Trade, aid and national development in Africa

Abstract

Trade is crucial for economic growth, with exports providing earnings to finance imports. Trade also promotes investments and knowledge transfer. Trading countries exploit their comparative advantages to promote self-sufficiency, which is obviously better than dependence on foreign aid, whether low interest-bearing loans or transfer payments. All aid comes with some kind of conditionality attached, amounting to substantial burdens that often outweigh possible benefits. Donors often replace the administrative machinery of recipient governments, undermining their sovereignty and autonomy. These governments then struggle to extricate themselves from implied commitments to donors and prevent donor governments interfering in their domestic affairs. This paper looks at Africa's poor trade performance, arguing that among the consequences are the continent's continuing dependence on foreign aid and the accompanying burdensome negative sentiments from the rest of the world. It recommends that the new African programme New Partnership for Africa's Development be developed to a full economic integration to expand the regional markets.

1. Introduction

Trade promotes competition, investments, knowledge transfer and growth. Poor trade in Africa compromises growth through low productivity, often culminating in dependence on foreign aid and heavy indebtedness. In 2005, Africa's total external debt stood at $318.5 billion, corresponding to 35.7 per cent of its gross domestic product (GDP) (African Development Bank, 2006:51). The continent's excess debt often results in debt repayment burdens, for which poor trade performance and policies are to blame (African Development Bank, 2004:117–8). The World Bank (2002:284) noted that the continent's performance is often matched by the trend in the official development assistance (ODA) from wealthy countries rather than by the world economic outlook and that ODA flows are equivalent to a sizeable share of the GDP and domestic investment in many African countries (World Bank, 2002). For example, the ODA as a percentage of GDP for the entire continent during 1975–84, 1985–9 and the 1990s was 3.6 per cent, 5 per cent and 4.9 per cent, respectively and for the sub-Saharan countries 4.2 per cent, 7.9 per cent and 6.3 per cent (World Bank, 2003:293). During the same periods, the net ODA as a percentage of gross domestic investment for the continent as a whole was 14.2 per cent, 24.3 per cent and 23.9 per cent and for the sub-Saharan countries 21.8 per cent, 49.4 per cent and 36.4 per cent, respectively (World Bank, 2003:296).

African countries have continuously expected to use foreign aid to fill the gap between the domestically available supplies of savings and the level of these resources necessary to achieve investment targets and growth or to fill the gap between targeted foreign exchange requirements and the revenue derived from net export earnings plus foreign private investment. Since the majority of these countries have barely any savings, in view of their very small earnings from exports of just a handful of primary commodities (Sandbrook, 1991:102) and the lack of foreign private investment in the region, these gaps are usually very wide, therefore encouraging a greater dependence on foreign aid.

A common neoclassical argument for foreign private investment or foreign aid is that an inflow of foreign capital in the form of either of these two can, besides alleviating a significant portion of the deficit in the current account of the balance of payments, also help to remove that deficit over time if the foreign-owned enterprise can generate a net positive flow of export earnings or if the aid flows of financial resources are properly used to generate further revenue (Todaro, 1994:531–2). Unfortunately for African countries, private capital, especially in the form of foreign private investment, moves towards the countries and regions with the highest financial returns and the greatest perceived safety, both of which are perceived by investors to be lacking in Africa. Equally unfortunate for Africa is that the availability of foreign aid discourages indigenous entrepreneurial initiative, weakening the necessity for these countries to outgrow aid dependency. The aid donors also use their economic power to influence the policies of recipient African governments in directions unfavourable for development. Often, they tie aid, especially soft loans, to their exports, as a result saddling the recipient African countries with substantial debt repayment burdens that exhaust their meagre development resources (Osei, 2005) and further exacerbating their dependence on aid.

Relying on donor countries and organisations is tantamount to accepting involvement by powerful international organisations that often tamper with the sovereignty of national governments and the autonomy of their domestic institutions. Such donors are reluctant to finance development projects if they are not allowed some degree of influence in the region concerned (Ilorah, 2004). They also adopt a strategy of aligning with despotic governments, especially in the former colonies, in exchange for raw materials (Van de Laar, 1980:80). In what follows this paper first gives a brief overview of the benefits of trade, focusing the discussion mainly on the static and dynamic gains, including possible obstacles to a successful trade for Africa. Thereafter, the paper looks at what dependence on aid has done to Africa and what a continuing dependency will mean. The study concludes with some recommendations.

2. The Benefits of Trade

Although international trade is believed to be characterised by unequal exchange between trading partners – an economic philosophy advocated by mercantilists during the seventeenth and eighteenth centuries, with Thomas Munn at the forefront (Salvatore, 1998:25–7) – it has nonetheless been acknowledged to generally enhance welfare and growth. According to Adam Smith's 1776 theory of absolute advantage a trading nation can gain by specialising in the production of the commodity of its absolute advantage and exchanging part of this output with other trading partners for the commodities of its absolute disadvantage. This process guarantees efficient use of resources, promotes productivity and increases in output and maximises welfare (Salvatore, 1998:28–9), all of which are considered dynamic gains from trade. Productivity and output increases, in particular, provide a measure of the gains from specialisation in production (Salvatore, 1998:28). Other positive derivatives include boosts in investments in innovations and technology. A limitation of the theory of absolute advantage, though, is that it alone cannot determine the pattern of trade (Krugman & Obstfeld, 1991:15).

