Tuesday, August 12, 2014

Trade with Africa – More Trade or Foreign Aid?

Last week the President not only met as planned with 50 or more leaders from Africa but he followed it up with a major budget proposal and a press conference. Despite wanting to watch my favorite shows on Fox Business News and the Bourbon Channel, I got the pleasure of our President announcing some new and important initiatives. If you read this blog with one or more eyes open, you know that I love trade. And I even stuck up for the US EX-IM bank because it facilitates more US exports. I love to hear plans to increase US trade – exports, imports, capital and more. So I had to listen to the President.

Meanwhile Russians were putting more troops in position to fight in Ukraine, Christians were being murdered in Iraq, Israelis were fighting in Gaza, and Republicans were doing all sorts of evil in America. So given all the items on the President’s agenda, you have to admit that Africa must be very important to the US for the President to pour out another half-million words on TV.

I decided that I haven’t bored you readers with data in a while and I was curious how the President was going to do really great things empowering Africans to help themselves and to buy a bunch more of our exported goods. To preface this data mining experiment let’s start with a few points. First, we are engaged and have long been engaged with giving foreign aid in Africa and many countries. But this speech and the $33 billion the President wants to send to Africa is not being marketed as more foreign aid. This is all about creating more business for American companies and workers. According to his speech, this is all about trade – not aid. 

Second, if it is about trade, then there ought to be some bang for the buck. A policy to increase US exports (or imports or capital) ought to have some impact. Third, it not only has to have some impact but it also ought to have the best impact. Okay so a policy might increase country A’s purchases of US goods by 49%. But if that 49% increase amounts to a tiny amount of dollar orders for Kentucky bourbon compared to a similar policy in country B, then you might prefer to direct the order to country B since that will generate more US sales, employment and profits. 

What I illustrate below is that President Obama’s new plan for Africa is mostly about more foreign aid. Africa is not a good place to increase US trade. If it is about trade – we would be better off spending that $33 billion elsewhere.

Let’s start with goods and services exports. The US wants Africa to buy more US stuff. In the first six months of 2014, the US exported $804 billion goods and services to the world. Africa bought $19 billion. The whole continent of Africa bought 2.3% of US exports. In contrast this is what other regions bought (in billions):
            World                                 $804
   North America                      273
   Europe                                 170
            Pacific Rim                           119
            South/Central America            91
            OPEC                                    39
            Africa                                     19

Egypt and South Africa were the two largest African buyers of US goods and services, buying $3.6 and $3.1 billion respectively. If we doubled exports to those countries it wouldn’t amount to a hill of beans to US workers operating in a $15 trillion dollar economy producing a couple trillion dollars in exports each year. 

The US Bureau of Economic Analysis (BEA.gov) also publishes direct investment data by country destination. Direct investment (plant, equipment, etc)  by US companies in the world in 2013 amounted to $4.7 trillion. That’s how much “capital” our companies owned abroad. That ownership increased by about 25% between 2010 and 2013. Below are comparison figures that put US business investment in Africa in a global perspective. First is the amount for 2013 in trillions of dollars and in parentheses is the percent change between 2010 and 2013:

            Europe                     $2.607   (28%)
            Asia Pacific                 .695  (22%)
            Islands  W. Hemis        .601   (16%)
            Canada                        .358   (25%)
            S. America                  .169   (23%)
            C. America                  .113   (15%)
            Africa                          .060   (  9%)
            Middle East                 .045   (32%)
When it comes to US business investments across the globe, Africa has not been a major destination. It stands out on this table for two reasons – the small amount and the very low growth rate of 9% in three years. One has to ask a question when seeing this – why haven’t companies been more interested in Africa and what is it about the President’s new program that will change those reasons substantially?

