Figure 23.1Terms of trade and GDP per capita growth in sub-Saharan Africa, 1962–95
Aid, Trade, Investment, and Dependency
This chapter discusses how external economic forces – aid, trade, and investment – affect politics and policy in African countries. It proceeds in two parts. The first half is historical and descriptive, narrating a stylized but common progression of economic policies in Africa from post-colonial developmentalism to crisis, structural adjustment, and liberalization. This short history culminates with a survey of the opportunities and challenges posed by the global economy and the current workings of the international aid system. A key theme is that the impacts of aid, trade, and investment on African countries cannot be considered in isolation, as policy responses to each of these forces usually affect the other as well, and so any potential policy change requires African policymakers to juggle a complex set of considerations.
The second half of the chapter builds on this foundation to address two key topical debates. First, what is the relationship between these global forces and domestic politics and policy? This includes a discussion of the incentives and constraints created by global forces for economic policymaking in Africa, as well as how policymakers and elites can manipulate aid, trade, and investment to their political advantage. The second topic revisits the dependency debate in light of the preceding discussion. It seeks to avoid stale dichotomies by asking not only how much policy space African governments have to make economic policy, but also what influences how well they are able to use it.
Aid, trade, and investment are each enormous topics in their own right. To limit the scope, the chapter focuses on the politics, policies, and choices of African governments, rather than those of donors or international institutions, and on how global forces create incentives and constraints for governments, rather than on whether these forces are ‘good’ or ‘bad’ for Africa. The focus is on aid delivered by multilateral institutions and bilateral (government-to-government) donors rather than non-governmental organizations (Jennings, this volume, discusses NGOs).
Economic Policy in Post-Independence Africa
Post-independence economic policy in most African countries followed a pattern that can generally be divided into three phases: progression from state-led developmentalism to crisis (independence through the 1970s); structural adjustment and stagnation (1980s and early 1990s); and the era of globalization and ‘partnership’ (from the mid-1990s). Each country’s path is unique, of course; the aim of this section is to synthesize some common themes without obscuring this diversity of experience.
From Developmentalism to Crisis (Independence through the 1970s)
At independence most African economies were largely rural and agrarian. Domestic economies and government revenues were heavily dependent on a handful of primary commodity exports, mainly minerals and cash crops. This meant that African producers missed out on the potential economic gains from processing and adding value to these commodities, and were vulnerable to global price volatility. As a result of mercantilist colonial economic policies that saw Africa as a source of raw materials and a captive market for manufactured products from Europe, industrial capacity was extremely weak and infrastructure was limited to the minimum necessary to get commodities to port.
The overriding economic priority of most post-colonial governments was therefore to industrialize their economies as rapidly as possible. Mainstream economic thought of the day emphasized that ‘modernization’ – the transition from rural agricultural economies, to urban industrial ones – would not happen on its own. Rather, the state needed to lead a ‘big push’ to get industrial growth to the point where it could be self-sustaining. Evidence for this view was provided by the rapid, state-led industrialization of the USSR in the previous decades and the accomplishments of the Marshall Plan in rebuilding post-war Europe. There was also an overlap between these statist economic theories, the nationalist political projects of post-independence leaders, and the narrow social and economic foundations of the inherited colonial states.
The industrialization imperative gave rise to the package of economic policies known as import substitution industrialization (ISI). Tariffs and quotas on imports were used to create a protected domestic market for local ‘infant’ industries, which would need time to compete with much larger and more advanced European firms. Furthermore, governments would heavily tax their existing export commodities (often by using monopsonistic marketing boards to pay producers much less than the world market price) and use the proceeds to invest in infrastructure and fund industrial promotion efforts. Importantly, industrial policy was usually selective, in that governments would choose particular industries to actively support and develop, either through targeted subsidies or state-owned enterprises (SOEs). African governments were not unique in their approach. Much of Latin America and Asia had also adopted similar strategies, and many large-scale industrial projects were supported by World Bank loans and aid from other donors.
Initially it seemed to be working, and in the decade after independence much of Africa experienced strong economic growth. By the late 1960s, however, cracks began to appear. In too many cases, SOEs were inefficient and corruptly managed; grand investment projects were unviable, unrealistic, or poorly executed; infant industries failed to become more competitive over time; and existing commodity export sectors were being severely squeezed for revenue so that production fell or was diverted into black markets.
