Module Nine, Activity Nine

Globalization

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Globalization: Have you heard or read this term on the news or in a newspaper article? Stop for a moment. Even if you have never heard this term, what do you think it means?

Globalization is a concept or term that is currently very much in use. However, like many popularly used terms, there is no commonly agreed upon meaning for globalization. Not surprisingly, people who use the concept frequently disagree, not only over the definition of globalization, but also over their assessment of the effects of globalization, that is, whether or not globalization benefits all people, all nations, or all the regions of the world.

If you are to investigate globalization and its impact on Africa, or on North America or any other region of the world, it is necessary to come up with a general understanding of the concept of globalization.

First, globalization is a process of building connections between regions of the world. People argue over how connected specific countries and regions of the world are with other countries or regions, but there is general agreement that networks of global connectivity are increasing. In this section, you will investigate the nature and degree of global connection in different parts of Africa.

Second, globalization is manifested in different arenas such as communication, culture, politics, and economics. Perhaps the impact of globalization is most dramatically demonstrated in the arena of communications. The development of the internet, advances in telecommunications, and the explosion of international jet travel have resulted in the ability to communicate instantaneously with many parts of the world. This ability to communicate widely and quickly has also resulted in the spread of a wide variety of cultural forms and expressions. Young people in Cape Town, South Africa, Nairobi, Kenya, and Lagos, Nigeria, listen to the same music as young people in New York, Kentucky, or Oregon. This lesson, however, will concentrate on investigating the economics of globalization.

Thirdly, globalization may lead to greater economic, social, or cultural equality around the world. On the other hand, the process of globalization may result in greater inequality. It may increase the power, wealth, and influence of individuals, institutions, corporations, and nations that are already wealthy, influential, and powerful. The section will help you to critically look at and make thoughtful judgments about the economic impact of globalization on Africa.

Economics of Globalization

Before looking at the economics of globalization in Africa, it is important to recognize how vital international trade and investment has become to the United States. Economists estimate that:

  • Approximately one quarter (25%) of our Gross Domestic Product, that is the wealth produced in the United States, comes from international trade. Sixty five percent of the wealth produced in Japan and by the economies of Western Europe comes from international trade.
  • Forty percent of the new jobs created in the United States during the first decade of the twenty-first century will be directly related to international trade and investment. In some U.S. states, the percentage of internationally related jobs is even higher than forty percent.
  • Each year U.S. companies, particularly from the high-tech computer-related industries, recruit more than a half million technicians, engineers, and other skilled workers from Africa, Asia, Latin America, and Europe. Continued economic growth in the U.S. is assisted by the international migration of skilled workers.

Economics of Globalization in Africa.

Having worked your way through this curriculum with the assistance of your teacher, you might come to the conclusion that globalization is nothing new in Africa! People and societies in different parts of Africa have long had contact with Asia, Europe, and in the past millennium, with the Americas. Trade, migration, and the exchange of ideas between African nations and societies with the outside world greatly impacted the history and development of Africa. Just as importantly, contact with African societies and peoples significantly influenced the history and development of societies and culture in Asia, Europe, and the Americas (Module 15: Africa and the World).

Societies in Western Asia have traded with societies in North and East Africa for thousands of years. Indeed, historians have recorded trade between China, South East Asia, and India with East Africa kingdoms and societies beginning over a thousand years ago. Societies in southern and south-eastern Europe have had economic contact with societies in North and West Africa (via the trans-Sahara trade) for at least 3,000 years .

Economic historians who study early economic contact between Asia, Europe and Africa believe that trade benefited both partners in the exchange. Societies (at least the governing classes) in Africa, Asia, and Europe were better off economically as a result of economic contact.

There was a dramatic change in the nature of contact between Africa and other regions of the world beginning at the end of the fifteenth century CE. This was particularly true for the economic relationship between Europe and Africa. You will remember from your study of European history that this period of time in Europe was known as the Renaissance, a period of learning and cultural change. Economically, European societies and nations were very interested in expanding trade with other regions of the world. These factors stimulated European nations, particularly Portugal and Spain, to seek ocean trade routes to Asia.