Critics of the theory argue that a nation could still gain from trade by producing commodities of its comparative if not necessarily absolute advantage. According to David Ricardo's 1817 theory of comparative advantage, developed some four decades after Smith's introduction of the theory of absolute advantage (Salvatore, 1998:25), nations should specialise in the production of and export the commodities of their comparative advantage, i.e. those in which their absolute disadvantage is smaller and import the commodities of their comparative disadvantage, i.e. those in which their absolute disadvantage is greater (Salvatore, 1998:31). Ricardo's theory rests on differences in labour productivity (Krugman & Obstfeld, 1991:11–2), with emphasis more on the static gains from trade. According to his model, countries whose relative labour productivities differ across industries will specialise in producing different goods and thus gain from trade, thereby enhancing their national welfare (Krugman & Obstfeld, 1991:18 and 28). Viewed also as trade-creation gains, particularly within customs union or free trade areas, the static gains result from resource reallocation between specialised sectors or areas and are measured by the excess cost of import substitution, i.e. by what is saved by not producing the imported good domestically (African Development Bank, 2004:120). Both the static gains, considered as direct benefits or the allocation effects of trade and the dynamic gains, considered as indirect benefits or the growth effects of trade are conferred on trading economies (Haberler, 1988).

Although the theory of comparative advantage, which makes accurate predictions about actual international trade flows, is favoured for its many practical applications (Salvatore, 1998:30), it nevertheless has some shortcomings, among the most significant being the model's implied suggestion either that labour is the only factor of production or that it is used in the same fixed proportion for all commodities produced and also that labour is homogeneous (Salvatore, 1998:37). The model allows no role for differences in countries' resources as a cause of trade (Krugman & Obstfeld, 1991:29).

Coming to the model's rescue, Harbeler (1936:Chapters 9 and 10) successfully explained the model on the basis of the opportunity cost theory rather than the labour theory of value, which neglected capital and other production factors and the possible substitution between these factors (labour, capital and other factors). Without specially emphasising labour as the sole production factor or considering it homogeneous or regarding its content as the sole determinant of a commodity cost or price, the opportunity cost theory argues that the cost of a commodity is the amount of a second commodity that must be forfeited to release just enough resources to produce one additional unit of the first commodity (Salvatore, 1998:37). This theory states that the nation with the lower opportunity cost in the production of the first commodity has a comparative advantage in producing it and a comparative disadvantage in producing the second commodity (Salvatore, 1998).

Moving yet further beyond Ricardo's theory, based solely on the difference in the productivity of labour among nations but providing no explanation for such differences in productivity (except for possible differences in climate) (Salvatore, 1998:109), the Heckscher–Ohlin neoclassical version of trade theory examines the basis for comparative advantage, with an emphasis on the differences in countries' resources as the proximate causes for trade (Krugman & Obstfeld, 1991:68). This version is referred to as factor proportions theory, because of its emphasis on the interplay between the proportions in which different factors of production are available in the different countries and the proportions in which they are used in producing different goods. This theory states that comparative advantage is influenced by the relative abundance of a nation's factors of production and the technology it has available to influence the relative intensity with which the different factors of production can be used (Krugman & Obstfeld, 1991). It would imply that a country may have natural resources but may not gain from trade in the absence of the technology to exploit the resources, a situation very typical of African countries.

3. Africa's Dismal Trade Performance

The gains from world trade have increased several fold since the end of the Second World War in 1945, but continue to elude the African continent, especially the sub-Saharan countries, which often suffer shortages of essential commodities, implying the lack of international trade benefits. Africa's world export share, which was just 7.3 per cent in 1948, had by 2001 been reduced to less than half (African Development Bank, 2004:147), reaching a low of about 1.5 per cent in 2004 for sub-Saharan Africa (World Bank, 2006:312). Table 1 shows Africa's total merchandise exports by bloc as a share of world exports, i.e. the ratio of the bloc's total merchandise exports to total merchandise exports by all economies in the world. Intra-trade in the region (merchandise exports within the bloc as a percentage of the total bloc exports, i.e. the ratio of bloc members' merchandise exports to total merchandise exports by the bloc) has not performed any better (see Table 2), for reasons that are discussed in Section 5.