There was also a political component to these failings. In theory, ISI was supposed to be implemented by rational, impartial technocrats motivated only by the national interest, but in practice personal and political considerations often dominated. In addition to more general instances of corruption and clientelism, it was argued that governments exhibited ‘urban bias’ in their policies, systematically favouring politically powerful urban workers over less visible but more numerous rural farmers (Lipton 1977). Even when they had developmental motivations, governments were often too politically and administratively weak to coordinate diverging political interests and properly plan and implement interventions. By the late 1960s, state weakness was increasingly erupting into full-blown political crisis in many countries, further undermining economic performance and increasing the necessity for rulers to use economic policy and projects to prop up clientelist networks and maintain political stability.
These internal challenges were soon compounded by external events, beginning with the Arab oil embargo in 1973. This episode triggered a series of shocks to Africa’s terms of trade, as shown in Figure 23.1, both by increasing the price of oil (which most countries imported) and by reducing the prices of its commodity exports as a result of global economic recession and hence reduced demand. This accelerated the downward spiral of economic weakness and political crisis in much of Africa. As the 1970s drew to a close, an increasing number of African countries were beset by stagnant or collapsing economies, high inflation, overvalued currencies, and bankrupt and unstable governments. With the situation untenable and few viable options, governments began to turn to the International Monetary Fund (IMF) and World Bank for help.
Structural Adjustment and Stagnation (1980s and Early 1990s)
The IMF and World Bank were founded in the wake of the Second World War to help govern the international economy and, initially, to rebuild Europe. The IMF was intended to focus on macroeconomic issues, acting as a lender of last resort to governments that were experiencing foreign exchange and balance of payment crises, while the World Bank mostly financed specific projects. When African governments needed money to stabilize their crisis-stricken economies, the IMF and World Bank were the natural place to turn – often the only place, since most other lenders viewed engagement with these institutions as a prerequisite to their own involvement.
The IMF and World Bank would loan money to governments on concessional terms, with below-market interest rates and long repayment periods, but in return they insisted that the recipient government undertake a set of policy reforms. This combination of stabilization loans paired with policy reforms came to be known as a Structural Adjustment Programme (SAP). During the 1980s, 36 African countries took 241 different adjustment loans (van de Walle 2001: 7), and this rate of borrowing continued into the 1990s. The idea of putting conditions on loans was not novel, but under SAPs conditionality began to take on a more deeply transformational role aimed not just at coping with the crisis at hand but at liberalizing the entire economy. Prior to this new paradigm of ‘policy-based lending’, foreign aid to Africa in the 1960s and 1970s had mostly consisted of governmental transfers which were often politically motivated (especially in the context of the Cold War), directed to specific large-scale infrastructure projects, or in the form of technical assistance.
The conditions imposed by SAPs can be divided into two categories: macroeconomic targets, such as cuts in government expenditure, exchange rate devaluation, and reductions in money supply to bring inflation under control; and policy reforms aimed at liberalizing the domestic economy. The latter category included the abolition of many statist economic policies, such as price controls, import restrictions, monopolistic commodity marketing boards, and restrictions on foreign investment. It also included extensive privatization of SOEs, many of which were perennially loss-making and required government subsidies to continue operating, as well as the curtailment of social service provision and introduction of user fees. The combination of the contraction in government expenditure, the privatization of SOEs, and the exposure of previously protected industries to international competition typically forced both the public sector and the formal private sector into large-scale lay-offs. Indeed, this was often an explicit goal of SAPs.
The IMF and World Bank believed that imposing these harsh conditions had both economic and political justifications. Economically, African economies were perceived as being burdened by price distortions that prevented efficient resource allocation. Financial and human resources were being poured into badly run SOEs that were unlikely ever to become competitive, consumers and businesses were forced to purchase expensive, poor-quality local manufactures, and traditional commodity exports (often the only internationally competitive sector of the economy) were being taxed to the point of collapse. If only all these economic distortions could be eliminated in order to ‘get the prices right’, the private sector would ensure that resources were efficiently allocated and economic growth would spontaneously follow. Williamson’s (1990) 10-point ‘Washington Consensus’ is perhaps the most widely cited summary of the policies being espoused by the IMF and World Bank at this time.
