Mainstream Weekly

Home > Archives (2006 on) > 2010 > South-South Cooperation with Special Reference to Sub-Saharan African (...)

Mainstream, Vol XLVIII, No 37, September 4, 2010

South-South Cooperation with Special Reference to Sub-Saharan African Countries

Wednesday 8 September 2010, by Anshuman Gupta

I. Introduction

After independence from colonial rule, which most of the countries of Africa were reeling under, these countries set out on the course of their economic development independently. Though some development had taken place even under colonial rule, it was circumstantial, based on the needs of the colonial masters, devoid of any proper planning and vision. So, virtually almost all countries of Africa had to start their journey of development from the scratch. In the 1950s and 1960s, the economic models available were indicating towards the North for meaningful and productive cooperation on the premise of comparative advantages arising from differences in factor endowments between the South and the North. This was also appropriate at that time owing to the similar positions of the countries of the South on the economic front. Northern countries, rich in capital and technologies, were the only viable option for any economic cooperation. The North too took it up as an appropriate policy, both morally and economically, to forge economic cooperation with these economies and return to them in some forms what they had extracted from these economies during the colonial rule.

This cooperation came through many channels including the unilateral channel, bilateral channel and multilateral channel. The cooperation found more unilateral elements in it as these countries had little to offer in reciprocation. It was in the form of direct aid related to some development projects, concessional loans and market access to products originating from the African countries on a non-quid-pro-quo basis. The African Growth and Opportunity Act (AGOVA) by the US was an example in this regard. Bilateral channels included something on the basis of mutuality. They mainly constituted FDI in these countries primerily in extractive industries. The multi-lateral and regional channels comprised the World Bank, IMF, EU etc. The EU has the ’Everything But Arms’ Agreement with poor countries of the South, under which it unilaterally provides products coming from these countries access on preferential basis. This is being replaced by Economic Partnership Agreements (EPAs) which is based on the principle of quid-pro-quo.

The Bretton Woods institutions (World Bank and IMF), which are virtually run by the North, also opened a window of cooperation by providing soft loans for development purposes and loans for meeting the BoP crisis respectively. However, something fundamentally has gone wrong with North-South cooperation. Its testimony is the per capita incomes of most of the Sub-Saharan countries, most of which have been dependent on such cooperation right from the beginning; these have either gone down or stagnated at the level of 1980, though other factors, like political instability, locational disadvantage etc., are also responsible for it. A major part of the economic plight of the Sub-Saharan countries was due to their reliance on Western technology, which did not match their basic endowments. (Sharma, 1993) As a whole, the Sub-Saharan region’s per capita Gross Domestic Product declined by 1.2 per cent during the period 1981-1990 and by 0.2 per cent over the period 1991-2000. (Dupasquier and Osakwe, 2007) During 1980-2002, its share in the world trade fell from 4.6 per cent to less than 1.8 per cent.1 The Structural Adjustment Programme (SAP), initiated by the IMF in these economies, also did not produce the desired results.2

The monetarist model, prescribed by the IMF to the African countries going for help to it for their BoP problems, produced more ill-effects than doing good to them.3 Moreover, it has been ironical that in spite of their industries being at a nascent stage invoking the infant industry argument and all the conditions of the market failures (warranting protected markets for the nascent industries in Africa in general) prevailing there, the IMF prescribed for them the open market policies designed under the Washington Consensus, which either destabilised their infant industrial base or did not let it come to a critical level. This becomes more surprising because these market failure conditions and infant industry argument giving preferences to the protected market over the open one have been espoused by the Western economists only and they are well documented in the textbooks. They are referred to as the theory of the second best.4

The African countries were fit cases for the theory of the second best though some economists argue that instead of using the theory of the second best, it is more appropriate to deal with the market failure directly. For example, if there is excessive unemployment in an economy, it is better to subsidise the labour-intensive industry directly rather than protecting them from free trade by using tariff or non-tariff means. This would at least avoid the consumption distortion in the economy.5 However, this argument is more relevant in cases of developed or emerging economies. In case of poor countries, it would be even more harmful as it would be resulting in extra burden on their exchequers, and these countries already run in deficit owing to the narrow tax bases of their economies. Further, the removal or reduction of tariffs would make these tax bases still more thin. Moreover, the free trade policy would not let even these subsidised industries come up to a critical level owing to intense competition from outside. So this argument is more relevant in the countries where industries have set their feet firmly, not in countries where things have to start from the scratch.

