Economics Commentary. This article deals with the development of African countries through export-led growth and export performance.

This article deals with the development of African countries through export-led growth and export performance.

Export-led growth is economic growth based on increasing exports and export revenue, a key factor in Aggregate Demand. This would mean GDP increases, resulting in higher incomes and growth in the domestic economy. This can be achieved by exploiting a country’s comparative advantage. For this to happen, several criteria must be met, such as liberal trade and minimal government intervention. However, there must also be a strong provision of infrastructure. This is highlighted in the “weak supply capacity-limited ability… in Africa”. Indeed, the UNCTAD senior economist Samuel Gayi raised the issues of a “shortage of reliable electric supply … banking services and efficient transportation”.

Additionally, Africa’s primary export is agricultural products. Due to technological improvements such as enhanced fertilisers and increased mechanisation in developed countries, supply of agricultural products has dramatically increased. Protectionist policies such as subsidies have also lowered prices. Because demand for agricultural commodities is very income inelastic, demand has barely changed. This means that prices of agricultural products have fallen dramatically. At the same time, people are now consuming more manufactured goods, which are income elastic. This increases the cost of manufactured products, which are Africa’s primary imports.

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The falling global price of agricultural commodities and increasing cost of manufactured goods means that Africa faces deteriorating terms of trade. Deteriorating terms of trade mean that Africa’s exports command a lower price while imports become pricier. This means that countries have to sell more exports to be able to buy the same amount of imports. By further increasing supply, prices fall even lower. This creates a vicious cycle. To try and earn larger revenues, some countries have overused their resources. For example, in Ethiopia, observers have recently commented that in some areas, soil is irreversibly damaged. This has long-term consequences. This could have contributed to Africa losing world export market share, despite “two decades of… trade liberalisation”. Unsustainable practises may have also lowered productivity. Indeed, the article notes how Africa was once a net food exporter and has now “become the region most dependent on external food aid”.

The article notes the “strategic role of agriculture in Africa”, implying that more focus and funding needs to be placed into agriculture. This would allow Africa to be able to feed itself. While I agree with this, I do not believe this would ultimately allow Africa to pursue export-led growth.

The most commonly cited examples of export-led growth are the “Asian Tigers”. These countries focused on exporting manufactured good at a low price thanks to their comparative advantage of low-cost, low skill labour. The increased revenue from exports was then used to improve education so future exports were sophisticated products, such as South Korean electronics.

The problem with this method is that it may not be feasible for Africa. An export-led growth through manufactured products would require greater levels of technology and infrastructure, both of which Africa lacks. This would require extensive government spending. However, many African countries are heavily in debt and would not be able to finance this, or may be unwilling to borrow money. For example, Nigeria has a debt of $34 billion, despite having paid off $18 billion on a $17 billion debt. This is where “developed countries can play a critical role”.

What could be done is debt relief or waiving debt. This would allow governments to reallocate expenditure. Using a debt service diagram, we can see how reducing debt payments can mean improved funding for other purposes, such as infrastructure development. This would make export-led growth more feasible, as well as improving the quality of life for millions. For example, people as well as industry could have access to clean water.

However, this strategy is not without its problems. This plan would not solve food problems. What needs to be done instead is development of both the Primary and Secondary Sector. This would allow African countries to supply their own agricultural needs and not rely on food imports and aid. Money spent on buying foodstuffs could be used to further increase infrastructure.

In conclusion, to pursue export-led growth, Africa needs substantial investment in infrastructure, as well as renewed efforts to improve agricultural performances. This can be achieved by reliving debt, or waiving it all together. This would allow governments to invest the money, for example in infrastructure. These strategies would reverse “worrisome trends” and help Africa develop.

Source: Make Poverty History, Geraldine Bedell, Penguin Books, 2005