It was also believed that these same reforms would have beneficial effects on African countries’ politics. This was informed by an analysis of the corruption, mismanagement, and clientelism that had often characterized implementation of state-led development strategies in the 1960s and 1970s (e.g. Bates 1981). If import licenses and subsidized credit were being allocated based on political favouritism or opportunistic rent-seeking, it was thought easier to simply eliminate these and other policy tools that created opportunities for corruption than to improve their administration. Shrinking the state might also reduce the ability of regimes with authoritarian tendencies to use their control of state resources to suppress political competition. It was hoped that conditionality would provide greater leverage for reform-minded policymakers inside the government.
This reform project was as ambitious as it was controversial. For better or worse, though, the reality of structural adjustment rarely matched its lofty ambitions. In large part this was because countries often did not implement the conditions to which they had agreed. Many African governments managed to maintain aspects of their economic policies that they viewed as politically important, or twist the reforms to their political advantage, and so economic liberalization was rarely as complete as the IMF and World Bank would have wished (van de Walle 2001). Privatization efforts also met with limited success, as divestiture procedures were often marred by corruption and cronyism, and in some cases simply served to replace public monopolies with de facto private monopolies. In addition, the withdrawal of the state from many areas of the economy did not necessarily lead to spontaneous growth and investment in the private sector. Indeed, the presence of market failures and attendant supply-side limitations was part of the original developmentalist justification for state intervention in the economy. In the absence of either decisive reforms or economic take-off, most countries spent the better part of this period muddling through and taking multiple loans, sometimes just to pay off previous ones.
Did structural adjustment work? The answer is not obvious. Certainly the 1980s and much of the 1990s were a period of poor economic performance – sub-Saharan Africa’s gross domestic product (GDP) declined by an average of 1 per cent annually from 1980 to 1997 (Collier and Gunning 1999). Proponents of SAPs argue that countries that adopted policy reforms somewhat improved their growth rates and that the problem was poor implementation of reforms. Opponents point out that these growth rates were still too small to make a difference to poverty reduction, and cited the obvious hardships imposed on large parts of the population by expenditure cuts and price changes (e.g. Cornia et al. 1987).
Adjudicating between these claims is problematic, however, since the effects of SAPs are difficult to distinguish from the effects of the economic crises that invariably preceded the programmes. Even where loan conditions explicitly required expenditure cuts, it can be argued with some justification that the depth of the economic crisis would have imposed fiscal contraction in any case. The partial nature of conditionality implementation also limits the extent to which SAPs can be said to have ‘caused’ poverty and stagnation (see Rodrik 1995).
Although there was disagreement about whether structural adjustment went too far or not far enough, by the 1990s both sides of the debate increasingly agreed that it was not achieving its objectives. Even the World Bank’s own evaluation department rated half of all Bank adjustment loans in Africa as having failed to meet their objectives (Dollar and Svensson 2000). While stabilization had clearly been necessary, there was an increasing recognition that conditionality was not working, that SAPs had undermined social development, and that more attention needed to be paid to governance and the role played by state institutions in enabling growth. Some of these critiques gradually began to be taken on board by donors in the 1990s, precipitating yet another shift in the aid paradigm.
Globalization and ‘Partnership’ (From the Mid-1990s)
If the dominant theme of economic policy in Africa during the 1980s had been response to domestic crises through structural adjustment, in the 1990s the main challenge facing newly liberalized African economies was how they would fare in the world’s increasingly globalized economy. The spread of the Washington Consensus as a blueprint for national economic policies was accompanied at the global level by the increasing importance of international flows of goods and capital. At the same time as enthusiasm grew regarding the potential of trade and investment, the frustrations of the structural adjustment era had led to greater scepticism about aid from both the right and the left. This intellectual shift gained popular expression in the phrase ‘trade, not aid’.
It also gained legal and institutional underpinnings, most notably with the founding of the World Trade Organization (WTO) in 1995. The WTO was created as a result of the Uruguay Round of trade negotiations with a mandate to enforce countries’ existing multilateral trade liberalization commitments and provide a permanent negotiating framework for further liberalization. The early 2000s saw the advent of a number of explicitly ‘pro-development’ trade agreements (or negotiations directed toward agreements), partially in response to criticisms of the global trade system by developing countries and NGO campaigners. The most visible was the (still un-concluded) Doha Round of WTO talks launched in 2001, optimistically marketed as the ‘Development Round’ since it was intended to address some issues of concern to developing countries, such as rich-country agricultural subsidies, while also pushing for deeper liberalization of other trade barriers.
