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The good and the bad of global trade in Sub-Saharan Africa

While development economics is scarcely the discipline to breach mainstream headlines, debates over globalization and its implications for more impoverished regions have outwardly served to mire capitalism in a state of controversy. Images of sweatshops, stories of countries buckling under debt, and the continued severe lag between the world’s wealthiest and poorest economies have all rightly captured Western sympathies for billions of the less fortunate, yet often at the expense of the globalizing forces that may be lifting such a population out of poverty. There perhaps may be no better instance of this than in sub-Saharan Africa, whose decades-long increase in openness to global trade leaves room for improvement, but has nonetheless instilled considerable progress in the sub-continent.

Firstly, consider the dual rise of trade openness and economic expansion in the region. Trade openness, defined as imports plus exports as a percentage of GDP, saw comparatively small growth in sub-Saharan Africa across the 1980’s and 1990’s, growing from 34.8% in 1983 to 44.6% in 1999. In the process, sub-Saharan GDP grew by almost 42% over this 16-year span, which although may sound impressive at first, does figure out to be about 2.6% annual growth.

Nonetheless, growth in GDP implies that changes in the trade openness metric reflects sub-Saharan Africa’s growing involvement in global exchange. With this in mind, compare the 80’s and 90’s in sub-Saharan Africa to the 2000’s; between 1999 and 2011, trade openness in the region grew by 18.4%, an average annual rate of 1.5% growth in trade openness as compared to a 0.6% average annual rate in the 16 years prior. As global trade activity skyrocketed in the sub-continent, sub-Saharan Africa’s GDP spiked by over 82% over this 12-year span, for a staggering annual average growth rate of over 6.8%.

Evidently, there seems to be a strong correlation between sub-Saharan Africa’s economic growth and its propensity to engage in global trade. Of course, correlation does not signify causation, yet even mere correlation proves the economic benefits of global trade. Over the previously observed time spans, sub-Saharan exports, as a share of GDP, were consistently higher than the world average. Sub-Saharan Africa’s top exports are overwhelmingly commodities, such as oil, gold, diamonds, and copper, most of which seeing massive increases in value over the 2000’s.

Thus, at best, the relationship between GDP growth and trade openness in the region may be seen as circuitous. Increasing values in commodities not only represents higher export value for the sub-continent’s developing economies, but higher returns on these commodities allow such economies to finance more imports, investment, and government spending that fuel economic growth. The ability, however, for sub-Saharan Africa to exchange at a global scale is crucial to this process as it allows the region to take advantage of global trends in the commodities that it specializes in, especially in light of the fact they are heavily export-reliant in the first place.

Trade Openness, 1980-2013

Source: IMF BOP Statistics

Nonetheless, the region’s increasing involvement in global trade has actually seen it further entrenched in a trade deficit. Consider movements in the region’s current account and trade balance alongside its trade openness: although the commodity price boom of the 2000’s was able to temporarily reverse the trend, sub-Saharan Africa has only sunk further into a sub-continental trade deficit. In a regional context, this is a problem. Nicola Moussa, reporting for the United Nations Committee on Trade and Development, reminds that, “a deficit arising from an increase in consumption (or a decline in savings) as observed in SSA (sub-Saharan Africa) should be of concern because it is often an indication that a country is living above its means.”

GDP Expenditures by main components, 1970-2013

Source: UNCTAD

Indeed, Moussa finds that as the region experiences general economic growth over the last several decades, consumption has taken on a greater share of aggregate demand: the concern that sub-Saharan Africa is “living above its means” is indeed, very real. A trade deficit implies that a country is relying on a net inflow of foreign capital to finance its consumption, in other words meaning that African countries are increasingly reliant on foreign countries’ capital for daily economic activity. Instead, sub-Saharan countries ought to focus on building the investment portion of aggregate demand, represented by “gross capital formation” in the graph above.

Building up investment means cutting back on consumption given that consumers can either spend money or save it, yet increasing savings rates is paramount for long-run economic growth, supplying firms and future generations with the capital necessary to keep the economic gears turning. Moussa notes that, “despite the increase in investment experienced over the past decade, the investment ratio in SSA is still low relative to the 25 % rate deemed necessary for African countries to make significant progress in the fight against poverty.”

Overall, then, while increasing involvement in global trade has enabled sub-Saharan countries to profit off of rising commodity prices and translate them into economic growth, this process has actually translated into a current account deficit, and an unhealthy reliance on foreign countries for short-term economic growth. Instead, African economies ought to combine rising wealth with policies that promote savings. Doing so will increase investment in the long-term and allow such countries to be less reliant on foreign inflows as they are right now.

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