 The answer is pretty simple. By and large, African countries are dictatorships that score high in corruption and low on income. Not all African countries are the same. But spend an hour Googling lists of countries by corruption, or income per capita, or percent of people below the poverty line – and African countries are always well represented. A richer country like Egypt can be used as an example. According to the World Bank, Egypt’s income per capita is about $11,000 (South Africa was listed at about $13,000). Cubans make $19,000 and Puerto Ricans earn $35,000. Germans collect about $43,000 per year. With respect to people living in poverty, Nigeria had about 55% of the population labelled as poor. Egypt and S. Africa were more like 23-25%.  Naturally the same countries scored high on indexes of corruption.

Tourists love the diversity of colors and cultures in Africa. But such diversity is not great for US companies who want to penetrate new markets. In Africa there are 54 countries. It is believed that Nigeria alone has more than 500 languages/dialects. Our President says he wants to create more trade across the continent. But diversity in South America should be a caution to what can be expected in Africa. While South American companies have become more global in recent years they have not done it by trading with each other. Often they are more trade-loyal to their colonial pasts than to their regional presents.

The President cited many statistics that show that some Africa countries are growing and could become better trade partners. But let’s be honest – growing from a low base is one thing. Large enough to matter is another. Either call that $33 billion foreign aid and try to give it in ways that will reward and promote less corruption and more democracy and enterprise – or call it trade promotion and give it somewhere that is more apt to bring a strong return in US trade and employment. The last I checked we still have a huge national debt, a slowly growing economy,  and little room to employ precious national  resources inefficiently. 


  1. Dear LSD. Your numbers always provide a welcome beam of light on erstwhile obscure subjects—particularly when the subject is spoken of by pols who either are uninformed or spinning or both. Here’s another perspective.

    Bloomberg Biz Week’s last issue contained a good article on China’s investments in Africa, mostly for natural resources, but further explained China’s objective of penetrating Africa’s growing middle class and purchasing power for consumer goods. China’s longer view on Africa is that it will strengthen China’s global strategic/competitive position since its own economy could support economic growth only so far. Expansion into foreign markets would provide extra growth (China, Japan, Asia, etc. are known for honing long-term views/strategies). China believes growing its consumer investment in Africa in low-cost brands will position it as stronger global player—emerging into “bigger, richer, and tougher markets . . . Understanding that, for the remainder of the century, the bulk of global population growth will take place in Africa, China is making a long bet on the emergence of vibrant, high-consuming middle classes there, and with each year this wager is looking smarter and smarter.”

    The article further pointed out that Africa could be a growing market for U.S. education because of Africa’s growing demand for education as “enrollment in secondary schools jumped 48 percent in sub-Saharan Africa from 2000 to 2008; higher-education rates grew 80 percent.” Electric power generation is another growing market—Power Africa, a 2012 Obummer initiative, “aims to double the African electricity supply, by adding 10,000 megawatts to production. A recent Senate bill proposes doubling that goal.”

    Africa might not be a good relative market for U.S. goods/services now, but it does possess considerable potential. Waiting for corruption to subside and per capita income to increase before targeting African markets allows global competitors to create formidable barriers to entry.

    1. Thanks Charles. It is true that waiting has a price. It is also true the Africa has made some strides. But I would trust the business people when it comes to deciding how much they want to risk and where. If GE wants to triple in Africa I am all for it. But given the tiny medium terms gains for our country, I am not convinced that we need to use the people's money to help GE enlarge their foot print. In terms of waiting, I think we can wait and not lose much. China is there because they want to barter for energy. China is there because they are a low price low value producer. That doesn't mean we should be there.Furthermore it isn't clear that China is right. I'd like to see how that goes for them. There is so much that needs to be done in Africa in the way of infrastructure development, security, safety, rule of law, democracy and so on -- I'd rather see us help them in ways that directly address these huge obstacles in the way of foreign aid than raise expectations of business people that Africa is a great place to do business.

  2. Yeah, I don't have much use for the kind of "foreign aid" we dole out.....the kind with no strings attached. The despots who rule most of those African, Central American, South American, and Asian countries wind up with large Swiss bank accounts and their people remain dirt poor.