All the policies stemming from the Washington Consensus based on neo-liberalism, including privatisation, liberalisation and deregulation, without proper attention to pre-conditions for them and their pace and sequencing, only harmed the countries seeking help from the IMF.6 Excessive obsession about fighting inflation at the cost of growth and employment creation took its toll on the IMF disciples’ economies.7 In fact, the countries which bypassed the advice of the IMF performed better.8 Even bilateral relations, ostensibly based on mutuality did more good to the countries of the North by bringing little benefits to the African countries, as they could produce little positive externalities.9 Though two important agreements-like AGOVA and Everything But Arms (EBA)-opened the markets for the goods originating from Africa, their positive impact eroded in the backdrop of the overall reduction of tariff and non-tariff barriers by the North in the multilateral framework10 and the still persistent unfair trading system, whereby the North is till date maintaining huge subsidies in the agricultural sector, an important sector for the African countries. So in a nutshell, North-South cooperation has not brought the desired results for these economies. It did more good to the economies of the North than the economies of the South in general and the Sub-Saharan African countries in particular. More often than not, it turned into a donor-donee relationship which brought in the exploitative elements.

It is in this background that the present paper tries to see critically the case of South-South cooperation and attempts to find out some bases for increasing trade and investments within the South in general and between India and the African countries in particular. It analyses the present trends in trade and investment between India and the African countries. It tries to explain the reasons as to why the trade and investment ties have been low between them and attempts to give some recommendations to improve the economic ties between India and the African countries. The second section analyses the justification for South-South cooperation and seeks to find a basis for increasing trade and investment between India and Africa. The third section critically analyses the recent trends in trade and investments in Africa. The fourth section attempts to critically examine the reasons for the low level of trade and investment relations between India and Africa with empirical analysis. The fifth section gives results of the augmented-gravity model to show the factors impacting the decisions of the Indian exporters for the destination of their exports, especially in Africa. The sixth section comes out with conclusions and some policy recommendations on the basis of discussions and the results of the gravity model.

II South-South Cooperation: Bases for Increasing Economic Ties

THOUGH talk about South-South cooperation is not a new phenomenon, and its genesis can be traced to the time of the Non-Aligned Movement (NAM) [even if, at that time, it was more in reference to the political considerations)], it got a new impetus especially after the 1997 currency crisis. The idea again shot into prominence after the recent financial crisis, when it became evident to many countries from the South that they could no longer be dependent on the North. The profligacy on the part of one country (the US) has brought the whole international financial system and eventually the world economic system to a virtual halt. It resulted in a massive shrinkage of the world economy with a substantial scale down of the GDP and large scale unemployment, and the phenomena continue to this day. No country is totally unaffected by it. The scale of damage is dependent on the degree of integration of the respective country to the world economy, especially to the North. All-round measures are being initiated to salvage the world economy from slipping into deep recession. Though the major economies of the world are now showing signs of recovery, it has already inflicted much damage on the world economy, especially the African economies, much dependent for the export of commodities to these markets.

Now the countries of the South in general have realised about the fundamental problem of over-dependence on the North, especially the US. They have started looking at some alternative economies for playing the role of a power-house, currently being played by the North, especially the US. They are also mindful of the fact that in the current scenario, some countries in the South also, such as Brazil, India, China, South Africa, can assume the same role. They have developed indigenous technologies in many fields. There is re-intensification of efforts for looking inward to the South, whose testimony is in the all-round attempts to forge new regional agreements and strengthening the old ones in the South. The usage of inappropriate Western technologies, which are highly capital intensive, by the Sub-Saharan countries resulted in the decline of the marginal return on their investments and near absence of backward and forward linkages. So there is a strong case for South-South cooperation. (Sharma, 1993) India can help the Sub-Saharan countries especially in small-scale industries and agriculture.11

