International Trade in Africa - Essay Example

International Trade and Macroeconomic Policies Africa’s trade with other countries can be traced in the first millennium AD, when “the Axumite Kingdom had a prosperous trade empire on the eastern horn, where the modern states of Ethiopia and Eritrea lie” (Wikimedia Foundation, Inc.). The trading partners of the Axum reached as far as Byzantine Empire, India and China while it is “the profit from salt and gold that created powerful empires from western Sahel inlucding the Kingdom of Ghana and the Mali and Kanem-Bornu Empire. (Wikimedia Foundation, Inc.). Africa has been open to international trade even during its early colonization by the Greeks. International trade is a common policy of an open economy. This might come in goods and services trade or in shipping of capital to and from the country. International trade is one of the highly talked about macroeconomic policies of the governments in the world. Almost all the capitalist countries open their goods and services to trade especially with the creation of the international agencies such as World Trade Organization and the World Bank. Opening the country to the rest of the world also means having an ally in the form of aids in case of calamities or wars. Trade talks can be bilateral or multilateral. At the present, the vast of its international relation of Africa is through foreign aid. The continent has opened its door to foreign aids especially after its independence from Europe. “Overseas development aid has played a much greater role in Africa than in any other part of the world” (Mkandawire). This paper wishes to trace if the existence of a trade deficit (having higher imports than exports) influenced the conduct of macroeconomic policies in African countries such as Tanzania. If so, in what ways has the deficit influenced macroeconomic policies? “In the broadest sense, macroeconomic policy is directly concerned with the aims of growth, distribution and sustainability that have been recognised as overriding national objectives” (National Development Strategy). “It is a tool for changing the economic positions of countries in the wordl economy” (Wuyts). International trade is one of the most important macroeconomic decision of a country as it affects its exchange rate, the interest rate and other aspects of the economy. TheAfrican economies was tagged as “uncommonly open” because of a high ratio of trade relative to the Gross Domestic Product (Wuyts). In the year 2000, this number reached to more than 60% of the GDP in Sub-Saharan Africa. An important study then is to link trade to macroeconomic policies. This is exatcly the goal of this paper, taking a specific look at the African economies especially the country of Tanzania. “Over the period 1987–2001, Tanzania has managed to use, for consumption or investment, more goods and services than it has produced; it did so by importing more than it exported” (Wuyts). In the year 2000, Tanzania’s export was 14.4% of its GDP while its imports reached 22.7% of the country’s GDP. In 2003, the export-import gap widened as registered at 18.3% and 27.4% respectively. This gap continued to increase to 18.6% against 28.9% (Stanley St. Labs). These figures reveal that even in the current years, the gap continues to balloon, even after some macroeconomic changes instilled by the government. “The economic difficulty of sustaining this, and the international and domestic political consequences, have driven economic policy changes” in Tanzania (Wuyts). To examine this clearly and logically, Wuyts has developed a national income accounting section that “trace(s) the role of the trade gap and the problem of its financing in Tanzania” (2004). The general expenditure approach in national income accounting was used to fit this purpose. Normally, the expenditure approach traces GDP from the expenditures for the year of each large sector of the economy, namely; the Household Consumption, Government Consumption, Investment and Next Export (Mankiw). Consumption is spending by households on goods and services, Government spending inludes purchases of goods and services by local, state and federal governments, Investment is the purchase of capital equipment, inventories, and structures, while Net Export is “spending on domestically produced goods by foreigners (export) minus spending on foreign goods by domestic residents (imports)” (Mankiw). This accounting framework is built on the assumption that the country’s spending is equal to its production, taking into account the changes made by net exports. It also reveals that macroeconomics requires the process of aggregating variables (Wuyts). This scheme is proven to be an economical way of seeing the changing pattern of use of resources in relation to total output (Wuyts). In an equation, we can also see the trade gap, that is on Africa’s case the import exceeding the export. The following expression shows the identity: Domestic Absorption + Exports = GDP + Imports Subtracting “Exports on both sides, we arrive at the following equation, Domestic Absorption + Exports – Exports = GDP + Imports – Exports Defining Trade Gap as export minus import, the equation results to Domestic Absorption = GDP + Trade gaps This identity reveals that the higher the Domestic Absorption is relative to the GDP, the higher the trade gap is. Tanzania’s trade deficit is shown in two ways in Table 11.1. First is the series of years wherein import figure is greater than export figure; 26.3% vs. 9% in 1987, 41.5% vs. 24% in 1995 and 24.5% vs. 16% in 2001. The higher figure for domestic absorption (or consumption) than the total GDP also reveals this dillema. The figures for domestic consumption were recorded at 117.3%, 117.5% and 108.5% in 1987, 1995 and 2001 respectively. In percentage tersm, “Tanzanian domestic absorption was slightly more than 17 per cent in excess of GDP in 1987 and 1995, but subsequently declined to about 9 per cent in excess of GDP by 2001” (Wuyts). Evidently, Tanzania is consumming more than it produces and it has to rely on other countries for this additional supply. Since export is lower than import, we consider Tanzania as a country with a trade deficit. Trade deficit is opposite to trade gap. Although they are equal in magnitude, their signs are different. The macroeconomic policies change with relation to the trade gap. After proving the existence of trade gap in Tanzania, we are going to link this event to changes in the macroeconomic policy of the country. Noticeably, in the table provided, the trade gap was reduced over time until the year 2001, but it is also worthwhile to look at the factors that are affected by this decline. Visibly, government consumption was drastically reduced from 16.9 in 1987 to 6.3 in 2001. The investment side was also lowered to 22.1 to 17. The changes in botht he government spending and investments have serious effects to the economy of the country. Government spending is defined by Wuyts as “recurrent expenditure by government on final goods and services used in government departments and public institutions: to keep public administration running, to keep the army functioning, to provide social services and so on” (340). This represents expenditures on education and education administrating agencies which aims to increase literacy and know-how, expenditures on health to boost the health status of the citizens and on military spending which aims to keep the peace and order of the country. Since this spending is limited or reduced, we expect the quality and quantity of these social services to also be reduced. This is usually specifically evidenced by lesser available books in public schools or lesser number of public schools, lesser number of highways, good roads and other infrastructure which facilitates business, and lesser number of public hospitals and free medicines which are about to cater to the needs of the poor thus dampening the health condition of the poor citizens, especially in a poverty-stricken country in Tanzania. The investment side is usually seen as the participation of the private firms and corporation in nation-building which are in the form of capitals such as new machines and equipments, new buildings and other structures that promote business and industrialization. Lower investment is also a possible result of low savings that is supposed to spur growth of country. Practically, low investment results to lesser progress and development. Examining how Tanzania finances its trade deficit will also lead us to specifics about its macroeconomic policies. A basic question that one would ask is how does Tanzania finance the trade gap or the trade deficit? There are various ways in which a coutnry can finance its deficits and these mainly form reliance from other countries, whether in terms of its existing assets such as labor or grants and loans from abroad. Factor payments can be used to financ the trade deficit. Factor payments refer to “are payments for labour, capital or land across national frontiers” such as when “residents of a country work as temporary migrants in foreign countries and remit part of their wages; or a company invests in a venture abroad and repatriates part of the profits earned there; or an investor receives interest payments on financial capital held abroad; or, finally, residents of a country own land in other countries and receive rent payments from abroad” (Wuyts). On the other hand, “Transfer payments are unilateral payments which are not made in return for factors of production” which includes “money sent to elderly parents by their children permanently resident abroad” (Wuyts). If these two are not enough to offset the deficit, “a country can finance such a deficit either by drawing on its official foreign exchange reserves or through the balance on capital account transactions” although some countries like Tanzania can have few foreign exchange reserves (Wuyts). In