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Africa’s Free Trade Hangover
Why African leaders have growing doubts about the virtues of free trade.
After 30 years in which the virtues of the free market went largely unchallenged, a quiet revolution is making its way across Africa. Many governments are increasingly ready to toss out the orthodoxy and rethink the importance of the role of the state in national development. African leaders are worrying that the free trade model has left their economies overly dependent on raw commodity exports and that growth has often produced very few higher paid manufacturing jobs and has been accompanied by rising inequality.
Now, from Nigeria to South Africa to Uganda, there are strong domestic movements increasingly mobilizing against free trade deals. Leaders and activists are scorning bilateral investment treaties with rich countries, focusing instead on regional integration and formulating more serious industrialization strategies. Top trade ministers and central bank governors are openly pondering the benefits of increased trade protection, public development banks and more expansionary monetary policies — steps that would have been considered heresies just a decade ago.
This might seem a surprising conclusion given recent news in the region. On July 10, after 11 years of intense negotiations, the 15 nations of the Economic Community of West African States (ECOWAS) finally agreed to sign an Economic Partnership Agreement (EPA) with the EU. It will allow the African countries 100 percent access to the European market, except for rice and sugar, while the EU countries will have 75 percent access to their markets over a 20-year period. For many observers, the concluding of this long-awaited deal will simply come as a further sign of "business as usual." But a closer look shows a broader uneasiness building across the continent.
In fact, the EPA faced serious opposition from a number of quarters, leaving the outcome in doubt as late as March, when Nigeria came out against it. Then, several other ECOWAS states followed Nigeria’s example in April. The EU had to apply serious pressure in order to get its African partners to sign. Those measures included threats to cut off existing preferential market access for ECOWAS members that are dependent on selling their agricultural commodities to Europe, such as Ghana and Ivory Coast.
Many, including the Africa Progress Panel led by former U.N. Secretary General Kofi Annan, have long worried that a EU-ECOWAS deal could hinder the region’s efforts to industrialize and build its own manufacturing base if African markets are flooded with European goods. Others point out that the deal threatens regional economic integration. These groups are now calling on national parliaments not to ratify the agreement.
There is similar opposition to trade deals with industrialized nations elsewhere in Africa and the developing world. At the World Trade Organization (WTO) talks, African countries have joined with the BRICS and others to oppose further negotiations because they increasingly see the WTO game as rigged: After all countries agree to lower formal tariffs and quotas at the border, the rich countries use a host of other expensive and sophisticated "behind-the-border" tricks called non-tariff barriers (product quality controls, sanitary and phytosanitary requirements, rules of origin, etc.) to, in effect, continue blocking imports from developing countries. Few developing countries have the capacity to do the same to imports from rich countries, so in practice, only one side actually liberalizes.
The free market approach also blocks developing countries from using a host of government measures to build up domestic industries over time, such as trade protection, subsidized commercial credit, tax incentives, and public support for research and development. Developing countries in the U.N. General Assembly and elsewhere are criticizing their loss of "policy space," their legal rights to adopt industrial policies in the future, and blame this loss of space for the failure of African countries to develop successfully. Rich countries used various forms of these during their own periods of industrialization, but such "state intervention" is now deemed contrary to the free market approach. Decades of IMF and World Bank loan conditions and WTO membership requirements increasingly outlaw the use of these industrial policies.
Working together, the coalition of developing countries and the powerful BRICS has managed to block nearly all of the rich countries’ consensus agreements at the WTO level. Stymied, rich countries are now resorting to smaller regional and bilateral free trade agreements and bilateral investment treaties (BITs) to press developing countries to liberalize their economies and give up even more of their rights to implement industrial policies over the long-term — in return for being allowed to export more of their primary commodities to wealthy markets today. But many in Africa are tired of only exporting raw materials. As Nkosazana Clarice Dlamini-Zuma, chairperson of the African Union Commission, put it: "Industrialization is not a luxury for Africa, but a necessity for its long-term survival."
In recent years, this viewpoint has been expressed at the highest levels of annual trade and finance ministry meetings and on the top of the policy agenda for regional institutions, such as the African Union, the United Nations Economic Commission for Africa, and the African Development Bank. The debate has moved away from asking if developing countries should adopt industrial policies toward asking how best to implement them, as demonstrated by Nigeria in February when it launched two major new programs to boost manufacturing and national economic development.