In North America, we know the story of Spain’s sponsorship of Columbus and his voyages of exploration that brought Europe into contact with the New World. Less well studied are the endeavors of Portuguese sailors to reach Asia by sailing around Africa. These Portuguese endeavors brought Europe into direct contact with parts of West, Southern, and East Africa, where Europeans had no prior contact.

Over the next five hundred years, the nature of Africa’s economic contact with other regions of the world changed dramatically. Europe’s expansion into the Americas and Asia embraced Africa in a manner that drastically impacted many societies and people in Africa. Most dramatic was the Atlantic slave trade that forcibly removed millions of Africans to work as slaves in the farms and mines of South and North America, which in turn produced sugar, tobacco, and cotton, the profits from which fueled the industrial revolution in Europe. This was the beginning of the global economic system!

As detailed above, the next phase in the development of a truly global economic system was the colonization by Europe of almost all of Africa, most of Asia, and somewhat earlier, South and North America. As a result of the colonial experience, at the time of their political independence, the new African nations were integrated into an international economic network. Think back on what you have studied earlier in this lesson. How did colonial economic practice result in the integration of Africa into a global economy?

At the beginning of the twenty first century, forty years after political independence, is Africa still globally connected? If so, how has globalization affected Africa? Is there a relationship between globalization and Africa’s current economic situation? These are important questions that need our attention.

At independence, you will remember, governments of the newly freed countries were committed to promoting economic growth and development. You looked at two different strategies, import substitutions and diversification of exports, that governments selected in an attempt to promote economic growth. Although these two policies are quite different, both strategies resulted in a stronger connection to or integration into the global economic system. Can you think of why either policy would increase a country’s global connection?

Regardless of which economic strategy an African country follows, it looks as if global connection or global dependency will continue. If this assessment is correct, three additional questions become interesting and important. These questions are not meant to be answered immediately. Instead, they are meant to be questions that guide your thinking as you engage the next learning activities.
  1. How successful have African countries been in attracting the international investment and exports markets essential to economic growth in the era of globalization?
  2. How successful have global economic strategies been in promoting economic growth and the human well-being within African countries?
  3. How would you assess the impact of globally oriented economics on African economies and peoples?

Regardless of which economic strategy African governments follow to promote economic growth, they need capital from abroad. African governments have had three options for obtaining the capital necessary for growth. The final activity will carefully look at each of the options.

International Investment.

An important method of raising finance for economic growth and diversification is through direct investments by global companies (sometimes referred to as transnational or multi-national companies) in African countries.

Take a careful look at Table Four: Foreign Investment in Africa. The figures in these tables are in millions of dollars. The numbers recorded may seem like a lot of money, but it is important to put these figures into perspective. Do you know that to build and open a new McDonald’s restaurant requires an investment of between two and three million dollars? Moreover, did you realize that opening a new suburban mall in America requires an investment of $300 to $500 million dollars? With this in mind, take a look at the figures of foreign investment in Ghana over the past twenty years. Of course, Ghana doesn’t need McDonald’s restaurants, but how many McDonald’s restaurants could be opened for the amount of money invested in country of 18 million people? Do you think that this investment is large enough to stimulate economic growth and diversification?

Here are some additional questions:

  1. Compare the amount of direct investment in Ghana with its near neighbor, Nigeria. Of course Nigeria is a bigger country, but the investments are much bigger. Look at information on Ghana and Nigeria in Table One. Is there information provided that explains the difference in investment between these two countries?
  2. Look at investment in Angola, Botswana, Gabon, and South Africa. Based on information provided in Tables One, Two, and Three, can you think of reasons why investment was considerably higher in these countries than in most other African countries? All of these countries are exporters of important minerals: petroleum, diamonds, gold, etc.
  3. Think again about the question asked about Ghana. Based on the data contained in this table, what conclusions would you make concerning the availability of foreign investment in promoting economic growth and diversification?
  4. Notice that some countries had a loss of foreign investment over the years. For example. Angola had an average decay of 15.6% from 1980 to 2011. Why do you think this is?

