The World’s Trend Towards International Trade

Globalization refers to the expansion of international flows of trade, finance, and information into an integrated global market, the prescription to the liberalization of national and global markets in the belief that free flows of trade, finance, and information will produce the best outcome for both economic growth and human welfare. The concept of international trade sounds like it should benefit all nations on Earth, but that is far from the reality we face today.

There are two reasons for the recent popularity of the concept of globalization. The first is the scale and speed with which it is occurring and the way technology (especially in communications and transportation) is changing the world. Second, it is now widely accepted that globalization is not just the latest economic fad but that the international environment is changing in profound ways and that the world is indeed becoming a global village.

Nigeria was among the fastest growing African countries from 2001–2010, but has since declined slightly in average GDP growth.

Development crisis in Africa

How Africa decides to approach globalization must be determined by its most urgent goals: accelerating economic growth and development and eradicating poverty, which is not only widespread but deep and severe in some countries. At the beginning of the twenty-first century, poverty remains Africa’s most pressing problem, and economic growth is the sine qua non of poverty reduction. Thus, Africa needs to achieve, as quickly as possible, growth that is both sustained and rapid.

The main questions Africa has to ask itself about globalization are as follows. First, having escaped the worst effects of the Asian crisis, should it still pursue globalization? Can Africa continue to remain isolated as the winds of change sweep through the global economy?

Second, what are the advantages and disadvantages of integration into the global economy? How can the risks of globalization be minimized? What are the most important lessons Africa can learn from the crises and growth experiences of the Asian countries so that it can more successfully manage the unavoidable difficulties of globalization?

Third, to what extent is Africa (in specific, Nigeria) already integrated into the global economy, judging from the various indicators at our disposal, and how can it improve its competitiveness in international trade? Fourth, is globalization the panacea for all of Africa’s economic problems? Fifth, what policy measures must Africa put in place to derive maximum benefit from globalization?

Avenues to globalization

There are a number of reasons why many analysts advocate Africa’s greater integration into the global economy. The overriding reasons are Africa’s poor overall economic performance—which is due to a number of factors, including colonial history, disadvantageous geography, heavy economic dependence on exports of primary products, and macroeconomic policy errors—and the advantages Africa can derive from globalization.

International trade. The first avenue of economic integration for most countries is international trade. Trade remains the main vehicle for Africa’s participation in, and full integration into, the global economy. Africa’s trade is, however, concentrated in a narrow range of primary commodities, and, within this narrow range, Africa’s market share has been shrinking. Although Africa made substantial progress toward trade liberalization in the 1990s, its trade policies remain, on average, more protectionist than those of most of its trading partners and competitors.

Capital flows. With respect to capital markets, the second avenue to globalization, it has been noted that Africa was arguably the first continent to become integrated with the world economy: a higher proportion of Africa’s wealth is held internationally than of any other continent. Estimates of the ratio of capital flight from African countries to Africa’s gross national product range from 24 percent to 143 percent. And, although the global level of private capital flows has increased, Africa has not been one of the main beneficiaries.

Maximizing the benefits of globalization

It is important to stress four points. First, globalization is not a panacea. It will not solve all of Africa’s economic problems. Integration with the global economy is a necessary but not a sufficient condition for growth. Sustainable growth and poverty reduction depend on other factors as well, including macroeconomic stability, a high investment-to-GDP ratio, reliable accounting and legal systems, and responsible government institutions.

Empirical evidence shows that countries that have grown fast are those that have invested a large share of their gross domestic product and maintained macroeconomic stability. Africa must also anchor its growth prospects in the development of human capital, physical infrastructure, and strong institutions.

It must foster the development of the private sector and the macroeconomic environment needed for the private sector to be viable. Good governance that stresses accountability and transparency and the development of institutions—the civil service, a sound banking system, and a trustworthy and independent judiciary—is also critical in this era of globalization.

Second, it is unlikely that a liberal trading regime will, by itself, generate greater volumes of trade unless accompanied by high-quality economic growth.

Third, to benefit from the global economy, Africa must make policy changes to become competitive and capable of venturing into new areas.

Fourth, given the differences in education, infrastructure development, and macroeconomic stability in individual African countries, the benefits of globalization are not likely to be the same for all. Africa can learn a lot from Asia’s development strategy.

Asia benefited from its openness to the entire world and achieved enviable stable per capita income growth of 5 percent and above, with few downturns, and a remarkable decrease in the incidence of poverty. This progress was due to the importance the Asian countries attached to education and technology, an export-oriented strategy, a sound macroeconomic environment, and high saving and investment rates.

What does Africa need to do to reap the maximum benefits from globalization?

Trade. Tackling Africa’s trade problem requires a two-pronged approach. At the national level, countries need to liberalize trade by removing trade barriers, adopting appropriate exchange rate policies, and diversifying exports. At the international level, there are two strands of thought on where Africa should concentrate its efforts.

Some believe it should concentrate on primary products, where it has a comparative advantage. Others focus on the long run, arguing that a determined shift toward the promotion of manufacturing and export of manufactured products will be required for Africa to achieve rapid productivity growth. A comparative advantage in manufacturing would be a launching pad into the global economy.

Building up Africa’s manufacturing sector will not be simple, however. The sector is not competitive for a host of reasons.

First, policy has failed to promote the technical capacities or specific knowledge needed to enhance efficiency, which is fundamental to successful industrialization.

Second, the key to successful exporting lies in the technical efficiency of firms, which, in turn, is dependent on policies encouraging innovation and economies of scale.

Third, transaction costs in Africa tend to be high for a number of reasons, including high tariff and nontariff barriers, high international transport costs, poor telephone systems, and unreliable infrastructure facilities for essentials like water and electricity. Because manufacturing is transactions-intensive, this sector is nonexistent in some African countries and extremely small in others.

At present, the playing field in international trade is not level. The industrial countries should eliminate restrictions against imports of African products, while the African countries must develop a coordinated trade strategy and play a more active role in both demanding and making concessions in trade negotiations.

Capital flows. Many African countries have adopted policies intended to make them more attractive to foreign investors—for example, liberalizing investment laws, offering fiscal incentives, easing restrictions on entry and profit remittances, and strengthening their banking and financial systems to eliminate the kinds of weaknesses that were responsible for the Asian crisis.

Debt. There is ample evidence that Africa’s external debt burden is a severe obstacle to investment and renewed growth. Attempts to reduce or eliminate the debt burden are crucial to Africa’s development.