By: Germinal G. Van
During the postcolonial period, most of the African countries which had opted for socialism as their economic system also adopted protectionism as an economic measure to favor certain politically preferred industries. Policymakers wanted to protect domestic industries from foreign competition through tariffs, subsidies, import quotas, or other restrictions or handicaps on the imports of foreign competitors. For example, today Tanzania is one of the top exporters of agricultural commodities in Africa. It mainly exports tobacco ($248.8 million), coffee ($181.6 million), and oilseeds ($230 million). Interestingly, those products are not primarily exported to other African countries. In fact, Switzerland is the main importer of Tanzanian agricultural commodities, purchasing 16.2 percent of Tanzanian agricultural production, and India is the second-largest importer of its goods. But Tanzania does not trade much with its African neighbors. As figure 1 shows, the country only trades with Kenya and South Africa, while the rest of the world is its customer. It has imposed higher tariffs and subsidies when trading with its neighbors but has loosened those same tariffs and subsidies on non-African countries. Despite the good intentions of protectionists, we find that their policies create two substantive conundrums in the economic development of a country.
Figure 1: Tanzania Major Export Destinations (2016)
Source: Trading Economics. “Other” includes some African countries such as Rwanda and the Democratic Republic of the Congo (DRC), and Uganda, as well as the United States, many other Western countries, and Latin America.
Protectionism harms domestic markets. A healthy domestic market relies on the freedom of consumers and entrepreneurs to choose the products they buy, whether for personal consumption or as inputs in their businesses. Protectionist policies limit this ability to choose. Since African protectionist policies are often based on quotas, consumers have very limited choice as to the quantity, quality, and type of products available to them than they would without trade protectionism. Moreover, tariffs and subsidies force a consumer to pay a higher price for a domestic product. Thus, the purchasing power of the African consumer is not as high as that of Western or Asian consumers. When trade protectionist policies are implemented upon domestic products, it compels the consumer to settle for low quality and pay more for a particular product. That is one of the reasons why African consumption is not adequate. Africans are constrained to consumption of lower-quality products that they purchase at a higher price. France, for example, sells its Peugeot automobile to many French-speaking countries, although many consumers consider Peugeots to be low-quality cars. However, because trade restrictions limit access to other choices in automobiles, many Africans end up purchasing these relatively low-quality cars at relatively high prices. This further contributes to the impoverishment of Africans. Protectionism also negatively affects the growth of new industries. In fact, the protection of an infant industry may actually end up costing a government a significant amount of money and financial resources and actually promotes inefficiencies within the new industry, which has no incentive to make efficient, intelligent long-term investments by borrowing funds or issuing common stock in domestic international capital markets.
Protectionism also creates poverty. Indeed, GDP output falls once tariffs rise because of a significant decrease in labor productivity. Income, in addition to being based on the availability of capital, depends on the productivity of labor. But growth in labor productivity requires growth in access to capital. When firms in the import-competing sectors receive protection, resources are reallocated within the economy to relatively unproductive uses. For example, when Kwame Nkrumah was the President of Ghana in the 1960s, he imposed tariffs and subsidies on the major Ghanaian industries. However, the president of the neighboring country Ivory Coast (Côte d’Ivoire) during that same period applied free trade policies to the major industries of the Ivorian economy. As we can observe in figure 2, income per capita significantly differed between Ghana and Ivory Coast. The application of free trade policies improved the living standard of the Ivorian people while the living standard of Ghanaians stagnated. Moreover, protectionism often leads to an increase in unemployment. Countries that close themselves off to foreign competition eventually lose their edge, along with innovation, jobs, and growth. This loss of touch with current world affairs leads to unemployment, and therefore to greater poverty.
Figure 2: Impact of Trade Liberalization on Per Capita Income: Ivory Coast and Ghana, 1960–20
Source: World Bank, author’s computation
How Free Trade Can Improve African Economies
African countries can benefit from free trade by increasing their amount of or access to economic resources. The lowering of trade barriers helps small nations obtain the economic resources they need to produce consumer goods or services. It is here that the comparative advantage theory of David Ricardo becomes more relevant than ever. Ricardo over two centuries ago, in his pathbreaking book Principles of Political Economy and Taxation (1817), argued that comparative advantage exists where local industry can produce a product or service at a lower cost compared to elsewhere. This theory elucidates why a country might produce and export something its citizens don’t seem very skilled at producing when compared directly to the citizens of another wealthier country. The citizens of each country are better off specializing in the goods that they have a comparative advantage producing, even if one country has an absolute advantage in each item.
Over time, free trade will improve the efficiency of production in African economies, because trade enables producers to fill in the gaps in their production processes. That is, entrepreneurs and business owners can make their businesses more productive the more they have access to a full, global range of products and services. The acquisition of knowledge and skills will undeniably contribute to the amelioration of labor productivity and output efficiency. Higher labor productivity and output efficiency will logically reduce unemployment and therefore reduce poverty.
This was originally published on Mises.org.
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