Integration of African Countries into the Global Economy - Term Paper Example

To What Extent Do Geographical Location And The Natural Environment Constrain The Integration Of African Countries Into The Global Economy? Africa is the second largest continent of the world and contains about ten percent of the world population. Yet, the region has been marginalized and is a lost continent in the age of globalization process and the new world order. The transformation and transition occurring in the global political and economic domains have been at an unexpectedly fast pace, sweeping across the boundaries and integrating the national economies into the global production system. The regions of the world that have pioneered the globalization process include the triangular alliances of the North America, Western Europe and the Asia Pacific. Africa is one of few regions of the world, who have been too engrossed with their local political and economic problems and have not participated in the world globalization. The development efforts in the continent have suffered severe setbacks in the past decades. Africa has been surrounded by multifaceted problems ranging from perennial famine, constant economic crisis, political corruption, abject poverty and civil wars that describe the crisis, problems and failure of Africa. Even in this era of globalization, Africa is described as a metaphor of absence and a ‘dark Continent’. According to Edoho (1997), the concepts of Globalization and the new world order have given shape to the evolving geopolitical and geo-economic framework. These concepts seek to achieve political integration and remove the economic isolation of nations. Globalization will bring down the regional boundaries and the benefits of technological advancements are shared amongst all. Globalization is a multidimensional concept that focuses on functional integration of the internationally dispersed economic activities. Growing exposure to the intense competition and multi-nationalization of production are the major drivers as well as the causes of diminishing economic boundaries. With the advancement of technology, transportation and telecom, the globalization process has been fast and powerful. Infact, technology is the crucial force that has shaped the globalization process by increasing the capacity to process and transmit information across the national boundaries at a light speed. However, the concept has demonstrated divergent impacts on different regions of the world. For some countries, globalization has been a harbinger of boom in the economy, whereas for some other countries of the continent of Africa, who have been alienated to the concept, globalization is redistribution of power and prosperity in certain parts of the globe and poverty in the others. Globalization and economic realignment have adversely affected the continent. The structural adjustments of the political system, from the formal democratization to the emerging non governmental civil societies that were intended to bring African economy in line with the global standards, have actually caused the worst deterioration of the continent this has been primarily due to the corrupt nature of the officials and the political leaders. Much of the wealth generated by the natural resources of Africa, such as Copper, Petroleum etc., have been filling up the private coffers of these people rather than being used for the development .of the African nations. Ferguson (2006) points out how the ‘selfishness’ of the government was attacked by the mine workers in Zambia. The officials were accused for the exploitation, immorality and enriching themselves at the expense of the people. Vested interests in political authority have feared the multinational firms as the predators of the valuable resources and have prevented the development and exploration of such resources. Among African countries, Nigeria and South Africa are two countries which are very strongly placed to utilize the opportunities that the global economy could provide. Together, these two countries account for fifty five percent of the region's GDP and a quarter of its total population. South Africa and Nigeria have the potential to bring about an economic growth of the entire region. Nigeria is one of the fifteen countries in the west Africa that make up the Economic Community of West African States (ECOWAS) and accounts for half of its population and three-quarters of its total GDP (Oshikoya, 2008). Emphasizing on the multidimensional aspect of globalization, Edoho suggests that “Although considered mainly an economic phenomenon, globalization does not occur in a political vacuum.” The political decisions like economic liberalization, elimination of trade barriers and quest for regional cooperation are vital ingredients of globalization. Most of the African countries are fledgling democracies and are not in a position to take decisions to liberalize or open up the economy to global companies which can bring about growth of the region. This includes large African countries like Nigeria, which has the world's eighth largest oil producer and has the seventh largest reserves of natural gas. Nigeria has provided priority rights on several oil blocks to state-owned Asian oil companies of China and India in exchange for investment in power plants, refineries, and railways to boost its infrastructure. However, the transparencies of such large oil deals are in question. The control of Nigerian