Free Trade, not foreign aid, as the primary catalyst for the development of Sub-Saharan Africa.

By Mack Carlos Shapeero (January 2022)

Free Trade has proven itself as a viable asset in developing countries that engage in its practice. Economists argue that free trade could potentially bring Africa to the forefront of global trade. This is expected with the recent African Continental Free Trade Area agreement. However, free trade can also negatively impact development if unregulated. Therefore, can aid also serve as a catalyst for development? Throughout this essay the benefits and disadvantages of both free trade and aid will be examined and explained.

Free Trade is the only catalyst for development

Firstly, is free trade a catalyst for development? From a neoliberal perspective, encouraging the growth of the private sector is crucial to development. The potential of a free trade agreement encouraging a dynamic business environment is vital. Economists argue that free trade is tantamount to fighting poverty and increasing the wealth of developing countries (Brenton, et al., 2015).

Free trade has the possibility of increasing economic growth, lowering government spending, and boosting development through international trade. This would ideally result in the opening of new markets and forcing local economies to become more competitive as a result of the dynamic business climate. Direct foreign investment by investors or partnerships between multinational and local firms should be beneficial (Amadeo, 2020). It would be expected that free trade could lead to significant reforms as regime change and the democratization of political systems is argued to be linked with free trade (Milner & Kubota, 2005).

Consequently, foreign investment should lead to a rise in expertise and employment as local firms are exposed to new methods and technology introduced through multinational partnerships (Amadeo, 2020). It is expected that free trade may lead to the development and expansion of local industries through increased trade. The industrial production capacity of a country may become more efficient as a result.

Free trade should benefit developing countries as it results in increasing the economic resources available. This should improve the quality of life as increased competition may drive the costs of goods down as there are no import costs as many developing countries do not have the resources of producing valuable consumer goods (Vitez, 2019). It would also lead to a stabilization of a volatile region such as Sub-Saharan Africa as free trade can lead to better foreign relations as states would favour improving diplomatic relations in order to benefit their development (Vitez, 2019).

The African Continental Free Trade Area

Free Trade Agreements such as the recent AfCTA are likely to lead to more economic cooperation and international trade across the region. This should result in more development among the developing states as free trade agreements have proven to increase national trade and encourage economic growth. The AfCTA is also expected to significantly increase the quality of life in Africa by reducing poverty within the region by increasing employment opportunities. The agreements’ objective of creating a single pan-African market could have the opportunity of creating Africa as a potential future leader on the global trade agenda. The liberalization of trade policy could significantly push the development of the region and reform many African states (World Bank, 2020).

Benefits of the AfCTA

The UN claims that the agreement will lead to inclusive growth, as more international trade should improve interregional knowledge sharing, this may increase efficiency and could spread new technologies therefore potentially contributing to the redistribution of wealth (UNCTAD, 2021). Furthermore, only 17 out of the 49 African states have experienced inclusive growth whereas 18 out of the remaining states have seen a reduction in poverty due to economic growth but increased inequality. The remaining 14 have not experienced either and instead have suffered increasing inequality and little inclusive growth (UNCTAD, 2021). The AfCTA could change this as it is forecasted that it will lift 68 million people out of poverty and 30 million out of extreme poverty.

The AfCTA will encourage industrialization with the sector expected to double from $500 billion to $1 trillion in the period 2015 – 2025. Not only will the agreement settle trade disputes, but it also has the opportunity of stabilising the region through the creation of a single market which will lead to an economic boost and trade diversity across the region (The Borgen Project, 2021). It is expected that the agreement will assist in leading to deep reforms that are necessary for long-term growth and development in the region. A potential gain of $450 billion (a 7% increase by 2035) with trade facilitation measures that cut red tape and simpler customs procedures being responsible for $292 billion if the AfCTA is successful. The increase in exports, mostly in manufacturing, worth $560 billion could significantly develop the region. The agreement could also benefit women as their wages could increase by 10.5% compared to 9.9% for men (World Bank, 2020).

The AfCTA has the potential to encourage significant development and reform in the region if the agreement is permitted to function. The potential benefits of the AfCTA argues that the development across Sub-Saharan Africa is only possible via free trade.

The Consequences of Free Trade

From a neoliberal perspective, free trade is a solution to poverty and suggests that any country can develop. However, there are various consequences that accompany free trade. The largest criticism being that free trade is a cause for increased job outsourcing. The transition and growth of domestic companies into transnationals may lead to certain companies outsourcing jobs to developing countries where labour is cheaper (Amadeo, 2020). This can be an advantage, but these countries do not usually have protections in place to protect workers who are subjected to sub-standard conditions.

Free trade can lead to a crowding of domestic industries as traditional economies exposed to the international market are unable to compete with large transnational companies. This can lead to local industries failing such as small farms that are unable to survive against large transnational agricultural businesses. As a result, unemployment can rise as people migrate to urban centres for employment, this may lead to more poverty and crime (Amadeo, 2020).

Free Trade is also criticised for its damage on the environment. Developing countries may not have the necessary environmental protections and may be exploited by TNCs. Natural resources may become degraded and native cultures in isolated areas are at risk of development as indigenous cultures are endangered in which the communities are exposed to disease and death as local resources are depleted and polluted (Amadeo, 2020).