It is in this backdrop that the African countries, which got adversely affected in a large measure by the recent economic turmoil, have also realised the systemic problem of being excessively dependent on the North. African countries as a whole recorded reduction in the growth of the GDP from 6.2 per cent in 2007-08 to 5.2 per cent in 2008-09, which has been further projected by the IMF to go down to two per cent in 2009-10.12 The countries of the Sub-Saharan region are still worse. They accounted for reduction in the average growth of the GDP from 6.9 per cent in 2007-08 to 5.5 per cent in 2008-09. This has been further projected to scale down to 1.7 per cent in 2009-10. In this recessionary situation, in fact, the reasonably good growth rates of China and India, which recorded nine per cent and 7.3 per cent respectively during 2008-09, and their increased trade relations with the African countries have come as a saviour for these economies. Furthermore, the gradual democratic movement in African countries, making their governments more accountable to the people, has forced the ruling classes in these countries to be more introspective and come out of the narrow, self-serving policies to do real good in general. They want to break out of the donor-donee relationship and seek ties based on mutuality. This mindset of the African countries is providing a good platform to the giant countries of the South, especially India, to forge economic ties with the African states, especially Sub-Saharan countries, based on mutuality. These economic ties with the countries of the South will give many additional advantages to the African nations, something that is often missing in the case of ties with the North. They are:

• The technologies developed in the South would be more suitable to the endowments of the African countries. (Kumar 1987)

• These technologies can be further adapted to the scale and other conditions of the recipient countries.13

• These economic ties are more likely to provide the backward and forward linkages with other sectors in the economy.

• Since these technologies and related capital goods would be cheaper than what they were importing from the North, it would save their precious foreign exchange.14

• Since these technologies are relatively simple, they will reduce the dependency on foreign experts, saving further their hard currency.15

• It will diversify their economies into the genuine industrial sector, which will reduce their over-dependence on primary products for exports.

• And finally, these would be helpful in meeting the Millennium Development Goals (MDGs)._

REFERENCES

Dupasquier, Chantal and Osakwe, Patrick N. (2007), "Trade Regimes, Liberalisation and Macroeconomic Instability in Africa" in Senghor, Jeggan C. and Poku, Nana K. (eds.), Toward Africa’s Renewal, Ashgate Publishers, England.

Kumar, Nagesh (1987), "Transfer of Industrial Technology to Africa: Prospects of South-South Cooperation" in African Economic Development: An Agenda for Future, Crescent Printing Works Private Limited, RIS, New Delhi.

Kankwenda, Mbaya J. (2007), "Revisiting the African Development Trajectory: From LPA to NEPAD" in Senghor, Jeggan C. and Poku, Nana K. (eds.), Toward Africa’s Renewal, Ashgate Publishers, England.

Krugman, Paul R. and Obstfeld, Maurice (2003), International Economics: Theory and Policy, Dorling Kindersley, India.

Sharma, Raj (1993), The Missing Middle in Sub-Saharan Africa: Role of South-South Cooperation, RIS, Interest Publication, India.

Stiglitz, Joseph (2002), Globalisation and Its Discontent, Penguin Group, India.

WEO (2009), Crisis and Recovery, World Economic Outlook (IMF), April.

WTDR (2007), "Building a Development-Friendly World Trading System", World Trade and Development Report, RIS, Oxford University Press.

FOOTNOTES

1. Dupasquier and Osakwe (2007).

2. Kankwenda (2007).

3. Ibid.

4. Krugman (2003).

5. Ibid.

6. Stiglitz (2002).

7. Ibid.

8. Stiglitz (2006).

9. Kankwenda (2007).

10. WTDR (2007).

11. Sharma (1993).

12. WEO (2009).

13. Kumar (1987).

14. Ibid.

15. Kumar (1987).

Dr Anshuman Gupta is the Head of Economics and International Business Department, University of Petroleum and Energy Studies, Dehradun.

Notice: Due to the Corona Virus crisis and lockdowns underway our print edition is interrupted & only an online edition is appearing. No subscriptions are being accepted