Table 1: African regional trade blocs: total merchandise exports by bloc as a percentage of world exports

Trade bloc	Number of member countries	Year of creation	1990	1995	2000	2004
CEMAC	7	1994	0.2	0.1	0.1	0.2
CEPGL	3	1976	0.1	0.0	0.0	0.0
COMESA	21	1994	0.4	0.4	0.4	0.5
CBI	14	1992	0.2	0.2	0.2	0.1
EAC	3	1996	0.1	0.1	0.1	0.1
ECCAS	11	1983	0.3	0.2	0.3	0.3
ECOWAS	16	1975	0.6	0.4	0.6	0.5
IOC	5	1984	0.1	0.0	0.0	0.0
MRU	3	1973	0.1	0.0	0.0	0.0
SADC	14	1992	1.0	0.8	0.7	0.7
UDEAC	6	1964	0.2	0.1	0.1	0.2
UEMOA	8	1994	0.1	0.1	0.1	0.1
Source: World Bank, 2006: 334–5.
Acronyms: CEMAC (Economic and Monetary Community of Central Africa); CEPGL (Economic Community of the Countries of the Great Lakes); COMESA (Common Market for Eastern and Southern Africa); CBI (Cross Border Initiative); EAC (East African Community); ECCAS (Economic Community of Central African States); ECOWAS (Economic Community of West African States); IOC (Indian Ocean Commission); MRU (Mano River Union); SADC (Southern African Development Community – formerly Southern African Development Coordination Conference); UDEAC (Central African Customs and Economic Union); UEMOA (West African Economic and Monetary Union).

Table 2: Africa regional trade blocs: merchandise exports within bloc as a percentage of total bloc exports

Trade bloc	Number of member countries	1990	1995	2000	2004
CEMAC	7	2.3	2.1	1.1	1.3
CEPGL	3	0.5	0.5	0.8	1.2
COMESA	21	6.6	7.7	5.7	6.7
CBI	14	10.3	11.9	10.6	13.2
EAC	3	13.4	17.4	16.1	14.6
ECCAS	11	1.4	1.5	1.1	0.9
ECOWAS	16	7.9	9.0	7.9	8.5
IOC	5	4.1	6.0	4.4	4.3
MRU	3	0.0	0.1	0.4	0.3
SADC	14	4.8	8.7	9.3	9.5
UDEAC	6	2.3	2.1	1.0	1.2
UEMOA	8	13.0	10.3	13.1	13.9
Source: World Bank, 2006: 332–3.

Arguments are many on the causes of Africa's poor trade performance. Some argue that the type of goods that Africans produce and export compared to the type they import has meant that the continent very often experiences deteriorating commodity terms of trade (African Development Bank, 2004:123–4). These terms of trade deteriorate for a country if export prices decline relative to import prices, even though both may rise (Todaro & Smith, 2006:586). The continuous decrease in the ratio of the prices of Africa's export commodities (comprising mainly primary commodities) to the prices of its imports (comprising mainly manufactured goods from developed countries) is argued to cost Africa a great deal. Table 3 shows that the selected countries, for which data are readily available, lost a total of $16.4 billion in 1990 alone, with Nigeria, the Ivory Coast, Gabon and Ghana having lost the most both in absolute terms and as a percentage of GDP. This development, which is due to the combined effects of low income and price elasticities of demand for primary commodities, is argued to continuously transfer income from Africa to the developed countries (Todaro & Smith, 2006), resulting in Africa's poor growth in general. The low income and price elasticities of demand for Africa's commodities means that an increase in the supply of the commodities is accompanied by drastic price decreases that are unaccompanied by equally intense increases in demand, even with income growth in the importing developed countries.

Table 3: Terms of trade loss/gain in selected African countries, 1990

Country	Index 1980 = 100	Loss/(gain) $ million	Loss/(gain) as a % of GDP
Burkina Faso	98	3	0.0
Central African Rep.	94	8	0.6
Ghana	48	800	12.8
Kenya	75	344	3.9
Madagascar	85	59	1.9
Malawi	98	8	0.3
Mali	109	(29)	(1.2)
Mauritania	93	35	9.5
Niger	69	195	7.7
Nigeria	57	10 313	29.1
Rwanda	51	108	5.0
Sierra Leone	71	56	6.2
Tanzania	77	90	3.8
Togo	72	117	7.2
Uganda	55	124	4.1
Cameroon	63	704	6.3
Congo	70	484	16.9
Ivory Coast	62	1 594	16.1
Senegal	102	(15)	(0.3)
Gabon	63	1 451	30.1
Source: Green, 1993: 36.

Studies have revealed that a 1 per cent increase in developed country incomes will normally increase their imports of unprocessed foodstuffs and primary agricultural commodities (both the main exports of African countries) by a mere 0.6 per cent and 0.5 per cent, respectively (Todaro & Smith, 2006:585). By contrast, the income elasticity of demand for manufactured commodities from developed countries is high, estimated at about 1.9 per cent (Todaro & Smith, 2006). These estimates imply that commodities produced by Africans are treated as inferior goods. The real prices of primary products have reportedly decreased at an average annual rate of 0.6 per cent since 1900 (Todaro & Smith, 2006:586), implying that terms of trade have deteriorated over the decades. This would therefore mean that Africa's future trade prospects will continue to be bleak as long as the continent's exports remain concentrated on primary commodities and do not diversify significantly into manufactured and high-tech products.