In addition to the multilateral WTO, the new global trade architecture included a growing web of bilateral and plurilateral treaties that go deeper than the requirements of the WTO and are aimed (at least nominally) at supporting development. These include trade preference schemes that give tariff-free treatment in rich-country markets to exports from certain developing countries, such as the United States’ African Growth and Opportunity Act and the European Union’s (EU) Everything But Arms scheme. Since the Cotonou Partnership Agreement of 2000, the EU has been attempting to convert these unilateral preferences into Economic Partnership Agreements (EPAs) with groups of African, Caribbean, and Pacific countries. The EPAs are meant to be free trade agreements that would go beyond WTO levels of integration, beginning with trade in goods but eventually extending to other areas, such as services and investment. Although they would impose more restrictions on policy than the WTO, EPAs are intended to be ‘pro-development’ and thus include some favourable provisions and leniency for African countries, as well as financial aid. EPA negotiations have been slow, however, and are currently stagnant with different African countries at different stages of the process.
Despite all this attention to trade’s role in development, the shift in emphasis from aid to trade was not as abrupt as the rhetoric made it seem. Aid flows did decrease somewhat in the 1990s, as shown in Figure 23.2, but were still very significant for Africa. The IMF and World Bank continued to give structural adjustment loans and promote economic liberalization, even if the term ‘structural adjustment’ gradually fell out of favour and faded into new aid modalities. More importantly, the concern with trade was not new. A primary goal of SAPs was to re-orient African economies toward production for export markets rather than the domestic market, so trade was seen as a successor to structural adjustment, not an alternative. From a more historical perspective, international trade was nothing new for African economies, which have for centuries been profoundly influenced by global economic linkages. Even the ‘trade, not aid’ mantra actually dates from the 1968, when developing countries called for a more equitable global trade regime at the second meeting of the United Nations Conference on Trade and Development (UNCTAD).
These qualifications notwithstanding, promoting exports and attracting foreign investment did take on a new importance for African economies in the 1990s and 2000s. In part this was inspired by the success of export-led growth in East Asian economies. Producing for export would allow African firms to take advantage of economies of scale in production and the size of the global market. More practically, economic liberalization had left African countries with little alternative but to turn to exports and investment for economic growth and job creation, as the dismantling of protective tariffs and import controls had taken away the option of using protected domestic demand to incubate new industries. Neoclassical economists emphasized that African countries could successfully compete in the world economy by focusing on their comparative advantage – goods they could produce relatively efficiently. In effect this usually meant traditional commodity and resource exports, with the intention that foreign investment and domestic entrepreneurship could help Africa gradually diversify its exports and develop agro-industry as a base for industrialization.
Again, though, the supply-side response of African economies was underwhelming. The latter half of the 1990s did witness a gradual return to growth in many countries, but this growth tended to be based on traditional commodity exports rather than economic diversification and structural transformation. Foreign investment in non-extractive sectors was also not as forthcoming as had been hoped. It was becoming increasingly clear that economic development in Africa was being hindered by a factor that was not economic, but political: poor governance.
The concern with governance arose from the recognition that the state was a critical part of growth, not simply an obstacle. The efficient operation of markets required (at a minimum) a state that could effectively and impartially protect property rights and enforce contracts. This recognition stemmed from practitioner experience but also from the growing academic literature on institutions and the historical determinants of development, and was gradually integrated into the canon of development orthodoxy. The ‘good governance’ paradigm soon expanded from protection of property rights to encompass a wide array of state functions and characteristics, such as corruption, citizen voice, effective service delivery, and stable macroeconomic policy. The concept’s rapid rise was in large part because it was vague and flexible enough to accommodate perspectives from across the political spectrum, from the minimalist and technocratic neoliberal vision of government to more redistributive and participatory ideologies. The governance agenda expanded the scope of what donors expected of African governments to include new outcomes and process conditions – how the government did its business, not just what it did.
