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Africa: The Costs of Free Trade
AfricaFocus Bulletin
Jul 5, 2005 (050705)
(Reposted from sources cited below)
Editor's Note
"Trade liberalisation has cost sub-Saharan Africa US$272 billion
over the past 20 years. Had they not been forced to liberalise as
the price of aid, loans and debt relief, sub-Saharan African
countries would have had enough extra income to wipe out their
debts and have sufficient left over to pay for every child to be
vaccinated and go to school." - Christian Aid
Of the major issues on the agenda for rich country leaders and
demonstrators as the G8 Summit begins today in Scotland, trade has
received less attention than the more prominent duo of debt
cancellation and increased aid. It is also the one on which
observers expect least from the Summit. Instead, highly technical
negotiations in other venues remain stacked against attention to
concerns of African and other developing countries.
The damage done to Africa by rich countries' trade policies, many
critics note, goes beyond the relatively well-publicized subsidies
to rich country agribusiness. Indeed, some of the policies promoted
as "reforms" and set as conditions for countries to access debt
relief and aid, themselves cause more damage than the benefits
delivered by concessions on debt and aid. This theme appears in
protesters' demands under the rubric of "trade justice," but risks
being drowned out by the dominant media emphasis on how much aid is
promised.
This AfricaFocus Bulletin contains excerpts from a report by
Christian Aid estimating the cumulative negative effect of trade
liberalization on African countries. Another Bulletin sent out
today contains an article from Corpwatch documenting the
devastating effect of trade liberalization on the poultry industry
in Ghana.
For previous AfricaFocus Bulletins on trade issues, visit
http://www.africafocus.org/tradexp.php
++++++++++++++++++++++end editor's note+++++++++++++++++++++++
The economics of failure
The real cost of 'free' trade for poor countries
A Christian Aid briefing paper
June 2005
This briefing was written by Claire Melamed, based on a paper by
Egor Kraev.
[For full report including tables and endnotes, visit
http://www.christianaid.org.uk/indepth/506liberalisation]
Trade liberalisation has cost sub-Saharan Africa US$272 billion
over the past 20 years. Had they not been forced to liberalise as
the price of aid, loans and debt relief, sub- Saharan African
countries would have had enough extra income to wipe out their
debts and have sufficient left over to pay for every child to be
vaccinated and go to school.
Two decades of liberalisation has cost sub-Saharan Africa roughly
what it has received in aid. Effectively, this aid did no more than
compensate African countries for the losses they sustained by
meeting the conditions that were attached to the aid they received.
And these losses dwarf the US$40 billion worth of debt relief
agreed at the recent meeting of G7 finance ministers.
If new aid and debt relief comes with strings attached that require
countries to liberalise trade, it may well do more harm than good.
When they meet at Gleneagles, G8 leaders must agree to stop
demanding harmful conditions as the price of aid and debt relief.
Introduction
As a major part of its remit to challenge systems that perpetuate
poverty, Christian Aid has for many years given a voice to those
harmed by trade liberalisation. We have highlighted the plight of
farmers who are no longer able to sell their crops when cheap
imports flood in and of people made jobless when factories close.
These stories of the casualties of unfettered liberalisation need
to be told, and we are proud of our role in giving a platform to
those who otherwise would not have a voice in international
debates.
However, supporters of liberalisation have always argued that these
cases represent an unfortunate, but small, minority. They claim
that the majority benefit from the new opportunities created by
liberalisation. In this briefing, Christian Aid shows that this is
not the case. Complementing our previous case studies, which show
the devastation trade liberalisation wreaks on individuals, we
demonstrate that whole countries would be much richer today if they
had not been forced to open their markets.
Christian Aid commissioned an expert in econometrics to work out
what might have happened had trade not been liberalised, using
economic modelling. The work was reviewed by a panel of academics.
The model looked at what trade liberalisation has meant for 32
countries, most in Africa but some in Asia and Latin America.
The data came from the World Bank, International Monetary Fund,
United Nations and academic studies. We established the year each
country began to liberalise and the extent of its trade
liberalisation. We used evidence on the impact of trade
liberalisation on imports and exports, and the effect of this on
national income, to estimate how much income was lost given the
extent of liberalisation. The results suggested that:
- imports tend to rise faster than exports following trade
liberalisation
- this results in quantifiable losses in income for some of the
poorest countries in the world.
