Thursday, September 30, 2010

Basic Mistakes: Exports

Barder takes on the claims made by the trade-not-aid crowd and finds their math and economic understanding is lacking.

The first mistake is to equate exports with profits. Increasing Africa's share of world trade from 2% to 3% would increase the volume of exports by 4-5 times as much as ODA; this they get right. But that's not profit from exports. If exporters make about 10% profit on each item, the increase is only 40-50% of ODA. (only)

The second, minor, mistake is to forget that what exports earn is foreign exchange. That foreign exchange has primarily one use: increase imports. The relevant question is less what the profits are as how much more valued the marginal increase in imports is relative to the resources (human and natural) used to produce the marginal increase in exports. Is that difference greater than the value of aid? That's open to debate.

Let's also keep in mind the difference between increasing Africa's share of global trade by one percentage point and increasing Africa's exports by one percent:
If exports from sub-Saharan Africa increased by 1%, as Bono puts it in the video, the increase in Africa’s export earnings would be about $4 billion a year. This is only about a tenth of aid to Africa.  For Africa to secure a one percentage point increase in world trade would require a 40% increase in Africa’s exports.

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