The swelling backlash against the free trade approach has also extended to attitudes toward foreign direct investment (FDI) and BITs. Many developing countries now reject the latter as interfering with their domestic laws and regulations and compelling them to take disputes with foreign investors out of their national courts and into private international tribunals.
Countries such as Ecuador and Venezuela have terminated their previous BITs over such concerns. India-U.S. talks about an agreement have bogged down over the dispute-settlement mechanism. And now Brazil, notable for its refusal to negotiate any BITs, is drafting a model for FDI treaties that may serve as an alternative template for developing countries. Accepting the frameworks put forward by negotiators from rich countries will no longer be the only option.
Most dramatically, South Africa declared last November that it would no longer sign any further BITs based on the conclusions of a 3-year review. (Ironically, it found that, in any case, South Africa receives more FDI from countries with which it does not have BITs than from those with which it does.)
South Africa’s BIT review astutely noted a key insight that had long been understood by all of the rich countries: that benefits to host countries from FDI are not automatic, and realizing benefits requires regulations that balance effective protection of investors’ rights with other measures that ensure FDI "supports national development, establishes beneficial linkages to the national economy, augments domestic financial resources, fosters enterprise development, and enhances the technology, skill, and knowledge base of the economy." Therefore, there is a growing sense that signing BITs and free trade agreements that seek to remove such regulations may not be the best way to go. Similarly, in June, Uganda announced it would no longer sign double-taxation avoidance agreements until a new framework can be drafted to ensure that such agreements support the country’s interests, preventing their abuse through capital flight or tax evasion.
Other direct challenges to free market norms on monetary and financial policy are also being openly discussed. In a radical departure from the standard IMF view, the executive secretary of the Economic Commission for Africa, Carlos Lopes, recently told a meeting of African central bank governors that monetary policy must be more consistent with the continent’s structural transformation agenda. In other words, rather than blindly adopting the IMF’s priority of very low inflation, Lopes suggested the central bankers consider more expansionary policies for higher public investment, particularly for supporting their manufacturing sectors — moves that traditionally have set IMF officials’ hair on fire.
The need for effective exchange rate management is also being raised at the highest levels, citing the experiences of China and others who have demonstrated how it can be used to influence competitiveness of goods and services on international markets. And there is also talk of bringing back public development banks to provide the kind of long-term, low-interest commercial credit that big foreign banks will not provide.
Additionally, new research has bolstered the case for Africans to prioritize regional commerce over traditional African-European trade flows, because it shows that Africans buy more manufactured goods from one another than from others. This has important implications for identifying which trading partners can be most helpful in supporting increased manufactured exports. Such data led Stephen Karingi, also of the Economic Commission for Africa, to call for "a rethink of trade and integration priorities" and to urge that policy be led more by an African agenda. Regarding proposed agreements with countries beyond the continent, he said: "We should not hesitate to have our trade agreements, be they with industrialized or emerging economies, be re-designed, re-negotiated, and re-sequenced."
Carlos Lopes, reflecting the new thinking unfolding across Africa, commented: "It’s not a matter of choosing between state and market as if these were two opposites. That discussion is over. Everybody agrees now that there is a role for the state and there is a role for the market. There are regulations that are necessary. The U.S., Europe, Japan have done it. The moment they get in crisis, what do they do? They intervene in the banks and so on."
However, trade negotiators from the industrialized world are still preaching the virtues of free trade to anyone who will listen, and arm-twisting those who won’t. Some of the highest profile deals currently being pursued include regional free trade agreements such as the United States’ proposed Trans-Pacific Partnership Agreement (TPPA), encompassing 12 Pacific Rim nations, the European Union’s EPAs with dozens of developing countries in Africa and elsewhere, and the 50-country Trade In Services Agreement (TISA).
The claim that these will help developing countries is a common refrain. But more and more, Africans aren’t buying it. Many Africans seem to be waking up to a simple idea: that free market policies are not etched in stone. There is an alternative, and African countries should be able to use industrial polices to develop just as the rich countries did.