We are not arguing that countries which liberalise do not grow, or
that some people in them do not become less poor but we are
saying that without liberalisation, growth could have been higher
and poverty reduction faster.
This report shows the true cost of the policies that have been
forced on the developing world by donor countries and international
institutions. The devastation import liberalisation has caused
agricultural and industrial production in developing countries and
the way it has severely limited their prospects of future
development is well documented. This report puts a value on that
loss.
What poor people have paid for trade liberalisation
When trade is liberalised, imports climb steeply as new products
flood in. Local producers are priced out of their markets by new,
cheaper, better-marketed goods. Exports also tend to grow, but not
by as much. Demand for the kind of things sub- Saharan African
countries tend to export such as raw materials doesn't change
much, so there isn't a lot of scope for increasing exports. This
means that, overall, local producers are selling less than they
were before trade was liberalised.
In the long run, it's production that keeps a country going and
if trade liberalisation means reduced production, in the end it
will mean lower incomes. Any gains to consumers in the short term
will be wiped out in the long term as their incomes fall and
unemployment rises.
This has been the story of sub-Saharan Africa over the past 20
years. Trade liberalisation has cost the 22 African countries in
the modelling exercise more than US$170 billion in that time.2
According to our model, this is the amount that the GDP of these
countries would have increased had they not liberalised their trade
in the 1980s and 1990s. If the model is applied to all of
sub-Saharan Africa, the loss is US$272 billion.
While some countries in Africa have increased their GDP over the
past 20 years, this increase is not as great as it could have been.
There are more poor people in sub- Saharan Africa now than there
were 20 years ago some of them would not be poor today, were it
not for inappropriate trade liberalisation.
In the year 2000 alone, sub-Saharan Africa lost nearly US$45
dollars per person thanks to trade liberalisation. Most trade
liberalisation in Africa has been part of the conditions attached
to foreign aid, loans and debt relief. This looks like a bad deal:
in 2000, aid per person in sub-Saharan Africa was less than half
the loss from liberalisation only US$20. Africa is losing much
more than it gains if aid comes with policy strings attached.
The staggering truth is that the US$272 billion liberalisation has
cost sub-Saharan Africa would have wiped clean the debt of every
country in the region (estimated at US$204 billion) and still left
more than enough money to pay for every child to be vaccinated and
go to school.
The negative effects of trade liberalisation are not confined to
Africa. Low-income countries in Asia and Latin America have
suffered similar consequences. The average loss to the countries in
Christian Aid's study was about 11 per cent of total GDP over 20
years amounting to several billion dollars for each country. The
total loss for the 32 countries in the study was US$896 billion.
How trade liberalisation hurts poor countries
Academic studies have shown that the main impact of liberalisation
on trade flows is to increase the demand for imports at a faster
rate than the demand for exports.3 That is, following trade
liberalisation, countries tend to buy more than they sell every
year. As a result, their trade balance worsens and they have to
live beyond their means, a situation which is not sustainable in
the long term, without constant inflows of ever-increasing aid.
As imports increase, demand in the country for locally produced
goods falls, because people are buying imported goods instead. The
demand for exports doesn't increase enough to make up for the fall
in local demand. For farmers, this will mean producing less, or
selling at a lower price. For manufacturers, this might mean going
out of business altogether.
As a result, developing countries could become increasingly
indebted as they continue to spend more than they earn. However,
poorer developing countries are highly unlikely to receive the
finance either loans, grants or investment flows to fund this
increased expenditure. Africa, for example, has been a net exporter
of capital for much of the 1980s and 1990s.4 Trade and finance
liberalisation have been associated with increased capital flight
from Africa. The problem has been compounded by reduced aid to
Africa during the 1990s.
If more money doesn't come in from elsewhere, as aid, loans or
foreign investment, the impact will be felt on GDP in the medium to
long term. As demand for their products falls, local producers earn
less, the total income of the country declines and imports
eventually return to their pre-liberalisation levels all of which
leads to a lower level of national income than would be the case
without trade liberalisation.
