This chapter provides a theoretical framework for the study, namely the “political survival of ruling elites” approach. The purpose of this theoretical framework is to theorize the political origins of economic change in the African state type and to show how the EU trade system acts as a system of extraversion to prevent economic change. The political survival of ruling elites approach was born out of the LAO framework proposed by Douglass C. North, John Joseph Wallis, and Barry R. Weingast (2008; 2009; 2011; 2013). The theoretical language of the LAO framework expresses political order in developing countries as the outcome of a process of elite bargaining (Gray, 2015, 6). All societies must deal with the possibility of internal disorder and violence, especially developing countries in which loyalty is to the ethnic as opposed to the state unit. The LAO framework created by Douglas North and his colleagues incorporates the problem of preventing violence into a larger social science and historical framework, showing how economic behavior and political behavior are closely directed towards solving the problems of violence and disorder.
According to North, most societies in the former colonized world deal with the problem of order by politically manipulating their economies to privilege individuals whose collaboration is needed to attain peace (North et al., 2008, 1). LAO countries must meet minimum requirements for economic performance (Khan, 2011, 4), as the failure to do so will dislodge ruling elites. Therefore, in LAO countries (countries in which politics are constituted by the actions of an elite coalition), the failure to achieve a minimum level of economic performance is related to the collapse of coalitions and political order (North et al., 2015, 6). In this theoretical language, the political origins of economic change lie in the attempt to meet the minimum economic requirement for political survival (Doner et al., 2005). But Jean-François Bayart’s theory of extraversion (the use of external relations to guarantee political survival) shows how ruling elites in West Africa have solved the problem of meeting minimum economic requirements through the EEC trade system, thereby precluding the political basis for economic change.
The theoretical framework is superior to other ways of looking at the EU trade system for several reasons. Firstly, it acknowledges and explicates African elites contribution to the trade system, and the domestic politics driving the trade system from the African perspective. Other ways of looking at the trade system in general, for example Langan’s moral economy (see the introduction to this chapter), discount the evident contribution of African ruling elites in the design of the trade system. Secondly, the theoretical framework helps us to answer the research problem of limited economic change in West African countries. With an understanding of the nature of African countries and the motivation of ruling elites through the theoretical language of LAO, the use of the trade systems for extraversion can be easily comprehended. Furthermore the thesis adopts a theory-testing as opposed to theory-building approach, and the empirical chapters test the theoretical framework. One important part of the theoretical framework is a counterfactual approach to the EU trade system: that is, without the EU trade system, ruling elites would (1) be faced with more political threats due to the failure to meet a minimum level of economic performance; and thus (2) attempt to diversify to secure their position. This will be tested in the empirical chapter. Parts of Chapter 5 show how the ruling elites in Ghana (outside the EEC trade system before 1975) reacted to a reduction in minimum economic performance.
In conclusion, the general objective of the study is to show how the interaction between the EU trade system and African political elites’ strategies for survival has prevented economic change, transformation or diversification. One might ask why this objective is worthwhile. In other words, does it matter whether the trade system has prevented economic change? What is so important about economic change? To justify the focus of the thesis, the third chapter demonstrates the necessity of economic change in West Africa.
Chapter 3: The Imperative of Economic Change
This chapter is relatively brief, as it performs the single objective of demonstrating the necessity of economic change/transformation in West African countries. In doing so, it justifies the purpose of the thesis, which is to investigate the effects of the EU trade system in West African countries, especially its role in preventing diversification and economic change.
Economic change is needed in West African countries for two main reasons. First, it is necessary to diversify in order to promote the region’s economic development. Following new-trade theory (Romer, 1989; Krugman, 1992), the theory of economic dualism (Lewis, 1954), and historical theories of structural change from Friedrich List through Joseph Schumpeter to the development economists of the 1950s/60s (see Reinert, 2007), there is a qualitative difference between products exchanged in international trade in terms of their link with structural change and development. West Africa currently specialises in the wrong types of economic activities. Second, it is necessary to diversify so as to avoid either mass poverty deriving from diminishing returns or a changing input-output ratio due to a decrease in the production factors required for key sectors in Ghana and Côte d’Ivoire, such as cocoa beans (Ravallion, 2016). The chapter is divided into two: the first section addresses the development imperative and the second the anti-poverty imperative.
Why is economic diversification vital to Ghana and Côte d’Ivoire? According to Rodrik and McMillan, “one of the earliest and most central insights of the literature on economic development is that development entails structural change. The countries that manage to pull themselves out of poverty and get richer are those that are able to diversify away from agriculture and other traditional products” (2011, 1). Historically, production sectors economic activities can be categorised as either agriculture (the unproductive sector) or manufacturing (the productive sector) (Reinert, 2007; Ocampo and Khan, 2007). Economic transformation is the movement or reallocation of production factors away from agriculture to manufacturing. This rough picture corresponds with Friedrich List’s national system of political economy, heterodox economics and even the new-trade theory. However, it is not agriculture and manufacturing per se that constitute the theoretical foci, but multiple complex and interacting processes and features that are associated with both activities.
