• Home
  • Opinion
  • Fair trade partnership will end foreign aid

Fair trade partnership will end foreign aid

By Vision Reporter

Added 22nd April 2014 02:41 PM

THE EU has traditionally been Africa's biggest trading partner and is by far its largest donor. However, its influence is increasingly being challenged by China, now a major investor and donor in Africa

By Ronald Kamugira

TWO weeks ago, the 4th EU-Africa summit in Brussels attracted more than 60 heads of EU and African leaders, and a total of 90 delegations, to discuss the future of EU-Africa relations and reinforce links between the two continents. The same summit was boycotted by President Zuma of South Africa and Mugabe of Zimbabwe citing a visa ban for President Mugabe’s wife by EU.

President Zuma was quoted as saying "I think that time must pass wherein we are looked upon as subjects"  "We are told who must come, who must not come."- Zuma asserted. In his other earlier accusations,  he accused the Western mining companies in South Africa of extracting African resources without being open to fostering support industries that would generate large economic gains for host nations.

He advised them to change the way they do business with Africa if they want to regain Africa. He reminded them that if they treat Africa as a former colony, then Africans will look for new partners who are going to treat them differently. The new partners he is referring to could be of course China, Russia, India or Brazil (BRIC).

This expresses the current relationship between Africa’s economic mighty country and the European states more critically as China edges closer to the business nucleus of Sub Saharan African states.

Other significant discussions on the 4th EU-Africa summit agenda included Trade and investment. Some of the tradable remarks were from EU council President Herman Van Rompuy calling on delegates to mark a new stage in Europe's relationship with Africa in agreement that, It was time for a "shift from development cooperation to a partnership of equals” with trade and investment playing a key role.

The EU has traditionally been Africa's biggest trading partner and is by far its largest donor. However, its influence is increasingly being challenged by China, now a major investor and donor in Africa. 

The proposed “partnership of equals” has come out at a time of continued growth of the Chinese Business Empire in the Sub-Saharan Africa. Sub Saharan Africa ranks as second fastest growing region in the world after East Asia, with a growth rate of 4.8 in 2012 and 5.1 percent in 2013.

However, unlike European Union states, Germany has dominated on trade in the Sub Sahara Africa in the last decade with Imports from Germany to Sub-Saharan Africa increasing by over 133% between 2002 and 2012, going from $100b (2005 constant USD) to over $350b.

Exports from the region to Germany have also risen by the similar magnitude. Germany is now the fastest growing economy in Europe and is currently the world’s second-largest exporter and manufacturer in value-added term.

Conversely, with some African countries suffering from run-down social and economic conditions, Western democratic governments have been at the forefront of providing international aid to these countries. It is evident that donor aid has helped some sectors of the governments’ budgets, but at the same time has increasingly been an instrument of foreign influence and distortion of development models for the recipient states creating less or no output.

The recent withdraw of foreign aid to Uganda by some western countries due to mismatch in our social and governance ideologies is a pertinent symbol. This is a tip of the few vices of foreign influence that brings me to the old adage which states that, “The hands that pays the piper calls the tune”.

In other words the one that pays your bills dictates your governance. An indication that we are not partners but mere people in dire need of outside assistance. And equitably, money comes from business and fair trade partnership which for the first time was on the agenda of the recently held 4th EU –Africa summit.

Fair trade is the normative way in which people rise out of poverty. The case for Trade as a driver for economic growth has been proved in history and is one of the most fundamental tenets of economic theory. It is the fair exchange of goods that would place far more money into the hands of the affected people than relief operations. 

European Commission President Jose Manuel Barosso remarking on the same 4th EU-Africa summit, reflected on how the world works, explaining how a partnership of equals is one in which both sides are equally powerful. By this he meant that partnership of all equals between Europe and Africa could be a matter of controversy since the two economies lacks correlation- the poor cannot compete with the rich.  

This is one of the reasons African states are looking at China, India and Russia for mutual partnership and respect since they respect Africa’s development priorities and have no business in the continents governance.

Reflecting on the mutual partnership, In 2013, the government of Uganda had a battle with the oil multinational companies to construct a micro refinery of which did not go well with these companies who opted to export only crude oil as a raw material making Uganda vulnerable to losing billions of shillings in oil revenue.

Ultimately, the Ugandan tax payer would be losing $34 per crude oil barrel. Alternatively, failure to meet its local oil demand, Uganda could be sheepishly importing refined oil products that originated from its own land at more expensive rates leading to the loss of billions of dollars in the oil supply chain.  

The country would also lose jobs and taxes that would benefit a lot of Ugandans. Technical capacity to manage the oil resources would be lost, Vocational training institutions and skills the government has invested in would also go to waste. So why would a poor foreign–aided country loose such huge sums of money to the developed countries?

All these magnitude of losses would be a profit bonus to the western countries that would rip off all the profits leaving Uganda with small production revenues. Currently, Uganda spends about shs.2 trillion on the importation of petroleum products annually, which is a quarter of the country’s entire budget. This is a tip of the iceberg on how we also immensely donate to the western world losing out of the fair trade market.

In a different view to economic dependence, Africa’s poverty eradication is being increasingly overcome through China’s growth. In the study by (Organisation for Economic Co-operation and Development (OECD), it was found that for every 1 percent rise in China’s economic growth, 7.7 million people outside of China were lifted out of poverty. Outside its borders, China is the most potent poverty reduction engine the world has seen in the 21st century.

China has developed a mutually beneficial approach to its relations with Africa. This relationship is one that facilitates the production of stronger African economies in exchange for manufactured goods and natural resources that China desperately seeks. In return, African states have also benefited from infrastructure boom and technology spillovers from China like cheap agriculture machinery that have aided smaller holder farmers in Africa.

One of the stigmas associated with African countries relying on aid cannot be underestimated or ignored. It is the rare investor that wants to risk money in a country that is unable to stand on its own feet and manage its own affairs in a sustainable way. Foreign aid has indeed left many African countries debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency market.

An example is the aid-induced inflation where countries have to issue bonds to soak up the subsequent glut of money swamping the economy. In 2005, Uganda was forced to issue such bonds to mop up excess liquidity to the tune of $700m.

The interest payments alone on this were a staggering $110 million, to be paid annually. This also explains how the pattern of bilateral aid distribution is determined by donor interests rather than the recipient interest with the exception of education scholarship programs and disaster relief assistances. 

African states have the onus to ensure good governance, attract more foreign direct investment, reduce on the red tape and complex regulations for both regional and international trade as well as promote local entrepreneurship in order to wean themselves from this historical dependence.

This will be a major step to end coercing African countries into accommodating unpalatable economic policies from international funding institutions like IMF or World Bank since an international bank is a business entity with interest that is less palatable to Africa’s social economic growth and development.

Every banks priority is not to give money for charity but to make bulk profits and ensure constant growth. It only gives charity money for cooperate social responsibility and foreign policy purposes.

African young population boom need jobs and a belief in their respective country's future. This is what economically successful countries such as China and India, and even closer to home, in South Africa and Botswana has done. Their strategy of development finance emphasizes the important role of entrepreneurship and markets over a staid aid-system of development that preaches hand-outs.

Fair trade partnership will end foreign aid

More From The Author