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June 27, 2006

Africa and China: Why the fuss?

The news that China has made a big diplomatic and trade initiative in Africa has caused some concern. Why?

China is interested in securing the means that will sustain its high rates of export led growth. To do this it must secure predictable sources of raw materials and fuel. Sub-Saharan Africa, relatively un-industrialized, is a potential source of raw material inputs, including oil, needed now or likely to be needed by China in the future. The demand for oil and minerals is global and not restricted to China and price rises over recent years have benefited several primary commodity exporting countries. China’s interest in Africa is not new. Aid to sub-Saharan Africa started as soon as the movement towards independence took place and according to Chinese sources its current policy continues to work within the framework of non-interference established decades ago. China promotes a positive image of Africa, holds that the continent shares developmental experiences with China and accepts development suited to national circumstances. It therefore avoids the judgmental views of the West and plays the ‘learning from each other’ card, not so readily available to western countries. The difference between now and in the past is that China has the resources to engage substantially in both trade and aid.

As a ‘driver’ economy in Asia (along with India) it is likely to secure economic leadership in Asia, though there are many areas in which the Chinese economy is deficient when compared in detail with the Indian economy. Nonetheless, there is not an economy world-wide that is not likely to feel the impact of China’s industrialization in one way or another. Developing countries (such as Mexico or other countries in Latin America) making use of labor-intensive production processes are just as likely as developing countries to feel the impact of China’s economic growth in both positive and negative terms. Sub-Saharan Africa is no exception. This is something that Mauritius and South Africa are aware of with respect to added competition to their textile industries, a source in the case of Mauritius of its historical drive to full employment. So there are two main interests: Africa as a source of mineral inputs and Africa as an outlet for China’s industrial production. South Africa invests in China and hopes to increase Chinese investment in South Africa. The South African Government entered into an agreement with the Chinese to restrict textile exports from China to South Africa to help protect domestic South African textile markets. China clearly values potential mineral imports and potential investment opportunities in sub-Saharan Africa’s most significant economy more highly than textile exports!

The Chinese view trade with Africa as one in which interests are mutual. The leadership stressed, according to Chinese news sources, ‘non-interference’ and hence trade and investment activity without ‘dictating terms for political and economic reforms’. This and the resulting loss of potential leverage is what western governments and western commentators seem to fear. It should be noted that China broke diplomatic relations with Senegal (now restored) when Senegal decided to acknowledge Taiwan. China has investment interests in oil-producing countries such as Angola. In addition, cheap Chinese consumer goods are ideal for the developing markets in those economies that are starting to pull away from instability and head towards sustainable growth. There is however a problem in all of this: China needs predictable supplies and cannot therefore be indifferent to issues of stability in sub-Saharan African countries.

What sub-Saharan Africa needs is not simply better prices for its mineral exports but new export opportunities. Trade in agricultural exports and in new export crops would help economic diversification. One problem is that the price of the currency (the external value of domestic currency) is highly influenced by the value of key mineral exports (oil, and in the case of Zambia, copper). When commodities are in demand, the price of the currency goes up and alternative exports become too expensive. Governments in Africa need to resist very strongly the tendency to spend the ‘windfall profits’ (the Nigerian disease in earlier decades) on unproductive projects, whatever the source of trade and aid. Look at the way Botswana resisted the mineral investment boom during the years of high growth knowing full well that this would decline once the initial surge was over. No doubt governments in Africa need to be as skeptical about Chinese interests as they are of those of the West. An important thing is not to continue to be marginalized in the international economy by relying sole on one or two principle export commodities. Careful investment strategies are required as well as new export markets for agricultural produce. With the Doha Round seemingly stalled, China may be a source of new agricultural export markets.

China or the West, sub-Saharan Africa still needs to play a careful economic game.

June 21, 2006

Don't forget about Doha.

The Vienna Summit Declaration of 21 June 2006 covers a wide range range of common EU and US interests. Two short paragraphs cover key issues in international economic development. How are these two paragraphs to be read?

Issues covered range from peace to sustainable development. In amongst the big strategic agenda there is an agendum item listed as ‘Fostering prosperity and opportunity’. The section of the declaration, though dealing mainly with Trans-Atlantic economic initiatives touches briefly on the ‘Doha Development Agenda’ and on the achievement of the ‘Millennium Development Goals’. Both are important areas of concern and though less dramatic than other areas such as ‘security’ or 'peace' are no less important.

