Padmashree Gehl Sampath and Banji Oyelaran-Oyeyinka argue that President Trump’s executive orders on reducing foreign aid, prioritising domestic fossil fuels, and implementing protectionist trade policies threaten Africa’s economy, urging policymakers to focus on diversification and regional cooperation
Of the 220 executive orders that President Trump issued on his first day back in office, several impacted Africa. The key ones are those related to the reduction of foreign aid, his declaration of a national energy emergency focusing on domestic fossil fuel exploitation and the America First Trade Policy. All portend significant consequences for the global economy in general but Africa in particular. While the suspension of foreign aid offers the region an opportunity to reconsider its reliance on external support, the other two – the emphasis on domestic energy and the threat of using tariffs to protect the US economy –will significantly disrupt trade dynamics. As the world braces for an era of turbulence, if not outright sweeping change, how much of what is going on will worsen economic growth prospects in Africa, and what can be done to avoid it? That is the question that now confronts African policy makers.
Africa’s growth trends
Africa had a great start in the 2000s. The region’s real GDP growth, averaging 5.1 percent between 2000-2010, slowed to 3.3 per cent between 2010 and 2019. While half of Africa’s 1.3 billion people live in countries with increased GDP growth in 2010-2019, the other half experienced negative or stagnating growth in the second decade of this millennium. Prominently, the latter set of countries are largely resource-dependent and rely on the export of crude petroleum, minerals, and raw agricultural commodities for foreign exchange. In these countries, although there has been an effort to induce the shift to export-led industrialization, industrial exports have been focused on mining, energy production and other commodities to the neglect of productive sectors, namely, agribusiness and manufacturing. That makes these countries all the more sensitive to negative trade shocks (a decline of export prices relative to import prices) since they import more than the normal share of consumer and capital goods due to fragile or non-existent local production capacity.
This long-term pattern has been foundational to the negative impact on labour structures, shifting labour away from agriculture and manufacturing toward extractive industries, which is generally associated in economic literature with volatility, instability, distributional inequality and premature deindustrialization. Secondly, the reliance on non-manufactured export demand alone as a means of economic growth has left these countries deeply vulnerable to a decline in demand in global commodity markets. The “Trump Shock” now only adds to their pre-existing list of shocks related to climate, finance and trade that have ravaged the fragile agriculture and industrial ecosystems in Africa.
What we need to worry about
Declaring a National Energy Emergency in the USA opens the flood gates to expanding domestic fossil fuel production for both local consumption and exports. To be clear, the USA has produced more oil and gas than ever before, even under the Biden-Harris administration. Still, this Order will further push the American economy more intensely in that direction. For African oil exporting countries, this will mean reduced US imports of fossil fuels, less income from crude oil, and greater competition from the US in export markets in the years to come. Since 2015, several fuel exporting countries – Angola, Chad, and Nigeria – have already seen a sharp decline in growth rates due to adverse terms of trade in oil, which has only partially stabilized. The new trade shocks caused by the USA in the global energy sector can plunge these economies into greater chaos. Developments in the USA in this regard will also stifle the efforts of several African countries that seek to harness the potential of oil and gas to improve the fiscal and debt sustainability of their economies in keeping with the recommendations of major international partners such as the World Bank.
Next, the America First Trade Policy, while making a distinction between China and other countries, orders a review of the US industrial and manufacturing sector to see which imports are detrimental to ‘national security’. This was the same reasoning President Trump used to impose additional tariffs on aluminium and steel during his first time. This time, one should expect tariffs to be used much more and in a wider range of industries. Import tariffs in a wider variety of sectors will depress trade and investment on the one hand, and enhance trade uncertainty, as a recent IMF analysis shows.
What African policy makers should do
This is not the time to adopt a wait and see approach. African policy makers should proactively and urgently consider small and big changes that will transform commodities into engines of industrial development. This, as we have argued previously in our works, requires tackling two connected challenges. The first is a short term one: managing commodity price volatility and its impact on the domestic economy. A great place to begin here is to acknowledge that negative terms-of-trade shocks lead to a decrease in real income for the people. Evidence also suggests that terms of trade shocks have longer-lasting impacts on economies with weaker governance, thus reinforcing the role of policymaking in shielding the people from such changes. A second, larger challenge is to enact transformational policies that enable the shift from commodity dependency to diversified economies with a deliberate focus on a number of productive sectors.
Tackling both will require stronger domestic governance within countries focused on providing enabling policy frameworks. Such policymaking should be primed toward economic diversification, by engaging in reforms that make capital access easier for local businesses, offer support to domestic companies, and promote the accumulation of skills and human capital. This is easier said than done, significantly when the trade shocks in African countries will equally impact public budgets. Taking that into account, African countries should enact policies that use ongoing infrastructure projects to ‘crowd-in’ investments into productive sectors, as we argue in a forthcoming book.
An important institution for mitigating Trump and other shocks is the African Continental Free Trade Area (AfCFTA). African countries will become more resilient to external shocks by increasing intra-regional trade, lowering trade costs, and diversifying exports. The large African market can provide a significant impetus to this diversification exercise. The AfCFTA can help create regional production supply chains to boost competitiveness and enhance trade with significant positive spill overs for industrialization, employment and resilience. This is much needed in a world where distortionary trade effects abound.
Culled from International Development LSE blog