Global Power Disequilibrium, Trade Wars and Implications for Africa

Protocol Distinguished guests, Ladies and gentlemen; This is the first time I am attending this important event organized in memory of Dr. Babacar Ndiaye, a great and committed Leader who contributed immensely to the development of our continent, largely beyond his primary area of expertise which was finance. I knew him personally and worked closely […]

Protocol

Distinguished guests, Ladies and gentlemen;

This is the first time I am attending this important event organized in memory of Dr. Babacar Ndiaye, a great and committed Leader who contributed immensely to the development of our continent, largely beyond his primary area of expertise which was finance. I knew him personally and worked closely with him during the establishment of the Nigerian Trust Fund at the African Development Bank and I also know of the important steps he took to increase the capital of the Bank during his leadership as the President of the institution between 1985 and 1995.

In addition, we worked very closely and coordinated our actions during the fight against the Apartheid regime in South Africa.  Very often the thinking is that a solution to a political problem must come from the political arena; but a coordinated approach is the most effective path. The role played by President Ndiaye in the fight against Apartheid was one of the most effective, though not often discussed. He was a very courageous leader, and I would like to congratulate the leadership of the African Export-Import Bank for establishing this Annual Lecture which provides the opportunity to honor his memory and inspire future generation of young leaders. On a personal note I would like to thank the Bank for this opportunity to pay tribute to a brother and a friend.

I would also like to commend Afreximbank for creating a platform where African views will be articulated at the global level every year. Knowledge is power and ideas emanating from constructed knowledge are important aspects of power projections, especially in a highly competitive global environment. This is great leadership and a very important path to mainstream Africa in the global economy and knowledge world. I would like to join the President of the Bank, Dr. Benedict Oramah and to thank Professor Jeffrey Sachs, the intellectual father of the Millennium Development Goals (MDGs) and now Sustainable Development Goals (SDGs) for his support here and when I was President of Nigeria. We worked together on the Malaria Summit and the HIV/AIDS Summit which led to the establishment of the Global Trust Fund for HIV/AIDS which, as he pointed out, has saved 27 million lives. Professor Sachs has been a great friend of Africa and I would like to thank him for lending his intellectual and moral support to this intergenerational project—the Babacar Ndiaye Annual Lecture Series. There is no better way to bring the world together.

The world has been going through tectonic shifts over the last few decades, especially with the rise of the developing world, and steady decline of traditional powers shaking the old established world. One may refer to that long historical, and almost irreversible trend towards shifting power dynamics as Global power disequilibrium. More recently, and especially with the rise of President Trump, the trade war has been waged against emerging powers as a response to global power disequilibrium. Perhaps it is hoping to return to the old unipolar world of US supremacy. Like in any war, there are collateral damages which make the topic chosen for this year’s deliberation— Global Power Disequilibrium, Trade Wars, and Implications for Africa— one of the most relevant and timely.

 

Global Power Equilibrium of Partial Equilibrium

Ladies and Gentlemen;

Let me refer to the meeting of the InterAction Council which took place in Beijing on 29 and 30 September 2018. At that meeting, we referred to the catastrophic World Wars of the 20th Century which opened the eyes of all nations. Leaders began to see that the greatest future challenges to peace, security and progress would be global, enormous in scale, and transnational. The global community concluded that a multilateral system was needed to avoid the horrors of another war and to lead to peace, security, development and progress in the world. At core of the system is the United Nations (UN) with its specialized agencies particularly those pertaining to finance, monetary arrangement, development, trade and labour. We concluded “the reality now is that in the first quarter of the 21st Century, some current leaders seem to have forgotten willfully or otherwise the compelling reasons why their earlier compatriots saw the necessity for a rule based collaborative international structure and order.” That was the world that saw Africa to independence.  The argument of free, fair, and equitable trade no matter how sound it is can only be predicated on multilateral negotiation and agreement without disturbing or destroying the tenets of WTO.

The world which emerged from the struggle for independence in the 1960s has changed dramatically. The Second World War produced a bi-polar world, where the balance of power between the Eastern bloc led by the Soviet Union and the Western bloc led by the United States of America sustained global power equilibrium for decades at least in a military sense. I stress in a military sense because even then the world was in a state of economic disequilibrium. Several countries which were aligned with the Soviet Union at the time had to visit Washington— and especially the World Bank and the IMF which are hosting their Annual Meetings this week here in Bali, for the “almighty dollar”. To a certain extent the global equilibrium was partial, as it was more on the military and tactical sense than on the economics. The need for balance of payments support during economic crises and adjustment which followed often gave a lot of weight to the United States and its allies in Europe.

