Can Africa Make an Export Push?

Can Africa Make an Export Push? Topic 2: Some New Developments in International Trade National Graduate Institute For Policy Studies IDPTP Fall 2012 John Page

The Challenge of Breaking In • New entrants to global markets are competing with Asia • A window of opportunity? • Rising costs in Asia • Growing domestic demand in Asia • Industry no longer need smokestacks • But Africa is beginning from a really low base

“Out of Africa”:Manufacturing export capacity has moved out Decomposition of Changes in Manufactured Exports, 1985-2005 • Notes:[x] Change in Export intensity. [x] Change in global production [x]Change in global demand • Africa data excludes South Africa. • Source: UNIDO industrial development database (2008). Author’s calculations

There’s a big export gap…

And It’s not closing…

Can Africa Break In? • A “naive” Ricardian view: • Productivity is too low and wages are too high • What does this do to unit labor costs? • Are there any “easy fixes” • But what would a “structuralist” interested in firms say to this? • Sector and firm specificity are important determinants of comparative advantage • And what do the data show?

What do we know about labor productivity in Africa?It’s not “exceptionally” lowLabor productivity per worker

Can Africa Break In?Trade in Tasks • There is the potential for task based exports • Imported intermediates grew from 20 percent of total intermediate inputs 1986-1990to almost 50 percent in 1996-2000. • A chance for a foothold, but many low wage economies have not attracted task-based production

Intermediates in Production

Unfortunately… • Most imported intermediates were destined for domestic production • A brief surge of final assembly exports has faltered • Overseas Chinese investment in Lesotho, Madagascar and Swaziland under AGOA • US imports of clothing from AGOA countries increased from $730 million in 2000 to $1755 million in 2004 • A severe decline occurred with the end of the MFA • A ray of hope? Not all task based production has exited: garment exports still remained above 2000 levels.

Policies for Export Development • Conventional Wisdom: reform trade policy and fix the “investment climate” • Trade policy reform • Regulatory reform • Infrastructure and skills • Less Conventional Wisdom: Africa needs an “export push” • Tilting incentives toward exporters • Removing the obstacles to export

Why Do Economists Always Focus Fist on Trade Policy Reforms? • Import tariffs tax consumers, but they also tax exporters! • A simple way to see this is through “effective protection”: • [Value Added at Domestic Prices/Value Added at World Prices] – 1 • Why the focus on “value added”? • Why the use of world prices

What do we learn from effective protection? • As Bill Clinton would say: “it’s arithmetic”. • A key assumption: PD = PW (1 + t) R • Where t is the tariff rate and R is the exchange rate • Three simple examples (with R=1): • Making an import substitute with a 20 % duty and 25 % value added. [1.20-0.75]/[1.0-0.75] -1 = 80 % protection to value added. • An exporter of the same product with no duty and 25% value added. [1.0-0.75]/[1.0-0.75] -1 = 0 % protection to value added. • An exporter who pays 20 percent duty on imported inputs (and gets no subsidy to output) with 25% value added. [1.0-(0.75x1.20)]/[1.0-0.75] -1 = -60 % protection to value added • Which business would you rather be in?

But is trade policy the villain of the piece? • Since the “structural adjustment” period tariffs and non trade barriers for Africa have come down to levels similar to other developing countries • There is little difference between effective protection rates in Africa and Asia • But a big difference in export performance! • So, trade policy is important but not the only part of the story…

Priorities for Regulatory Reform • Port transit times are longand delays common (and interest groups may not want a solution!) • Customs delays on both imported inputs and exports are significantly longer for African economies than for Asian competitors. • Export procedures—including certificates of origin, quality and sanitary certification—can are burdensome. • Duty drawback, tariff exemption and VAT reimbursement schemes are often complex and poorly administered • Perishable exports (horticulture/cut flowers) are particularly sensitive to delays in shipping caused by inefficient or corrupt inspection procedures at airports • The aviation industry is heavily protected resulting in high air freight costs and limiting tourism

Closing the infrastructure gap • Firm level studies in Africa highlight infrastructure deficiencies as a significant constraint • Africa lags at least 20 percentage points behind the average for low income countries on almost all major infrastructure measures • Donors are part of the problem: ODA for economic infrastructure has declined as a share of aid since the 1970s • But if infrastructure cannot be built everywhere at the same time, where should it be focused?

