Chapter 3 Theoretical Framework
3.2 Theoretical Framework and related research issues
As mentioned above, the principal theory upon which the research project is based is comparative advantage theory. This theory has been chosen because it fits like a glove to the purposes of this study and is applicable to trade. The proponent of comparative advantage theory is English political economist, David Ricardo (Mcgowan et al, 2006:39). According to this principle all states benefit from the greater efficiency encouraged by trade: it allows them to specialise in goods they can produce better and cheaper than others, while importing those goods, that other states produce more efficiently.
P a g e | 59 As stated above the study looked at which goods Nigeria and South Africa produce better and how these have made them superpowers in the continent and also how these have put them at a disadvantage on the world trade. However like most other things this theory is not without faults. The most significant flaw of the comparative advantage theory is that, “many of the poorer countries of the world, for historical reasons, rely very heavily on the export of a single raw material,” (McGowan et al: 2006:39). This means that while it is true that the theory has positive consequences in the sense that it makes us better understand how countries command higher status, it also exposes the negative impact of competition amongst countries.
Nigeria relies heavily on oil whereas on the other hand South Africa’s economy is diversified.Therefore, this justifies using this theory. This is made clearer by the Sunday Times (August 10, 2014), which states that “With the exception of South, the continent’s most industrialised country, which exports high-end goods to the US,....the main beneficiaries of Agoa are oil producing nations, notably Nigeria, Angola, Chad and Gabon.” It is therefore apparent that although Nigeria has other strong sectors such as agriculture and services industry but it is very strong on natural resources such as oil. However South Africa, as stated above, is a diverse and the most industrialised economy in the continent. This puts the country (South Africa) at a comparative advantage.
Before looking at both Nigeria and South Africa’s trade and thereafter their comparative advantage perhaps it is most befitting to look first at the continent of Africa in general within the context of the chosen theoretical framework for this study. For many years Africa has been lagging behind when it comes to economic development. It has been used by the developed world as a base in which they import raw materials to manufacture finished products. However with new technological advances things changed for the better for the continent in the early 2000s. According to Eifert et al (2005:5), “Developing countries were traditionally considered to be primary exporters but that stereotype has long faded: by 2002, 60 percent of their exports were manufactured goods.” They further argue that although Africa has lagged behind other continents when it comes to the process of diversification, South Africa and Mauritius are two exceptions (Eifert et al, 2005).
So what could be the reason behind Africa lagging behind other regions when it comes to economic diversification? Eifert and others (2005:7) point out, “The combination of macroeconomic instability, crime and poor security, a weak and politicized financial system,
P a g e | 60 shoddy local roads and electricity systems, high transport costs, and predatory local officials,” as some determining factors. However they say these factors will have relatively little influence on the productivity and costs of offshore oil industries but will be devastating for small-scale and medium-scale manufacturing. They argue that even great businesses making huge profits and improving lives of local communities can be hampered by the poor business environment (Eifert et al, 2005:7).
The African continent has so long been described as the continent with no prospects for economic growth. The leaders of the continent have been described as greedy and are notorious for holding on to power for too long (Mngomezulu, 2013). Starting with President Hastings Banda of Malawi who ruled that country for over three decades, the likes of Mobutu SeseSeko of Zaire, now known as the Democratic Republic of Congo, Idi Amin of Uganda as well as Robert Mugabe of Zimbabwe to mention just a few, are all examples of leaders who have taken the rod from him [President Banda] and overstayed their welcome.
Another factor that goes against most firms in African countries is that of transport costs and this can be attributed to poor infrastructure. No matter how great the firm is doing however the bulk of the money it makes will be milked by high transport costs. As transport costs are higher in Africa compared to Latin America and Asia this therefore results in higher prices for raw materials. This in turn has an undesirable impact on sales and measured productivity.
Consequently this leads to lack of profits and eventual closure of these firms (Eifertet al., 2005:22).
