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Increasing Africa’s purchasing power is good for the world

Increasing Africa’s purchasing power is good for the world

By Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, currently Professor of Economics at Yale University.

NEW HAVEN – Until recently, we were regularly confronted with images of drowned migrants floating in the waters separating poorer countries from richer ones, from the Rio Grande to the Mediterranean. And although COVID-19 now dominates the news, the pandemic’s economic fallout is likely to exacerbate the global inequalities that drive migration.

Many developing countries have so far weathered the pandemic relatively well in public-health terms, but they cannot avoid its economic spillovers. More than ever, poorer countries need the support and cooperation of advanced economies. But the developed world, overwhelmed by its own problems, is turning inward.

Examples of the new policy environment abound. In the United States, the current administration recently suspended new H-1B visas for skilled foreign workers until the end of 2020, and, until forced to backtrack, was threatening to deport international students who do not attend in-person classes this autumn. Meanwhile, European Union policymakers boasted that the bloc’s ambitious COVID-19 stimulus package would be financed in line with a progressive European economic vision. But it includes carbon border taxes that will be anything but progressive, falling disproportionately on developing countries with lower environmental standards.

It is hard to imagine a more self-righteous justification of protectionism. Perhaps its only parallel is the US administration’s assertion that prioritizing “the dignity of work” lay behind the requirement in the new US-Mexico-Canada Agreement that 40% of the value of an imported car be produced by workers who earn at least $16 per hour.

This is not to give climate-change mitigation or worker protections short shrift. But protectionist measures like these will have no material impact on these important issues, and will hurt developing countries in their current hour of need.

One of the best ways for advanced economies to help poorer countries is to keep their borders open. In the short term, public-health risks may necessitate draconian measures to prevent the coronavirus from entering a country from abroad. But in the long run, developed countries should discourage restrictions on trade and immigration and encourage capital flows to economies that need them the most.

But why should rich countries help? Moral arguments aside, why should they not put their own interests first, especially given the domestic challenges they currently face?

At first glance, textbook economics seems to provide the answer: the point of trade is not to help your trading partner, but to help yourself. When countries specialize in what they do best, they produce more efficiently, resulting in increased output, more variety, better quality, and lower prices. All countries gain. Trade is not a zero-sum game. And a similar logic applies to immigration.

Appealing as this argument may be, it has lost its power in recent years. Decades of hyper-globalization have made advanced economies highly efficient, but this openness has also caused disruption. Some now argue that the incremental efficiency gains that advanced economies may achieve by further integrating with developing countries are not worth the associated disruption – especially given policymakers’ past failures to address adverse effects satisfactorily.

In developing countries, by contrast, growth and efficiency remain important requisites for poverty reduction and development. A recent paper that I co-authored shows that nothing contributes to sustainable poverty reduction more than trade, especially when it is conducted with richer countries.

There are several other reasons why advanced economies have an interest in helping developing countries. For starters, current demographic and wealth imbalances between rich and poor regions seem unsustainable in the long run. The median age in Africa is 18; in Europe, it is 42, and 35 in North America. Africa’s population is growing by 2.5% per year, meaning that it will double by 2050; annual population growth in Europe and North America is 0.06% and 0.6%, respectively. And average nominal GDP per capita in Africa in 2019 was about $1,900, compared to $29,000 in Europe and $49,000 in North America.

Vast inequality is nothing new. But in today’s increasingly interconnected world, the global poor have access to information as never before. No matter how high the rich world builds its walls, and how many migrant drownings it is willing to tolerate, desperate people will keep searching for a better life. Helping poorer countries to lift themselves out of poverty is the obvious way to ease this pressure.

Second, as Montesquieu and Adam Smith pointed out in the eighteenth century, trade and peace reinforce each other. In the twentieth century, the establishment of the European Coal and Steel Community, and subsequently the EU, underpinned democracy and peace in Europe as much as it did economic prosperity. Promoting trade with developing countries may not make advanced economies much more efficient. But it will help to preserve peace and stability – arguably their most precious achievement over the past 70 years.

Third, advanced economies benefit from openness in other ways besides incremental efficiency gains. For example, Germany’s largely export-based economic model depends on purchasing power in the rest of the world. With Africa projected to account for more than one-quarter of the world’s population by 2050, increasing its citizens’ purchasing power is good not only for the continent, but also for Germany and other Western economies.

Similarly, it is not clear whether America’s dynamism and innovation would have been possible without immigration. About one-quarter of all US technology and engineering start-ups established between 2006 and 2012 had at least one immigrant co-founder, while immigrants to the US are almost twice as likely to become entrepreneurs as native-born citizens. Many other countries exhibit a similar pattern.

Finally, many people in advanced economies would like to see a fairer, more equal world in which a person’s fate is not determined by where they were born – just as it should not be determined by their gender, race, religion, ethnicity, or sexual orientation. Those trying to build a better world should therefore make it a priority to support the global poor, and not just the disadvantaged within their own country. And there is no more effective way to help them than by keeping borders open.

Copyright: Project Syndicate, 2020.


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