In effect the “almighty dollar” was strategically used under the dollar diplomacy to tilt the balance of power towards the US. Over time the rise of Cold war-driven loans under that partial equilibrium led to a debt overhang and tremendously exposed African Countries. The process of privatization of African assets and state-owned enterprises, which in most countries essentially meant transferring the ownership of public assets and large public utilities to foreign ownership, undermined the development of private sector and set the continent on a reverse development gear of de-industrialization and natural commodity dependency and these commodities were shipped out of Africa without value addition. In most African countries we move from public monopoly in the supply of power and utilities to private and foreign-owned monopoly, with significant implications for the transfer of resources and capital flight.

For Africa, the structural adjustment era which characterized the tail end of the cold war has often been referred to as the lost decade. Some have referred to it as the lost quarter century because the period of economic contradiction, contraction, and recession was long, spanning the 1970s, 1980s and most of the 1990s. Ironically, while Africa was retrogressing or stagnating during this lost quarter century, Asia was taking giant strides and making progress. Hence even under that partial equilibrium the lots of Africa did not improve. Per capita income declined in real terms reflecting the volatility of growth in a region which depended excessively on primary commodities and natural resources. The share of African trade which represented about 5% of world trade at independence in 1960s fell to 3.5% in 1990, to less than 3% in 2017.

But the costs and implications of that partial equilibrium for Africa extended far beyond the economic sphere. The social costs were significant. Millions of Africans lost their lives during Cold War-influenced internal wars across the African region. After the terrible colonial experiment which led to the partition of Africa by European powers during the Berlin Conference in the 19th century, Africa, once again, became the theatre of competing geopolitical interests, this time between the Eastern and the Western Bloc. In my home country we had our own civil war, with its Cold War influence: the Biafra war where the part of Nigeria which attempted to secede from the Federal Government had a lot of sophisticated military hardware, indeed almost as much as the Federal government coming from the West and reasonable support for the Federal Government from the East. There was no factory for military weapons in Africa then and still not much to talk about today.

 

Experience of Liberation Struggle in Southern Africa – Global Power Disequilibrium

Ladies and Gentlemen;

The transition from a partial Global power equilibrium to a full global power disequilibrium which characterized the end of the cold war was a very interesting period in world affairs. Most countries, member of former Soviet bloc joined the European Union and the World Bank and IMF. Even the Federation of Russia, the anchor of the soviet bloc, joined the IMF and World Bank. The reconstruction and promotion of economic development in these countries during what was commonly referred to as transition to market economies led to competition for resources between traditional developing economies, including African economies, and new transition or emerging economies.

The world was under the diktat of the all-too-powerful West- which enjoyed both economic and military supremacy. The unipolar world is seen at its best. The free market ideology became the dominant driver of economic thought and development, both in the Western and Eastern Bloc, in the developed and developing world.

After the collapse of the Soviet Union and rise of free market ideology across the entire Eastern bloc, the accession of China to the World Trade Organization (WTO) in December 2001 was signaled as a very important milestone in the process of global ideological convergence. The US actively campaigned for the admission of China to the WTO. Accession meant that China would engage in global competition and trade under already existing terms—that is according to rules set with US leadership. China’s admission was viewed as a major victory for the US on a path to global convergence towards the free market economy. In the view of most experts in the US but also in Europe the unipolar world dominated by the USA both militarily and economically was a prelude to a new era in world affairs. The unipolar world led by America became a permanent feature for that time of the world economy—what President George Bush Snr called the “New World Order”.

However, that analysis did not take into account the dynamism of the Chinese economy and its ability to develop and compete favourably without completely succumbing to the democracy and free market ideology advocated by the US and its European allies. The economic reforms initiated by Den Xiao Ping dramatically changed the production structure of the Chinese economy which developed almost at breakneck speed and became globally competitive, remarkable without altering the political ideology as expected or predicted by Western experts. It was market economy with Chinese characteristics which implies socialism. The emergence of China which followed the rise of emerging developing market economies created a new and more vibrant South which has been shaking the old unipolar world dominated by the USA.