rebels in some of the oil fields of Niger Delta has prevented active investment in the development of these sites as well as loss of revenue and employment opportunities in this region. Therefore, despite decades of production and record high oil prices, the Niger Delta remains one of the poorest and least developed regions of Nigeria, troubled by perpetual violence and chronic pollution. Some of the factors that have adversely affected Africa in the era of globalization include the facts that Africa lies outside the economic influence, it is technologically weak and economically vulnerable. In terms of the geographical location also, Africa lies in a hemisphere away from the world of economic superpowers. Such remoteness and poor transport and communications infrastructure isolate Africa, inhibiting its participation in global production networks. The quality of produce from Africa and the production capability of its countries are also not so cost effective that the goods and services it produces will be in demand in North American and European countries. The main output from Africa is agricultural products or minerals, the demand for which is not there in the rich nations. This is so because the rich nations are the consumers of the final products which have been processed in the manufacturing nations of South Asia. These manufacturing nations do not pay a premium for the agricultural products of Africa. According to Cernea and Adams (1994), the costs of the structural adjustment policies (SAP) owing to the deteriorating standards of living and the prolonged crisis due to debt and recession, have been a major cause of the continent’s failure. Within the continent itself, most of the African nations are landlocked. Limao and Venables (1999) have studied the Sub-Saharan Africa, as a landlocked country, with high transportation costs and have explained poor infrastructure as the major cause for low levels of African trade, both inland as well as with the rest of the world. They state that the landlocked countries typically have high transport costs, but there adverse effect on the trade can be substantially controlled by improving the quality of infrastructure. Improving the infrastructure in one’s own country and in the countries through which the goods and services are transferred can greatly reduce the cost of producing them. It has been found that having effective trade and transit treaties between the neighboring countries can make the trade fast and induce growth in both the countries. In Africa, due to absence of stable political regimes and the presence of many a warring factions, the development of transit treaties have not taken place. The infrastructure development has thus taken only in small pockets. Even well-endowed nations like Nigeria and Angola, which have abundant oil resources, have not been able to exploit the oil fields in a profitable manner. Though the countries have been pledging oil resources in exchange for infrastructure and other development aids, this has often been negated by the corrupt officialdom. There is a lot of corruption in most of the poor nations of Africa. The revenues earned from the natural resources are often siphoned off. There is very poor financing of the infrastructure projects often leading to governments pledging future revenues. This problem has grown to such an extent in countries like Angola that even the operational expenses are being met by loans. This is despite Angola having good oil reserves. Dollar states that most of the marginalized countries in Africa are burdened with indefensible debts, and reducing their debt burden is a big factor for enabling these countries to participate in the globalization. However for the debt relief to be powerful and make a significant difference, it must be incorporated with the policy system, which aims towards poverty reduction and improvement of investment climate. Debt relief must be in addition to the aid that is planned to be given to such countries. A recent World Bank study identified infrastructure, investment, innovation, and institutional capacity as the most critical areas that need attention to pull Africa to the world globalization standard. This year’s competitive report marks a partnership between three institutions The World Bank, The World Economic Forum, and The African Development Bank (AfDB) have been identified as three institutions that have come together to help Africa reduce poverty, expanding opportunities and growth by collecting data for assessing competitive environment of the African countries. The World Bank conducts the Enterprise Surveys to collect data regarding the impact of the country’s investment climate on each firm by way of conducting face to face interviews with a range of entrepreneurs in different African countries. Such data collected reflects the actual experience of the entrepreneurs with reference to productivity information, labor and material costs, investment climate and is used to understand the relationship between investment climate characteristics and the firm’s productivity. The African Development Bank (AfDB) maintain the government and the private sector profiles as a basis for addressing governance issues and the in-depth analysis of political, economic, social and legal environment as well as opportunities and constraints of the private sector country profiles. The AfDB maintains the private sector profiles under four categories namely Algeria, Egypt, Mali and South Africa. The World Economic Forum conducts the Executive Opinion Survey Poll to capture the perceptions of leading business executives from a cross section of firms. The report of the Executive Opinion Survey Poll serves as the gauge of the current economic condition by compiling data regarding technology, government, private and public sector institutions, infrastructure, human resources, domestic competition as well as the company operations, responsibilities, and strategies. The report enlists the following five points that define the steps that must be incorporated to empower Africa be a vital part of the world globalization. 