When it comes to trade African countries are always at a disadvantage simply because trade reforms have been driven by adjustment programmes initiated by Bretton Woods institutions such as the World Bank and International Monetary Fund as opposed to a reciprocal process of negotiation with other countries to open market. It is therefore less surprising to see the persistence of widespread impediments to exporting firms despite declines in levels of protection (World Bank 2000/2001). This therefore tremendously diminishes the competitiveness of the African firms both locally and globally.
It is also important to note that although donors are doing a great job in assisting some poor African countries but they can also be a hindrance to economic prosperity and change in general. Governments constantly find themselves between a rock and a hard place in that they feel obliged to foster only changes suggested by donors. According to Eifert and others
P a g e | 61 this has meant that governments have to dance to the tune of donors and this is to the detriment of economic development. They argue:
Thus, governments have simply changed their methods of rent-seeking in response to donor-driven reforms. This has translated into a series of partial reforms without much change in the ability of the private sector to do business, leading to what is termed a “permanent crisis” in Africa. For the private sector, it has meant keeping up with ever-changing forms of government interference, as the sources of rents and the modalities of rent-seeking have shifted with reform efforts (Eifert, et al., 2005:29).
This has led to African countries lagging behind other regions such as Latin America and Asia in terms of economic development. Government employees are hostile to suggestions of change brought by anyone other than the donors because they feel they owe their loyalty to them. If there are any reforms at all, those are aimed at appeasing the donors and experts from donor countries.
There is also strong evidence that suggests that foreign-owned businesses in Africa enjoy more benefits than their local counterparts – thus leading to comparative advantage. It is quite clear from the onset that it is almost impossible for African businesses to succeed in such an environment. These foreign owned firms seem to be more productive and organised when compared to local businesses. They also seem to have more market power, enjoy more sustainability in a difficult environment and are more likely to export than indigenous firms.
The existing literature (Tangri 1999; van de Walle 2001) suggests that this group relies on trust between its members and on alliances with the political elite to generate rents on a continuing basis (Qouted in Eifert et al, 2005:31).
Despite Africa’s inability to take itself out of the abyss of poverty there are some countries that are doing very well economically - thanks to a new breed of leaders who are willing to put their countries’ interest before their own. There are also some Africans who are brilliant entrepreneurs and are contributing to the well-being of their fellow Africans. Moreover, some African countries are beginning to attract foreign direct investment and this contributes to economic growth. According to Dimant (2012:153) “the top five African recipients of foreign direct investment between 2010 and 2011 were Nigeria, South Africa, Ghana, Congo
P a g e | 62 and Algeria. Southern and Western Africa attracted 55% of Africa’s total investment in 2011.” Therefore the picture is not all gloomy as there are some positives, albeit scattered.
It would seem that indigenous African businesses are facing many problems that cannot just be wished away but only by applying stringent measures that will ensure stable environments to conduct businesses. This in turn will assist African businesses to prosper and this will result in the increase in exports and consequently competitiveness with firms in other regions of the world. Poor business environments generate entry barriers that provide larger firms with anticompetitive rents. According to Eifert et al.(2005:37) “Firms that might potentially push for reform are therefore faced with a choice between a hostile business environment that they have learned to negotiate and an unknown situation with potentially large increases in entry and competition.”
It is quite evident from the afore-going paragraphs that Africa as a continent is still lagging behind compared to other continents such as Asia and Latin America. What is of particular concern about all of this is that Africa is so well endowed with natural resources that its citizens should be among the richest in the world. However as the truth goes, the majority of Africans are the poorest in the world. Asia and Latin America were both colonised by European powers and most of the countries in these regions got their independence around the same time as some African states yet are doing very well compared to their African counterparts. This sorry state of affairs unfortunately puts a dent on Africa’s competitiveness.
Despite all of this the continent seems to have turned over a new leaf as investors are trickling in to invest. Yes there are many depressing things about the continent but it seems investors are buying into the notion that Africa has changed. The fact that the continent is lagging behind other regions does not mean that it cannot turn around its fortunes and take its rightful place in the world. Nigeria and South Africa are true examples of how countries can bounce back when all the odds are stacked against them. The study has looked into the competitiveness of both Nigeria and South Africa and how the comparative advantage theory fits into their affairs. The relevance of this theory in the present study is demonstrated below.
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