mired in long-term stagnation while significant storm clouds gather over Europe, western multinationals are racing to acquire market share in emerging markets, extending supply chains ever further. They are primarily targeting the Brics (Brazil, Russia, India, China and South Africa) business communities, and the “next 11”, an economic clustering that does not include the sub-continent, bar Nigeria. South Africa was mentioned, but in passing.

In the developed world, macroeconomic policies are broadly focused on reflating economic growth through demand stimulation, in the context of mounting debt problems at the centre of which remain unresolved banking crises. Destructive distributional politics has taken centre stage; and economic policies remain uncertain, prompting multinationals to hoard their cash or send it abroad instead of investing in domestic markets. Those who criticise South African multinationals for hoarding their cash should take note: policy uncertainty is the enemy of investment. By contrast, in many emerging markets growth is relatively robust, but with mounting inflation concerns. At a time when additional demand sources are required at the global level, key markets such as China may opt for contractionary policies.

Where stimulus policies were pursued, particularly in east Asia, the focus was on the supply-side, particularly growth-enhancing and supply chain maximising infrastructure. The obvious question is who will buy the resultant export goods now that developed country demand seems likely to be structurally repressed?

Fortunately, China seems to be rising to the challenge, albeit for domestic reasons. The government’s 12th five-year plan promotes domestic consumption and reduced reliance on exports. Already significant moves in this direction have been made through nascent attempts to internationalise the currency; attract foreign direct investment in financial services; provide a national social safety net to encourage citizens to save less and spend; and more.

This policy mix offers medium term opportunities to developing countries to grab a slice of the supply chain action as costs rise in China. Can sub-Saharan African countries position themselves accordingly? We need to move quickly.

China’s new policy mix will take time to take effect. In the short-term, currency misalignments and growth divergences are likely to increase tensions in the trading system. In the medium term, they will be exacerbated by the rise of the Brics and next 11; partly owing to policy supports they provide to their domestic industries, and partly owing to protectionist reactions in developed and developing countries.

Protectionism was of concern in Dalian. At the global level the potential epidemic has been contained, not least owing to the multilateral trading system anchored by the World Trade Organisation (WTO). Yet the longer growth and macroeconomic policies diverge, the more likely it is that the cancer afflicting the WTO will spread, at precisely the time its role in negotiating global trade deals and modernising the rules infrastructure is in serious question.

Consequently multinationals from the developed and developing world’s alike have strong incentives to push for the Doha round of WTO negotiations to be concluded, and beyond that for rules relevant to supply chain management in particular to be modernised. Yet in Dalian while a number of prominent chief executives raised the protectionism challenge, none advocated this position.

This reflects another divergence in policy preferences, rooted in the structural shifts taking place in the world economy. At its centre, is the US, which is no longer prepared to play the old US role of “buyer of last resort”.

The US is pushing for an ambitious WTO liberalisation deal targeting key emerging markets in order to underpin US growth through exports.

Emerging markets, many looking over their shoulders at China, are not prepared to “buy” this approach.

So the Doha round impasse is set to continue. In the short term, the Group of 20 does not appear capable of resolving this problem absent a fundamental change in its mandate spurring it to pay serious attention to global trade issues.

Perhaps the problem will resolve itself in the medium term, but without a sustained push from developed and emerging market multinationals that seems unlikely. Hence the stage is set for escalating tensions in the global trading system.

An African proverb tells us: “When the elephants fight, it is best to stay out of the jungle.” But the global trading system is too important to be left to outsiders to resolve. South African and African policy makers need to step up to the plate.

Written by: Peter Draper.
Draper chairs the World Economic Forum’s Trade Council and is Senior Trade Fellow at SAIIA's Economic Diplomacy Programme. This article was first published in the Business Report on 4 October 2011.

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