It is also argued that the developed countries' protectionist trade policies cause a good deal of harm to African exports. For example, cotton subsidies in the USA and the underpriced cotton on the world market cost West African cotton producers and their economies an estimated US$250 million a year (Nankani, 2005:10; World Bank, 2006:312). The tariffs for low-priced African cocoa beans in the European Union (EU) are more or less nil, but increase to about 10 per cent for semi-processed cocoa and up to 30–50 per cent for the final product, chocolate, depending on the sugar and milk content (Nankani, 2005). This means that tariff escalation penalises African producers when they add value (World Bank, 2006:312). These tariffs suggest that both the EU and USA prefer that Africa should rather produce only unprocessed primary commodities, exposed to export earnings instability caused in part by low income and price elasticities of demand. The developed countries' protectionist policies also suggest that mercantilism, although since condemned, continues to be practised even in the twenty-first century. Other recent trade barriers include the arbitrarily imposed sanitary and phyto-sanitary rules that now form extra layers of developed country regulatory barriers, shutting out African exports (Mutume, 2006:18–9). Having come into force in 1995 and officiously aimed at safeguarding human and animal health (through sanitary measures) and protecting plants from disease and pests (through phyto-sanitary measures), these rules have further limited the goods exported by many African countries to countries particularly within the Organisation for Economic Cooperation and Development (OECD). These rules, which demand certain standards, albeit set by the OECD member countries, are criticised as adding complex and intrusive regulations that burden many poor countries in Africa (Mutume, 2006).

Critics argue that domestic political pressures often influence these arbitrarily recommended standards because different countries have different degrees of risk tolerance and accordingly make different and high-handed assessments of the nature of the risk. They argue that these often-stringent standards have resulted in great losses for African producers. For example, the African horticultural producers are finding it difficult to penetrate the EU market. Mutume (2006) pointed out that Uganda lost US$36.9 million in potential earnings in the late 1990s because the EU countries banned fish imports from the entire East Africa sub-region, citing concern about sanitary standards and control systems. The ban also hit Tanzania hard: here fish and related products account for about 10 per cent of annual exports, so the country's fishermen lost about 80 per cent of their income. Mutume (2006) argued that, in order to meet the standards, African exporters of cereals, fruits, vegetables and nuts would be losing an estimated US$670 million annually. These required standards have also put pressures on African countries that export meat to the USA, dairy products to the EU and animal products to Japan, all of which face restrictions on health grounds. No wonder the rules are condemned by African governments as discriminatory and a form of back-door trade protectionism (Mutume, 2006).

Africa's poor trade performance is also argued to be a result of insufficient investments aggravated by poor management (Ilorah, 2004) and, most importantly, of the continent's refusal to outgrow its dependence on foreign aid. The continual management crises in Africa have meant that foreign aid to the continent has not been accompanied by trade reforms and capital investments to promote private capital flows and technology transfer. Rather, foreign aid has generally engendered a welfare mentality (Easterly, 2002:37–44). This means that the continent continues to lack the technology to exploit its enormous wealth of resources or to influence the relative intensity with which its different factors of production can be used. Not even a populous and oil resource-rich Nigeria has prioritised trade-boosting investments in infrastructure (roads, electricity and water), security, environmental protection and proper education. The country's existing roads are inadequate and often in poor condition because of poor maintenance and unruly traffic, power cuts are a daily occurrence, pure running water is non-existent and even the existing water facility is subject to the same supply failures as the power (electricity) facility. The majority of the country's cities are in a state of total environmental degradation and rendered unhealthy by filth, litter and rubbish-choked gutters. Equally serious are the generally poor security and a seriously deteriorating education system, both a by-product of decades of a militarised society.

These are not isolated problems unique to Nigeria, but actually widespread in Africa. For example, the problem of power cuts or an inadequate supply of electricity is also noted in countries such as Kenya, Cameroon, Egypt, Uganda, Tanzania, Senegal, the Democratic Republic of Congo (DRC), the Sudan and even a relatively affluent South Africa. Critics lament that this power shortfall remains a paradox considering that the continent is endowed with vast natural resources that could supply the deficiency (Mashalaba, 2006:5). Interruptions of electricity and water supplies are very costly to manufacturing enterprise (Sandbrook, 1991:97), since planning becomes more difficult, affecting production adversely and limiting growth potential (World Bank, 2006:265). Good infrastructure is fundamental to decision making by investors: it creates the right environment for investment and industrial development (World Bank, 2006). Apparently, creating such an environment is what most African governments are not doing.

