Trade as an engine for sustainable development?

A new book on winners, losers and policies for East Africa
Dar es Salaam harbour - Tanzania
Photo by Peter Mitchell on Unsplash

The Sustainable Development Goals (SDGs) regard trade as a key mechanism for inclusive economic growth and poverty reduction. But does this apply in the case of East Africa?

We sat down with Dr Binyam Afewerk Demena and Prof Peter van Bergeijk of the International Institute of Social Studies, co-editors of the new book ‘Trade and Investment in East Africa: Prospects, Challenges and Pathways to Sustainability’. The book was published by Springer in November 2022 as part of their series Frontiers in African Business Research.

The book takes stock of recent research, focusing on trade opportunities within the East African Community (EAC, comprising Burundi, Kenya, Rwanda, Tanzania, Uganda, South Sudan and the Democratic Republic of the Congo*) and between the EAC and the EU. The emphasis is on how policies constrain competitiveness and on identifying options for policy action.

The findings paint a positive picture for East Africa’s trade potential, but the contributors agree that appropriate policies are needed. In addition, while trade can drive inclusive sustainable development, Prof. van Bergeijk and Dr Afewerk Demena underline the importance of combining trade with development cooperation, indicating trade as a necessary, but not a sufficient condition.

Appropriate policies are needed to realize East Africa’s trade potential

The East African region is gaining increasing attention, including as a potential investment destination. This is partially due to steady improvements in economic performance. Tanzania and Kenia for example both experienced an increase in their Gross National Income (GNI). As a result, they graduated from lower income country to lower-middle income country (LMIC) in the World Bank classification. One of the key drivers was a shift in openness towards trade. The new LMIC classification, in turn, helps attract foreign direct investment (FDI). East African countries recognize the importance of foreign trade and investment for their economic development and are keen to stimulate this.

The book is actually part of a research and capacity building project - funded under the aegis of the African Caribbean and Pacific Group of States (ACP) and the EU - that aims to strengthen Tanzania’s capacity to develop trade policies towards a competitive and diversified export-led economy. The book was produced in our efforts to generate knowledge on key bottlenecks, challenges and opportunities. It complements another part of the project which deals with capacity-building in policymaking, policy analysis and negotiation.

The 15 chapters are written by 15 Tanzanian researchers and 5 ISS alumni who come from 5 universities and 6 policy-related institutions (including ministries and think tanks) in Tanzania. The common driver for their involvement was to contribute to evidence-based policymaking.

In their own words - Demena and van Bergeijk talk about their book

Trade and Investment in East Africa: Prospects, Challenges and Pathways to Sustainability

Trade and Investment in East Africa: Prospects, Challenges and Pathways to Sustainability

Can you briefly share the outlook on East Africa’s trade potential?

East Africa is very dynamic. The region has an abundance of natural resources, including untapped mineral resources and agricultural products. The member states of the EAC have different strengths and weaknesses in different sectors. This provides a good basis for specialization and increased intra-regional trade. Meanwhile, competitiveness can be enhanced through FDI. Overall, there is significant potential for international trade and investment, but there are challenges and risks that require a coherent and comprehensive policy effort.

Significant potential for international trade and investment with and within the EAC

What are some of the key challenges identified in the book?

One key finding is that missing firms, missing industries and missing institutions stand in the way of moving higher up in the value chain. Tanzania, for example, is an important exporter of cattle, but lacks the firms to move up the value chain; the country would gain if it produced leather products itself. However, the biggest bottleneck is logistics. This includes port management, documentary requirements as well as costs and procedures for border crossings.

Trade flows can be significantly enhanced by streamlining the red tape of international trade, for instance through improved (air)port management and a one-stop government portal for trade and investment. Mid-term funding through FDI or through concessional loans is critical here as it can help speed up the transformation. We should avoid a situation in which reaching longer-term benefits through further economic integration is obstructed due to lack of finance in the shorter term.

Does the book align with the idea that trade is an engine for inclusive economic growth, as envisioned by the Sustainable Development Goals?

Yes, but with caveats. The benefits of international specialization should not only trickle down to strengthen economic growth, but also to create jobs and reduce poverty. The process towards a competitive and export-led economy is not a free lunch. There will be winners in highly productive sectors, but also losers in sectors with lower productivity. Governments need to come up with a plan to support those who will lose, for example, by providing income support or retraining for jobs in flourishing sectors.

A competitive and export-led economy is not a free lunch

Trade and foreign investment can provide a pathway to inclusive growth and sustainability, when coupled to development cooperation. Focusing merely on trade may negatively affect developmental results. The reverse is also true, focusing only on development cooperation doesn’t work if it is not coupled to economic growth.

What kind of development cooperation are you thinking of?

The Netherlands is actually very well-equipped to help tackle the logistical challenges, particularly in relation to port management. The Netherlands also has ample experience in economic integration in the Benelux (Belgium, the Netherlands, Luxembourg) and the EU. Sharing insights and experiences can help others to avoid making the same mistakes.

The new policy document of the Dutch Minister for Foreign Trade and Development Do what we do best also recognizes that ‘there is still a world to win from combining development cooperation with trade and investment’. While some of the member states of the EAC are mentioned, the document unfortunately does not heed attention to the EAC. This is a missed opportunity. We hope the EAC can be included in the upcoming Africa Strategy. Of course, we also invite the ministry to read the book given the relevance of the findings for policies in the Netherlands, the EU and East Africa.

There is a world to win from combining development cooperation with trade and investment

Are you also engaging with policy-makers in East Africa, given the strong policy focus of the project and the book?

You need a partner in the global South if you want to reach policymakers. REPOA is a research institute based in Dar Es Salaam and leads the project. They have enormous convening power, allowing us to meet with farmers, representatives of the European Union, ministers, members of parliament, embassies, unions, and NGOs amongst others. Their efforts led to high level government officials engaging in the conversation. We’re very happy about our partnership with them, where we work as equals with great appreciation of the strengths that we each bring to the table. The contributors of the book also know very well that their engagement in policymaking goes beyond the context of the chapters they are writing about.

Synergy between research-based evidence and inputs for policymaking decision would produce more of a positive result

You also launched the MOOC ‘Trade and Investment: Evidence-based Policies for Development’ last month. Was this also part of the project?

It was not part of the original plan. The development of this Massive Open Online Course (MOOC)_is  an example  of making something good out of something bad. Because of the COVID pandemic we had to revisit our engagement in the project since we could not travel to Tanzania where we had planned to be involved in field research and capacity building. Our video lectures and the book filled the gaps that emerged due to the lockdowns.

The side benefit was that this enabled us to explore how our teaching and research could feed into each other. When you teach about your research, you discover the latter’s weak spots, and vice versa. In this particular case, we also had a clear link to policy, with the book focusing on policy actions and the MOOC preparing participants to provide policy advice. The interlinkages between the research, teaching, policy and project really inspired and motivated us. It is exactly what ISS is all about.

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