This document is an assignment submitted by Donavine Phukuile to the Thabo Mbeki African Leadership Institute. It discusses several topics relating to economic theory and African development, including: 1) How tariffs imposed by wealthy countries undermine Africa's potential comparative advantage in commodity trade by discouraging local processing of raw materials. 2) Arguments that the concept of "free trade" has not benefited Africa as promoted, as it encourages exporting raw materials while making it difficult for African nations to develop manufacturing industries. 3) Statistics showing that while Africa has experienced rapid economic growth based on commodity exports, it remains over-reliant on exporting raw materials and importing finished goods.

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THABO MBEKI AFRICAN LEADERSHIP INSTITUTE
(TMALI)
ECONOMIC THEORY WITH REFERENCE TO AFRICAN DEVELOPMENT
MODULE CAPE01L - 2014
ASSIGNMENT 01
SUBMITED BY : DONAVINE PHUKUILE
STUDENT NUMBER : 78327911

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Comparative advantage in the context of African commodity trade
The notion of comparative advantage alludes to the ability of one nation’s ability to produce a
commodity over another, giving it a cost advantage of trade. Investopedia’s definition places
emphasis on the realization of stronger sales margins as a result of comparative advantage:
The ability of a firm or individual to produce goods and/or services at a lower
opportunity cost than other firms or individuals. A comparative advantage gives a
company the ability to sell goods and services at a lower price than its competitors and
realize stronger sales margins.i
In the African context, this expected “advantage” is lost, due to the tariffs imposed by wealthy
countries, on imported goods from developing countries. According to an International Trade
Policy article in the World Savvy Monitor, US tariffs on Least Developed Countries (LDCs) are
“three to four times higher than those imposed on developed nations. The poorer the LDC, the
more the disparity; US tariffs on the poorest of the LDCs can be ten times higher than those
imposed on [Organization for Economic Co-operation and Development] countries”.
The article further suggests that not only is global competitiveness in the market negatively
impacted by the above, industrial development and the resulting poverty eradication or in the
very least unemployment reduction effects are negatively impacted:
African goods tend to be determined on an escalating scale that increases the tariff or tax
along with the amount of processing involved in producing the good. This makes raw
African cotton cheaper to import than African clothes and discourages the development
of garment and textile manufacturing (which is more lucrative than raw cotton) in Africa
itself.
A similar situation exists between Europe and Africa with respect to cocoa and
chocolate. The EU places a 1% tariff on raw African cocoa, but a 30% tariff on
processed cocoa in the form of chocolate, discouraging the processing of cocoa (again,
where the money is made) in Africa. Escalating tariffs essentially recreate a
mercantilistic arrangement similar to that which existed in colonial times – raw materials
shipped out of Africa and most processing (the adding of value) done abroad.

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The satirical notion of free trade
In an online Guardian article titled “Free trade is not what Africa needs Mr Cameron”, Nick
Dearden emphatically states that “African prosperity relies on a wholesale rejection of the
western "free trade" model”.
It means protecting industries, developing alternative and complementary means of
trading, control of food production and banking, progressive tax structures, controlled use
of savings, and strong regulation to ensure trade and investment really benefits people.
Stan Sorscher, writes in the Huffingtonpost, that free trade has neither ever been free, nor trade.
ii
He finally adds, “it doesn’t work”. Though his argument is framed within the North American
context, the same rings true for Africa. Free trade encourages the exportation of raw materials or
commodities, thereby stifling the development of manufacturing, the creation of employment
and the reduction of poverty.
Sorshcers’ argument that free trade is not trade, embodies the premise of trade in the context of
“each country [making] things of value for exports and [getting] comparable things of value for
imports”. Given the appetite globalization has placed on African commodities, Africa exports
raw materials in abundance, to the Rest of the World (RoW) at low costs set by the West; and
imports finished and processed goods at a premium.
This extensive integration of Africa into the RoW through globalization is a deliberate product of
colonialism. Africa’s dependency on the RoW for the import of finished or processed goods –
and the foreign currency required - drives exports, which drives mass production of commodity
extraction.