International Loans

Another method of raising capital for economic projects is through borrowing money from abroad. Beginning in the late 1970s, many African governments began to borrow money for economic related projects. Some of the borrowed capital was used for development of new industries or at up-grading of existing industries to make them more productive. Some of the borrowed money was used to develop or improve economic infrastructure that in turn would help facilitate industrialization. For example, loans were used to develop hydroelectric power through the damming of rivers. Electricity generated could be used in expanding industrial and agricultural production. A third target for borrowed monies was the social sector, particularly education and health-care. An educated population is essential to economic development. Schools can provide the skills necessary for an industrialized economy.

Where did the loans come from? There were three main sources of loans to African countries over the past three decades.

  • First there is the World Bank which is headquartered in Washington D.C. The World Bank is not like an ordinary bank because it is not privately owned. It is owned by its depositors who are comprised of the nations of the world. Richer countries in the world are expected to make deposits in the Bank, just as individuals make deposits in a regular bank. The World Bank uses it deposits to make loans to countries who need assistance in social and economic development projects, just as a regular bank uses money deposited by members to use as loans to other members. The World Bank has been a major lender to African countries, particularly through its “branch” bank, the African Development Bank. However, some of the World Bank loans have been controversial. Some critics of World Bank policy point out that at times the Bank will loan money only for projects that the Bank and its major depositors (the more wealthy nations) think are important. These projects are not always the first choice of the African governments. They may feel that the money would be better spent on alternative projects; however since they need capital for development, the governments may accept loans for projects that have a lower priority.Some economists also criticize the World Bank because of the conditionalities they set for making the loans. Conditionality is a big word, but it has a simple meaning. The World Bank requires that governments wanting to borrow money have to make certain policy changes before they can borrow money from the World Bank. Some of these conditions have nothing at all to do with the project for which the money is being borrowed. Rather, the conditions set are related to general economic and political policy. In the 1980s, the World Bank introduced a general set of conditionalities that was called Economic Structural Adjustment. African governments wishing to borrow money had to implement Structural Adjustment Programs, popularly referred to as SAPs. The World Bank argued that SAPs would lead to greater economic efficiency and help stimulate economic growth. However, critics of the SAPs argue that these conditionalities have caused suffering and have not resulted in economic growth. One SAP condition, for example, was that governments spend less money on social services, arguing that individuals should be responsible for paying a larger share of the cost of education and health care. However, the majority of people were not able to increase their contribution to schooling and health care. As a result, in many African countries there has been a decline in school attendance and in the availability of health care for the average citizen. How important are education and health care to economic productivity?
  • A second source of loans to African countries are foreign governments. These loans are called bi-lateral loans since they are come from agreements between two governments, the lending government and the government that receives the loan. Some developed nations have special governmental agencies that are responsible for making loans and grants to less well off countries. The United States Agency for International Development (USAID) is the U.S. agency responsible for international loans and grants. In Canada, the Canadian International Development Agency (CIDA) carries out this function. Like the World Bank, USAID and CIDA often attach conditionalities to their loans and grants.
  • A third source of loans to African governments are private transnational banks with headquarters in the United States, Western Europe, and Japan. Before the late 1970s, few private banks were willing to loan money to governments. However, their attitude towards loaning money to African governments changed. What led to this change?

You are too young to remember the gasoline crisis of the late 1970s, but maybe you have
Gas Crisis seen photographs of long lines of cars waiting to buy gasoline. Although the U.S. has been a major petroleum producer, by the 1970s, the U.S. was dependent on the importation of petroleum to meet its need for gasoline. West Europe and Japan, the other major industrial regions of the world, were nearly totally dependent on imported petroleum. Where did the U.S., Japan, and Europe import their petroleum from? Primarily from western Asia (sometimes referred to as the Middle East: Saudi Arabia, Kuwait, Iraq, Iran, United Arab Emirates) parts of South East Asia, North Africa (Libya, Algeria), West Africa (Angola, Nigeria, Gabon) and Latin America (Mexico, Venezuela). What do all these countries have in common? Prior to the discovery of petroleum, these countries were all poor, economically underdeveloped countries. With petroleum, they had the potential for economic growth and development. However, up until the 1970s these countries had little control over the price for petroleum. The price for oil was controlled by transnational oil companies whose headquarters were in the U.S. and Europe. Since the major markets for petroleum were in these regions, it was in the best interest of the companies to set prices at a level which would be profitable for them, but which would be low enough to keep industries dependent on oil profitable and the car-driving public happy.