Between 2001 and 2017 several new records and milestones, sign of the weakening post-Soviet New World Economic Order dominated by the US under the unipolar global framework of engagement were established:

1. The developing South became a major driver of global growth and trade, accounting for over 45% of global trade in 2017 from 23.8% in 2001;
2. China supplanted the US as Africa’s single largest trading partner in 2009;
3. China supplanted the US as the leading trading nation in 2012;
4. China became the largest economy in Purchasing Power Parity (PPP) terms, overtaking the USA in 2013;
5. Trade between China and Africa increased by more than US$160 billion, from $6.4 billion in 2000 to over $170 billion in 2017;
6. During the same period trade between Africa and the US increased by just about US$10 billion, from $32.7 billion to $42.8 billion;
7. Chinese investments in Africa increased significantly during the same period, rising from less than $100 million to over $3 billion. China is, thereby, playing a key role in the transformation of African economies, especially through the development of infrastructure;
8. The US which used to be the main destination for Nigeria crude oil lost that significant position now claimed by India. Today trade between the US and Nigeria is marginal, accounting for less than 11% of Nigeria total trade;
9. At the same time, and this has been the major point of contention and supposed reason of the trade war, the US trade deficit with China has increased steadily and reached the critical threshold of $365.7 billion in 2015, on the eve of President Trump’s election;
10. The US has also accumulated large trade deficit with Mexico which according to the latest estimates exceeded $71 billion;
11. Together China and Mexico accounts for over 48% of total US trade deficit.

What started as global economic imbalances in the IMF’s assessment, with US and other leading economies in the West accumulating large trade deficits with emerging developing market economies has become a global power disequilibrium. The epicenter of the world is shifting Eastward, towards Asia, and Beijing is emerging as the new epicenter under that transition.

In September 2018, more than 40 African Heads of State and Government converged on Beijing within the context of the FOCAC Summit. The Forum for China Africa Cooperation which is held every three years is indeed a sign of deepening economic cooperation between Africa and China—the leading drivers of the rising South.

Another important transition is well underway- perhaps the shift from unipolar world dominated by the US to a multi-polar World with China as the new leading economic super power and resurgent Russia on the military front and other emerging powers such as India, Brazil, Turkey, and of course I would like to add South Africa, Egypt and with a bit of luck Nigeria to that list—but the same people who did not see China coming will accuse me of being either too optimistic or strategically unrealistic, which is a problem for a Military General!

It is under this global power disequilibrium which has seen the emergence of new powers in the developing world that the US has put its finger on the trade war gun trigger. This must be in realization of the direct link between economic might and national security. That link was further illustrated last month in a seminal article which highlighted the risk associated with rising debt incurred by the US to finance its ballooning deficits.  According to US Congressional Budget Office, “Interest payment on US federal/debt is set to surpass the US Defense Budget in 2023”. At that point, the US may have no option but to cut its expenditure outlays, including military which has been the centerpiece of its power projection.

 

Global Power Disequilibrium and Trade War

Ladies and Gentlemen;

The US response to this threat has been to impose primitive tariffs on countries accumulating large trade surplus against it—most notably on Canada, Mexico and of course China—the biggest culprit. Jeffrey Sachs referred to this as Washington nervousness.

• In January 2018 the US imposed a tariff on solar panel imports, most of which are manufactured in China;
• In July 2018 the US specifically, targeted China by imposing 25% tariffs on $34 billion of imported Chinese goods;
• A tariff on an additional $16 billion of Chinese imports was added in August 2018;
• A further tariff on $200 billion of Chinese goods went into effect on September 24, 2018.

These unilateral measures taken by the US government to rebalance the ongoing shift in global trading structure were followed by retaliations from China, and other trading partners leading to a trade war. That war has been raging with risk of collateral damages for Africa. China has become Africa’s leading trading partner and sharp growth deceleration triggered by trade war in China could adversely affect growth prospects in Africa through trade and investment channels.  The US which can be credited with being in the fore-front of  building the global architecture on which the world trade and economic development grew after the Second World War, has deliberately chosen to become its destroyer. Pity! Because if we remove the props, they will not be there when we will need them and surely nobody can predict the future. The financial and economic situation of 2008 could not have been resolved as quickly as it was if there was trade war raging.

However, even directly Africa was already the target of a US trade war, though the region has accumulated trade deficits against the US. Recently, the US took measures to protect its trade interest in Africa by suspending duty-free access to all AGOA-eligible apparel products from Rwanda. This was a response to the decision by Rwanda to follow through on East African Community decision to outlaw the dumping of used clothes and shoes across the East African region to boost industrialization and stimulate manufacturing production in member states. But it must also be said that for me as an African leader, there is a little bit of human dignity which must be preserved for Africans by curtailing the amount of used clothing dumped into Africa.

