Where does Africa stand in globalisation?

ECONOMIC LIBERALISATION

By Benon David Makumbi

In an article that was published in Sunday Vision on 29 April, 2018, Ofwono Opondo, makes an interesting exploration on the history of the multi-lateral trading system and the rise  of economic nationalism, in the cradle of economic liberalism that left China as an active advocate for championing free trade in the 21st century.

The author concludes his article by casting doubt on the ability of the countries comprised in Africa to partake in the new investment opportunities that were announced in China. 

The investment opportunities the author is referring to is a plan that was announced at the 17th Annual Boao Forum for Asia by the new governor of China's central bank, Yi Gang, to allow foreign firms to compete on an equal footing with domestic companies in the financial sector. Currently, certain sectors of the Chinese economy remain blocked to foreign participation. Case in point, foreign-funded banks are permitted to open branches on mainland China but these foreign-owned subsidiaries are not allowed to offer advisory services to Chinese clients in China on their outbound businesses. This tiered system of discriminating against foreign firms has led to a lot of misunderstandings between China and its large trading partners like the US.

The author Jung Chang states in her book "Mao: the untold story", that: "When Chairman Mao Tse-tung came to power on 01 October 1949 he made it difficult for the western nations to recognize his regime because he wanted to appease Stalin, by demonstrating his commitment to the Communist camp, and secure Soviet technology required to build a world class army." Throughout the Maoist era China remained as an isolated nation. 

The author Yang Jisheng describes the deprivation inside Maoist China during the great famine in his book "Tombstone". Maoist China assumed a disdainful attitude towards these institutions established by the Chief Allied Powers at the end of World War II. The Bretton Woods institutions were established to foster closer co-operation and end the competition for dominance that led to the outbreak of the Great War. 

The author William Shirer recounts from first-hand information the genesis of the Great War in his book "the Rise and fall of the Third Reich". However, the situation in China changed when Deng Xiao-ping came to power in 1978. Deng implemented several radical reforms to improve on the productivity and welfare of his people. The immediate success of Deng's reforms created a springboard that propelled China into the World Trade Organisation on 11 December 2001. 

When China joined the multi-lateral trading system, it contracted to enforce her treaty commitments to open the economy to foreign participation on equal terms. However, the process of liberalising the financial sector remained slow. The US, whose companies enjoy a surplus of trade in services with China, complained about the restrictions imposed on foreign firms in the financial sector.

The situation did not change until the day President Trump threatened to hike tariffs on China's exports to the US. In response the leaders in Beijing decided to announce a plan to end the discrimination of foreign firms in the financial sector in the hopes of appeasing Trump.

It is now safe to conclude that the plan which was announced at the 17th Annual Boao Forum for Asia is rapprochement aimed at a particular trade partner. The countries comprised in Africa are net importers of capital with innovations too few to compete for market access in China. However, that does not mean that Africa will not benefit from a liberalised financial sector in China. 

According to a report on that was published on 03 December 2014 by African Development Bank on "Trade Finance in Africa", it is noted that issuing letters of credit (L/Cs) is a popular mechanism for financing import and export trade in the emerging markets.

Trading parties can decide to pay cash in advance but the idea of involving a (confirming) bank to guarantee payments is a secure means of financing the flow of international trade between countries. Most confirming banks are global brands located in advanced regions with stringent bank regulation. Such banks are averse to risk and rarely confirm large L/Cs issued by African banks.

However, if a foreign owned bank has a license to operate anywhere in Africa and China then such a bank can use the correspondence network between its branches to advice, issue and confirm large L/Cs denominated in the Chinese Yuan. In turn this would solve the liquidity problem for countries with smaller economies that lack enough US dollar reserves to finance their international trade flow with China.   

The writer is an advocate licensed to practice law in Uganda