9:51 AM Mar 8, 1996

AFRICA: TRADE LIBERALIZATION CAUSES DE-INDUSTRIALIZATION

Geneva 7 Mar (Chakravarthi Raghavan) -- Least Developed Countries (LDCs), particularly of Africa, have been increasingly marginalised in international trade and trade liberalisation recommended to these countries to expand exports and increase GDP have resulted in de-industrialization, according to an UNCTAD senior economist, Mehdi Shafaeddin.

A study of the effects of policies, according to Shafaeddin, shows that there is no clear and systematic association since early 1980s between trade liberalization and devaluation, on the one growth, and the growth and diversification of output and exports of LDCs on the other.

Trade liberalization and devaluation of currencies has been a common element of the Structural Adjustment Programmes (SAPs) for developing countries, and more so in Africa, where these policies have not only caused hardship to the poor, but have failed to create capacity and sustainable exports and growth.

The UNCTAD economist argues that the liberalisation policies has resulted in de-industrialization in many of the least developed countries (LDCs), particularly in Africa and there is need for an alternative approach to trade reforms.

In an article in the UNCTAD Review 1995, Shafaeddin, says that the design of trade policy reforms in these countries has been an important factor in performance failure, and there is need for an alternative approach which differentiates countries by their levels of development, industrial base and individual characteristics, with emphasis on need for building up supply capacity.

The idea of an across-the-board liberalization by developing countries, irrespective of their levels of development, Shafaeddin notes has been recommended as a way of expanding production and exports, particularly of manufactured exports.

From the data available, Shafaeddin says, it would appear that the LDCs, and more so the African ones, have undertaken quite impressive trade liberalization.

The Shafaeddin study uses ratio of imports to GDP, share of revenue from import tariffs in total government revenue, and the average foreign exchange premium on the black-market as proxies to judge the extent of trade liberalization, and compares the performance of the high, medium and low-liberalizers in terms of the growth in their real GDP, real manufacturing value added (MVA), export volume and the export and output diversification.

The study that the high and medium liberalizers did better than low liberalizers in their performance -- positive growth of GDP, MVA and export growth, and greater degree of production and diversification during the 1980s.

But the medium liberalizers did better than the high liberalizers in all indicators.

When the changes in real effective exchange rates (REER) and export growth were compared, it was found that there was no clear relationship between REER and export growth.

In general, countries with the greatest real devaluation (a fall in REER exceeding 50%) tended to have the lowest export growth, while those with the smallest devaluation, or whose currencies appreciated in real terms, tended to have high export growth.$

No clear association emerges either when the REER changes are compared to the extent of export and output diversification.

Countries with a rising REER or a relatively small real depreciation, had, on average, a greater relative shift to manufactured exports than those which had substantial real devaluation. The opposite held true for the export diversification. However this last appeared as partly due to the decline in prices of primary commodities which the LDCs exported. The UNCTAD economist argues that a number of exogenous factors have been found to be of greater importance to the performance of these LDCs than their reforms. Trade and exchange rate policies were not the only factors affecting performance and it was necessary to consider the other factors.

In looking at the high and low performers (comparing their performances in the 1970s and in the 1980s), in terms of GDP and MVA growth, the Shafaeddin study find that trade liberalization did not appear to have contributed to GDP growth in the high performers. Neither Bangladesh nor Nepal had undertaken substantial trade liberalization, rather they had done selective liberalization.

Those with slower growth in the 1980s than in the 1970s included countries which had achieved a significant degree of trade liberalization and devaluation -- Burundi, Gambia, Malawi and Tanzania.

Among the worst performers were those with extensive trade liberalization and/or currency devaluation, Shafaeddin finds. These included Guinea, Haiti (which he notes had also suffered political problems), Niger and Togo. Except for Togo, all these had negative growth in the 1980s.

Thus, there does not appear to be any clear relationship between trade liberalization and exchange rate movements, on the one hand and GDP growth on the other. And where growth has been dynamic, it has been mainly due to the manufacturing sector.

The study finds that investment and imports have been two key factors in determining supply capability in the developing countries, particularly the low-income ones.

In the study the group of countries where growth was higher than the LDC average during the 1980s, had a better investment and import performance than those with growth below the average.

Discussing the reasons for the policy failure of trade liberalization in LDCs when undertaken under external pressures, Shafaeddin finds three major ones: they were related to how the reforms were perceived, their context and timing and the particular circumstances of the individual countries.

In almost all cases influenced by the orthodox approach, policy reform was regarded as synonymous with 'uniform' import liberalization, applicable 'universally' to all developing countries. Their level of development, industrial base and special structural characteristics of individual countries were disregarded.

"Such an approach," he comments, "is based on a general theoretical abstraction -- the theory of static comparative advantage -- which in turn involves unrealistic assumptions such as a perfect functioning of markets in all countries, no externalities and no other causes of market failure, and constant returns to scale.

An assumption is that import liberalization will lead to an efficient reallocation of resources and that the free play of market forces will take care of industrialization and export expansion in each countries in accordance with comparative advantage.

And since there is no market failure, and no sector or industry plays a particular role in providing positive externalities, it is maintained there is no need for functional or selective government intervention. It is also assumed that all countries are at the same level of technological development and technology is readily and freely available to all of them and their firms, and that the firms do not play an active role in pricing, technological development, capacity building and learning process.

All these are unrealistic assumptions, particularly for LDCs.

Trade policy must aim at the long run development of supply capacity. But this cannot be left to market forces alone. The traditional approach to trade liberalization neglects the important role of investment and imports in expanding capacity as well as the external obstacles to industrial expansion.

Also while "uniformity" of trade liberalization has worked against exports of manufactures, its "universality" adversely affected export earnings from primary commodities.

The UNCTAD economist suggests that if further marginalization of LDCs, particularly in Africa, is to be avoided an alternative approach to trade policy reform is needed. It must take into account the experience of LDCs and other developing countries, as well as each country's particular situation.

Trade policy should be development-oriented, aimed on a selective basis at building up supply capacity, both at national level and firm-levels, and form an integral part of industrial and development strategy.

Trade policy is not necessarily synonymous with trade liberalization and success in liberalization per se is not a guarantee of success in development. Trade policy must serve to achieve long-run objectives of development and may compromise liberalization of trade in some goods and, at the same time, may strengthen or reduce the degree of protection accorded to others. It may include tariffs, quantitative restrictions for particular goods or any other measures to achieve the objectives of industrial and development strategies.

Trade policy may also vary from one country to another and can't be uniform for all. It must also be dynamic, taking into account changes in domestic and external situations.

And finally, the success of alternative trade policy reform needs external financial support, technical assistance and, most important of all, market access.