The “Seoul Consensus” on development: Substantial progress for sub-Saharan Africa or paperwork again?

Peter Draper, Andreas Freytag, Matthias Bauer, 15 April 2011

a

A

The global financial crisis not only hit the developed world; it also created huge problems and a recession in many developing countries, particularly in sub-Saharan Africa. These countries had reformed their economies over several painful decades and had just started to reap the benefits. Although the causes of the crisis are rooted in the North, sub-Saharan Africa suffered from it. Therefore, it is worthwhile to analyse the attempts of the significant economies in the North but also key developing countries to solve their own problems, and the implications of these policy shifts for African economic development.

Our prism for doing so is the G20 Leaders’ Forum. At their November 2010 meeting in Seoul, the G20 agreed on a “Seoul Action Plan”, which also addresses the problems of the poorest in the “Seoul Consensus”. Both documents can be positively judged, as they take the right direction, inter alia freer trade, lower imbalances, and fiscal stability. Much emphasis is given to consensual cooperation and avoidance of global economic conflict. In theory the G20 members learned the lessons of history. However, it is also pretty obvious that the documents, as with any former G20, G7 or G8 agreements, lack an enforcement mechanism.

Sub-Saharan African and G20 crisis responses: A catalogue

Macroeconomics and trade

Prior to the global economic crisis sub-Saharan Africa’s economic growth performance and macroeconomic fundamentals, as a whole, improved remarkably from the dark days of the 1980s and 1990s debt crises (IMF 2010). This was driven by two broad sets of factors: rapid economic growth propelled by first US, then Chinese demand for commodities (Reisen 2010); and continued policy reforms resulting in more sustainable macroeconomic profiles in a number of countries. As OECD and Chinese growth and exports took serious hits the initial impact of the crisis in Africa as a whole was felt in declining export volumes and commodities prices, with attendant effects on current accounts and economic growth. Furthermore, tourism and remittance receipts, linked particularly to EU markets, suffered in many countries (IMF 2010; N’Zue 2010).

Many observers of African political economy were concerned that the global economic crisis would lead to African governments undoing the hard-won policy reforms of the 1980s and 1990s. Crisis response measures were implemented in a number of countries, along two broad fronts: stimulus packages, and budget revisions and/or targeted sectoral support measures designed to secure revenues. 

Recently growth rates in sub-Saharan countries have generally recovered. Stagnant growth in the OECD for the foreseeable future implies increasing reliance on emerging economies’ economic growth, especially Chinese but down the line India too. Hence the economic crisis has accelerated trends underway prior to it, and along with that African hopes for diversifying traditional reliance on the West (UNCTAD 2010).

Trade policy issues

At the onset of the global financial crisis many observers were concerned that protectionist trade policy responses could result in a global trade war. Clearly the worst predictions have not come to pass, albeit there has been a substantial escalation in “murky protectionism” (Baldwin and Evenett 2009). By and large developed countries have resorted to fiscal (subsidies; bailouts) and regulatory measures, whereas developing countries with their shallower pockets have resorted to tariff, including contingency (antidumping, countervailing, safeguard) measures (Evenett 2010, 19).

Ogunleye (2010) documents the contours of impact of African trading partners’ protection measures on African trade and finds substantial incidence of harm (80% of total measures versus 20% that were liberalising). Not surprisingly these mostly affected the more diversified economies, particularly South Africa (80 measures) followed by Egypt, Tunisia, Morocco, and Kenya (56, 40, 33, 31 measures respectively. Ogunleye (2010, 40) also notes that a substantial portion of these measures are concentrated in the agricultural sector in which many African countries have a comparative advantage, and that the WTO’s rules specifically allow for developed countries to increase payments to their farmers in times of declining global prices, including export support payments. This points to the urgency of concluding the Doha round.

Specific problem areas from the standpoint of African countries include:

  • Subsidies disciplines on finance, in light of huge bailouts to the financial sector.

  • Government procurement policies. As the “Buy America” package and its various clones in other countries such as China demonstrated, this area is not well regulated by WTO disciplines.

