What Africa Needs is Less “Aid” (2005), by Sean Gabb

What Africa Needs is Less “Aid”
by Sean Gabb
(Published by Tech Central Station sometime in 2005)

Already a fixture in the news, the debate over what to do about poverty in Africa has moved back to the headlines with the current famine in Niger.

Now, most debates over this issue follow a standard pattern. On the one side we have the Christians preaching socialism dressed up a soft-hearted regard for the poor. On the other we have the hard-core globalisers crying the praises of every corporation in sight.

What I want to do is take a middle position. In many respects, I agree with the religious aid agencies. The whole structure of world trade as it exists today is profoundly unfair. Poor countries all over the world have their trading arrangements – and, indeed, quite often their internal policies – dictated by the great trading powers, these being the United States, the European Union and Japan.

Because this country is trapped within it for the moment, let us look at the European Union. This runs a set of protectionist policies that could be almost designed to wreck the trading chances of those poor countries that have comparative advantages in food and textiles.

There are the trade restrictions. Agricultural tariffs average 20 per cent, but rise to a peak of 250 per cent on certain products. For example, the tariff on Bolivian chickens is 46 per cent, and on Bolivian orange juice 34 per cent. On textiles, there are strict quotas on most important lines. These have been reduced or removed in the case of fairly unimportant products such as parachutes and umbrellas. But the European market remains barely open to the majority of low cost textiles from the developing world.

Added to open trade barriers are the complex rules of origin applied to imports from the developing world. These stipulate how much of a product must be made from local inputs to qualify for the preferential tariffs. Only a third of imports from poor countries eligible for preferential access are able to meet the strict criteria to comply with the rules of origin.

Even if an exporter from the developing world is able to comply with these regulations, there are then the further regulations on health and safety. These have a protectionist effect, and that again may be their intention.  For example, one regulation requires that milk should be taken from cows by machinery and not by hand. This effectively shuts out all Indian milk products, which would otherwise, admittedly, enter only at prohibitive tariffs of between 76 and 144 per cent.

These rules reduce trade between the European Union and the developing world. They also filter out exports of value-added products from the developing world. In February 2002, for example, Tony Blair visited a cocoa farm in Ghana. This is a collective enterprise set up by the Comic Relief charity. It is a great success. The cocoa is good and has a ready market in Europe – which has no cocoa sector of its own and so does not penalise imports. It could be a greater success, though. The cocoa is used to manufacture a brand of chocolate bar called Dubbles. These are not manufactured locally, but in Germany. The reason is tariffs that would raise the price of Dubbles by 10p a bar if manufactured outside the European Union. As with all primary products, the world price of cocoa is highly volatile, rising and falling according to how much is produced. The price of manufactured confectionary is highly stable. In this respect, the European Union is effectively taking a choice joint of meat, chewing off all that is tasty and nourishing, and tossing the bone to a malnourished dog – and then preening itself on how generous and caring it is.

Second, there are the agricultural subsidies handed out by the European Union under the rules of the Common Agricultural Policy. These amount to $41 billion a year

These complete the effect of tariffs and other barriers in shutting them out of a market in which they would otherwise have a comparative advantage. For example, the European Union spends €2.7 billion each year on subsidising European farmers to grow sugar beet, while it maintains high tariff barriers against sugar imports from the developing world.

They generate immense surpluses of foodstuffs that cannot be sold within the European Union at the prevailing intervention prices. Much of these surpluses are exported at very low prices that undercut those charged by the unsubsidised producers of the developing world. A prime case of this is sugar sales in the Middle East. Countries like Sudan are crowded out of the sugar market in Egypt and Saudi Arabia.

Some of the surpluses are exported at subsidised prices to developing countries, thereby crowding out domestic producers. In Jamaica, some 3,000 dairy farmers are being driven out of business by imported milk powder from the European Union. 5,500 metric tons are sent there each year at a cost to the European taxpayers of $3m. Many of the farmers are women.

This is an outrage. It has no defence. Now, if the advocates of fair trade were to confine their critique to this trading order, I could have no argument with them. But they do not.

