Book-Blogging: Dead Aid – Chapter Eight

This is part of my effort to read through a number of development-focused books. Previous chapters of Dead Aid: onetwothreefourfive/six, seven

Component number two of the “Dead Aid Approach” emphasizes the benefits of trade. Moyo ended the previous chapter with a claim that this chapter would open the door for resource-poor countries in a way that Foreign Direct Investment couldn’t; after reading the chapter, I think there are good reasons to be skeptical of this claim.

First, Moyo lambasts Western agricultural protectionism for being hypocritical and damaging to African growth. No argument here – subsidies, tariffs, and other barriers to free trade are indeed troublesome and difficult to change. It doesn’t just happen from north to south though; as Moyo notes,

“African countries impose an average tariff of 34 percent on agricultural products from other African nations, and 21 percent on their own products. As a result, trade between African countries accounts for only 10 percent of their total exports.”

So, let’s take this for what it is: an extremely complex economic and political issue that is near-endemic in (almost) all countries.  Curing it isn’t reasonable – to take the obvious example, the American political system is far too sclerotic and beholden to interest groups to make this type of change. It’s not impossible, of course, but energy put into alternatives would likely yield more progress.

Moyo’s solution: China, again. Which makes sense! China demands an increasing amount of natural resources to fuel its growth; many African countries have those resources. A match made in free-market heaven. But there are a few problems with this solution, and I’ll focus on two:  the “too many eggs in one basket problem” and the infrastructure problem.

If African countries rely too heavily on China as their main – or even favorite – trading partner, China will have a remarkable amount of leverage that it can use to set trading terms. Certain countries would be too beholden to China to say no, and would have to accept most of the terms.  Of course, this can happen with any country – not just China – but a diversified group of trading partners is more desirable than one.

Perhaps the more significant issue is that trade won’t solve the issues outlined in the previous chapter; resource-poor countries would be kept out of the market. Look at it this way: let’s assume that China will inject FDI into countries with resources, and as a result will also put investment into infrastructure necessary to carry the resources from point A to B (e.g., plants, ports, airways, roads). Resource-rich countries now have the resources and infrastructure; resource-poor countries (who may otherwise be able to get in on agricultural or textile trade, say) lack both. Now they are even farther behind; unless they have a significant competitive advantage in a certain good or especially cheap labor, there won’t be a free-market-based incentive to trade with them. As in the last chapter, this disadvantage would erode over time, as resources are depleted, but even then it’s unclear if the resource-poor countries would be in a position to benefit.

There’s one last point I want to focus on: the technology gap between African countries and the West, created in part by tariffs and other protectionist policies:

“Of course, such are the West’s demands that even if all its trade barriers were lifted, Africa no longer has the technological equipment and know-how to compete on many products where it once had a comparative advantage. Together with environmental and labor issues, these are now serious barriers to trade.”

For the sake of argument, let’s assume that Moyo’s right when she assumes this is the West’s fault (which may or may not be true). Then what? Knowledge can be copied and shared, essentially for free; equipment can be made and donated/sold, and technological diffusion happens all the time – this is why it took the U.K and U.S. a few hundred years to “modernize” but only took South Korea forty years; they could imitate the West. We can argue about whether filling the gap is the best thing to do, and how exactly to do it – but it’s possible to do so, at least in theory.

It seems like we’re back where we ended the previous chapter – while trade is a great thing and should be promoted, it’s unlikely that a robust trading partnership would be established between the resource-poor countries and other trading partners. Moyo needs to grapple with this reality and come up with a proposal that makes the worst-off countries a priority.

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