I’ve now seen the same annoying elementary (but quite common) mistake twice in two days, and I’d like to knock it on the head before it gets repeated.
If Africa captured captured only a small percentage of global trade, it would make a big difference. In fact, in 2008, 1 percent of global trade was worth $195 billion, more than five times the development assistance sub-Saharan Africa received that same year.
And Ali Hewson and her husband Bono use a similar statistic in this short video (which Chris Blattman posted yesterday):
I support the basic point that is being made: trade is good for developing countries. I can’t recall ever meeting anyone from Africa who would not prefer more trade to aid. I agree with Bill Easterly’s argument in the FT that rich countries should be more focused on reducing trade barriers.
But the video and remarks by Mr Yohannes grossly overstate the benefits of exports.
Before we get on to the economics, let’s try to get the numbers right.
The total value of world trade is about $16,000 billion a year (measured as the total value of exports of goods and services). Exports from sub-Saharan Africa are about $380 billion a year, so they constitute a bit more than 2 percent of world trade, as Ms Hewson rightly says. And aid to sub-Saharan Africa from OECD countries is about $40 billion a year, roughly as Mr Yohannes implies.
So that means:
- If Africa’s share of world trade grew by one percentage point, its export earnings would grow by about $160 billion a year. So the figures quoted by Ms Hewson’s $(70 billion) and Mr Yohannes ($195 billion) are in the right ballpark. (They may get different numbers because they are using different years for their estimates of world trade.)
- One percent of the value of world trade ($160 billion) is about four times aid to sub Saharan Africa ($40 billion). On this, Mr Yohannes is roughly right (he says five times, but he is using older figures).
- If exports from sub-Saharan Africa increased by 1%, as Bono puts it in the video, the increase in Africa’s export earnings would be about $4 billion a year. This is only about a tenth of aid to Africa. For Africa to secure a one percentage point increase in world trade would require a 40% increase in Africa’s exports.
So it’s true that if sub-Saharan Africa could increase its share of world trade by 1 percentage point, its export earnings would grow by about $160 billion a year, and that’s about four times what it gets in aid.
But the net benefit to Africa of increasing its exports is not the same as the increase in its export earnings. That is the same mistake as equating a firm’s turnover with its profit.
Put another way, Mr and Ms Hewson and Mr Yohannes are all making the fundamental error of mercantilism, which is the idea that the prosperity of a nation is increased by the accumulation of bullion obtained from overseas.
They seem to have forgotten that exports have a cost. You have to put labour, land, energy and other inputs into making the thing you are going to export – inputs which could be used for something else. You have to grow tea, dig diamonds out of the ground, or make the shoes or silicon chips. You may have to transport the goods. There may be workers on the factory line, and the firm will need administrative staff, drivers and security guards. You may have to make or buy machines, tractors or lorries. All this is a cost. Even oil has costs of exploration, extraction, refining, transportation and damage to the environment.
These may well be costs worth bearing. When you export those goods and services, you get foreign currency in return. This foreign currency enables you to buy more imports. (That’s the point of exports.) But they are costs nonetheless.
Nations benefit from trade in other ways too, in addition to the extra imports that they can buy. Trading nations tend learn from abroad; their firms are forced to be more competitive and so more productive; and the imports can be of machines or technologies that help the economy to be more productive. So being an open, trading nation may help a country to grow faster.
So if the value of increasing exports is not the increase in export earnings, what is it?
The value to a firm of a new contract is not the price on the contract, its the profit it will make meeting it. In the same way, the value to Africa of exports is the difference between the cost of making what it has exported, and the value of what it can import as a result.
Of course, we don’t really know what those exports cost, or what the imports are really worth, so we don’t know the true net benefit to Africa of increased exports. But the value added is more likely to be about 10% of the turnover than 100% of it. If that’s a reasonable estimate, an increase in Africa’s share of world trade by one percentage point would be worth $16 billion a year. This is, as it happens, less than half of what it currently receives each year in aid.
And remember that increasing Africa’s share of world trade by one percentage point would be no mean feat – it would require a 40 percent increase in Africa’s exports.
It is true that nations benefit from exports (or, to be more precise, they benefit from the imports that exports enable them to buy). But you can’t measure the benefit to a nation of exports by the value of its export earnings, any more than you can measure the profitability of a firm by its turnover. Getting this right is important because, as Paul Krugman pointed out in Peddling Prosperity, if you lose sight of the fundamental economics you get drawn into stupid policy prescriptions such as export subsidies or import tariffs. For example, if you make it a policy goal to increase export earnings, you may subsidise exports, and so start to export goods that cost the nation more to make than someone abroad is willing to pay for them. Though export earnings have gone up, the nation is worse off, not better off, because the exports have cost the nation more than it earns from them.
Exports are good for development. There are almost no examples of successful development that have not been built on export-led growth. We should support reductions in trade barriers; and we should support investments that help developing countries to be more productive and so export more at lower cost to themselves. Developing nations would rather have trade than aid, and most taxpayers in donor nations would agree.
But let’s not overstate the case by claiming that the net benefit of exports is the same as the value of turnover. Even if Africa could increase its exports by 40%, which is a lot, and so achieve the (more modest-sounding) increase of 1 percentage point of world trade that Mr and Mrs Hewson, Mr Yohannes, and indeed all right-thinking people would like to see, the benefit to the continent could still be quite a bit less than it presently receives each year in aid.