The once poor oil exporting countries recognized that the transnational companies and the industrial countries were benefiting much more than they were from this arrangement. To address what they considered to be an issue of fairness, the oil exporting countries formed OPEC – Organization of Petroleum Exporting Countries. By the late 1970s, OPEC decided that their governments should be directly involved in setting the price of oil. If the transnational oil companies refused to accept this new system then the OPEC countries would simply drastically cut the production of petroleum. What happens to the price of a popular product if it becomes scarce? Or as economists put the question, what happens when demand for a product outstrips supply? The price of the demanded product increases.

This is exactly what happened in response to OPEC’s policy! In the late 1970s, the price of petroleum more than tripled in a short period of time as gasoline became scarce resulting in long lines at gas stations in North America and Europe.

Now, what does this have to do with loans to African countries? Some oil exporting countries became fabulously wealthy in just a short period of time. Most OPEC countries used their new wealth to stimulate economic development in their countries, and they also invested heavily in the expansion of education, health care, provisioning of safe water, electrification, and housing. However, even with these needed investments, there were profits left over. If we as individuals or families have money beyond what we immediately need, one of the things that we often do is put the money in a savings account in a bank. This is exactly what happened in the case of excess oil profits. Oil exporting countries made huge deposits in large transnational banks. Nations, like individuals, do not deposit money in a bank just for its safe-keeping; deposits grow with interest.

Banks are, of course, in the money-making business. Banks make a profit through providing a number of different services, but the most profitable part of banking is the making of loans. The flood of OPEC money placed some large transnational banks in an unusual situation-they had too much money! The traditional customers of large banks, large industries, were not in the position to borrow the huge amounts of money necessary to keep the banks profitable. These banks had to find or create new customers for large loans if they were to remain solvent (not go bankrupt!).

The rapid increase in oil prices did not just affect rich countries. Most African countries are not oil producers. Moreover, like the economies of Europe, African economies were oil dependent, but they were far less able than European countries to deal with the increase in oil prices. In the early 1980s, in part as a result of oil prices, many African economies had stopped growing. They were in desperate need of capital to cover the cost of oil imports and to help their weak economies.

At the same time that OPEC countries and international banks were seeking new areas to invest money and to make loans, African countries were in need of huge new and substantial sources of capital. As a result of this mutual interest during the 1980s, transnational banks loaned African governments huge amounts of money. What a clear example of economic globalization!

GLOBALIZATION, PRIVATE LOANS AND AFRICAN INDEBTEDNESS

 

Oil Chart

LOANS AND INDEBTEDNESS

Over the past two decades, many African governments borrowed heavily from the World Bank through bilateral agencies and private banks. Borrowing money is sometimes necessary for poor countries. Money is desperately needed in order to maintain basic government services. However, money borrowed to provide services is not easily repaid because it is not used to produce new wealth with which the loan can be repaid. Governments face a dilemma. They need to borrow money to provide important basic services such as education and health care, but they know that it will not be easy to repay this money since education and health care are not directly productive. Schools and clinics cost money, but they don’t produce profits from which loans can be repaid. Faced with this dilemma, many African governments borrowed money knowing that it would be difficult to repay the loans. Think about what you would do if you were a government official. Would you borrow money knowing you couldn’t pay it back if the welfare of your citizens as threatened?

Not all loans to African governments were targeted at providing services. Some loans were directed at creating wealth and productivity. Loans, if carefully planned, can provide needed capital for economic growth and diversification. However, during the 1980s when transnational banks were anxious to loan money, they did not always think carefully about the viability of the projects they were funding. Moreover, some African government officials were so anxious to access capital that they did not always think carefully about the potential success of a project. This combination of anxious and willing lender and anxious and willing borrower resulted in some unwise loans.

YOUR TURN

It is your turn again to use data on loans and debt to draw some conclusions on the nature of Africa’s participation in globalization and its impact on economic growth and development in African countries.

