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Somaliland:How Africa can overcome being marginalised in the global economy

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Unregulated finance has facilitated the expansion of capital flight and illicit financial flows from African countries. Reuters/Carlo Allegri

Unregulated finance has facilitated the expansion of capital flight and illicit financial flows from African countries. Reuters/Carlo Allegri

Asymmetries in the regulation of global trade in goods and services as well as finance have serious implications for Africa. Reuters/Toby Melville

July 2, 2015

By Léonce Ndikumana

One of the challenges facing African countries is that the global environment is rather unfriendly. This hampers their efforts to gainfully tap into global markets.

Additionally, African economies are hindered by them still depending heavily on external assistance. Domestic revenue mobilisation is substantially below potential and progress in this area is very slow.

How to handle these challenges has typically focused on what African countries should do to improve their positions, and what their development partners or donors should do to improve the continent’s economic fate.

Much less attention has been given to the role of global governance. This is important because features of the global governance architecture are holding back efforts at the national, bilateral and multilateral levels, undermining national policy and international co-operation.

Global governance has become more relevant in the context of increasing global economic interdependence. This is because globalisation is characterised by important asymmetries that have substantial implications for African economies.

Financial flows are outstripping trade growth

Take the governance of trade and finance.

Financial flows have expanded rapidly in recent decades. This has included foreign direct investment, portfolio flows and cross-border mergers and acquisitions. This expansion has been facilitated by financial liberalisation and deregulation at the national level, as well as the proliferation and rapid growth of offshore finance.

Finance has outpaced trade in goods in size, scope, and sophistication over the past decades. Between 1980 and 2012, capital flows grew five times faster than exports.

Substantial efforts have been made to establish and strengthen global frameworks to regulate trade in goods. But no equivalent structure exists for global finance.

Unregulated finance has facilitated the expansion of capital flight and illicit financial flows from African countries. Reuters/Carlo Allegri

Unregulated finance has facilitated the expansion of capital flight and illicit financial flows from African countries. Reuters/Carlo Allegri

Quite the opposite. There has been an increasing deregulation of finance. This has serious implications. Unregulated financial flows increase the fragility of national and regional financial systems through higher contagion across the globe.

Globalisation and unregulated finance have also facilitated the expansion of capital flight and illicit financial flows from African countries. In the four decades to 2010, Africa lost about US$1.3 trillion through capital flight, or US$1.7 trillion including interest earnings. This vastly exceeds the continent’s liabilities to the rest of the world. Ironically, this has made the most capital-starved continent a net creditor to the rest of the world.

Regulating global finance requires addressing weaknesses and systemic issues. At the national level the key issues to tackle are transparency and accountability in trade and capital account transactions. This includes looking at import and export mis-invoicing, an important channel of capital flight.

Capital can move easily – labour can’t

There is also a mismatch between the movement of labour and capital. Globalisation has been accompanied by increasing capital mobility. Comparatively, labour is more strictly regulated.

This means that the tax burden falls disproportionately on labour compared to capital. Increased capital mobility favours capital owners relative to workers and large companies relative to small and medium enterprises.

The taxes paid by workers and small and medium enterprises are used in part to cover the tax holidays that large foreign investors enjoy. As a result income inequalities deepen, while the provision of public infrastructure and social services is held back. Workers are affected more than capitalists who can afford private services in or outside the country.

Domestic resources need to mobilised

Traditionally the focus has been on efforts to increase official development aid and facilitate access to markets for African countries. But we now know now that aid volumes will not increase meaningfully in the foreseeable future.

It is time to shift the focus towards helping African countries to mobilise more of their own domestic resources.

It is time African countries mobilised own domestic resources, including bringing the growing urban real estate sector into the tax net. Reuters/Akintunde Akinleye

This involves helping countries expand their tax base, including bringing the growing urban real estate sector into the tax net. It also involves increasing the transparency and user friendliness of tax systems and building investigative skills to track and prosecute evasion.

Also, national development policies need to be geared towards building stronger productive capacities. For this to happen greater country ownership is needed. Two important dimensions stand out.

African countries need to move away from the “do no harm” approach to macroeconomic policy. They need to consider using it beyond the confines of macroeconomic stabilisation to actively supporting national development strategies.

Countries have been trapped into a minimalist approach that confines the role of macroeconomic policy to keeping inflation at low single digit levels, explicitly at a magic 5%. This rewards the few occasional stellar performers able to bring down inflation regardless of progress in real development. This is a rather cynical view of policy making. Governments can do better.

The second dimension is the need to embrace industrial policy as the cornerstone of national development policies. This requires a philosophical and ideological shift to overcome the negative view of goverenment’s role in economic development.

Africa needs a unified voice in the global arena

Up to now the global governance architecture has been founded on a very simple principle: economic size. Representation is determined by the size of a country’s economy. Given that this principle was established a long time ago it naturally favours old economies such as Europe and North America.

Africa is inadequately represented in institutions such as the World Bank and the IMF. Reuters/Gary Cameron

Africa is inadequately represented in institutions such as the World Bank and the IMF. Reuters/Gary Cameron

Global governance is gradually shifting towards elite multilateralism where deliberations on vital issues are held in small clubs of large economies. This is marginalising more representative bodies such as the United Nations and its affiliated organisations.

What options does Africa have to address this? The large African economies, namely South Africa, Nigeria, Algeria, and Egypt can embrace their leadership destiny and champion a unified African voice in the global arena.

The consolidation of regional integration is also a powerful strategy for increasing Africa’s voice. Integration would enable the continent to develop larger regional markets and build capacity to initiate African solutions to Africa’s economic and political problems.

The combination of these two options is Africa’s winning strategy in an increasingly integrated yet marginalising global economy.

Léonce Ndikumana

Professor of Economics & Director of the Africa Policy Program, PERI at University of Massachusetts Amherst

This article is based on the author’s paper published in a Yale Center for the Study of Globalization’s book, Africa at a Fork in the Road: Taking Off or Disappointment Once Again?

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