• But the US waged a trade war against Africa even before the election of President Trump when the country unilaterally decided to dramatically cut down on its import of crude oil from Nigeria. Between 2011 (when the production of shale oil expanded in the US) and 2017, Nigeria exports to the US decreased from $28.7billion to $5.9 billion, about 80% fall within 5 years.
• For a country which depends on crude oil exports for more than 95% of total exports revenue and 75% of government revenues this was a major shock, perhaps more significant than a 10% or 25% tariff hike on any imports;
• Nigeria was able to survive that unexpected trade shock because the global South stepped up its cooperation, with China and India increasing their import of Nigeria crude oil during that period of US transition to energy independence. In the process China and Nigeria became Africa’s first and fourth single largest trading partners.

In other words, adverse implications of the US-waged trade war have already been significant for Africa and could become even more important if risks to global trade materialize and result in sharp contraction in China which has become Africa’s largest single trading partner. The key question is what should African countries do to mitigate these risks triggered by the latest trade war which in my view is here to stay at least for some period of time?

 

Global Power Disequilibrium, Trade War and Implications for Africa

Ladies and Gentlemen;

Americans and Europeans have dominated the world economy for centuries and will not easily accept the transition towards a multipolar world in economic terms which may imply that they relinquish part of their global power to account for palpable changes in the world economy. These countries have resisted the reform of the Bretton Woods Institutions (World Bank and IMF) which were established after World War II when most countries in the developing world were not even independent and even though China has become the leading trading nation and second largest economy in the world. With China becoming the largest trading nation with Africa, we need to seek arrangement that will not require looking for intermediary currency for Sino-African trading which will save Africa between 4 to 5 billion dollars.

New global financial institutions are emerging as alternative, spearheaded by China perhaps to create a new world more to the image of the post-Bretton Woods and ongoing process of rebalancing of global power—The Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (BRICS Bank). The trade war is unlikely to soon go away from the global economy. In this regard the potential implications of the ongoing trade war are significant and mitigations measures and policies that must be contemplated by Africa should include:

1. Unity, Integration and Progress: There is no substitute for unity and integration for Africa’s development, growth and progress. In population, China, India and Africa are comparable. But while China and India are one country each, and one market, one policy, and one custom and custom regulations, Africa is fifty-four countries. If Africa cannot be one country, it can be one market with one economic policy, custom and monetary regulations.
2. Recognizing the centrality of the link between national security and economic development in the quest for self-reliance. The tectonic shifts and global power disequilibrium witnessed at the global level are largely driven by recent developments in China. China is reclaiming its independence after the Opium War which decimated its economy; and the resurgence of Russia is partly motivated by its strengthening economic power. Indeed, while there is no economic development without national security, in the long term there is no lasting peace and security without economic development. African governments should therefore strengthen and invest in their private sector, social infrastructure, and military to sustainably achieve both lasting economic development and national security.
3. Deepening and expanding Africa-South trade. The shift in the direction of trade operated by Nigeria in less than a decade enabled it to weaken the shock associated with the collapse of Nigerian exports to the US—perhaps the first trade war of the 21st century. Since 2001 trade between Africa and the South has increased significantly- expanding by 509% to reach $439.5 billion in 2017. The future of African trade and effectiveness of policies to achieve macroeconomic stability in Africa will largely depend on the strength and resilience of Africa-South trade.
4. Accelerating the process of industrialization and transformation of African economies: Industrial products and manufactured goods account for the bulk of African imports. These patterns of trade which rely heavily on imports of finished manufactured goods and export of primary commodities, natural resources and leading to waste of foreign reserves have been a source of recurrent balance of payment and macroeconomic management challenges in part because primary commodities are subject to deterioration of terms of trade in the long term. The Lagos Plan of Action articulated a framework to accelerate the process of industrialization of African economies. This objective was reiterated under the African Union Agenda 2063—The Africa We Want. It will strengthen the bargaining power of African countries in international trade negotiations and boost cross-border trade and investment.
5. Boosting Intra-African Trade and Deepening the Process of Regional Integration: During the Annual Meeting of the Afrexim Bank held in Seychelles I challenged African Leaders and bankers to commit to raising intra-African trade then at less than 15% to at least 25% of total African trade by 2025. It was the first milestone and target set to motivate African Leaders. As I also pointed out during the same gathering Africa was not really independent and will only become independent when total intra-African trade accounts for at least 50% of total African trade. Intra-regional trade is at 68% in Europe and over 53% in Asia. Then “trade wars” whether waged by the United States of America or any other major country or group of countries will essentially target less than 50% of total African trade. It will be easier and less painful to withstand such storm.
6. Education: Popular education is still the bane of African development, growth and progress and well-being and enhanced living standard of Africans. With estimated over 100 million children who should be in school, not in school and more than 50% of the girls, there are not empowered and prepared to make meaningful contribution in development terms to their own lives, families, communities, and nations. There is no reason why there should be any African child out of school for lack of means. If we established Global Trust Fund to deal with HIV/AIDS which saved 270 million lives, we can establish Africa Education Trust Fund to put all African children in school within five years. Then we can pay attention to quality and relevant education to match with development in Science, technology, Engineering and Mathematics to place Africa in line with Artificial Intelligence, Robotics, and Automation. With quality and relevant education, the future will not elude Africa. Education in Africa, like in all parts of the world, must take care of the development of innate abilities of individuals, acquisition of knowledge and skills, inculcation of values, virtues and character.
7. Infrastructure and Energy: Development will continue to elude Africa for as long as Africa is poor in infrastructure especially land, water, and coastal transportation and energy. Africa’s infrastructural development must be coordinated and integrated so that road, rail, water transportation systems are sub-regionally and continentally planned, designed and executed. With thriving coastal shipping system all around Africa, intra-Africa trade will increase by at least 10%. As for energy, Africa’s situation is starvation in the midst of plenty. We have Ingar Dam project on the Congo River which has been studied for decades and yet remains unimplemented. It is estimated to be possible of supplying up to 60, 000MW of electricity. The future of energy is renewable particularly solar which Africa has in abundance. Africa should encourage and join China Global Energy Interconnection to develop climate-friendly energy for Africa and for export to Europe and Asia. The perilous journey of African youths across Sahara and the Mediterranean for greener pasture can be replaced with energy export and job creation at home.
8. The African Continental Free Trade Area Agreement (AfCFTA) signed by the overwhelming majority of African countries last March in Kigali was one of the most important developments in our continent since independence. The AfCFTA will accelerate the process of industrialization and expand intra-African trade. It will also make trading with the rest of the world easier as the world will have Africa as one market and one economy and Africa will trade with the rest of the world also from the point of one economy, economic regulation and strategy. African countries should all sign and ratify the Agreement to shift their focus towards its implementation. Empirical studies, including one recently undertaken by Afreximbank have all stressed the tremendous benefits the Agreement will provide, both in terms of economic transformation and trade—and naturally mitigating future risks of trade wars.

African governments, especially Ministers of Finance and Central Bank Governors here present should increase their support to the African Export-Import Bank which is doing a excellent job in the promotion of intra-African trade and transformation of African economies, financing the development of Industrial parks and certification centers—exactly what has been articulated in the Lagos Plan of Action, but not implemented and only recently revived by the African Union Agenda 2063—The Africa We Want. All measures that can curtail import of what Africa can produce must be embarked upon to generate Intra-African and African trade with the rest of the word not only as a means of enhancing prosperity but also as a means of creating employment to satisfy the doubling of Africa population in about thirty years from now.

Finally, I would like to strongly encourage African Leaders to increase their support to the institution which has become one of the vanguards of our development. Their contribution to the Central Bank Deposit Programme (CENDEP) established by the Bank will enable them to effectively deploy their foreign reserves toward the promotion of trade and transformation of African economies using the Bank as the medium because the Bank created by President Babacar Ndiaye has fulfilled the promises of becoming the Trade Finance Bank for Africa. And there is no better way to honor the memory of President Babacar Ndiaye than sustaining the growth of institutions he created for the transformation of the continent he so much loved and treasured.  Small Africa countries need protection and enjoyment of economy of scale which can be provided from within Africa.

As part of the implementation of the AfCFTA, the Bank in partnership with the African Union will be organizing later this year (December 11-17, 2018) in Cairo, Egypt, the first-ever Intra-African Trade Fair which will connect buyers and sellers to bridge trade information gaps and accelerate the growth of Intra-African Trade and transformation of African economies. As the Chair of the Advisory Council on Intra-African Trade Fair, I invite all of you to Cairo in December. At this point, I would like us to take a short pause and watch a short video introducing the trade fair to the world.

Thank you.

 

Dr. Olusegun Obasanjo was a former President of the Federal Republic of Nigeria. He delivered this paper at the Second Edition of Afreximbank Babacar Ndiaye Annual Lecture Series on October 13, 2018, in Bali, Indonesia.