The growth of a nation's population is assumed to boost the size of its labour force (Salvatore, 1998:186). Similarly, a nation can, by using part of its resources, produce capital equipment and increase its capital stock, including all man-made means of production, such as machinery, factories, office buildings, transport, communications and human capital, all capable of greatly enhancing the nation's ability to produce goods and services (Salvatore, 1998). In recent years, India, China and the so-called Asian ‘Tigers’, including South Korea, Taiwan and Singapore among others, which have in the past few decades prioritised investments in education and the hi-tech export sectors (Todaro & Smith, 2006:607–13 and 654–8), have enjoyed the fastest export growths, exceeding 10 per cent per annum in some countries (African Development Bank, 2004:118). These countries also adopted aggressive export promotion policies and recorded the fastest GDP growths (African Development Bank, 2004). During the same period, the sub-Saharan African share of world exports plummeted to an all time low, its per capita income recording an annual decrease of 2.4 per cent. The continent as a whole recorded a 15 per cent decrease in investment, affecting both exports and imports adversely (African Development Bank, 2004:146). Many African countries barely produce any substantive manufactured goods for export other than a few primary agricultural commodities. For example, the total quantity of textiles sold by 38 African countries to the USA under the Africa Growth and Opportunity Act is less than 2 per cent of the total Chinese textile exports to the same country (Reuters, 2006:7). These African countries must, nevertheless, import goods. Lack of substantive exports means lack of enough export earnings (foreign exchange) to pay for imports and this implies that these countries must borrow or rely on aid to pay for imports and bridge other financial gaps.

4. The Downside of Africa's Dependence on Foreign Aid

Foreign aid includes debt cancellation, emergency relief assistance such as temporary shelters, food and medicine for victims of natural and man-made disasters, outright grants and soft loans for economic programmes and projects and implicit capital transfers or disguised flows such as the granting of preferential tariffs by one country to another's exports, thereby permitting such exporters to sell their products at higher prices than would otherwise be possible (Todaro, 1994:537–8; Harsch, 2005:16–7). It also includes post-conflict peacekeeping assistance and technical cooperation (World Bank, 2006:351). Each of these has different effects on the economy. For example, expenditures on technical cooperation do not always directly benefit the recipient economy to the extent that they defray the costs incurred outside the economy on the salaries and benefits of technical experts and the overhead costs of firms supplying technical services (World Bank, 2006). Generally, though, the revenue from foreign aid is supposed to fill recipient countries' savings–investment gap or their foreign exchange-trade gap.

A savings–investment gap is the difference between the amount saved by a country and the amount it requires for investment and a foreign exchange–trade gap is the difference between the country's foreign exchange requirements and its actual trade-generated revenue. Explained in a two-gap model (Todaro & Smith, 2006:724), the basic argument is that most developing countries face a shortage of either domestic savings to match investment opportunities or foreign exchange to finance imports of capital and intermediate commodities. The model assumes a lack of substitutability between savings and foreign exchange, their associated gaps being unequal in magnitude. It implies that either of the two gaps must at any point in time dominate the other for a given country. A country with a dominant savings gap operates at full employment but lacks private savings. However, part of the country's foreign exchange earnings remain unused and may not be purchased by economic agents, whose income is mostly spent on consumption goods rather than on capital imports. The country's excess foreign exchange, including foreign aid, could be used to purchase productive resources as long as it does not rely on economic agents who would rather divert their purchasing power into consumption goods.

Should the foreign exchange gap be dominant, as is often the case for most developing countries, implying excess productive resources such as labour but shortage of foreign exchange, these countries could undertake investment projects with the assistance of foreign aid in the form of either external finance to import capital goods or direct technical assistance. It is generally assumed that the impact of foreign aid in the form of capital inflows will be greater where the foreign exchange gap rather than the savings gap is dominant (Todaro & Smith, 2006:724–6). In practice, however, the allocation of foreign aid, particularly bilateral aid, to poor countries is rarely determined by the relative sizes of their savings–investment and foreign exchange–trade gaps, which by implication means a neglect of the relative needs of these countries. Most bilateral aid policies are rather largely based on political and military considerations and the ad hoc judgements of donor decision makers. For example, the bottom ten less developed countries with 72 per cent of the world's poorest people receive only 27 per cent of aid and countries that spend more on their military (over 4 per cent of gross national product) receive twice as much per capita as countries that spend much less (Todaro, 1994:540). In many cases, foreign aid has merely helped to prop up corrupt governments and violent and exploitative rebels and generally nurtured a welfare mentality (Easterly, 2002:Chapter 2).

During the Cold War years, donors from the West, including its big business, had, through aid, encouraged repressive African regimes, such as Mobutu Sese Seko's Zaire (the present Democratic Republic of Congo (DRC)), Arap Moi's Kenya, Jerry Rawlings's Ghana, Kamuzu Banda's Malawi, Emperor Bokassa's Central African Republic and Nigeria under successive military regimes, as long as these regimes remained anti-communist. In the same power tussle, the communist Soviet Union, also through aid, held on to regimes in countries such as Ethiopia, Mozambique, Somalia and Angola, as long as they remained anti-West. Regardless of what governance these regimes practised and how their aid monies were spent, their loyalty to donors determined the development assistance they received (Enoki, 2002; Ilorah, 2004). In theory, these countries have, with the exception of Somalia, adopted democratic processes to elect new leaders. Nevertheless, even the democratised ones have yet to extricate themselves fully from the legacies of their past. These countries and many others on the continent continue to ignore the transitory nature of foreign aid. They fail to use the time during which it is available to reflect collectively and address the domestic constraints (such as lack of good planning, education and investment in technology) effectively. This prevents the region from taking advantage of global trade opportunities. These countries still clamour for aid, but the post-Cold War period has seen changes in aid policies, with aid monies earmarked mainly for debt relief and emergency relief assistance. These still constitute, however, a sizeable share of recipient countries' gross national income and domestic investments (gross capital formation).