Who paid the price?
If a country's GDP falls, it doesn't affect everyone equally. It is
often the poor who suffer most. Recent evidence from the United
Nations shows that countries which liberalised their trade most
tended to suffer from increases in poverty. Countries that cut
themselves off from trade altogether don't reduce poverty very
successfully either in fact, it was countries with moderate
levels of protection that did best.
Anecdotal evidence supports this general trend. Christian Aid
has produced numerous case studies over the years which show how
poor people have been affected by trade liberalisation.
- Tomato production used to provide rural households in Senegal
with a good living. But after liberalisation, the prices farmers
received for their tomatoes halved, and tomato production fell from
73,000 tonnes in 1990 to just 20,000 tonnes in 1997, leaving many
farmers without a cash crop.
- In Kenya, both cotton farming and textile production have been
hit. Cotton production, a key income earner for poor households,
fell from 70,000 bales a year in the mid-1980s to less than 20,000
bales in the mid-1990s. Employment in textile factories fell from
120,000 people to 85,000 in just ten years.
- Rice imports in Ghana climbed to 314,626 tonnes per year
following trade liberalisation. For local farmers, the results have
been catastrophic. One of them told Christian Aid: 'One of the main
problems we face is the marketing of our rice. We find it difficult
to compete with imported rice on the market.'
As the examples above indicate, it is often poor farmers who suffer
most when trade is liberalised. The fall in domestic demand which
results from increased imports hits them particularly hard. Poor
farmers have little access to capital or technology to increase
their productivity or improve the quality of what they sell in
response to more competition. They are also competing in an
extremely unequal market, where imports from developed countries
are often heavily subsidised.
Manufacturing industries have not grown up to employ people who are
no longer able to make a living from farming. Instead,
manufacturing has also been hard hit by trade liberalisation:
- In Zambia, employment in formal-sector manufacturing fell by 40
per cent in just five years following trade liberalisation.6
- In Ghana, employment in manufacturing fell from 78,700 in 1987 to
28,000 in 1993 following trade liberalisation.7
- In Malawi, textile production fell by more than half between 1990
and 1996. Many firms manufacturing consumer goods like soap and
cooking oils went out of business, and the poultry industry
collapsed in the face of cheap imports.8
A closer examination of import and export trends following
liberalisation shows how this happened. In all the countries for
which it had data, the UN Conference on Trade and Development
(Unctad) found that, following trade liberalisation, imports of
food increased as a proportion of all imports, while imports of
machinery declined, again as a proportion of all imports.9 The
increase in cheap food imports priced farmers out of local markets.
The relative decline in imports of machinery showed that
manufacturers were also suffering; importing less machinery to run
their factories, improve productivity and provide more jobs.
Trade liberalisation means a 'double whammy' for poor people,
stifling the development of industry which would replace lost jobs
in agriculture. Wherever they turn, poor people are hard hit by
trade liberalisation.
Export trends bear this out. Though exports did increase in most
cases following trade liberalisation, most countries simply
exported more of the same they did not start to export more
manufactured goods, for example, or more higher-value agricultural
exports. An Unctad study also found that many least-developed
countries lost market share following trade liberalisation, as
their exports failed to compete in international markets.10
It is clear that trade liberalisation is not driving the
development of a more dynamic, diversified or pro-poor pattern of
development. On the contrary, it is locking Africa into greater
dependence on a few agricultural products whose prices have been
declining for 50 years. Liberalisation is hitting manufacturing
hard and it is the development of manufacturing that Africa needs
if it is ever to trade its way out of poverty.
Conclusion
Trade liberalisation is not a good policy that has unfortunate
consequences for a small minority of people. It is a policy imposed
on developing countries by donors and international institutions
that has systematically deprived some of the poorest people in the
world of opportunities to develop their own economies and end
poverty.
Poor people have been driven out of their domestic markets and
found no international markets to compensate them. Development has
stalled as industries have collapsed and imports of capital goods
fallen, exacerbating the crisis in agriculture as fewer employment
opportunities are available elsewhere.
