To become economically successful African countries have to do two things simultaneously: (1) They have to keep more of what they earn; and (2) they must sell more of their products and services to the world. By products, I am not only referring to commodity exports but also manufactured goods as well services. Services that western companies desire simply to reduce their labor overhead while delivering market-share preserving services to their customers. Services such as call centers for banks and credit card companies, information processing centers, corporate accounts’ receivables and payables processing and accounting services, as well as a whole host of other similar activities and profit centers, which allows African countries to deploy their low cost labor. If there is an African country that has used exchange rate policies to artificially prop up the cost of labor and commodities, now is the time as we are a few years into the 21st century, to reconsider such ill-advised short-term remedies. Changing strategies will bring short term pain but long term, permanent gain.
In order to keep more of what they earn, African countries have to reach deep into the bag of tools that sophisticated and non-sophisticated countries alike have used to combat economic challenges. For instance, every country that imports goods and services should link outflow related to it to export goods and services from their country. It is going on in other richer countries as we speak. In military procurement, western countries deploy co-production—a variation of offset technique. Why co-production? It allows the countries that are contracted to buy the weapons and offer the ordinance system a chance to offset some of the resources that they will spend procuring the system to contribute through a sub-contracting part of the manufacturing to their home companies, using their labor and raw materials. This in effect minimizes the resource flow out of their treasury.
Offset technique of compensatory trade, therefore, is one way in which African countries can immediately reduce hard currency outflows. Offset technique will work in their domestic economy as well. There are many companies in African countries that are huge importers, contractors or beneficiaries of government patronage but who do not invest in areas that are important to the local economy. In their case, applying offset is enforcing a quid-pro-quo. It means saying to local companies, in effect, that in order to qualify for this contract award, it is necessary to invest in an export industry. So offset technique not only gives poorer countries a way to constrain and stretch resources, it can also help them to compel local companies to make investments in areas that are important to the development of their economy. Construction is a huge drain on finances of African countries. It therefore makes sense for beneficiaries of construction contracts to spend a designated amount of the contract award on local investments. It is a good way to build a local export capability in manufactured and processed goods as well as some of the labor-sensitive services areas mentioned earlier.
In hard numbers, assuming a country awards the equivalent of five million dollars in contracts every year, if an offset requirement of ten percent to twenty percent is added to the contract, five hundred thousand to one million dollars of new investment projects will be derived from the contracts. The investments if properly deployed will create jobs, produce goods and services for local and or international consumption, thereby positively affecting the local economy in myriad of ways. It is also an opportunity for public-private partnerships across a broad spectrum of public and commercial interests in symbiotic arrangements in which business benefits and does what its commercial mandate specifies while also contributing to the public good. Where it was once a direct and immediate outflow from treasury, offset requirement reverses some of the flow and turns it into a jobs-creating capital investment in the local economy. Deploying offset technique of compensatory trade is just one of many ways in which African countries can keep more of what they earn and grow their economies.