In the first place, the fair traders seem convinced that the present trading order is the free market in action. It is not. It is manifestly not free. Tariffs, subsidies, restrictions – these are nothing to do with a system of voluntary exchange, in which people cooperate for their mutual advantage. They are the effects of a highly cartelised, regulated trading order, in which big interest groups use their influence with western governments to rig the market in their favour. Look at that $41 billion a year of agricultural subsidies paid out by the European Union. This may amount to $14,000 per European Union farmer – but half that spending goes to the biggest 17 per cent of farming enterprises. And much of the rest simply passes through the hands of the recipients to the big landowners in higher rents.

Or look at the big and often multinational corporations that also benefit from the system. These are not free market entities. They are creatures of the State. They were able to grow so large because they have the privilege of incorporation, whereby the owners are protected in their own pockets from the risk of bankruptcy. They stay big because they can get their home markets cartelised and regulated. In return, they do favours for the politicians.

You may call the present system "neo-liberal". You may denounce free markets. But you are picking the wrong target. What we actually have is corporatism with a tinge of market economics. We are all of us the serfs of a ruling class that comprises those politicians, bureaucrats, educators, lawyers and media and business people who derive wealth, power and status from an enlarged and activist state. To call this state of affairs liberal in any sense is about as taxonomically accurate as calling the old Soviet Communist Party syndicalist.

In the second place, the fair traders have a solution that is easily worse than the problem. It is possible they have the best intentions. They want to see poor countries grow wealthy on the basis of their own agriculture and their own industries. But wishes are not facts. The most likely effect of fair trade is to have the world divided into sealed territories within which poor majorities are ruthlessly exploited by their own local ruling classes. Presented in the now obligatory lilting, patronising tones of concern for the poor, what we have is nothing more than the old Nazi policy of autarky.

Do not suppose that ruling classes in any country have the best interests of their subjects at heart. In poor countries, just as in the West, corporatism has given us a jungle in which the best-connected flourish. The talk may well be of "rational planning" or "picking winners". The reality is always corruption and incompetence and impoverishment.

I have already mentioned the Common Agricultural Policy in Europe. But we are rich. We can afford to pay out something like half our income in taxes that are visible, and half of the rest on compliance costs with regulations that amount to invisible taxes. The masses in the poor world are poor. Give them completely over to their ruling classes – and you can really watch them starve.

Let me give one example of how fair trade works in practice. On the 1st January this year, import taxes were raised in Kenya and in several other African nations on second hand clothing from the West. The stated purpose of this was to give local textile manufacturers the chance to grow big enough to face foreign competition. Of course, the textile interests will never be able to face open competition. Infant industries never grow up. Protect them, and prices rise. Money that would otherwise be saved and invested is spent on paying the higher prices. Money that would otherwise be spent on other goods is spent on paying the higher prices. The country gains a sector in which it may have no comparative advantage – or in which it might have a comparative advantage only in less well-connected hands. Those sectors in which there might be a comparative advantage suffer. But the lucky capitalists who are protected make big profits, and their friends in government collect the usual gifts. And the people at the bottom? Norman Nyaga, a Kenyan Member of Parliament can answer here. Writing in The Kenya Times last month, he accused the Government of deliberately rigging the textile market in favour of some foreign investors. He said the effect would be to damage the livelihood of 10 million Kenyans who work in the second hand clothing sector, and to lower the incomes still further of the 56 per cent of Kenyans who live below the official poverty line and who must buy second hand clothes or go naked.

I do not support the present system of world trade. But give me a straight choice between this and the economics of the jungle that is fair trade, and I will choose the present system any day. Global corporatism may be unfair. But it does at least allow some wealth to be created. It does allow at least some rational economic calculation. Fair trade simply gives even more power to politicians and bureaucrats and favoured business interests in poor countries – that is, to the very people and interests that made and have kept these countries poor.

If you really want to improve the lives of the poorest, forget all this "kumbaya socialism" – which is a cocktail of bad economics and bad theology, accompanied by self-righteous candle-waving. Either settle for what we have – which, unfair as it is, delivers something – or campaign for a return to national and international voluntary exchange. Fair trade can never be fair. But free trade can be free.

© 2005 – 2017, seangabb.

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