A further change in aid practice was also underway in the 1990s. Conditionality had become unpopular with everyone, albeit for opposing reasons. In Temple’s (2010: 4468) apt formulation, ‘views differ on whether [conditionality] should be criticized for the clear success in securing policy change, or the equally clear failure to do so’. The discourse that grew to replace it was one of ‘partnership’ and recipient government ‘ownership’ of the aid process. ‘Ownership’ promised to solve the conditionality problem and was also seen as a solution to the problem of donor coordination, a challenge that was increasing as a result of the growing number of international institutions, bilateral donors, and NGOs trying to aid and influence governments (Whitfield 2009).
This rhetoric gradually led to the creation of new aid delivery mechanisms that sought to get away from the model of structural adjustment lending with externally driven ex ante policy conditionality. The Poverty Reduction Strategy Papers (PRSPs) of the early 2000s were one such attempt. The widespread reliance on foreign borrowing throughout the 1980s and 1990s had seen the creation of a group of Highly Indebted Poor Countries (HIPCs), mostly in Africa, with economies weighed down by large external debts and interest payments. The IMF and World Bank coordinated an international debt relief effort, but required countries to produce PRSPs in order to qualify. PRSPs were intended to be comprehensive, prioritized national development plans drafted by the government (but in intensive consultation with donors and civil society). In theory, donors could then formulate their aid programmes based on this document and the use of HIPC funds could be tracked. Other new delivery mechanisms included the United States’ Millennium Challenge Corporation (MCC), which would give money only to countries that exhibited good governance according to a pre-defined set of indicators; and the use of outcome targets for determining aid awards, with the idea that these ex post conditions would allow governments to decide how best to achieve these goals and make prescriptive ex ante conditions unnecessary.
However, the practice of ‘ownership’ has not been as transformative as its discourse. New governance and planning process conditions were simply layered on top of existing types of economic and policy conditions, with no overall decrease in the use of ‘hard’ conditionality. Rather than implying greater control for the recipient government over the aid process, Fraser and Whitfield argue:
The World Bank and the IMF define ownership as commitment to the reforms and policies which they think governments should implement. They hope that they can convince recipients to see it their way, and to believe that the ideas are their own. If not, they retain conditionality.
(Fraser and Whitfield 2009: 92)
In addition to new delivery mechanisms, aid took on new focuses in the 1990s and early 2000s, again often as a reaction to criticisms of SAPs. Poverty alleviation and social development gained new emphasis, most obviously with the Millennium Development Goals (MDGs) created in 2000. These established a set of human development targets for 2015 and became a common benchmark for allocating and evaluating aid. A variety of aid programmes grew out of the good governance agenda, including civil service reform and capacity building, administrative and judicial reforms for the protection of property rights, and reforms aimed at the ease of doing business. The challenges of economic globalization led to ‘aid for trade’, which aims to help countries improve their infrastructure and productive capacities to take advantage of the export opportunities provided by global market access. Going beyond the economic liberalization required by SAPs, bilateral and multilateral donors alike have also provided technical and financial support for countries to reform their investment laws and domestic regulatory frameworks to attract foreign investment and deepen their integration into the global economy.
Even as this aid system was evolving, however, new trends were altering the issues facing African countries and the balance of power with donors. In the 2000s, a number of African countries began to experience strong and sustained economic growth and receive higher levels of investment (Figure 23.2 and Figure 23.3), which has increased governments’ self-confidence and arguably also their leverage with donors. This growth has been driven in large part by high global commodity prices and demand for natural resources, which is mainly due to the economic success of emerging economies (e.g. Brazil, India, and especially China). The recent emergence of these countries as aid donors in their own right has also decreased African countries’ dependence on the traditional donors (see Alden, this volume). For new donors like China, aid is even more closely linked to trade and investment, with impacts for Africa that will only become fully clear over time.
Global Forces, National Politics
Studies of the politics of economic policy are dominated by attempts to explain why governments often do not choose policies that are thought to maximize long-run aggregate social welfare (e.g. open markets, public good provision, balanced budgets, and long-term investment). Although the literature contains many such hypotheses, it is only a slight oversimplification to think of them as variations on a theme: governments use economic policy to benefit specific individuals or interest groups at the expense of the wider population, either for the purpose of personal enrichment or to build political support through patronage and clientelism. Examples include Bates’s (1981) analysis of post-independence economic policies and van de Walle’s (2001) study of the partial implementation of SAP-era reforms.
