Africa has long been strongly integrated into the global economy. In respect of product markets, the typical African country trades a high share of its GDP, its economy being small and specialized in primary exports. In respect of capital markets, Africa was arguably the first continent to become highly integrated: a higher proportion of African wealth is held internationally than on other continents. Thus, in one sense “globalization” is not new to Africa, but it has meant primary exports and capital flight. However, when economists now talk of globalization they mean something rather different. Specifically, they mean falling trade barriers, integrating financial markets, and transnational corporations. In this chapter, I argue that these changes can potentially integrate Africa into the world economy in a new way, but that whether these opportunities are taken up depends upon African economic policy.
Trade barriers have come down around the world, in particular with the phased elimination of QRs. Although restrictions on textiles and garments will not be fully lifted for a further 7 years, the fact that there is a timetable and a commitment has revolutionary implications for the newly industrializing developing countries. Given Africa’s present pattern of exports, this international trade liberalization is of little consequence since Africa does not face important barriers for its present exports. The reduction in trade barriers is only of significance if Africa changes its comparative advantage. I argue that its present comparative advantage is determined mainly by its policy environment rather than by its factor and natural resource endowments.
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Financial capital markets are becoming much more internationally integrated. Financial capital is increasingly flowing to developing countries as pension funds realize the advantages of international diversification. At present, Africa is not attracting significant portfolio capital inflows and so is not benefiting from this globalization of portfolios. I argue that again this reflects its policy environment rather than its endowments.
Further, manufacturing firms are internationalizing their production, shifting investment to lower cost environments. At present, Africa is not attracting footloose manufacturing, except for production for its highly protected domestic markets, and so is not in a position to benefit from this globalization of production. I argue that again this reflects policy rather than endowments.
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Thus, on present policies, Africa has little to gain from globalization. At the same time, it has little to lose. This is in sharp contrast to the integrated economies of Europe and East Asia. There, the domestic policy environments are now subject to a new discipline. If governments impose high taxes on manufacturing profits or embark upon reckless fiscal policies, there is a capital outflow. No one is in control of these market forces: even the largest speculators are tiny relative to the size of the market. International capitalism does not mean that “capitalists” have power, but that no one has power. Globalization thus constitutes a much larger loss of power for the governments of Europe and East Asia than for the governments of Africa.
In the next section, I consider the potential of reduced trade barriers for African exports. In particular, I speculate on Africa’s comparative advantage. Two distinguished economists have recently advanced propositions that taken at face value are quite disturbing. Rodrik (1997) argues that Africa already has a level of trade to GDP that is normal given its level of income, and that trade liberalization cannot be an engine for African growth. Wood and Berge (1997) and Wood and Owens (1997) argue that Africa’s natural resource and human capital endowments imply that its comparative advantage is inevitably in unprocessed primary commodities. They argue that Africa will not be able to export manufactures even if it liberalizes its trade policy. An implication that can easily be drawn from these papers is that it is endowments rather than policies that have determined Africa’s present trading pattern, so that there is little that governments can do. I challenge this proposition.
In the third section, I consider the potential of financial market integration. 1 argue that there is scope both for large capital inflows and for risk bearing. In particular, I suggest that Africa is in the anomalous position of facing the highest underlying level of risk in the world, while having the lowest supply of risk-bearing instruments. As a result, it has the highest price of risk.
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