Closing the skills gap • Between 1990 and 2005: • East Asia secondary enrollment rates increased by 21 percentage points, Africa 7. • East Asia tertiary enrollment rates increased by 13 percentage points; Africa 1 • The skills gap poses a major constraint to export development • Higher education is linked to export performance (especially for African business owners) • It is also linked to export sophistication • Again, the donors are part of the problem: A new education MDG is needed.

Tilting Incentives to Exporters • If there is “something special” about exports (learning by exporting) there is a good public policy argument for subsidizing exports. • What’s special? • All exports and exporters (vacasturisticas)? • What would be the “optimal” subsidy? • Isn’t tilting toward exporters just trying to “pick winners”?

Tilting Incentives to Exporters • The debate about “picking winners” misses the point: governments make industrial policy on a daily basis via the budget, regulations and trade policy. • The issue is: do these decisions have a strategic focus? • In Africa they frequently do not. • A first step: focus “investment climate” reforms on export promotion

Tilting Incentives to Exporters • Export subsidies • They worked in East Asia (color TVs in Korea) • But are a no, no under the WTO • Exchange Rate Protection • Maintaining an undervalued exchange rate to promote tradables • Macro policy tools are available (excess of saving over investment) • Forcing saving in poor societies has welfare costs • And rich countries may retaliate • Preferences for African manufactures • Simplify and unify EU and US preference systems • Extend preferences to Asia under WTO

Reducing “Indirect Costs” • Efficient African enterprises have factory floor costs comparable to Chinese and Indian firms for some product lines, such as garments. • They become less competitive because of higher indirect business costs, • In China indirect costs are about 8 percent of total costs; • In Africa they are 18–35 percent.

Reducing “Indirect Costs” • Why do indirect costs matter so much • In task trade low levels of value added amplify the impact of “trade friction” costs • To see this we can use the concept of effective protection again

The impact of trade friction costs • Trade friction costs are like a “tax” between the factory gate and the border • Consider an assembly firm with 20 % value added: • China – trade friction cost 5 % of FOB price: • ERP = [.95 -.8] / [1-.8] -1 = -.25 % • Africa - trade friction cost 15 % of FOB price: • ERP = [.85 -.8]/[1- .8] -1 = -.75 % • Where would you rather do business?

Improving Trade Logistics • Trade logistics covers shipping, handling and distribution. • African countries have an average ranking of 121 out of 155 countries in the recently compiled World Bank (2011) Trade Logistics Index. • Only three of Africa’s low income economies rank in the top half of the global distribution. • Two thirds of African countries are in the bottom third of the distribution, • And 36 percent are in the bottom quintile.

Improving Trade Logistics • The region ranks especially badly in terms of trade related infrastructure • Poorly functioning institutions and uncompetitive logistics markets also increase trade friction costs. • And so does being landlocked • Recently some donors – notably JICA and the World Bank – have begun to focus on trade logistics, but more needs to be done

Strengthening regional integration • Why regional integration matters for Africa: • Small countries • The disadvantages of the landlocked • The failure of collective action • A lot of talk but not much action • The AU initiative • Failures of regional infrastructure • The East African Union, a ray of light?

Strengthening regional integration • A new approach to regional integration • African governments will need to cede sovereignty • Start “small” and get things to work (power grids; transit corridors) • RECs need to take the lead on regional issues • Development partners must step up • Aid bureaucracies find regional investments difficult • Regional Economic Communities are weak • Cross-border projects are too few and too slow • Link trade preferences with regional integration

Can Africa Make an Export Push?