Smaller states with smaller economies may also struggle to independently raise revenue due to free trade. Tax revenue is reduced as import tariffs and fees are removed, this can weaken the government as they rely on revenue collected from these import tariffs and fees (Amadeo, 2020). Furthermore, in certain states the economic power is linked to political power. A criticism of the AfCTA is that it will only benefit the economic elite and will disproportionately affect the region because certain countries in Sub-Saharan Africa are more developed and stable (e.g., South Africa) compared to others (Tayo, 2021). Furthermore, South Africa dominates trade within the Southern African Customs Union, therefore it will benefit more than the other members of the SACU as the AfCTA would only enrich its producers and government more (Tayo, 2021).

Free Trade can be therefore be criticised for the consequences that it can have on developing countries. These implications will need to be addressed if the AfCTA is to fulfil its potential and be a catalyst of development across Sub-Saharan Africa.

Aid and development

It is difficult to measure how beneficial developmental aid is to Sub-Saharan Africa. In the case of Botswana, it has proven itself to be beneficial. However certain types of aid such as bilateral aid can be beneficial if used in the correct environment i.e., a stable and democratic government as the capital from the aid may be used to invest in the development of the country (Ross, 2021). Therefore, if used correctly, in the long term, development aid can promote economic growth and alleviate people affected by poverty.

Aid can prove itself as a catalyst for development under the right conditions as proven in Botswana (Gray, 2011). It can improve governance under the right environment and can therefore contribute to the development and economic growth (Haider, 2019). It is therefore difficult to argue that aid is a catalyst for development when taking its consequences into account.

The consequences of Aid

Foreign aid is perceived as a controversial subject in development economics. Critics agree that aid has had a negative impact on the developing world, especially in Africa. The view that official aid can lead to dependency, encourages corruption and currency evaluation presents the argument that aid has far worse consequences than free trade. Critics such as Manning or Moyo argue that aid can lead to dependency. This can lead to exchange rates increasing and a subsequent stunting in development. Over-dependence may also lead to national policy becoming directly influenced by foreign agents and can affect a national governments effort in raising revenue independently.

The negative impacts of aid vary on the type of aid. Food aid from foreign donors can be responsible for the death of local farm industries. Local farmers cannot compete against an abundance of cheap imported aid food. Furthermore, the large inflow of money in foreign aid to a developing nation can increase the price of locally produced goods and products. As a result, the export of local goods would fall forcing local industries and producers out of business. Therefore, stunting development (Thapa, 2020). Aid can prevent developing countries from “taking advantage of the opportunities provided by the global economy” (Edwards, 2014).

Aid can also be used as a tool of neo-colonialism as foreign donors may be able to exert economic and political influence in exchange for aid. Therefore, the Global North is able to halt the Global South from developing through dependency and foreign influence (Thapa, 2020). Foreign aid has therefore been used to assert influence over developing countries (Ross, 2021). Aid is used for political reasons with the intent of exploiting weak institutions for economic and political gain (Moyo, 2009). It therefore harms development.

The effectiveness of aid is diminished by its inefficiencies when it is donated to recipient countries. Countries with weak institutions or in a state of political turmoil may not benefit from aid due to issues such as conflict or corruption being an issue within the nation. Corruption is a factor that diminishes the effectiveness of aid. Bilateral aid has been found to be used by authoritarian African leaders to strengthen their military control or create propaganda-style education programs (Ross, 2021). The effectiveness of aid is diminished as it is not used to develop but instead to oppress. Due to these disadvantages, lesser developed and unstable Sub-Saharan countries are unable to experience significant economic growth and development without foreign assistance (Manning, 2012). Unfortunately, African economies becoming dependent on aid has become a norm in the systems of international relations between the high- and low-income countries across the globe (Thapa, 2020). Furthermore, aid does not have a consistent relationship with growth (Edwards, 2014). Instead, it may promote neopatrimonialism, can perpetuate, or prolong a conflict.

Conclusion

Ultimately, Free Trade is the only catalyst for development across Sub-Saharan Africa. This conclusion arises because when taking in the disadvantages of aid, there is little potential that aid encourages development. When comparing Free Trade Agreements and Aid in a region such as Sub-Saharan Africa, the implications of free trade can be addressed and regulated whereas aid could be used to strengthen autocratic and corrupt governments. Measures such as regulations or trade protectionism (short term) are more effective in guaranteeing economic growth and development across the region than aid. Free trade also can bring Africa to the forefront of global trade and protect its economies from neo-colonialism. Hence, free trade is the only viable catalyst for the development of Sub-Saharan Africa.

Bibliography

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Reports:

Gray, R. J., 2011. DOES FOREIGN AID PROMOTE DEVELOPMENT? A STUDY OF THE EFFECTS OF FOREIGN AID ON DEVELOPMENT IN SUB-SAHARAN AFRICA, Orlando: University of Central Florida.

Brenton, P. et al., 2015. The role of trade in ending poverty, Washington D.C.: World Bank Group.

World Bank, 2020. The African Continental Free Trade Area : Economic and Distributional Effects, Washington D.C.: World Bank.

Manning, R., 2012. Aid As A Second-Best Solution: Seven Problems Of Effectiveness And How To Tackle Them., Helsinki: UNU-WIDER.

Thapa, I., 2020. Foreign Aid: Positive and Negative Impact in Developing Countries, Kathmandu: Tribhuvan University.

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Milner, H. V. & Kubota, K., 2005. Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries. International Organization, 59(1), pp. 107-143.

Interviews:

Moyo, D., 2009. 'Everybody knows it doesn't work' [Interview] (19 February 2009).