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‘Bad trade’ and risks of stifling local production in Africa
‘Bad trade’ and risks of stifling local production in Africa
John Cary, a prominent British merchant and writer on matters regarding trade, wrote between the end of ‘600 and the beginning of ‘700 two manuscripts where he argued that a trade model based on the export of raw materials/commodities and import of manufactured/industrial goods (as it happens in most of African countries), has a destructive effect on the economy of the nation exporting raw materials, as it stifles the birth of a local industry.
The theory illustrated in the Cary’s works[1] was based on the idea that when a country imports finished goods that are more sophisticated of those that it produces (e.g. raw materials or primary commodities with little or no value-added), this pattern in the long run will depress its domestic market and stifle local production. This is why Cary called this model ‘bad trade’, as opposed to ‘good trade’ which happens when the opposite situation occurs or when trade is beneficial to both nations.
During a trip to Benin in 2019, I had the chance to visit an area in Cotonou full with shops selling fabrics and textiles at the outskirts of the Benin’s capital. I was surprised to find that many of these shops, also those selling traditional African clothes or fabrics like batik or ankara (a cotton fabric decorated with traditional motifs and finished with a wax or resin treatment which gives it a slightly shiny appearance), were owned by Chinese and Indians, with most of the city merchants who were buying imported products from them for resale in local markets. During my visit I also noticed the presence of many Nigerians traders that were buying such products for selling them in their country.
I then decided to stop and have a chat with some of these merchants. My question was simple: “Benin is one of the biggest cotton producers in Africa[2], why you do not invest in creating a textile industry instead of importing these cheaper and synthetic fabrics products from China or India?”. The answer was that there was no market for African-made products because they were too much expensive. The reason they gave me is that in Benin the production is totally (or almost totally) manual, while in China or India, where the production is automated and labour costs are lower, the manufacturing of these products enjoys more competitive costs.
They showed me some 100% African made textiles, but they went on by saying that most of their customers were not interested to buy them and were not even able to understand their difference in quality with respect to the imported ones. They concluded by saying that for them was more convenient to export raw cotton and to import finished textiles and clothes from other countries. In telling me so, I perceived a strong feeling of frustration in their face.
As we were talking, I also noticed some Chinese visitors that were taking pictures with their phones of such textiles. I have seen this scene many times in my life, also in other African countries such as Ethiopia, for instance, where I recently traveled. Also there, in a well-known market close to the old Addis Ababa stadium, I noticed the presence of many Chinese who were taking pictures of shoes and other leather products in the shops selling traditional items. It was immediately clear to me that they were trying to reproduce such items for production in China and sale in Africa.
Intrigued by this topic, I decided to made a research to verify the validity of the theory that when a country exports raw materials and imports goods that are more sophisticated, this will destroy its domestic market by killing the demand of locally-made products.
I then stumbled upon this recent working paper from the Middlebury Institute of International Studies (Monterey, Canada)[3] that analyses the textile industry in Sierra Leone. The paper argues that the reason why Sierra Leone has not developed a cotton or textile industry, despite having significant cotton resources, is that this country and West Africa in general, have not the capacity to compete with countries such as India, China and The Netherlands (another foreign producer of traditional African fabrics that are exported to Sierra Leone or other West African countries).
In addition, the paper argues that in Sierra Leone there are no factories that transform locally produced cotton into the fabric seen in the local markets. I asked to myself: “why?”. Interestingly, i found that an interviewed importer of fabric in Sierra Leone tries to answer in the paper to my question. I was surprised that he gave the same answer given to me in Benin. “There is no market.” And again… “Sierra Leonean people do not understand the quality of fabric”… “100% cotton tends to be a bit more expensive, but if you go into town you will see in all the street markets, they sell a lower quality fabric at a much cheaper price.” Conclusion: the lower quality fabric sold in all the local markets are made in China products that are imported in Sierra Leone.
John Cary was right. Dubbed as “Dutch disease“, this cycle of heavy imports in Africa from non-African countries of finished goods is entering into a vicious cycle that risks to compromise the African industrialisation process.
There is therefore an urgent need for Africa to break the cycle of exporting raw materials and low-value added products by increasing their sophistication. In order to do this, African countries need to industrialise and undergo structural transformation to make their industries competitive, or the foreign competition will kill them.
The reality, however, is that in Africa the manufacturing sector, generally speaking is underdeveloped and not competitive. In the last 20 years it has grown very slowly. According to an article published on The Africa Report[4], over the past 20 years its growth has reached 2.5%: absolutely nothing, when compared, for instance, to countries such as China and Vietnam where the manufacturing sector has grown in the same period between 15% and 20%. The article also points out that if while in the 1970s the industrial sector represented about one fifth of the total output on the continent, now it represents only a little over a tenth of Africa’s GDP.
If it is true that Africa is going through a process of deindustrialisation, something needs to be done urgently. In this sense, the construction of the African Free Trade Area (AfCFTA) can be an important opportunity… insofar this project will lead to an increase of investments in Africa. Not only indigenous investors, that in Africa are few, but foreign investments as well.
But what are the conditions for foreign investors to invest in Africa? As indicated by a TRALAC paper[5], foreign investors and investments are generally more attracted by big, integrated markets with policy certainty and predictability, among other things.
These are exactly the objectives of the AfCFTA. Can we therefore assume that the implementation of the AfCFTA Agreement will lead to an increase of foreign direct investment (FDI) in the continent in future?
This question leaves open a doubt: is the AfCFTA a path to industrialization or industrialization should come first[6]?
Although opinions on this subject differ widely, a condition for the success of this goal is that African countries will complete their AfCFTA implementation strategies and actions plans. Such policy documents are necessary to identify the sectors with the higher potential and upon which the industrialisation efforts and African nations’ strategic actions aimed at creating regional values chains will need to be focused in the next years. The reality, however, is that most African States are late in adopting such plans. Moreover, their adoption does not guarantee their implementation, which, in the end, will be left to national governments.
The question is: will African governments respect their engagements under the AfCFTA and will be up to their commitments? As Latins used to say “et posteris judicas” (posterity will judge).
[1] Essay on the state of England in relation to its trade, its poor, and its taxes, for carrying on the present war against France” and “A discourse concerning East Indian trade”.
[2] Benin, along with Burkina Faso, Chad, and Mali constitutes the “C-4 group”, which represents the major cotton producers in Africa and in the international market for cotton. Collectively. these four countries represent about three percent of the world production and about eight percent of world exports of cotton.
[4] https://www.theafricareport.com/81052/is-manufacturing-dead-across-africa-we-didnt-get-the-memo/