a country with unstable economy, capital account transactions which include public or private investment from abroad can also be limited. The country then resorts primarily to Foreign aid loans at concessionary terms. “We find that two items in particular allow Tanzania to import more than it exports: grants and loans obtained through foreign aid” which comes in two ways “the former are transfer payments, while the latter are capital transactions” (Wuyts). Examining the effect of the trade deficit further will make someone look at its link with investment and growth. “Domestic savings are defined as the difference between a country’s GDP and its private and public consumption of resources” (Wuyts). It is then equal to the part of the income not used for consumption and therefore available to finance investment. With the national accounting table, we can see that since domestic savings is GDp minus consumption, we arrive at the following identities, Domestic Savings + Import = Investment + Export Re-arranging the terms, we get, Domestic Savings + Imports - exports = Investment Since trade gap is defined as Imports minus Exports, we get the equation, Domestic Savings + Trade gap = Investment This macroeconomic identity has immense policy implications. If trade gap would be zero, domestic savings would be equal to investment. This means that all domestic investments are financed by local governments and citizens. If the trade gap is positive, it means that part of the country’s investment-and therefore growth is heavily dependent on foreign aid. This then has a problematic economic and political consequences. One of Tanzania’s economic scholar saw the high foreign relations as a window to foreign direct investment and growth. According to him, the open-door policy to foreign investment would facilitate easier flow of foreign private capital to Tanzania. He believes that this will be the driver of growth. It was the Arusha Declaration that signalled a new era in Tanzanian economy. It has three main aims pertaining to development which are highly linked to having large trade gaps and dependent on foreign grants and loans. These aims were; “ to increase industrial growth through direct state investment in industry, to promote widespread and egalitarian access to state-provided social services and to promote collective and cooperative agricultural development” (Wuyts). Aid was seen as a way of boosting investment. This gave the reason for Tanzanian government to focus its macroeconomic policy on investment planning. The Tanzania’s Basic Industry Strategy was formulated to “to step up the process of import substituting industrialization by investing in those industries with the most linkages to the rest of the economy – especially linkages with agriculture (for example, fertilizers), between industries (for example, supplying industrial inputs), and with final demand for mass consumption goods” (Wuyts). “Tanzanian government would draw up development plans and on that basis articulate a ‘shopping list’ of investment projects” which heavily depended on foreign aid (Wuyts). Although there were foreign donors to the planned investment, it still necessitated local capitals. This local expenditure usually comes from the government or a public sector enterprise. Since the demand for construction materials, labour, rental of buildings and other things necessary for the construction of new investments increases, inflation became inevitable. More specifically, inflation resulted from the need of Tanzanian government to borrow money from the Central Bank. This is because as the influx of foreign aids furthered, the Tanzanian government had to complement it with local expenditure coming from domestic savings. Since the savings rate especially private savings was low in such a small country as Tanzania, the government had to resort to borrowing from the Central Bank. The increase in money supply resulted to more money in circulation. This in turn caused increases in demand which also boosted the price up. Worse, due to this severe increase in prices, Tanzanian government was forced to impose “price controls and rationed basic goods such as food and soap. The inflation has resulted to a drop in people’s real income which drove total consumption down equating to an economic crisis in the early 1980’s. “Moreover, ‘aid fatigue’ set in as donors became disenchanted with the economic policies of the government” and the “declining aid drove down the investment rate and the savings rate” (Wuyts). One of the concerns in macroeconomic policy is the exchange rate. This is much affected by the trade status of the country, wherein we say that as the demand for domestic goods and services (exports) and domestic capital increases the domestic currency is expected to evaluate or appreciate while the opposite will result to devaluation od depreciation of the domestic currency. The devaluation and evaluation terms are used if the exchange rate