The issue of trade liberalization in agricultural produce is one of the key issues of the Doha Round. No reference is made to progress in the declaration with respect to agricultural trade. An ‘ambitious and balanced agreement’ that is capable of ‘improving living standards’ and of reducing poverty, must, if only by implication, mean facing-up to agricultural subsidies in the developed market economies. The communiqué calls for ‘an agreement that is worthy of the objectives identified in launching the Doha Development Agenda’. Is there likely to be significant progress on this issue given the Common Agricultural Policy? Can something more than the removal of export subsidies be possible? Is the risk of failure so great? Are trade ministers being sent a significant message or is this mere face saving?

With respect to the achievement of the Millennium Development Goals, the declaration is bland indeed: ‘We will increase our partnership with developing countries to promote growth globally for the benefit of all’. At least the notion of achieving the Millennium Goals has not vanished from summit discussion but is this kind of vagueness the best that can be expected? Do such statements do more harm than good? It is certainly hard to see in such statements what the implications might be or how the contradictions of economic globalization (between, say, growth and income distribution) may be resolved. ‘Trade ministers’ are identified with action with respect to Doha, with just a hint (or perhaps more than a hint, depending on how such statments are intended to be read) of urgency— ‘We recognize the need for trade ministers to make substantial progress on core negotiating areas over the next few weeks … ‘. Can we conclude that progress has been slower than even the most cynical expected and that this is a call for action? What, if anything, hangs on such a statement? Any potential actors with respect to the Millennium Goals are left vague and indeterminate. Does this matter?

There is bound to be a protocol for writing summit statements. How does a 'communiqué' differ from a ‘declaration’? What precise commitments do summit participants make when they make a 'declaration'? What, I wonder in addition, is the protocol for reading such documents? Should we just be pleased that they even noticed the issues highlighted here?

June 20, 2006

IMF Reform, the Bank of England and Others

The issue of the reform of the IMF is now on the international agenda. What are the options and how can the public understand the issues and help inform the solutions?

The issue of reform of the IMF is unavoidable. It is not only on the agenda of participating governments but it has been on the Fund’s own agenda since the publication, in September of last year, of the Medium-Term Strategy. Now the concern is the extent of the reforms. The British Prime Minister called for reform of the international institutions and framed the problem in terms of trying to solve the problems of the 21st century with mid-20th century institutions. In this he was following the line taken by Mervyn King (Governor of the Bank of England) who had earlier in the year set out, in India as it happens, his views on the need for, and on the extent of, the reforms. In going back to basics, perhaps paradoxically, King calls on some of the ideas of John Maynard Keynes who was in at the beginning, whilst rethinking contemporary contexts and needs.

The Managing Director of the IMF reported in April 2006 that the discussion that followed the publication of the Medium-Term Strategy ranged from the ‘evolutionary to the revolutionary’. The Fund sees the issue broadly along the lines of adjusting relationships with its members and with emerging markets in particular whilst maintaining a long list of responsibilities. The Governor of the Bank of England talks of a lack of clarity with respect to the Fund’s present role whereas an independent commentator, Rainer Falk, also argues for a fundamental reform and, especially for radical democratization of the institution. Falk sees the "European response' i.e. the EU response, as pathetic. Abolition of both the Fund and the World Bank do not seem to be part of the possibilities under consideration though King referred to Keynes’ view that if the IMF and the World Bank were to become politicized then the best thing would be for the organizations ‘to fall into an eternal slumber’.

King posed a series of questions, contextualized within the current conditions of international capital flows, designed to take the issue back to basic concerns. One issue is whether or not capital markets have replaced the need for the Fund. Interactions and the international transmission of shocks are significant issues and as countries are no longer ‘atomistic’ there can be incompatibilities. King would locate the Fund’s role in the context of the need for an objective analysis of ‘spill-over effects’ and in the need to discuss risks. The basis for the Fund as a risk analysis/risk averting forum would be the analysis of country balance sheets and the promotion of transparency about monetary policy. This would not be a Central Bank ('lender-of -last resort') to the world economy but an altogether more modest though nonetheless essential role.