According to the World Bank (2006:351) the aid dependency ratios for African countries are generally much higher than those of other regions. Table 4 shows the extent of aid (the ODA) in selected African countries in 1999 and 2004. These countries are either already eligible (the countries in the first 15 rows, i.e. Benin to Cameroon) or are expected to be eligible (countries in the remaining rows) for the so-called Heavily Indebted Poor Countries initiative launched in 1996 by the World Bank and the International Monetary Fund to provide debt relief to very poor countries (Mutume, 2005:8–9). The countries in the first 15 rows have already been granted total debt relief under the G-8 agreement reached at the summit in Gleneagles, Scotland, in July 2005, while the remaining seven are expected to benefit equally in due course (Mutume, 2005). Table 4 shows that aid is without doubt equivalent to a sizeable share of gross national income and domestic investment in many African countries. The World Bank (2006:351) cautioned though that the real value of aid may be overstated owing to a lack of adjustments to changes in international prices and exchange rates. It is also important to note that, if the components of debt relief and emergency relief assistance, the total of which is usually relatively substantial (Harsch, 2005:17), are discounted from the total aid revenue, this would reveal that these countries received less money for development during the period than the table shows.

Table 4: Aid as shares of gross national income (GNI) and gross capital formation (GCF) in selected African countries, 1999 and 2004

	Official aid ($ million)		Aid as a % GNI		Aid as a % GCF
Country	1999	2004	1999	2004	1999	2004
Benin	211	378	8.9	9.3	50.5	45.6
Burkina Faso	398	610	14.2	12.7	59.6	66.2
Ethiopia	643	1823	10.0	23.0	58.4	107.7
Ghana	609	1358	8.1	15.4	37.9	54.9
Madagascar	359	1236	9.8	28.8	64.7	103.2
Mali	355	567	14.0	12.2	65.1	59.2
Mauritania	219	180	20.1	11.1	120.2	54.5
Mozambique	805	1228	21.3	21.4	55.1	100.6
Niger	187	536	9.4	17.5	90.7	109.3
Rwanda	373	468	19.4	25.8	112.2	121.8
Senegal	535	1052	11.5	13.9	60.9	57.9
Tanzania	990	1746	11.6	16.2	73.8	83.8
Uganda	590	1159	9.9	17.3	50.3	75.7
Zambia	624	1081	21.0	21.2	113.4	77.1
Cameroon	435	762	5.0	5.4	25.3	31.8
Chad	188	319	12.4	11.8	121.6	30.6
DR Congo	132	1815	3.1	28.6	91.0	213.9
Gambia	34	63	8.2	16.0	43.6	63.3
Guinea	238	279	7.0	7.3	31.1	68.6
Guinea Bissau	52	76	24.9	28.3	139.0	219.4
Malawi	447	476	25.8	25.9	171.7	229.4
Sierra Leone	74	370	11.5	34.3	204.7	211.3
Source: World Bank, 2006: 348–50.
Note: Gross national income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipt of primary income (compensation of employees and property income) from abroad.
Gross capital formation (GCF) consists of outlays (expenditures) on additions to fixed assets (land improvements; plant, machinery and equipment purchases; and the construction of roads, railways, schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings) of the economy, net changes in the level of inventories (stocks of goods held by firms as precautionary measures), and net acquisitions of valuables.

The often-common rhetoric from donors is that greater aid to Africa breeds corruption, implying that African institutions have a limited capacity to manage any substantial aid effectively. This frequently echoed sentiment is channelled to every sub-Saharan African country, including those that ordinarily may not need foreign aid. The sub-Saharan countries are perceived as the same by the rest of the world, especially in terms of culture, unsuitability for foreign investment and dependence on aid (Ilorah, 2004). According to the World Bank (2006:264), sub-Saharan Africa is a high-cost, high-risk place to do business compared with other developing regions. The effect of this perceived unattractive business climate is that aid remains the largest source of external finance for countries in the region. One must wonder, though, how long Africa will remain dependent on foreign aid and what the continent should do to extricate itself from the ‘aid trap’.

5. The Need For Economic Integration of African Economies: A Recommendation

Africa's trade crisis has reached such heights that, rather than individual governments acting alone, a coordinated action by all governments in the region would make better sense. Both the neoclassical and the classical trade theories agree that an expanded market is good for trade, since it encourages specialisation and division of labour and ultimately efficiency in production (productivity), growth and capital accumulation. This implies that countries with limited market access are excluded from trade benefits. Such countries will have very little scope for large-scale investments in education and advanced capital equipment, their limited market access also constraining specialisation. African economies have limited market access and this discourages trade and subsequently economic growth. Lack of market access also means lack of other dynamic trade benefits, such as the acquisition and dissemination of new knowledge, private direct investment, changes in attitude and proper institutions. The absence of these benefits leaves the long-term growth prospects of these countries vulnerable (African Development Bank, 2004:121). At present, foreign direct investment in the region is dominated by extractive industries, including oil and minerals (World Bank, 2006:313).