African countries have lost hundreds of billions of dollars in 20
years of liberalisation. This means lost opportunities for
education, for life-saving medicines and for investment in
infrastructure and new industries. Instead, many African countries
have seen increases in poverty. Trade liberalisation and those
who have forced it on Africa must take its share of the blame.
What can be done?
First, the drive to more liberalisation must stop. G8 countries
must:
- use their controlling stake in the World Bank and IMF to stop
them forcing countries to liberalise trade as a condition of loans,
grants and debt relief
- stop forcing countries to liberalise trade as a condition of
bilateral aid and debt relief. As a first step, the UK should enact
legislation to end the practice of demanding trade liberalisation
as the price of UK aid
- support proposals in the WTO for special and differential
treatment allowing developing countries not to implement agreements
that are not in their interests. Second, developing countries must
be allowed to roll back decades of liberalisation: they must be
free to raise tariffs if necessary to meet development goals
technical advice offered to them by multilateral institutions or
bilateral donors must include advice on the possible benefits of
raising trade barriers as well as liberalising trade.
Country Examples
What trade liberalisation has cost Ghana
Ghana began to liberalise trade in 1986. In 2000, its gross
domestic product (GDP) was just under US$5 billion. If Ghana had
not liberalised, our model suggests that its GDP that year would
have been nearly US$850 million higher. Adding the loss every year
from 1986 to 2001 (the last year for which we have data) gives a
total loss of nearly US$10 billion, or around ten per cent of
Ghana's GDP over that period. In 2000, Ghana lost US$43 for every
one of its 20 million people. In the same year, Ghana received aid
worth just US$31 per person.
Over the 15 years since trade was liberalised, Ghana's population
has lost the equivalent of US$510 per person a huge sum, given
that per capita GDP in 2000 was just US$330. It's as if everyone in
Ghana stopped working for one and a half years.
What trade liberalisation has cost Malawi
Malawi began to liberalise trade in 1989. In 2000, its GDP was just
over US$1.7 billion. If Malawi had not liberalised, our model
suggests that its GDP in 2000 would have been more than US$1.9
billion US$200 million higher. Adding the loss every year from
1989 to 2001 (the last year for which we have data), gives a total
loss of more than US$2 billion, or eight per cent of Malawi's GDP
over that period.
In 2000, Malawi's population was 10.3 million and it lost more than
US$20 per person thanks to trade liberalisation. In the same year,
Malawi received aid worth US$43 per person.
Over the 15 years since trade was liberalised, Malawi's population
has lost US$196 per person a huge sum when you consider that per
capita GDP in 2000 was US$165. It's as if everyone in Malawi
stopped working for 14 months.
What trade liberalisation has cost Uganda
Uganda began to liberalise trade in 1991. In 2000, its GDP was
nearly US$6 billion. If the country had not liberalised, our model
suggests that its GDP in 2000 would have been over US$735 million
higher than it was more than what Uganda spent on health and
education combined that year. Adding the loss every year from 1986
to 2001 (the last year for which we have data), gives a total loss
of almost US$5 billion, or eight per cent of Uganda's GDP over that
period. I
n 2000, Uganda lost US$32 for every one of its 23.3 million people,
thanks to trade liberalisation. In the same year, the country
received aid worth just US$35 per person. Over the ten years since
trade was liberalised, Uganda has lost US$204 per person compared
with a per capita GDP in 2000 of US$253. It's as if everyone in
Uganda stopped working for ten months.
What trade liberalisation has cost Mali
Mali began to liberalise its trade in 1991. In 2000, its GDP was
US$2.4 billion. Our model suggests that, without trade
liberalisation, the country's GDP would have been US$191 million
higher in 2000 than it actually was more than what Mali spent on
healthcare during that year. Adding the loss over the ten years
since Mali liberalised for which we have data, gives a total of
US$1.4 billion.
In 2000, Mali's population was 10.8 million and it lost nearly
US$18 dollars per person from trade liberalisation more than half
of the US$33 per person they received in aid. Since the early
1990s, Mali has lost nearly US$130 per person from trade
liberalisation or half a year's income. It is as if everyone in
Mali stopped working for six months.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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