1st January, 2021 marked the start of trading under the African Continental Free Trade Area (AfCFTA) agreement and signified the dawn of a new era in Africa’s development quest. The AfCFTA will with time eliminate import tariffs on 97% of goods traded on the continent, as well as address non-tariff barriers. This will open up a market of over 1.3 billion people; it’s expected to spur more intra-African trade while increasing the appeal of direct investment in Africa for the rest of the world.
Right from history Intra-Africa trade has been known to be minimal. For instance in 2019, only 12% of Africa’s $560 billion worth of imports came from the continent. African countries have long been confined to lower echelons of the global economy by selling low-value raw materials and buying higher-value manufactured goods. This is one of the major challenges for impeding Africa’s development, which African leaders seek to reverse through the free trade agreement.
Certainly the rationale behind the agreement is simple in theory, but complex in actuality. Free trade among/between African countries is anticipated to fuel structural transformation in Africa. Structural transformation is projected to increase growth in exports of more complex goods and services as well create jobs.
The creation of a larger African middle class will signify more consumption, which should trigger more production and even higher incomes on both national and individual levels. Evidence shows that intra-African trade comprises a higher share of manufactured goods, and meeting domestic demand for these can better position African countries in global value chains. For this, African leadership must find answers to several questions including
- production growth
- productivity growth
- reduced transport costs.
The agreement is intended to solve demand issues by creating a single African market, but there are reasons that countries haven’t been able to scale up production to match the consumption of their citizens. It must be noted that increased production for export cannot occur in a vacuum.
Just after petroleum products, cars are the highest-value imports into Africa. In 2019 alone, the continent spent over $19 billion importing cars and only 3% of this was fulfilled by African exporters. For instance, a country like Nigeria spent close to $4 billion importing cars in the same year and has done so for five years.
A better understanding of why Nigerian producers have been unable to meet even the local demand for cars will highlight what needs to change in the context of a single African market. The idea, however, is that a larger market will improve the case for African businesses and foreign direct investment, bringing much-needed capital and technology into Africa.
However, productivity or being able to produce more output with fewer resources may even be a harder nut to crack among African countries. Increased productivity has been recognized as a key driver of growth; improving productivity will require more efficient allocation of dynamic endowments like land, labour and capital while leveraging on appropriate technologies.
Productivity growth could be driven through industrial policies by encouraging the transition of economic activity from the simple extraction of raw materials to the more complex production of manufactured goods. This is achieved by providing infrastructure, loans, subsidies and tax incentives to support producers, or by ‘protecting’ them with trade restrictions.
A transport cost is another issue. Tariffs aren’t the sole reason intra-Africa trade has been so low – non-tariff barriers like transport costs have played a substantial role. Talks around implementing the free trade agreement have recognized the need for further investment in transport infrastructure to facilitate trading. Although several options are being considered, high transport costs continue to pose a threat to the pricing competitiveness of intra-African exports, especially in the cross-regional context.
Obviously, there will be several other barriers to trade in Africa even with AfCFTA in place, some of which including the deficit in hard and soft infrastructure, certification requirements, bureaucratic red tape and rent-seeking by government officials. African countries will need to work together to find lasting solutions to these problems now more than ever. More precisely, for industrial policies to work for and not against the AfCFTA, they may have to be coordinated on the continental level. Else, most African countries are likely to focus on similar goods and services, again limiting themselves to their domestic markets.
By coordinating industrial policies, it will also help countries or regions to specialize production in specific and complementary directions. Specialization accelerates economic growth and scale up productivity; it can also lead to lower prices and more competitive goods for both the African and global markets.
There have been several purposeful attempts – both nationally and regionally – to find collective solutions to these problems. Almost all regional economic communities have created collective industrial strategies at some point; the African Union had also launched the implementation strategy for its Accelerated Industrial Development of Africa plan in 2008. Although, some of these attempts at supra-national cooperation and coordination have failed for several reasons including legitimacy and enforcement challenges with regional bodies, and insufficient political will from national governments.
Comparable to China’s ‘century of humiliation’, Africa’s history of slavery, colonialism and subsequent global marginalization provides an impetus for change. From the independence to the post-independence period, leaders like Kwame Nkrumah, Nnamdi Azikiwe and Nelson Mandela laid out a vision of unity and cooperation for Africa. With 54 signatories and 36 ratifications, the speed at which African leaders moved on the AfCFTA may signal a new level of commitment to these ideals.
Cooperation has its difficulties, as shown by the decline of multilateralism. African leaders must navigate the path to collective Africa development with sufficient wariness for these issues. The ubuntu philosophy captures the famous African collectivist idea that is often proudly contrasted with the Western individualist version.
With AfCFTA the foundation for Africa to become a beacon of multilateral cooperation in an increasingly divided world has been set on ground. Will African business achieve the intended benefits? Will Africa advance its development? A continent occupied by developing countries has set the ground running to take its place in the global markets. Opportunities are limitless, the possibilities are there. It’s now left for Africa to seize the chance and take its place. Will they? Only time will tell; hopefully they do.