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Why trade matters for African development

A repository of real-time information on current trade negotiations is needed to track the rules that shape development outcomes in Africa, writes David Luke

Trade is central to development in Africa. A long history of economic thought, theory and practice underpins this proposition. However, I do not seek to interrogate the foundational principles of international trade, but rather to highlight issues that underscore the key role of trade as a driver of growth, sustainable development and poverty reduction. This is not automatic. It requires trade policies that are dynamic, inclusive and responsive to both opportunities and constraints in constantly changing national, regional and global contexts.

Positive and negative externalities

There are two main pathways – public and private – through which international trade generates resources for sustainable development. Through the public pathway, governments derive revenues from international trade through taxes on imported and exported goods and services, taxes on incomes and profits from trade-related production and transactions and by directly receiving the proceeds from exports. The private pathway is through returns on investment and other transactions including remittances. Both pathways can further generate positive externalities and indirect financing for economic and social development. Both pathways, however, can also generate negative externalities, including unsustainable levels of inequality.

Trade, poverty, inequality and growth

Trade revenues are multiple resource flows from other sources into Africa. As shown in figure 1, over the last decade export revenues have accounted for more than three times the value of remittances, FDI inflows and official development assistance taken together. Exports have been worth approximately 17 times as much as overseas development assistance, such as development aid, during this period.

Poverty and inequality in Africa are pervasive, as can be seen in figures 2 and 3. Much of this outcome can be attributed to the historical legacy and current reality of African economies undergirded by trade regimes that are mainly dependent on producing and exporting low value products (and services), often subject to severe price fluctuation. Africa, with 17% of the world’s population, accounts for about 3% of world trade.

Formal trade between African countries is also low, at an average of 15% of total trade during 2016­–18. Africa’s trade challenges are compounded by the strong prevalence of informal cross border trade in both goods and services of even lower value transactions. Informal cross border trade is associated with the high rates of poverty that compel people to seek a living by buying and selling small quantities of fast-moving merchandise, especially food items, and providing low skilled services. It is fuelled by such constraints as high trade costs, expressed through a lack of access to credit and finance and inefficient border processes. Women constitute the majority of informal cross border traders, accounting for as much as 61% of all informal cross border transactions in the Lagos-Abidjan corridor, for example.

Sources: Exports from IMF DOTS 2020; FDI inflows from UNCTAD Stat 2020; Official Development Assistance from OECD ODA 2020; and remittances estimates from World Bank 2020. Note: Reliable FDI data is available only from 1970 and remittances data from 1980, represented above accordingly.
Africa’s total exports, remittances, FDI inflows and DAC official development assistance, 1980-2018, constant 2018 US$
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