Liberalisation has done Africa more harm than good

As a general rule, trade promotes economic growth. At least, that is what most models of economic theory suggest. Empirical studies confirm this view, albeit inconclusively and with reservations: factors other than trade – especially institutions – have more influence on a country’s prosperity, and some countries benefit more from trade than others. Nonetheless, the prevailing view is that exposure to the world market is generally beneficial.

However, a recent study by the Hamburg Institute of International Economics (HWWI) maintains that this is not the case for sub-Saharan Africa. Authors Matthias Busse and José Luis Groizard base this conclusion on statistical analyses, which link levels of per-capita to other long-term economic data – including openness to trade, natural climate, sizes of domestic markets, ethnic diversity and the quality of institutions. Statistics from 146 countries were considered. The study reveals that institutions are the most important factor for long-term economic growth, and that geographical variables also have significant influence. Openness to trade, however, does not. Busse and Groizard even establish that the opposite is true for sub-Saharan Africa as a whole (not, however, for each individual country). Indeed, trade has slowed down economic growth in the long term.

The authors give three reasons for this finding. First of all, Africa predominantly sells agricultural products and commodities. Relying on these types of exports is often economically and politically detrimental. World market prices for many of these goods – especially agricultural ones – have been falling for decades, due at least in part to agricultural subsidies in Europe and the USA. Prices for some commodities have risen again recently. Nonetheless, high revenues from commodity exports often promote corruption and mismanagement.

Second, the infrastructure in Africa is poor, and in many places there is no guarantee of political stability. Both factors reduce exports and make them more expensive. Moreover, they prevent investments in the manufacture of high-quality goods, which means that export compositions do not change. Third, adjustment costs for market liberalisation are very high in Africa due to poor-quality institutions. According to Busse and Groizard, bureaucratic hurdles, above all, prevent new companies from being set up; furthermore, the overly regulated labour market restricts labour from migrating from shrinking sectors to those that are expanding. To some extent, this finding is surprising, given the vast informal sectors and the high number of job-seekers prevalent in most African countries.

The study does not imply that Africa is a victim of globalisation. Rather, it suggests that Africa is not taking advantage of the opportunities. Busse and Groizard argue that the subcontinent can only benefit from world trade if it improves the quality of its institutions and removes excessive regulation. The authors do not discuss whether or not short-term restrictions on free trade would be beneficial. (bl)