What should world (and African) leaders do to halt protectionism from spreading?

Image: Flickr, PROAndrew Smith
Image: Flickr, PROAndrew Smith

There is a saying in Africa which goes: "when the elephants fight, the grass gets trampled". This accurately depicts the fallout from the current global economic disorder since it is clear that whilst Africans had very little to do with the makings of the crisis, we will suffer from it.

This will manifest in two broad ways: the direct economic impacts, and growing regulatory protectionism. The former will occur through three channels:

  • Direct financial contagion, specifically capital flight – or more accurately avoidance – from emerging markets and associated macroeconomic dislocations (weakened exchange rates; increased domestic interest rates and increased debt payments). It is unlikely this financial squeeze will be offset by increased inflows of official development assistance from the donor community since many developed countries are scraping pennies together to recapitalize banking systems and provide fiscal shock therapy to domestic economies. Therefore already vulnerable revenues are likely to come under great stress in many African countries in the months ahead.
  • Reduced remittances from African diasporas resident in the developed world. In recent decades these financial inflows have alternately cushioned the ill-effects of macroeconomic mismanagement or underpinned positive structural transformation stories. This will exacerbate foreign exchange shortages, dampen domestic growth prospects through reduced consumption, and heighten revenue pressures.
  • Reduced prices and volumes of major commodity exports, induced by recessionary conditions in the developed world now spreading to China and India. This will reduce economic growth across the continent, although some countries will benefit from lower commodity prices and hence less pressure to raise interest rates to curtail inflation.

Altogether a potentially gloomy scenario is unfolding across the world’s most vulnerable continent. But things are likely to get considerably worse if developed world lobbies get their way. That scenario depends in turn on two related issues: how bad will the recession be (depth; duration), and how will the developed world respond to it?

Concerning the first question opinions are mixed, to say the least. My money is on a relatively short US recession, accompanied by huge amounts of dollars thrown at its constipated financial system and large bailouts for the industrial heartland. Those two dynamics raise protectionist dilemmas in the form of subsidies to major established interests. In the case of the automotive industry, the current focus of discussion in Washington, the subsidy element is arguably clearer – bailing out Detroit will require effective subsidies which may be actionable or at least copied by others. In the case of the financial sector it is less clear: at what point does a bailout and recapitalization become subsidization and elicit copy-cat responses? Since the entire developed world seems to be engaged in these activities it is possible no-one country will take action against another – this is the financial equivalent of “MAD” (mutually assured destruction). Nonetheless world leaders – or more accurately finance ministers – will have to agree on protocols to govern these programmes lest the protectionist genie be let out of the bottle. And such protocols need to be institutionalized in the WTO, possibly as part of an “early harvest” package under the Doha round.

Of more concern is the course the crisis could take in Europe. Viewed from the outside things do not look good. The UK government has moved decisively to implement crisis response measures and is able to do so more flexibly than its European counterparts by virtue of the fact that the latter are constrained by their common membership of the European Monetary Union (EMU). Given that EMU countries have ceded monetary policy autonomy to the European Central Bank, whose sole mandate is to combat inflation, fiscal policy is the only national instrument available for reflating their economies. Spain, Italy and potentially Austria seem particularly exposed; the latter two are heavily exposed to Eastern Europe where the crisis is likely to hit hardest. The travails of these three countries could strain EMU unity to the breaking point if not handled correctly. Add France to the pot, with its increasingly strident calls for wholesale reform of the global financial system and protection of “national champions” and the potential for growing regulatory protectionism emanating from Europe becomes serious.

Currently this takes the form of standards protection, covering industrial, consumer, health, and increasingly environmental regulations. Financial services are now being added to the pot, whilst exchange rate “manipulation” and taxation issues are being dragged towards it. All of these are likely to intensify in response to recessionary conditions, whilst compensatory financing flows to assist African exporters in overcoming regulatory hurdles is likely to decrease. Meanwhile attempts to shield “national champions” from recessionary impacts and “unfair competition”, using safeguards, anti-dumping duties and the like will grow.

Consequently global leaders need to reinforce efforts to shore up domestic demand in order to put a floor under their own growth prospects, but also those of poor developing countries in Africa and elsewhere. China has already shown the way; the developed world should follow in earnest with fiscal stimuli combining tax relief with infrastructure spending, but avoiding special deals for distressed sectors in order to minimize protectionist impulses. And they should commit to seeing the Doha Round through, whilst offering maximum flexibility in their “red line” areas. The truth of the matter is that the Doha round deal is there for the taking provided entrenched domestic lobbies particularly in the developed world are stared-down. Not that I am optimistic on that front!

Furthermore, since the crisis will impact directly on African economies, world leaders should as a first step ensure sufficient resources are available via the multilateral lending institutions (the World Bank and International Monetary Fund) for well-managed economies on non-punitive terms and without conditionalities to enable relatively smooth adjustment. In the medium-term they should agree to change the established voting patterns governing both institutions to more accurately reflect underlying global economic realities; in such a scenario Africans will have to put their faith in China, India, and other rapidly growing emerging markets to represent their interests since a realignment must be based on relative economic weight – and Africa is thin indeed.

Finally, there is the not insubstantial matter of what Africans can do for themselves. Given the proximity of the mooted Doha Round Ministerial in December it is appropriate to ask how “the” African approach to it stacks up against the gathering protectionist winds. Up to this point the Africa group’s positions on the core market access package have been overwhelmingly defensive, including inter alia:

  • Retaining preferential access into developed country markets by minimizing tariff reductions there;
  • Resisting wholesale reform of European Union agricultural regimes for the same purpose;
  • Tempering EU demands for an overhaul of US food aid practices in order to avoid disruptions in provision of food aid (the continent being chronically dependent on such imports);
  • Avoiding liberalization of domestic services markets ostensibly because we do not have services to export;
  • Advocating developed country liberalization of temporary movement of natural persons in order to encourage growth of remittances;
  • Seeking wholesale carve-outs from industrial tariff reductions in order to protect policy space.

This defensive agenda is not surprising given the continent’s major economic and governance challenges. However, in the current and unfolding global environment it does not serve Africa well.

First, defending developed country agricultural protection systems blunts the price signals African farmers need to build their productivity, whilst locking whole economies into cash crop production for export at the potential overall expense of food security. Yet the global environment is likely to entrench existing developed country policies potentially for decades to come.

Second, retaining policy space for tariff protection only makes sense for those imports that generate substantial revenues. Overall Africa does not have a comparative advantage in industrial production, and could benefit hugely by importing from much more efficient Asian producers. The global competitive environment is going to become much more contested in the coming years as production is reallocated (and the process resisted) from developed countries to rapidly growing emerging Asia. In the interim surplus capacity will ensure prices remain depressed; further discouraging African production.

Third, in order to build competitive economies, not least in manufacturing, African producers and consumers need access to low-cost, efficient network (and other) services. With very few exceptions African producers are not in a position to provide these, whereas foreign producers require attractive regulatory settings to do so. Therefore African countries should seize the services liberalization nettle – retaining due regard for universal access policies – and embrace this element of the Doha Round.

Adopting this approach would make a substantial contribution to unlocking the reciprocal concessions required from developed countries in order to bed down the Doha round. Altogether African leaders need to overcome their own protectionist instincts in order to contribute to unlocking developed world lobbies in our own, African and global interests. Times of crisis present ideal opportunities for reformers with sufficient leverage and vision to take advantage of them. Personally I suspect such people are in desperately short supply.