On this basis, there needs to be ‘mandate reform’ (at its core ‘global economic and monetary stability’) followed by ‘management reform’ (the new mandate to be ‘delivered, by ‘the management of the IMF’ rather than through the Board). Any international institution in a global world must face up to the problem of ‘legitimacy’ (Falk’s issue is that of radical democratization). King sees the need to ensure that ‘all regions of the world’ are ‘appropriately represented’ and is clear that China and India have a part to play. No mention is made of a coordinated European approach, a suggested by Falk. King calls for answers to the questions that he posed in February 2006. The views that he put forward would limit the responsibilities of the IMF, particularly with respect to economic development. His list is certainly different from the long and detailed list that the Fund proposes for itself. King wants to avoid the further evolution of the IMF through ‘bland communiqués’ and ‘meaningless statements’. This would place him more on the 'revolutionary' than on the 'evoluitonary' part of the spectrum of opinion as described by the Fund's Manager.

Choices with respect to the institutions for running the global economy are significant choices. It is part of my job to raise the quality of public discussion about international issues. There must be others with similar roles and concerns. How can such choices be transmitted to ordinary people, outside the corridors of power, or in King’s terms outside the ‘windowless rooms’ of international meetings, in ways that help ensure that the choices made are informed by democratic rather than simply technical considerations? How can wider public discussion ensure that ‘bland communiqués' and 'meaningless statements' do not win out?

June 15, 2006

Governance and Enlightenment

Governance and related issues continue to be given attention by development agencies. Is there anything we can learn from the Scottish Enlightenment on the issue of governance?

Governance and Enlightenment

The United States has raised repeatedly the question of promoting democracy in fragile states. The United Kingdom has repeatedly called for the development of good governance in parts of the developing world, in sub-Saharan Africa in particular. The significance of forms of government for the social and economic welfare of populations is not a new topic. Aristotle thought about the topic. Thomas Aquinas had something to say about it. In the 18th century members of the Scottish Enlightenment, such as David Hume, Adam Ferguson and Adam Smith, all had something say about the importance of good government and the rule of law for economic development. The development of ‘civil society’ was of considerable concern to such thinkers and to their American counterparts.

Governance is concerned with how states make political and economic decisions and how politicians and administrations relate to society, to the constitution and to the rule of law. If development means an increasing capacity to create incomes, to raise social welfare and engage in trade then stability and legality would seem to be important and enduring issues, as Enlightenment thinkers argued. Where ‘governance’ is ‘good’, then the prospect of raising social welfare and incomes through a combination of government action and the market is better than where the situation is less good. Where ‘governance’ is poor, government and the state hinder the development of social welfare and incomes. Democracy itself encourages participation and involvement and this is more likely to lead to better policy and more fulfilled lives.

There has been considerable research put into defining the characteristics of good governance in a variety of contexts. The elements have been defined and categorized. The African Commission Report high-lighted the governance issue with respect to sub-Saharan Africa as a key issue. But is the issue really amenable to outside influence to any significant extent? Is there any real possibility of change unless and until it becomes the focused desire of change-oriented politicians and a supportive domestic constituency? Fragile states can get addicted to debt and lapse into poor behavior.

The Scottish Enlightenment thought that it was the middling-classes of society that could merge ‘virtue’ with the demands of ‘commercialization’. The ruling classes were too open to temptation and the poor too distracted by their poverty. Maybe we are clear about what ought to be done but as outsiders cannot in fact do very much. If the Africa Report is right, the action must be perhaps with African politicians (but remember the Enlightenment’s warning). Professional people working to international standards of professional behavior may be should also be given a chance. Through the internet, the domestic representatives of civil society can also make use of the ‘politics of shame’ though this is more likely to have successes where governance is relatively good. There is something or someone in such contexts capable of feeling shame and so capable of undertaking changes in behavior and hence in ‘governance’. Politicians often seek out praise. Perhaps there should also be a ‘politics of praise worthiness’ (praise worthiness is a term used in Adam Smith's Theory of Moral Sentiments)where attention is drawn to positive behavior that ought to be reinforced. Maybe international policy advisors should have another look at the social philosophy of the Enlightenment.