A more optimistic alternative to the rent-seeking approach to state-business relations is that business associations can be part of ‘reform coalitions’ or ‘growth coalitions’ that lobby and work with governments to correct market failures, such as under-provision of public goods (Bräutigam et al. 2002). In practice, however, the distinction between lobbying to solve market failures (to enable industry growth) and lobbying to create market failures (to capture rents) is blurry at best. The potential of these coalitions to promote diversification into new industries is also limited because (by definition) a non-existent industry has no constituency to lobby for provision of the public goods and infrastructure needed to bring it into existence, so policy will naturally tend to favour existing industries.
The incentives for rent-seeking are arguably greater in Africa than elsewhere because state power and wealth historically have been based on control over external economic ties, as opposed to internally oriented control of territory and taxation of the population (Herbst 2000). The insecurity and consequent short time horizon of many African regimes also accentuates the incentives for opportunistic predation and discourages public good provision, protection of property rights, and long-term investment. Weak or inconsistent rule of law encourages political insiders to seek informal favours and exceptions rather than to lobby for changes in formal policies, which benefits politically connected firms and undermines the potential for socially beneficial state-business relations.
Other authors approach aid, trade, and investment as resources and investigate how competition for control of these resources affects politics. The most extreme form of this is the hypothesized relationship between natural resource revenues and conflict (see Roessler and Soares de Oliveira, both in this volume). Large flows of aid and investment (especially in natural resources) would be expected to raise the stakes of political competition since governments exercise substantial discretion in directing fiscal spending and also potential commercial benefits, as investors are often required to enter into partnerships with politically connected elites. Alternatively, aid and investment flows could facilitate political compromise, since they provide the means to buy off political opponents and can give elites an incentive to maintain political stability. A vibrant private sector might also provide alternative means of accumulation for elites and therefore make them more likely to accept being out of power.
There is also commonly thought to be a negative relationship between revenues from aid and natural resources on the one hand, and domestic taxation and productive sector investment on the other. Large external transfers (such as revenue from aid and natural resources) cause exchange rate appreciation, which shifts resources into the non-tradable sector of the economy (that which produces exclusively for domestic consumption) and shrinks the tradable sector (exports and import-competing industries). This is often referred to as ‘Dutch disease’. Since tradable industries are generally thought to have greater long-term growth potential, external windfall revenues can therefore lower the economy’s long-term growth rate even while creating a boom in present consumption.
External revenues are also hypothesized to affect governments’ accountability to their populations by reducing the need for domestic taxation. This has potentially two negative effects. First, domestic taxation requires a functional administrative apparatus, so aid can undermine the development of state capacity. Second, domestic taxation is thought to bind governments into a social contract with their populations, where governments provide public goods and accountability in exchange for the population’s acceptance of taxation. This argument is largely based on the fiscal sociology literature on state development in Western Europe, and there exists a debate whether the same mechanism transfers to contemporary Africa (Bräutigam et al. 2008).
This leads to the question of how aid, trade, and investment affect the dynamics of political liberalization and democracy. During the 1980s and 1990s, democratization became a common demand of donors and sometimes an explicit condition for aid flows (see Brown, this volume). Although the evidence is mixed, Bratton and van de Walle (1997) sum up the mainstream opinion that international pressure can sometimes have a positive effect, but that it is secondary to domestic factors. Likewise, van de Walle (2001: 17) observes that donor-induced political liberalization was often only cosmetic, and in fact rather than democratization the two modal responses to structural adjustment-era reform pressures were: state decay, and even collapse, as the existing order is undermined; and further centralization of power and authoritarianism as regimes manipulate the reform process to consolidate their power.
Fraser and Whitfield (2009: 75) note another way in which aid might affect the relationship between African governments and their populations: while African governments frequently denounce aid conditionality, they nevertheless ‘continue to use conditionality as an explanation of their unpopular policy choices and a buttress against internal dissent’. Aid also has been accused of de-politicizing economic policy in African countries by casting policymaking as a fundamentally technocratic – as opposed to political – activity and restricting the range of policies available to African governments (Ferguson 1990). A tangible example of how the aid process can create ‘choiceless democracies’ (Mkandawire 1999) is illustrated by the overlap between PRSPs and electoral cycles: even when governments change after elections, donors expect the new government to continue policies and projects initiated by the previous regime (Fraser and Whitfield 2009: 86).