  • Policies affecting movement of workers. Ogunleye (2010, 44-45) notes that a number of European countries in particular tightened their immigration procedures, which in turn impacts on African skilled migrants with attendant consequences for remittances back home.

  • Investment conditionalities, such as the French government prevailing on Total not to shut down its refinery at Dunkirk which in turn meant rationalisation in another national jurisdiction, potentially Nigeria.

Consequently, even if the Doha round were to be (perhaps miraculously) completed, there is a large agenda arising from, and transcending, the economic crisis which could and should keep the WTO busy for years to come. Africans have an interest in securing these outcomes.

Financial regulation

On the regulatory front, tightening capital requirements as required under the Basel 3 amendments and the extra steps likely to be required of those banks deemed “too big to fail”, could result in restricted flows of capital to emerging markets and Africa especially. Since these regulations will be phased in over a number of years they are best considered medium-term in their impact. They may also restrict the supply of capital within African countries as they will be obliged to impose stricter prudential requirements on their own financial sectors (Thomas 2011).

Offsetting this potential negative trend is the fact that such prudential tightening would reinforce the good governance trend seen in substantial parts of the sub-continent, particularly concerning the financial sector. On the flip-side if there is a sustained and substantial increase in capital inflows into these economies that could have deleterious consequences in terms of currency appreciation and potential Dutch disease effects. However, these effects can be mitigated with appropriate structural reforms and supply side measures.

On balance, better global financial regulation that improves governance can be seen as advantageous for Sub-Saharan Africa.

The “Seoul Consensus” on development

The G20 developed the ‘Seoul Consensus’ on development (G20 2010). Its core underlying principles are useful and appropriate for Africa. Economic growth is regarded as the foundation of development; one-size fits all policies are to be avoided; and the private sector is regarded as central to achieving the objectives. This agenda is clearly large, and some winnowing is required. Nonetheless, it seems to address the needs of African economies.

On the trade front the Consensus essentially rehearses well-known WTO debates on duty-free-quota-free market access for least developed countries without recommending decisive action; recommits G20 countries to providing Aid for Trade finance; and pledges G20 support for regional economic integration efforts in Africa. On the macroeconomic front it advocates ‘growth with resilience’ through provision of social protection schemes; and ramping up domestic resource mobilisation in order to reduce reliance on aid inflows. The pillars also acknowledge important microeconomic aspects, e.g. the necessity of access to capital markets for small and medium enterprises, the virtues of investment promotion and the need for knowledge building and transfer. On balance, the text is aware of the basic problems both in economics and policy.

However, as usual with “G-something” declarations, the commitment is rather loose. It is worth mentioning that again there is no single pledge about a withdrawal from agricultural protection in the G20. There is only a commitment to food security. This may even have perverse incentives: in order to preserve food security, the rich Northern countries may feel the need to maintain overproduction and maintain food aid programmes. Such programs destroy incentives and market opportunities for domestic producers in developing countries, so that this pledge might prolong a vicious circle.

Macroeconomic and trade policies: Is the G20 on the right track?

A crucial passage of the “Seoul Action Plan” is the following:

“…12. We have a shared responsibility. Members with sustained, significant external deficits pledge to undertake policies to support private savings and where appropriate undertake fiscal consolidation while maintaining open markets and strengthening export sectors. Members with sustained, significant external surpluses pledge to strengthen domestic sources of growth.” (G20 2010, p.3)

To judge the document with respect to its potential success both within the G20 and in relation to sub-Saharan Africa, in our view it is important to ascertain whether or not the G20 members interpret this paragraph equally in terms of modern inter-temporal allocation theory (Obstfeld and Rogoff 1994). Such an interpretation does not express a prior normative judgement on a trade deficit or a trade surplus. It rather analyses the current account simultaneously with the capital account. According to this approach, the inter-temporal decisions about saving and investment lead to capital flows, which then change the nominal and/or the real exchange rate causing trade flows to adjust. As a result, the current account changes. The normative judgement of the resulting imbalances depends on the sustainability of the capital flow. As a general rule: if capital flows are invested properly, the imbalance seems unproblematic ex-ante, if it is consumed the judgement is much more critical (See Draper and Freytag 2008 for a short literature review as well as Corden 2007).