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A recent case study of Ghana’s cocoa processing has been delivered to an African Center for
Economic Transformation workshop in Senegal, during November 2013. The statistics depicted
in Figure 1: overview of ghana's cocoa sector are typical of the balance of trade issue within
Africa.
Moreover, also a product of colonialism has African countries trading more with countries in the
RoW than with it’s neighboring countries on the content.
FIGURE 1: OVERVIEW OF GHANA'S COCOA SECTOR

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The RoW needs Africa more than Africa needs the RoW
The Economist first published in an article the map in Figure 2, depicting the “true size of
Africa”. The Daily Mail (UK) published that Africa “really [is] as big China, India, the United
States AND most of Europe put together”.
FIGURE 2: THE TRUE SIZE OF AFRICA

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More astounding than the true size of Africa, is the true wealth of the continent:
Africa’s wealth of natural resources boasts “12% of the world's oil reserves, 40% of its gold, and
80% to 90% of its chromium and platinum”. In addition, Africa has vast timber resources, and
holds 60% of the world's “underutilized arable land”.iii
Commodity exports have fuelled the continent’s economies of the last decade and a half. In
Figure 3, which looks at the World’s 10 fastest – growing economies; the Economist depicts the
parity between the “simple unweighted average of the economic growth rates in Africa and Asia”
(between years 2001-2010). The report further forecasts that for years 2011 to 2015, “Africa is
likely to take the lead”.
FIGURE 3: WORLDS 10 FASTEST GROWING ECONOMIES (2010 ESTIMATE)

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Figure 4 below, taken from the Economic Report on Africa 2013 by the Economic Commission
for Africa and the African Union, depicts the staying power of the African economy, largely due
to the demand for natural resources. Africa’s dependency on the rest of the world for economic
wellbeing is alarming. As stated by Florence Udoh : “No country survives by exporting only raw
materials”.
FIGURE 4: GDP GROWH 2008-2012iv

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Despite the astounding economical growth of Africa, poverty and unemployment remain rife.
The conversation has begun amongst thought leaders of the African Renaissance; on how to
develop a collective conscious map toward sustainable development and economic emancipation
for the continent. Some of these schools of thought are discussed briefly in the next section –
which aims to strike a balance between the demands of Globalization and Sustainable Economic
Development
Striking the balance between globalization and sustainable development
Jekwu Ikeme in his article on “Sustainable Development, Globalisation and Africa: Plugging the
holes“, has indicated that Globalization is characterized by issues of Rights and freedoms to
TNCs who dominate the market; Letting free markets reign; No environmental controls, or
protection; and Reduction / cancellation of state regulations on market.
By contrast, Sustainable Development is characterized by Consensus seeking policies which
incorporate the needs of all countries; Partnerships where the strong help weak; Integrated
environment & development concerns; and finally State and international communities control of
market forces to ensure social equity, and sustainability
With globalization and sustainable development at distinct loggerheads, within the African
context - the latter calls for adherence to the Constant Capital Rule (CCR).
As defined by Ikeme:
CCR amounts to each generation leaving the next generation a stock of productive
capacity, in the form of capital assets and technology, that is capable of sustaining utility
or well-being per capita than that enjoyed by the current generation, or at the very least,
equal to that enjoyed by the current generation…