Manufacturing is characterised by a high entry barrier, increasing returns to scale and imperfect competition. As a result, manufacturing sectors enjoy technological rent, which reduces costs and price making. Advances in trade theory, for example, highlight the importance of distinguishing between export products as carriers of (increasing returns) and barriers to (diminishing returns) growth and development (Dunn, 2015, 86; Reinert, 2009, 13; Krugman, 2008). According to new-trade theory, countries trade due to increasing returns, and trade benefits are derived not from comparative advantages or complementarity but from activities with increasing returns (Krugman, 2008, 340). The concept of increasing returns better explains international trade, because producers are always inclined to search for markets to reduce factor costs (Krugman, 2009, 2). Increasing-returns activities involve manufacturing and production in conditions of imperfect competition, with no fixed production factor.
Conversely, agriculture is characterised by a low entry barrier, diminishing returns to scale and perfect competition (Whitefield et al., 2015, 39; Reinert, 2007). Heterodox economists such as Erik S. Reinert and Ha-Joon Chang have argued that economic transformation moves the economy away from an asset-based system running on unskilled labour towards a knowledge-based system running on skilled labor. Again, however, there is a manufacturing bias in this submission: the emphasis on technological and knowledge bases requires a separation of agriculture from manufacturing, because the two sectors respond differently to technological changes. According to Erik Reinert, technological innovation in agriculture or products with perfect competition is more likely to reduce prices for consumers than to increase benefits for producers (Reinert, 2005, xii). In contrast, price making in imperfect competitive activities increases the likelihood of producers’ gaining from technological advancement.
Furthermore, agricultural activities eventually reach a point of diminishing returns, after which it becomes difficult to improve productivity and input increases relative to output. Speaking of the theoretical contributions of new-trade theory (which basically delineates sectors), Krugman argued that “[i]t’s possible to conjure up examples in which countries are worse off with trade than without, in a way that isn’t possible in pure comparative advantage models.” He concluded that “the clear presumption is that trade is a good thing under increasing returns” (Krugman, 2008, 340; italics mine). Nations that trade products with diminishing returns in the international market will reach the point of intensive production due to the exhaustion of the vital resource(s) needed to cultivate the product in question. Exchanging products produced using intensive methods (an increase in labour or other input), which do not reflect price changes, amounts to a loss from trade.
Earlier development economists such as Arthur Lewis, who arguably created the sub-discipline of development economics in his influential article “Economic Development with Unlimited Supplies of Labour” (Lewis, 1954), followed this separation of sectors in his development model. In the “Lewis model,” also known as the “dual-sector model,” development and structural change are explained in terms of a labour transition between two sectors – capitalist and subsistence. Development occurs when labour (and other production factors) is reallocated away from the subsistence sector to the capitalist sector. Outside the mathematized region of neoclassical economics, there is something of a silent consensus that economic development involves the cultivation of certain sectors or the reallocation of factors to industry and manufacturing.
Although recent writers promoting structural transformation have tended to return to the development economics of the 1960s, just as heterodox economists return to Friedrich List’s 19th-century theories, the global economic system on which some of the earlier arguments were based has changed dramatically. This altered economic and political context requires a new understanding of the separation between sectors. For example, the rise of the service industry has led some countries to bypass manufacturing and move directly to service provision. Another change has been the increase in the geographical fragmentation of production activities in a single product line. This is best expressed with reference to the theory of the global value chain (GVC). The increasing global fragmentation of production activities has given rise to “incomplete firms”; that is, firms that take part in only one stage or a few stages of a production process. The rise of the GVC has led some academics to claim that industrial policy (or complete industrial policies) is irrelevant (Gereffi, 2013, 238; Gereffi and Sturgeon, 2013, 330; Tijaja and Faisal, 2004) as discussed below.
Under GVC, industrial policies that are intended to create an entire industry (production chain) within a national territory are now seen as irrelevant (Gereffi, 2014). Domestic industries in developing countries are understood to be deeply intertwined through complex, overlapping business networks, and today’s industrial policies to be GVC-oriented, as nations seek to improve their position or niche within a production chain. However, this argument may be too hasty, and certainly cannot be applied to all geographical locations. It is impossible to study the GVC without reference to context, and most GVC scholars are from the West. Explications of the GVC are very Europe-/U.S.-centric. For example, if cost-saving is the main reason for the fragmentation of production processes, it can be argued that fragmentation is essentially a Western phenomenon, due to the large wage differences between developed and developing countries. There is no need for a Nigerian textile firm, for example, to fragmentize to the Western world, where production costs are higher. Indeed, whereas numerous Western firms distribute some of their production processes to the East, firms from the East rarely fragmentize their production processes to the West.
To return to the issue at stake, West African economic specialisation are mainly in agriculture and asset-based economic activities running on unskilled labour with few connections to the economy at large. In Côte d’Ivoire and Ghana, cocoa is the main product made and exported. The production of cocoa requires no skill and has very little connection with the real economy (because there is no demand for cocoa or chocolate in West Africa); it is thus a perfectly competitive product with diminishing returns, due to its link to forestland. Illiterate peasants in rural areas are the main cultivators of the product, and according to all formulations of development it is essential for Côte d’Ivoire and Ghana to diversify away from cocoa into industry. However, there are other reasons to diversify away from cocoa and all such agricultural products, namely their susceptibility to diminishing returns and the decreasing profit they yield.