Over the decades since the end of the Second World War in 1945 world trade has gradually grown about 16-fold at an average annual compound rate of over 7 per cent, having benefited from liberalisation (World Bank, 2006:118), first under the General Agreement on Tariffs and Trade (GATT) established in 1947 and later under the World Trade Organization (WTO) that replaced GATT in 1995. During the same period, world output, measured by world GDP, has also grown about fivefold, trailing behind world trade (World Bank, 2006). Considering Africa's present situation, with over 80 per cent of the export earnings of the region's economies derived from just the sale of primary commodities (World Bank, 2006:123) and the price of primary commodities (excluding petroleum and mineral resources) relative to that of manufactured goods deteriorating steadily at an average annual rate of about 0.5–0.6 per cent for several decades (African Development Bank, 2004:123; Todaro & Smith, 2006:586), should the continent not embark on drastic measures to halt these adverse developments? It is, after all, not lacking in resources, but undoubtedly so in resource management. The outlook for resources remains positive in Africa, but the shortage of skills and technology continues to delay proper exploitation of the resources. Apparently, countries that have difficulty tapping their potential resources must rely largely on aid flows to fund development programmes, a description that has continued to fit African countries.

Africa hosts about 30 per cent of the world's mineral reserves, including 90 per cent of the platinum group of metals, 60 per cent of cobalt and 40 per cent of gold (Ilorah, 2004). Nigeria alone is the sixth biggest oil producer in the world and this suggests that, together with the other African oil producers, such as Libya, Angola, Equatorial Guinea and Gabon, the continent supplies a significant chunk of the total world oil requirements. This means that with proper resource management, through investment in skills and technology, a resource-rich Africa should be able to improve its international trade position, putting an end to the constant humiliating requests for foreign aid that have, through donor preferences and conditionality, continued to pressurise the recipient countries' government development plans. Critics argue that the conditionality imposed on aid-receiving countries has actually impaired the capacity of such countries to follow their own development routes of action (Wuyts, 1991:230; Stiglitz, 2002:9). Apart from tying aid to donor countries' exports, as experienced by Ghana (Osei, 2005), other examples of donor aid-motivated influences include using aid funds to develop the donor's own managerial capacity to compete with host governments, especially for labour resources, as experienced by Mozambique (Wuyts, 1991:231) and encouraging mushrooming non-governmental organisations, most of which distrust the host governments, often displaying hostile and dismissive attitudes by marginalising these governments' development efforts and preventing them from reaching a broader majority (Wuyts, 1991:232).

For African governments to shun aid will require setting up proper institutions to look after the interests of countries in the region, such institutions ushering in unambiguously interest politics (Mattli, 2001:24–6; Ilorah, 2004), their most important goal being to succeed. An important move in this direction is the continental strategic development programme, called the New Partnership for Africa's Development (NEPAD), initiated by African leaders as a collective action to look into the region's economic problems in particular. The NEPAD, as a programme for building member countries' economic confidence and strength, should be successfully implemented through an economic integration of member countries. Through such integration the member states of an organisation can maximise their wealth and power (Mattli, 2001:19). Integration promotes bigger markets that stimulate investments, promote specialisation and encourage competition among producers (Salvatore, 1990:295). It also leads to the creation of coordinated industrial planning, assigning given industries to different member countries, depending on the available local raw materials and thereby avoiding trade-diverting duplication of industries. Opportunities are created for industries to enjoy economies of scale of production. For consumers, the main associated benefits will include lower prices and a generally enhanced welfare because of the increased quantity and range of goods made available.

The integration of African economies is especially important since virtually all rounds of trade negotiations through the WTO, including Seattle in 1999 and the Doha round that was launched in 2001, have disadvantaged Africa, particularly the sub-Saharan region. These trade rounds have repeatedly discriminated against African countries and rather protected mainly the special interest within the advanced industrial countries. For example, at Cancun (a Doha round), member countries deadlocked on the issue of lowering agricultural subsidies (The Economist, 2003:13; Ilorah, 2004) supposed to benefit African countries. The EU agricultural exporting countries, with France at the forefront, would not budge on the request by African countries to abolish the agricultural subsidies. Africa's disadvantaged position has meant that the price of primary commodities relative to that of manufactured goods has for nearly a century continued decreasing at approximately 0.5 per cent annually (African Development Bank, 2004:123).