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Sustainable development requires that the stock of natural, man-made, social and human
capital should not decline, or depreciate, below the present level”... but rather, ideally, be
increasing.
Against the backdrop of CCR within the context of comparative advantage in Africa, commodity
export trade is not sustainable, due to the resulting “decline of natural capital”. Ikeme elaborates
on the two forms of natural capital depreciation, namely natural resource depletion and
environmental degradation:
Natural resource depletion is associated with the extraction and consumption of natural
capital such as gold, oil, timber, coal, columbite, etc. Environmental degradation, on the
other hand, is the loss of environmental quality associated with production of goods and
services. This takes the form of air pollution, water pollution, land degradation, etc.
There is an urgent need for stricter trade laws – to limit extraction quantities or non-replenishable
resources; and protect the environment. Through supply and demand, this limitation will drive up
the prices of commodities – and possibly allow for Africa to develop brands in this space.
Africa also needs to be able to decide on pricing for commodity exports out of Africa.
Furthermore, Africa will need to be sure to “replenish the good within the land to maintain
integrity / quality” by applying green initiatives and conscious extraction and replenishment
cycles.
Multinationals on the continent are to be responsible corporate social citizens in the operations;
provide value in knowledge and skills transfer, and infrastructure investments toward sustainable
development.
Public and private partnerships on the continent should work together toward an African Dream,
of environmental and social protection, with policies and incentives to support the same.
Finally, on the comparative advantage issue, Africa must unite, to create an Industrial revolution
– and add value to raw and unprocessed commodities. These finished goods or processed
products can first supply the needs of the continent cost-efficiently, and sold to the RoW at a
premium, reversing the dependency of Africa on the RoW for imports.

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In closing, proceeds from the commodity and processed product trade in Africa must be
reinvested in Africa, to build infrastructure, technology, human capital, and economic
investments in order to maintain natural capital and diversify sources of economic growth and
development for the continent.

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REFERENCES
Investopedia. 2013. Comparative Advantage Definition. [ONLINE] Available at:
http://www.investopedia.com/terms/c/comparativeadvantage.asp. [Accessed 14 March 14].
Mulangu, F, 2013. Optimal Agro-Industry Policy: A Case Study of Ghana Cocoa Processing.
African Centre for Economic Transformation, AGRODEP Workshop Dakar, Senegal November
19, 2013, [Online]. 1, 6. Available at:
http://www.agrodep.org/sites/default/files/annualmeeting/2013IR_Maiga_E_final.pdf [Accessed
14 March 2014].
Worldsavvy. 2013. International Trade Policy. [ONLINE] Available at:
http://worldsavvy.org/monitor/index.php?option=com_content&view=article&id=345:internatio
nal-trade-policy&catid=143:tools&Itemid=544. [Accessed 14 March 14].
HuffingtonPost. 2008. Free trade was never really free. [ONLINE] Available at:
http://www.huffingtonpost.com/stan-sorscher/free-trade-was-never-real_b_3427477.html.
[Accessed 14 March 14].
Nick Dearden. 2011. Free trade is not what Africa needs Mr Cameron. [ONLINE] Available at:
http://www.theguardian.com/global-development/poverty-matters/2011/jul/19/david-cameron-
africa-free-trade. [Accessed 14 March 14].
African Centre for Economic Transformation. 2013. Optimal Agro-Industry Policy: A Case
Study of Ghana Cocoa Processing. [ONLINE] Available at:
http://www.agrodep.org/sites/default/files/annualmeeting/2013IR_Maiga_E_final.pdf. [Accessed
14 March 14].
WILLIAM TURVILL. 2013. True size of Africa. [ONLINE] Available at:
http://www.dailymail.co.uk/news/article-2445615/True-size-Africa-continent-big-China-India-
US-Europe-together.html. [Accessed 14 March 14].
ECONOMIC REPORT ON AFRICA. 2013. Making the Most of Africa’s Commodities:
Industrializing for Growth, Jobs and Economic Transformation. [ONLINE] Available at:
http://www.uneca.org/sites/default/files/publications/unera_report_eng_final_web.pdf.
[Accessed 14 March 14].

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AllAfrica Leadership. 2012. Nigeria: No Country Survives By Exporting Only Raw Materials -
Aganga. [ONLINE] Available at: http://allafrica.com/stories/201212101530.html. [Accessed 14
March 14].
Jekwu Ikeme. 1999. Sustainable development, Globalization and Africa: Plugging the holes.
[ONLINE] Available at: http://www.afbis.com/analysis/Jekwu.html. [Accessed 14 March 14]

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