Tag Archives: WTO

Brexit risks for Africa are overblown

By Rafiq Raji, PhD

For Africa and the United Kingdom, I choose to be optimistic.

Scare-mongering can stop now, the vote is over
I do not share the pessimism expressed by some on the potential negative impact of Brexit – term used to refer to the now almost certain exit of the United Kingdom from the European Union – on African countries. It is important to distinguish between short-term and long-term impacts. Credible risks – if they materialize – are likely short-term. Once market participants get over the shock, things should get back to normal. Market participants were surprised by Brexit. UK pollsters got it wrong. Again. Considering the margin by which the ‘leave’ side won, it is hard to believe that robust polling would have showed a ‘too close to call’ reading. Brexit-induced market volatility may pass sooner than people think, in my view. That is, after market participants get over the angst of being blind-sided. The South African Rand – the worst-hit African currency in the aftermath of the Brexit vote – is typically vulnerable when there are market jitters. And when negative domestic events – bizarrely intermittent – don’t cause some trouble, happenings in distant lands – a la Brexit – almost always come about to disrupt things. But if a long-term view is taken, it is not likely that increased sovereignty for the United Kingdom would be disadvantageous for African countries, the longstanding primary focus of UK foreign policy – or influence. There is ample time for both sides to calmly negotiate, once emotions become subdued and rationality takes over.

Brexit is an opportunity to rebalance the UK economy
Former Rolls Royce – a British carmaker – chief executive, John Rose, wrote once of the unbalanced ‘post-industrial’ UK economy for The Economist. In the article (“Made in Britain”), he recalls how an eminent British industrialist at a conference he was attending was introduced to a German audience as follows: “Our speaker is now going to explain how you run an economy based on real estate.” Sir John Rose made a case then for more British high value-added manufacturing. Brexit is an opportunity for such issues to get the type of attention they deserve. Also, even as Brexit negotiations could potentially get nasty, London’s place as a global financial centre in continental Europe would be hard to replace in a hurry. Still, some global banks have started to make contingency plans, reportedly transferring some jobs to Dublin, Paris, and Frankfurt. They are probably being hasty. It is still possible that the UK would be allowed some form of nuanced access to the single EU market for some services, probably just enough for financial institutions to be able to continue doing their EU-related business from London. So, upcoming Brexit negotiations may still tilt in banks’ favour. The view that a hard EU stance would be a crucial signaling tactic to dissuade other potential ‘Brexiters’ in the EU is short-sighted. I think the EU would be pragmatic.

Domestic factors matter more for African giants
It is the actions of authorities in Nigeria and South Africa – Africa’s largest economies – that matter more for investors. Structural imbalances in both economies have nothing to do with Brexit. And even portfolio inflows into these countries – expected by some to slow due to volatility and uncertainty in global markets owing to Brexit – would depend on the actions of their monetary authorities. Both countries clearly need to remain on a policy tightening path. And in the Nigerian case, if authorities follow through on ongoing structural reforms, the investment case for that country is hard to refute. Morever, capital seeking African assets are now more diversified. Long-term investment plays for asset classes like infrastructure are likely to continue unabated, in my view. The African Development Bank, Africa Finance Corporation and other African infrastucture or development-focused financial institutions are not going to cut back plans just because the UK decided it wanted more sovereignty over its own affairs. Furthermore, fears about a potential reduction in African diaspora remittances may be misplaced. Actually, I think Africans – who now see an increasingly insular West – may begin to build closer ties with their home countries.

Recessions don’t last forever
UK recession fears are the main argument behind negative African Brexit impact fears. Pray tell, do recessions last forever? The key question is whether Brexit would have a long-term negative impact on African economies. It is hardly robust to base an assessment of this on a potential UK recession; which would likely pass – if it happens – within the two years or so that Brexit negotiations and modalities are expected to be completed. Fears that Britons would buy less Kenyan flowers – expressed no less by the Kenya Flower Council – seem defeatist to me. Say that happens during a UK recession that everyone seems to think would occur this year, what about afterwards? I think things would either go back to normal or improve. Morever, there are other markets that could be explored.

British outwardness was never about the EU
There is a need to distinguish between the increasing insularity of some Britons – mostly the white, less educated and older ones, borne out of fears about immigration, and the likely rational decision-making of UK authorities. Whoever succeeds David Cameron as prime minister is not likely to jeopardize the advantages that the UK currently enjoys in global trade and finance. Now free from its EU obligations, it would likely ramp up its foreign policy reach through The Commonwealth – a multinational association of fifty-three member states formally under British colonization, which it controls. A likely renewed British Commonwealth focus would be an additional positive for African countries’ trade. Thus, I am sceptical of the view that the UK would need to renegotiate each and every trade deal it agreed to under the aegis of the EU, especially those with African countries. Brexiters are not dumb. A simple conversion would do.