Possible threats to a successful economic integration on the continent, theoretically speaking (Salvatore, 1990:294; Todaro, 1994:512), may include the fact that not all NEPAD signatory member countries are at an equal level of development, the region's general lack of the basic infrastructure that should form part of an industrial base and the probable reluctance of leaders of the different countries to relinquish part of their sovereignty to a supranational community body as required for a successful economic integration (Ilorah, 2004). Basically, all African countries, including the relatively affluent ones, such as South Africa, experience similar economic difficulties, such as poor direct investments, high unemployment rates and poor primary goods exports, all of which have made these countries susceptible to aid. These economic difficulties should in fact form the background condition for integration (Mattli, 2001:51). A successful economic integration in Africa will require that the integrated body avoids the mistakes made by some of the sub-regional integration initiatives such as the Economic Community of West African States (ECOWAS), Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA), among others. Significant barriers to trade remain within these sub-regional integration initiatives because of the following: (1) imperfect implementation of agreements, (2) cumbersome and costly border formalities, (3) an absence of common standards, (4) inconsistent (and inconsistently applied) tax policies, (5) countervailing duties, (6) ‘emergency protection’ to address balance of payment problems or to shield an industry from surges of imports and (7) discrimination in public procurement (World Bank, 2006:312 and 335). The continent must deal with these issues if it is to achieve effective regional economic integration (World Bank, 2006:312).

Qualification for membership in the integrated body should require that NEPAD member countries agree to sign up to the African Peer Review Mechanism, an arm of NEPAD and allow themselves be peer reviewed. It is imperative that only signed-up countries that have, in principle, committed themselves to guaranteeing individual liberty and accountable and participatory government should be part of the integrated body, the members of which are entitled to enjoy the associated trade and investment benefits while non-members are excluded. To reverse the severe skills shortage in the continent, member countries should prioritise education, especially in the natural sciences and mathematics and also try to retain skilled citizens as well as lure back home those outside the continent. Africa should begin to shun foreign aid. Perhaps foreign aid in the form of foreign direct investments should be encouraged as these promote technological and other knowledge transfers. This implies that aid should be used as a stimulus for investment, with a significant proportion of it steered towards infrastructural development and, possibly in partnership with the private sector, towards attracting even more resources, in the process reducing risks in infrastructural ventures on the continent.

Very importantly for Africa, aid in the form of foreign direct investments, unlike aid in the form of the so-called soft loans, is likely to minimise resource misallocations. Soft loans to Africa, even though made on a concessionary basis, i.e. at below market interest rates, have often been known to go into unprofitable investments or imports of consumption goods and have thereby exacerbated the continent's debt crisis rather than contributed to meaningful investments. A soft loan is debt finance and a country's liabilities to creditors do not fall even if its real income falls (Krugman & Obstfeld, 1991:639; 1997:693), a typical predicament for many African countries. Promoting foreign direct investment on the continent, on the other hand, will require that Africa avoids adverse economic events, such as expropriation or nationalisation, which could result in a fall in earnings and dividends. Successful investments will facilitate better trade on the continent.

6. Conclusion

Africa continues to project a sad case of a region that is more or less excluded from world trade and its benefits. African goods (except petroleum and mineral products) are perceived as inferior goods characterised by low income and price elasticities of demand. Part of the problem is that African countries have not invested sufficiently in education and infrastructure and, as a result, the continent lacks the technology to exploit its relatively abundant natural resources to its benefit. Its limited market access also means that both the static and dynamic trade benefits continue to elude it. Series of rounds of trade negotiations through GATT, which was later replaced by the WTO, with the aim of tearing down barriers to trade so as to benefit rich and poor countries alike, have failed to achieve their objectives. These trade rounds have merely created unbalanced rules, benefiting developed countries but disadvantaging Africa. Ironically, the developed countries would rather give aid to Africa.

Africa should discontinue its present dependence on foreign aid to fill savings and foreign exchange gaps. Perhaps aid as knowledge transfer and aid for emergency relief assistance should be welcomed, but only temporarily. The African-style total dependence on aid, however, tends to erode local initiative and should therefore be discouraged. This total dependency can be a major problem because, apart from problems associated with time lags before external (donor) response to shocks (Green, 1993:38–9), if those donors providing the aid change their minds and stop providing it the recipient countries can be in serious trouble, to the level of a national crisis. The tendency to tie aid to the donor countries' exports gives monopoly powers to such donors, enabling them to unilaterally set uncompetitive high prices that disadvantage the aid-receiving countries (Osei, 2005). This suggests that tied aid has a tendency to aggravate the already deteriorated terms of trade of African export commodities, saddling many countries with substantial debt repayment problems. According to the World Bank (2006:351), the practice of tying aid tends to reduce its purchasing power.

African countries should begin to work together more actively, both economically and politically. For example, the OECD countries' rules, which restrict exports of meat and dairy products from Africa, should rather serve as a challenge to African producers to improve the quality of their goods in general, including those meant for African markets. Among the long-term effects of such improvements would be increases in demand, production, exports and export revenues. The very slow pace of development on the continent or, arguably, the total lack of development means that individual countries are unable to accomplish the uphill task of development alone. A coordinated action by African governments has led to the establishment of the NEPAD programme and a further coordination of efforts is needed to develop the programme to a full economic integration. A successful integration will instil discipline in member countries, their resources channelled into proper capital investment since countries misappropriating their resources will be left lagging behind.