Carefully study the following tables:

Table One: Economics

Table Two: GDP

Table Three: GDP Per Capita

Table Four: Foreign Investment

Table Five: African Debt from Loans

Table Six: Exports of Goods and services

 

Then answer the following questions:

  1. Based on the data on Table Five, list the five most indebted countries in Africa as of 1996.
  2. Now find these five countries on Table Eight. Look at how their exports have increased (or decreased) in the course of 31 years. List each of these five countries average annual percent growth. Based on the percent growth of their exports, do you think these countries are still in debt? Why or why not?
  3. Now look the data for Nigeria. Nigeria is Africa’s largest exporter of oil. How different is Nigeria’s situation than that of non-oil producing countries in Africa? Consider that Nigeria has one of the largest populations in Africa. How does this affect the amount of loans it received?
  4. Now return to table two again. Once more study the five countries you identified as being the most indebted in 1996. List their average annual percent growth rate in GDP. Is it higher or smaller than other countries? What does the data tell you about the relationship between debt and growth?

Exports, Imports, and Globalization

In addition to international investment and international loans, there is a third source of capital for African countries. Exports provide the primary source of international capital for most African countries. Exports are paid for in an international currency (foreign exchange). The most commonly used international currencies are the United States dollar, the Japanese Yen, the Euro, the British pound sterling, and the French Franc.

These international currencies are accepted anywhere in the world. Zambia, for example, is paid in U.S. dollars for the copper it exports. Zambia can use dollars earned through export to either invest in new projects at home or to pay for goods and services it needs to import. If Zambia could have used money earned from copper exports just for investment in its own economy, it would most likely have experienced stronger economic growth. Zambia, like other African countries, has other obligations that have to be paid for with the money earned through the export of copper. First, international debt repayments have to be made in an international currency. As shown on Table Seven, Zambia needs to use nearly thirty percent of the money earned on exports to make payments on its debt.

There is another important use of money earned from exports. No country in the world produces all the goods and services needed by its citizens and its economy. To meet these needs, countries import goods and services from other countries. As you have learned, African economies, due to the history of colonialism and the way in which they have been integrated in the global economy, are not self-sufficient and are dependent on imports from richer and more economically developed countries. Imports have to be paid for with international currency. Consequently, in addition to making debt repayments, African countries have to use the money earned through exports to pay for the imports that they need.

There is one more important issue to look at related to the nature of international trade and African economies. You will remember the termmono-economies is used to describe most African economies. This means that most African countries are dependent on a single export. Most economies lack diversification. The nature of international trade in the current global economy serves to further disadvantage African economies. Take another look at Table Six, which lists the primary exports of African countries. You will note that nearly three quarters of African countries are dependent on agricultural exports. Over the past twenty years due to competition from other areas of the world, the market value of African produced cocoa, coffee, cotton, peanuts, and tobacco has declined. Yet at the same time, the cost of imported industrial goods has continually increased. Consequently, African countries exporting agricultural goods have to dramatically increase their exports in order to pay for the same amount of industrial goods.

A few years ago Julius Nyerere, who was then the president of Tanzania, gave a concrete example of this changing relationship between the value of exports and imports. He pointed out that in 1962 when Tanzania became independent, it took two tons of sisal (a plant from which heavy duty rope is made), at that time Tanzania’s leading export, to pay for the import of one tractor. By 1980, Tanzania had to sell six tons of sisal to purchase the same tractor! Without economic diversification, mono-economies may become increasingly disadvantaged by economic globalization.

YOUR TURN

Once again, it is your turn. This time, you will use economic data to form opinions on the relationship between international trade, globalization, and the economic growth in African countries.

Look carefully again at Table Six: Export of Goods and Services and at Table Seven: Imports of Goods and Services, then answer the following questions.

  1. How many countries in 2011 earned more on exports than they spent on imports? These countries have what economists call a positive balance of trade. Is there anything that these countries have in common
  2. How many countries earned less in exports than they spent on imports in 2011? These countries had what economists call a negative balance of trade. What strategies for raising capital are open to countries whose exports cannot cover the cost of both imports and debt repayment
  3. Did any countries have an annual percent decrease in their number of exports? Why do you think this is?

Go on to Activity Ten or go to one of the other activities in this module