Also published in my BusinessDay newspaper back-page column. See link viz. http://businessdayonline.com/2016/06/brexit-risks-for-africa-are-overblown/

Africa is not yet ready for free trade #EUAfrica Summit

A lot has been written on why the EU’s open regionalism is really another scramble for Africa. It is curious that none of the stated objectives of the Cotonou Agreement mentions explicitly how the EU would provide assistance to help resolve the supply-side constraints that Africa faces. Especially as it helped former Soviet countries in this regard. These constraints (rules of origin, sanitory and phyto-sanitary standards, poor transport, lack of access to telecommunication infrastructure, low labour productivity, lack of economies of scale, absence of functioning capital markets) make it premature for full trade liberalization in Africa. African countries were and still remain largely unable to benefit from free trade and would probably remain so for a while. The EU and Africa are unequal partners. That is a fact. However, what is heartbreaking is how much African leaders underestimate the amount of leverage they have (and in fact, some are complicit in the distorted arrangement). The EU, albeit a superior negotiating party, needs Africa. It needs Africa’s markets for its goods and services. But it seems some African leaders just find EU aid (and market access for some) so irresistible. Of course, there have been suggestions in the literature that some of them were essentially “persuaded” to accede to EPAs. The literature is awash with examples of the devastating consequences of EU and US dumping on numerous African economies. So, there is no point stressing that angle of the argument.

Although the Cotonou Agreement is a marked improvement from the Lome and Yaounde Conventions {exports to the EU from African, Carribean and Pacific Countries (ACP) actually declined from c. 7% to c. 3% during the period (1978-2002) of the Lome Conventions (1975-2000)}, it is a sub-optimal deal for Africa. The stated objectives (poverty reduction, institutionalisation of democratic principles, respect for the rule of law and human rights, good governance, peace building, conflict prevention and regional integration) are all very well. They, however, pale in comparison to what Africa really needs: Industrialization. African countries need to move up the value chain of industries where their resources are major inputs. Job creation is what would accelerate poverty reduction in Africa. By one’s reckoning, labour-intensive manufacturing offers the best chance of achieving this; at least for now. Not cash transfers or dividend payments like some very admirable and well-intentioned economists at the World Bank/IMF are considering.

Historically, countries that have succeeded in achieving industrialization have tended not to abide by the stated objectives of the Cotonou Agreement; at least during the early stages of their evolution. These countries had commonalities of either war, strong single-party or monarchical/military rulership during the early stages of their industrial evolution. There are a few exceptions, of course. Also, it turns out the African countries that have made some (albeit very little) effort at pushing for more value addition of their resources before exports turn out to be longstanding rulers. The irony is that although they likely made these policy moves for political gain, they were able to do it (in spite of the potential backlash from developed nations) largely because they were African big men.

Truth be said, it is not the responsibility of the EU, US or other developed countries to watch out for the interests of African countries. Leaders of African countries must be butts of jokes in Paris, Brussels, London, and Washington when they visit these capitals with all the pomp and ceremony walking with puffed up pride just to show how independent they really are. Well, if you are really independent, don’t ask me not to negotiate to maximize my interests. I mean, it’s silly. It must be said, however, that there are lots of people in these capitals who are genuinely eager and desirous to see Africa develop. They wear their frustrations on the grey hair that some have developed through decades of hard work fighting and campaigning on African issues. Progress has been slow.

If the EU really wants to help Africa, it should make tangible commitments towards helping these countries resolve the supply constraints that hold them back from enjoying the benefits of free trade. That is an irrational request, however. It is foolhardy to expect the EU to diminish the advantage it has. Trade with Africa may not be attractive otherwise. The task thus falls on African leaders. The beginning of the solution lies not with boycotts and posturing; but to protect selected industries and insist on minimum value addition to minerals and other natural resources before exports. If a country has crude oil, it should insist that the MNOCs build refineries (Uganda’s policy in this regard is exemplary). If you produce copper; well there are many uses for copper. How about producing some of the finished goods in situ. The list is endless; iron-ore, coffee, diamonds, gold, cocoa, etc. But of course, these policies should be backed by resolving the logistics nightmare (and numerous other issues) on the continent.

Thus, as African and EU leaders start their two-day trade summit today in Brussels, let our big men and women bear at the back of their minds that it is not too late to re-negotiate. The solution does not require any complicated legalese. It is simple. Import liberalisation for African countries (as early as 2015) is premature. African countries should protect selected markets and ensure that trade and FDI revolves around value-addition. The postponement of the signing of EPAs by some African regional blocs (and the outright refusal of some African countries to accede to one) should be used as an opportunity to revisit some of the terms in the Cotonou Agreement. Every and any Agreement, no matter how strong or binding, can be renegotiated. African countries should see this Summit as an opportunity to start the process of reviewing the EPAs and in fact every facet of the EU-Africa economic arrangement. If none of the EPAs are signed and no African (or ACP) country makes any unilateral arrangement, the EU would have no choice but to re-negotiate. African (or ACP) leaders have more leverage than they realise. They should use it!