1. Importance of good policies to establish sound business environment is an urgent requirement of Africa that needs to be fulfilled to improve the range of factors that have always deterred Africa to be a part of the new world order. Working towards a sound business environment means providing the business firms with the basic needs to improve production, quality and create an environment that is technologically abreast. Good policy reforms are needed to provide an open system which protects investor’s interests, pulling African firms in line with the world companies. 2. Access to finance, and good education system. The African competitiveness report 2007 recommends that African nations can be integrated into the global trade on the back of strengthened educational institutions. Low access to financial services is a major obstacle for African enterprises. The World Economic Forum’s Global Competitiveness Index shows that the region lags in the basics of infrastructure and education. Improvements made in this regard will be beneficial for the region. 3. Infrastructure remains to be a vital constraint to African economy. Energy and transportation are the main bottlenecks to productivity growth and competitiveness in Africa. Being a landlocked, a country, Africa does not enjoy the benefits of reduced transportation costs. Unlike the resource endowed countries and some other countries in vicinity to the sea, Africa needs to work against the odds of power outages and transportation delays, which constitute for the major portion of the indirect costs. Substantial efforts need to be taken to improve the infrastructure in order to improve the critical success factors such as transportation, energy, Information and communication technologies. These efforts will assist Africa to leapfrog against the geographic constraints as well. 4. Friendly business institutions need to be fostered in Africa to counter attack corruption and promote healthy competition. The institutions need to devise transparent reforms against the bribe culture, inconsistent enforcement of regulations and political favors to special interest groups. Such manifestations account for a considerable portion of indirect costs, especially to the small firms. 5. The challenge is to identify constraints, benchmark the technology readiness and efficiency of the few successful countries linking these indicators to the outcome to sustain and expand the opportunities. The Global Competitiveness Index (GCI) enlists the factors and assesses the institutions and policies that impact the economic prosperity. According to the GCI’s nine pillars, for Africa to prosper and be a part of the globalization, the elements such as institutions, infrastructure, macro-economy, health and education, higher education and training, market efficiency, technological readiness, business sophistication and innovation must be given due urgent attention. Also, the poor quality and regularity of the data reporting exercised by Africa adds on to the problems of the continent’s global trade. The World Bank’s Enterprise survey data demonstrates that the geographical area and the climatic conditions need not be seen as the primary issues in determining firm’s prospects, unless their impact is severe and unmanageable. It argues to state that the issues concerning natural endowments and constraints, although inevitable, can not deter the businesses to prosper. A more reliable infrastructure can counteract the greater challenges imposed by natural constraints. Even the problem of minimal economic advancements and lower-income countries can be set right by having a strong financial system with regulations. The survey results emphasize on the need for individualistic approach to the adopted for different firms facing different types of constraints owing to the varying sizes and international trade policies. Africa’s economic landscape that includes the SANE (South Africa, Algeria, Nigeria, Egypt) includes the four largest economies of Africa and account for more than half of the Africa’s total Gross Domestic Product (GDP). The strategic and richly endowed locations of these SANE countries need to be tapped to benefit the surrounding regions. These countries need to attract capital flows and to facilitate regional infrastructure, hence evolving as growth poles for the entire continent. A vital step that can greatly enhance the growth of Africa as a continent is the augmentation of the Intra-African trade so that the disparity between the percentage contributions in trade exhibited by the different SANE countries can be reduced. A comparison of South Africa and Nigeria brings out the wide difference between the exports percentages of the two countries. Despite the huge oil well reserves and ongoing financial market reforms, Nigeria still lags behind in the