Africa’s New Janus-Like Trade Posture

It wasn’t all that long ago when virtually all of sub-Saharan Africa’s exports were destined for Europe and North America.

But the winds of Africa’s trade have shifted over the past decade. There has been a massive reorientation towards other developing countries, in particular China and India.

Like Janus, the Roman god, Africa’s trade is now, as it were, facing both east and west.

Our latest Regional Economic Outlook for sub-Saharan Africa looks closely at these developments and its policy implications.

In addition to the well-known gains from international trade, Africa’s trade reorientation is also beneficial because it has broadened the region’s export base and linked Africa more strongly to rapidly growing parts of the global economy. These changes will help reduce the volatility of exports and improve prospects for robust economic growth in Africa.

Transitions

The reorientation of Africa’s trade has been incredibly rapid. In little more than ten years,

Africa’s exports to Europe, North America, and Japan—what I will call traditional trade partners—have dropped from three-quarters to just one-half of the region’s total exports. This change in trading patterns is much more dramatic than we have seen in other developing regions, including the Middle East and North Africa or Latin America.

China’s rise as an economic force is only part of the story. Exports to other developing countries have also increased sharply.

  • Today 17 percent of the region’s exports are headed to China, up from negligible levels in 2000.
  • But other emerging markets—most notably, India and Brazil—are now the destination for 20 percent of Africa’s exports, double what they were a decade ago.
  • There has also been striking growth of trade between countries in sub-Saharan Africa, now accounting for 14 percent of the region’s total exports.

New beginnings

Exports to new trade partners have thus been an increasingly important engine of growth for sub-Saharan Africa. Exports to non-traditional partners accounted for half of the region’s total export growth between 1990 and 2000, and this share rose higher still – to two-thirds – during 2005-10. This has been incredibly important given the economic malaise in the advanced economies during the global financial crisis—exports to non-traditional partners declined considerably less than exports to traditional partners.

Mirroring trade flows, financial linkages with emerging partners have also strengthened significantly in recent years. In 2008, for example, some 16 percent of all foreign direct investment in sub-Saharan Africa was from China, compared to around 2 percent in the early 2000s.

When we look at what kinds of products are driving the re-orientation of exports, we find a nuanced picture – and one that presents both opportunities and challenges to Africa. Exports to the three large emerging markets (Brazil, China, and India) are dominated by natural resources, particularly oil. Indeed, by 2008, oil accounted for some 70 percent of exports to the three countries. By contrast, natural resources represent a considerably smaller share of trade with traditional partners and other developing countries, and an even smaller part of trade within the region. For example, manufactured exports account for 10 percent of intraregional exports, compared to around 5 percent of exports to Brazil, China and India.

Sub-Saharan African can thereby benefit from the shift in the sources of global growth towards emerging and developing countries. Economic growth among these emerging new economic powerhouses has been particularly resource intensive. For Africa’s commodity exporters, the demand for their resources and the corresponding upward pressure on commodity prices, has contributed to higher African income.

But, just as Janus is a two-faced god, this is not all good news. Higher commodity prices tend to invite even more investment in natural resource output, further intensifying the region’s already heavy dependence on such exports. One problem with growth that is heavily dominated by resource production is that it tends to be much less labor-intensive and with fewer direct linkages with other parts of the economy.

Pleased as I am that sub-Saharan African exporters have been quick to take advantage of the new engines of global growth, I am also mindful of the potential drawbacks. There are three main things that policymakers in the region could do to benefit more from this new beginning:

  • First, countries need to improve how they manage natural resource revenues: good examples of this would be channeling resource revenues to high return infrastructure investments, which would help to raise productivity in agriculture and others sectors, and using these revenues to strengthen education and health care systems.
  • Second, strengthening economic flexibility and safety nets can help, particularly important where imports may displace domestic production. For example, it would be worth considering retraining programs for affected workers and facilitating access to finance for companies to shift to more competitive sectors.
  • Third, African countries need to negotiate better market access in non-traditional trade partners, which tend to have much higher trade barriers.

In summary, then, the reorientation of sub-Saharan Africa’s exports towards developing countries offers the prospect of stronger and less volatile export growth. But for the region to take full advantage of this opportunity and address the challenges it brings, African governments play a vital role and need to rise to the task, particularly through policies that support broader-based and more inclusive growth.

This post originally appeared at iMFdirect and is reproduced with permission.