regime used is the fixed exchange rate while the depreciation and appreciaion terms are used when it is the floating exchange rate that is being used. Tanzania used to have a fixed exchange rate, which means that the exhange rate is chosen by the government as an element of macroeconomic policy. Government’s apply the fixed exchange rate regime because it is relatively more stable and it is used to protect domestic residents from high-prices of imports. If a currency is evaluated, it would require less of the domestic currecy to buy foreign currency which means that locals require less of the currency to purchase imports. This is most probably the strategy of Tanzania given the mammoth number of imports compared to exports. However, in the second half of the 1980’s the Tanzanian Shilling was devalued. This usually happens when the government cannot sustain the existing exchange rate anymore. In the 1990’s they were forced to resort to the floating exchange rate regime, in which “exchange rates vary as a result of changing supply and demand on foreign exchange markets” which is therefore deemed to reveal the true value of the currency (Wuyts). The effect of devaluation of currency is actually positive in terms of exports. This makes domestic products appear relatively cheaper compared to products from other countries and this will boost exports. However, it should be noted that “for the intended effects of structural adjustment policies to occur, the real exchange rate must rise (and hence the shilling must devalue in real terms) – not just the nominal exchange rate. Chapter 10 of the book discusses about sovereignty and authority. Sovereignty was defined as a state’s claim to authority: its claim to a right to rule rooted in recognition of that right by the state’s own citizens and by other states (Mkandawire). Autonomy, on the other hand, “is about the state’s ability to rule: its ability to make independent decisions such as policy choices around economic development strategy of the type just discussed so that while the autonomy of a state may require sovereignty – it must have the recognized right to exercise its authority – sovereignty is not a sufficient condition for autonomous action” (Mkandawire). Being much dependent on foreign grants and loans, “the sovereignty of the Tanzanian state has been redefined and reconstructed through the actions of aid donors and their relationships with internal political forces in Tanzania, between 1980 and 2000” (Wangwe). “From the mid 1980s the influence of the international donors grew to the extent that it was they, not Tanzanians, who were setting the development agenda” (Wangwe). Over-all we observed that the trade deficit has far-reaching effect to the Tanzanian government, not just economically but also politically. The trade deficit dampened the country’s savings which is supposed to fuel investment and growth. Instead, it made the government reduce on its spending resulting to lesser amount of social services. To achieve the desired growth, Tanzania resorted to channelling of funds from foreign countries in the form of aid and loan grants. Since this investment should be coupled with domestic expenditure, it still necessitated considerable amount of local savings. Knowing that the country has failed to save, the government was forced to borrow money from the Central Bank thereby increasing the supply of money in the economy. This then resulted to inflation and economic crisis. With this precarious economic climate foreign donors decided to quit and withdraw investments from Tanzania making the matter worse. The macroeconomic policy also included liberalization of the exchange rate, a shift to the floating exchange rate regime. The biggest impact of the trade deficit however was political rather than economic. It is the apparent doubt of whether the country achieves sovereignty and autonomy that perceptibly hurts Tanzania the most. Works Cited Mankiw, N. Gregory. Principles of Macroeconomics. Orlando, Florida: The Dryden Press, 1998. Mkandawire, Thandika. "Can Africa have developmental states?" Simon Bromley, Maureen Mckintosh, William Brown,Marc Wuyts. Making The International: Economic Interdependence and Political Order. London: Pulto Press, 2004. 292. National Development Strategy. 14 October 1996. http://www.guyana.org. 27 April 2009 . Stanley St. Labs. http://www.economywatch.com. 27 April 2009 . Wangwe, Samuel. "The politics of autonomy and sovereignty:Tanzanias aid relationship." Simon Bromley, Maurren Mackintosh, William Brown, Marc Wuyts. Making the International: Economic Interdependence and Political Order. London: Pluto Press, 2004. 379. Wikimedia Foundation, Inc. http://en.wikipedia.org. 24 March 2009. 27 April 2009 . Wuyts, Marc. "Marcoeconomic Policy and Trade Integration." Simon Bromley, Maureen Mackintosh, William Brown, Marc Wuyts. Making The International:Economic Interdependence and Political Order. London: Pluto Press, 2004. 331-376. Read More