race of globalization. The main constraints that pose a threat to the growth of Nigeria include financial problems like the macroeconomic uncertainty, unfair competition and corruption and the problems of inadequate resources like poor infrastructure and power failure. Comparing the SANE countries to the BRIC (Brazil, Russia, India, and China) countries, in terms of the international trade context, it is evident that it is easier to start a business in the SANE countries. With moderate rules for international trade, these African countries attract more Foreign Direct Investments (FDI) and have liberal policies for business. However, there is no legal system in Africa that protects investors. The lack of such a regulatory system is a major reason why, inspite of the considerable size and scale of the SANE countries to be the drivers of Africa’s economic growth, there is hardly any potential that is realized. Such key obstacles to competitiveness and constraints to their investment climate must be identified and addressed. Gender is an important cultural dimension that affects the Africa’s private sector led growth. With family dynamics playing an important part in the Africa’s culture and women entrepreneurs consisting of a significant part of the labor force, it is important to devise ways to facilitate legal system and regulatory reforms that augment women entrepreneurship and protect their interests. Although there are not many gender based obstacles with operating business in Africa’s culture, the Entry level barriers for women entrepreneurs is much greater as compared to male counterparts. Gibbon and Ponte (2005) state that owing to the weak resource base, the Entry barriers are a sensitive issue for Africa and the lack of specialization and enhanced capacity greatly account for the marginalized role of Africa in the globalization. The system must support legal and economic reforms to empower the women economically, reducing disparities in access to resources. Such a positive impact on women entrepreneurs is vital for Africa to tap the full potential of the workforce in order to remain competitive and sustain long term globalization efforts. The Information technology and communication (ICT) infrastructure is another important area that Africa needs to focus on in order to design long term strategy for competitiveness. The earlier model of Africa revolved only around communications, with a state owned monopoly operator, funded by the government. The little income earned from the communications operator went to serve the corrupt government officials. The contrasting new model emphasizes on improving the information technology in the continent, with the privately owned mobile operators, making strategies to boost the access to telecommunication network across Africa. ICT plays a pivotal role in modern day business as it enables rapid communication, boosts skills and technology levels generating new growth and technological changes across all sectors of economy. Incentives to support local capabilities, and efforts to promote technological readiness of the firms, must be initiated by the government. Market liberalization and reforms are designed to attract investment in the ICT sector, exploiting the potential of low cost technologies in the sector. Africa is the fastest growing region for mobile communications and offers the most attractive grounds for investment. Africa is already on the verge of economic integration with the global economy, but imbibing this change with poise and sustaining competitiveness in this era of economic integration remains to be an issue for Africa. Africa needs to reinvent and reposition itself to come up in the turbulent global environment. The continent has enormous potential which has been unexploited owing to the lack of education and poor production factors such as unskilled labor. The integration of African countries into the global economy, although restrained by a number of factors, can be achieved by policy reforms that are designed to promote macroeconomic stability, promoting openness to trade and capital flows by supporting them with necessary social and economic infrastructure (Quattara, 1997). References CERNEA, Michael. M. and ADAMS, April.L. 1994. 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Temple University Press. Has Africa’s ICT Renaissance Begun ? 2004. Switzerland. [Online] Available: http://www.itu.int/AFRICA2004/media/renaissance.html [January 26, 2009]. LIMAO, Nuno and Venables, Anthony, J. 1999. Infrastructure, Geographical Disadvantage and Transportation Costs, Policy Research Working Paper. The World Bank Development Research Group Trade. Available: http://www.agirn.org/documents/Infrastructure_Geo_Disadvantage_1999.pdf [January 24, 2009] OSHILOYA, Temitope. W. 2008. Nigeria in the global Economy: Nigeria’s Integration into the Economy is below its Potential. Business Economics, [Online] Available: http://www.accessmylibrary.com/coms2/summary_0286-34644750_ITM [January 25, 2009]. http://www.sacu.int/docs/pr/2007/pr0618a.pdf - The Africa competitiveness report Africa’s Debt Burden: Who Suffers? Who Benefits?.1997. Africa: Africa World Press Guide. [Online]Available: http://worldviews.igc.org/awpguide/debt.html [January 26, 2009]. QUATTARA, Alassana. D. 1997. The Challenges of Globalization for Africa. IMF and World Economic Forum. Harare. [Online] Available: http://www.imf.org/external/np/speeches/1997/052197.htm [January 26, 2009] Read More