Aid is not the only restriction on African countries’ policy choices. The footloose nature of global capital may also act as a homogenizing force on economic policies, forcing countries to compete with each author by complying with investors’ demands and encouraging a ‘race to the bottom’ in regulation and taxation. Such pressure is hardly unique to African countries, however; nor is it entirely new. Nonetheless, this possibility leads into the debate discussed in the next section: given the effects of aid and the global economic system, how much control do African countries really have over their own economic policies?
Dependency and Policy Space
The debate over whether African countries actually have control over their economic destinies has been raging since independence. In the colonial era, the orthodox view was that African economies needed to integrate into the capitalist economy in order to develop, but radical Marxists like Rodney (1972) argued the reverse: the underdevelopment of former colonies was not the result of a lack of integration into the world economy, but rather the structurally subordinate way in which these countries had been integrated – too much capitalism, rather than too little. This ‘dependency theory’ analysis helped provide the intellectual rationale for nationalist economic policies like import substitution. It also strongly influenced ‘externalist’ explanations for Africa’s economic crisis in the 1980s, which focused on global factors like terms of trade shocks. In contrast, the ‘internalist’ analyses that informed SAPs located blame primarily with the policy choices of African governments (e.g. World Bank 1981).
In the 1990s two factors began to change the terms of this debate. First, the rapid growth of several East Asian countries showed that the global economic system did not strictly prevent poor countries from industrializing. Both sides claimed the East Asian experience as support for their position. The World Bank focused on the major role played by exports in these countries to argue that embracing export-led growth and global markets was a winning strategy (World Bank 1993). Critics pointed out that rather than trusting in markets, these countries had made extensive use of the statist industrial policies that the Washington Consensus claimed were bad for growth (Wade 1990).
Second, a new architecture of global trade governance was developing. The trend was towards ever-lower tariffs and more open markets, but also the extension of global trade rules beyond trade in goods to areas like intellectual property, investment, services industries, and subsidies. In part this was occurring through the WTO, but gridlock in the Doha Round negotiations has meant that deeper integration has increasingly been pursued at the plurilateral or bilateral level. The EU’s EPAs are one example of this, but while these talks have stagnated, Africa’s regional organizations have been undertaking their own economic integration (see Khadiagala, this volume). Numerous bilateral investment treaties (BITs) have been signed also between African countries and (mostly) developed and emerging countries. Although lower profile than trade agreements, BITs create restrictions on host governments’ treatment of foreign investments that go far beyond the WTO’s investment provisions.
Tighter global economic integration in the last two decades thus has been synonymous with greater restrictions on national policy space. Critics point out that some of the policies that have been prohibited were the same ones that rich countries used to promote their industries at earlier stages of their development (Chang 2002). Such policies include: high levels of tariff protection; targeted industrial subsidies; performance requirements on foreign investment, such as mandatory levels of local content and technology transfer; and weak patent laws to enable local manufacturers to copy cheaply foreign technology.
The effects of these restrictions on trade policy are linked to the operation of the aid system. In some cases this relationship is direct, as with the coordinating role played by the WTO in the global Aid for Trade initiative. The aid component of the EPAs, which the EU has used as a ‘carrot’ to entice its negotiating partners and ‘compensate’ them for the adjustment costs of integration, is another example of this connection. In general, however, the link is indirect or unintended. Aid conditionality by donors (especially during the structural adjustment period) and the WTO both exert strong liberalizing pressure on African countries, but this is due more to coinciding ideologies and interests than to explicit coordination. Competition for global capital can also reinforce the pressure for liberalization in an uncoordinated but systemic way, since governments are desperate to attract investment and afraid that unorthodox policies could scare away investors. As well as signing numerous BITs, the past two decades have seen many African countries pass new national investment laws that grant broad legal protections and financial incentives to foreign investors. These mutually reinforcing constraints on African governments’ policy choices are portrayed by some as undermining sovereignty and preventing governments from taking actions that are necessary for their development (Soludo et al. 2004).
How much policy space still exists for African governments? It is certainly true that current African governments can choose from a more limited set of feasible trade and investment policies than was formerly the case, and that in the past some of these now-restricted options had been successfully employed elsewhere. However, critics sometimes overlook the range of policies that are still available. Even if a certain policy is forbidden by the WTO, it does not necessarily follow that it is unavailable to African countries, since countries can comply in letter but not in spirit and WTO dispute settlement procedures are rarely invoked against small, poor countries. Defenders of the WTO also argue that a variety of ‘special and differential treatment’ provisions for developing countries are built into the agreements.