The statement in the “Seoul Action Plan” is remarkable as it seems to interpret imbalances not as disequilibria per se; rather it acknowledges that the saving-investment decisions taken individually and aggregated in countries may well lead to imbalances in equilibrium. In this interpretation, the global economy has moved away from equilibrium; a new equilibrium will be reached by different saving-investment decisions in several key countries. Even after the adjustment, imbalances may well exist. In addition, trade protection is not an accepted tool in this context, as acknowledged by the plan.

The main question here is whether the very ambitious document is really mirrored by both the commitment and ability of governments to deliver a global coordination of policies, or whether the implicit prisoners’ dilemma of governments in the sphere of vested domestic interests is overwhelming. This raises the very real problem of policy dissonance or a large gap (an imbalance if you will) between official statements and real intentions and actions. Judging from the G20 members recent rhetoric regarding imbalances, it seems that at least the big G20 members still take a pure mercantilist perspective which regards trade surpluses as good and trade deficits as bad. The crisis has brought to light domestic – distributional – conflicts and also encouraged nationalistic impulses, both of which increase the need for scapegoats. This political dissonance is also a critical element in the broader recourse to protectionist rhetoric.

The test is whether or not the G20 will follow the general thrust of the plan with respect to unilateral macroeconomic policy actions fitting within the sensible framework put forward. Furthermore, it is relevant for Africa that the G20 really start energising the Doha round; taking fiscal stabilisation seriously; ensuring that exchange rates float rather than being subject to political deals or conflicts; and guaranteeing that quantitative easing stops eventually (with central banks’ attempts to reduce liquidity). The proof is still to come.

References

Baldwin, R and S Evenett (2009), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, A VoxEU.org Publication, 5 March.

Corden, W. Max (2007), Those Current Account Imbalances: A Skeptical View, The World Economy, Vol. 30, pp. 363-382.

Draper, P and Freytag, A (2008) “South Africa’s Current Account Deficit: Are Proposed Cures Worse than the Disease?” SAIIA Trade Policy Report 25.

Evenett, S (ed.) (2010), Tensions Contained… For Now: The 8th GTA Report, CEPR.

G20 (2010) “The G20 Seoul Summit Leaders’ Declaration”, November 11-12.

International Monetary Fund (2010) “Regional Economic Outlook Sub-Saharan Africa: Resilience and Risks”, Washington DC, October.

N’Zue, FF (2010) “Impact of the Global Financial Crisis on Trade and Economic Policy Making in Africa”, Global Trade Alert, 5, May.

Obstfeld, M and Rogoff, K (1994), The Intertemporal Approach to the Balance of Payments, NBER Working Paper 4893.

Ogunleye, KE (2010) “Effects of Post-Crisis Foreign Trade Policy Measures on Economic and Trade Performance in Africa”, Global Trade Alert, 5, May.

Reisen, H (2010) “Global imbalances, the renminmbi, and poor-country growth”, VoxEU.org, 1 November.

Thomas, R (2011) “Trade in Financial Services in Southern Africa: What Room for Negotiators in the post-2008 Financial Crisis? SAIIA Research Report No 8.

United Nations Conference on Trade and Development (2010) “South – south Cooperation: Africa and the New Forms of Development Partnership”, Economic Devel

Topics: Development, Global governance, International trade
Tags: global crisis, Seoul consensus, sub-Saharan Africa

Matthias Bauer

PhD student, Graduate Program on Global Financial Markets, Friedrich-Schiller-University Jena

Peter Draper

Founder and Director, Tutwa Consulting

Andreas Freytag

Professor of Economics, Friedrich-Schiller-University Jena; Honorary Professor; University of Stellenbosch

Subscribe