Supporters of state intervention also point out that the WTO still allows a variety of ‘smart’ industrial policies directed at innovation, infrastructure, and provision of public goods (Amsden 2005). In addition, the concept of policy space is much broader than just trade policy, and includes such issues as macroeconomic management (although many African countries are also subject to external disciplines on this front). Even where desirable policies have been taken off the table, it is arguable that institutional shortcomings in African countries are still a bigger constraint on effective policymaking. The benefits to African economies from improved implementation of existing policies could be substantially greater than the benefits that might accrue from using now-restricted trade policies like industrial subsidies.
In terms of the policy pressures imposed by investors and global market competition, the straitjacket of global capitalism also may not be as tight as it first appears. High levels of private investment and growth can coexist with illiberal practices on the part of governments, as evidenced by the recent experience of some East Asian countries (most notably China). Whether African countries can replicate this success is an open question, since it is less feasible for countries that are not already attractive destinations for foreign investment. The extent of a country’s effective policy space therefore depends to some extent on structural economic factors, such as market size, natural resource base, and competitiveness.
It is also important to emphasize that African governments usually have some room for negotiation, even when aid donors and trade treaties make explicit demands of them. The strategies used to negotiate with donors range from confrontational approaches, such as refusal to negotiate and the politicization of conditions, to more evasive tactics, such as non-implementation and the reversal of reforms through ‘backsliding’ (Whitfield 2009). Donors have strong institutional incentives to disburse loans regardless of whether conditions have been met, and recipients can manipulate this to their advantage. Aid is also fungible to an extent, in that money given for a particular project frees up resources that the government can allocate to other uses that the aid donor does not want to support (Temple 2010).
Jones et al.’s (2010) study of developing-country trade negotiators finds that strong negotiation teams can win important concessions despite structural challenges and power inequalities. This brings out an important point: what matters is not only how much policy space countries have, but also how well they are able to use it. This is influenced by overall state capacity and political economy factors, but of greater interest is how it might be endogenous to the operation of the aid system. Some scholars argue that the overall effect of the aid ‘ownership’ reforms has been to undermine the ability of recipient governments to negotiate with donors, for several reasons: the deep entanglement of government institutions with those of donors; permanent negotiation of resources and policy choices; encouragement of apparent passivity on the part of the recipient government; and discursive convergence based on donor ideologies (Whitfield 2009).
These factors can make it difficult not only for governments to win negotiations but even to formulate negotiating positions. Jones et al. (2010) stress the importance of clear identification of interests as a prerequisite for success, yet too often this is the step where developing country negotiators are found lacking. The failure of many governments to even identify their own interests in such situations has major implications for thinking about policy space and the determination of economic policies, since the awareness and pursuit of self-interest by political agents is assumed by many approaches.
Conclusion
The forces of global aid, trade, and investment should be thought of as producing a complex and often contradictory set of incentives and constraints for national politics and policy. These incentives and constraints are both de jure and de facto, formal and informal, ‘hard’ and ‘soft’. There are a few inviolable imperatives, but even most formal rules (such as aid conditionalities) can usually be negotiated, bent, or manipulated to some degree. This is not to say that governments have complete freedom, even within certain bounds. Global forces may not manifest themselves deterministically, but they clearly influence how easy and rewarding it is for political and economic agents to take different courses of action. Ultimately, political outcomes and policy choices are shaped by the interaction of many such agents, and it is this interaction that determines whether governments respond to external pressures by identifying and acting in the national interest – or not.
This approach explains why the same global forces can have such diverse impacts in different countries. How a political agent reacts to a set of incentives and constraints depends not only on the agent’s own preferences and capabilities (keeping in mind that in many cases political agents are themselves groups) but also on those of other agents. It is natural, then, that countries with different constellations of elites and interest groups will have different reactions to global economic forces.
The same approach can also be brought to bear on debates about dependency and policy space. Countries’ policy choices are subject to formal limits of varying rigidity, as well as a set of incentives that establishes a ‘path of least resistance’, which may or may not coincide with the national interest. Whether African governments take control of their economic destinies depends on these external incentives and constraints, on the outcomes of domestic political interactions, and on the connection between the two.
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