Africa Opinions

The African Continental Free Trade Area (AFCTA), Intra-African Trade and Industrialization.

Opeoluwa O. Runsewe

On Monday, 17th August, 2020, the Ghanaian government handed over a state-of-the-art building in its capital state of Accra to the African Union; the Said building to serve as the secretariat of the African Continental Free Trade Area (AfCFTA). Ghana was selected to host the AfCFTA headquarters in July 2019 after the operational phase of the agreement was launched in May of the same year. At this grand ceremony, President Akufo-Addo continually expressed his unending pleasure, particularly pinpointing how “a large part of the growth and prosperity that we currently seek on the continent will come from increased trading amongst ourselves.” He is undoubtedly and precisely right. But it is perhaps timely to note that this ceremony was one faint light within the uncertainty that now clouds the AfCFTA.

The potential of AfCFTA has been largely undermined by the COVID-19 pandemic. Its mission – the  integration of African economies – has become implausible in light of border closure, travel bans and other containment measures enforced by African countries; supplemented by huge political unrest across various countries on the continent. Trading under the AfCFTA, which was due to commence on 1st July 2020, has now been postponed to 1st January 2021. Briefly, this article paints an authentic picture and importance of this regional agreement, Intra-African trade as well as the correlation between these and Africa’s journey to industrialization.

Africa’s real GDP growth was 3.4 percent in 2019, exceeding the global average. Countries like Rwanda, Ethiopia, Côte d-Ivoire, Ghana, Tanzania and Benin are among the world’s fastest growers hence attracting immense opportunities for foreign funding. According to WeeTracker, African startups attracted $1.3 billion of venture capital in 2019.

However, trade among African countries remains the lowest of any world region. Intra-African trade was 15.3% of total African trade in 2015. To offer comparison, trade amongst developing countries in Eastern Asia as a share of total Eastern Asian trade was 32.1%. Intra-African exports were 16.6% of total exports in 2017, compared with 68% in Europe and 59% in Asia. Many factors are responsible for these relatively unimpressive statistical figures. For instance, at an average of 19%, African tariffs are much higher than the 12% average for the rest of the world. Also, while the informal sector is responsible for a significant portion of trade, its contribution to the economy is largely unrecorded.

More so, a few countries and a few products dominate intra-African trade. The World Bank reports that five countries (Côte d’Ivoire, Ghana, Kenya, Nigeria and Zimbabwe) in Sub-Saharan African provide a whopping 75% of all intra-African exports. Petroleum alone accounts for more than 30 percent of this exchange, while cotton, live animals, maize and cocoa combine for a further 18 percent. Clearly, all natural resources, with Manufactured goods and other processed commodities accounting for only 15 percent.

Meanwhile, policy makers and scholars agree that a robust manufacturing sector is fundamental to economic growth and development. This recipe transformed some of the world’s wealthiest nations. Notably, it made China and other Southeast Asian countries into some of the world’s fastest growing economies. Industrialization does not only tremendously boost innovation, productivity and technology contribution but further engages large swaths of workers, thereby alleviating poverty and unemployment; which are arguably at the fore front of the continents most pressing concerns.

Yet, Africa is even less industrialized than it was four decades ago. The UN Economic Commission for Africa (ECA) reports that the contribution of Africa’s manufacturing sector has fallen – from 12% in 1980 to 11% in 2013. While Africa accounted for more than 3% of the global manufacturing output in the 1970s, this percentage has since halved. Meanwhile, the significance of industrialization to better incomes and prosperity cannot be overstated. Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria urged African countries to “reject the misleading notion that they can join the West by becoming post-industrial societies without having first been industrial ones.”

Indeed, manufacturing holds tremendous potential. B2B spending (in manufacturing) of Africa is projected to reach $666.3 billion by 2030, $201.28 billion more than that it did in 2015. Africa is projected to become the manufacturing center of the world as it captures a significant chunk of the labor-intensive manufacturing jobs that will leave China in future. However, the continent has recently busied itself with its own destiny, as promoting industrialization is the main objective of the African Continental Free Trade Area (AfCFTA).

The AfCFTA is a trade liberalization deal that will create a Continental Free Trade Area (CFTA) for goods and services in Africa. It is expected to liberalise and facilitate the free movement of people, investments and businesses across the continent. The agreement is an important milestone for promoting intra-African trade (currently at 16 to 17 percent) by more than 52 per cent. It hopes to achieve these by committing African countries to eliminating tariffs on goods.

AfCFTA is the largest trade agreement since the creation of the World Trade Organization (WTO) in 1994. It promises to create a continental trade bloc of 1.3 billion people and a combined GDP of $3.4 trillion. It has the potential to lift 30 million people out of extreme poverty. However, for AfCFTA to achieve its full potential, policy reforms and trade facilitation measures have to be put in place.

For emphasis, AfCFTA can only improve industrialization if AfCFTA avoids the implementation gap. The record of African countries with REC (Regional Economic Community) agreements is poor. Nonconformity has impeded trade growth and “undermined the transformative potential of intra-regional trade”.

Furthermore, many African countries still lack industrial capability. Meanwhile, to maximize the opportunities created by the AfCFTA, African countries must improve their ability to match the demand of the AfCFTA market. The Continent’s leading economies need to implement effective industrial, monetary and fiscal policies aimed at driving domestic industrialization and spurring innovation.

Speaking about industrial policies, the national policies of many African countries often conflict with the goals of regional trade integration. In the event that this conflict arises, these countries tend to prioritize national objectives. A good example is the closure of the Nigeria-Benin border. Nigeria claims that smuggling undermines its industrialization efforts, and it may be right. Yet, the closure contravenes its commitments under the Economic Community of West African States (ECOWAS). While the AfCFTA agreement is admirable on paper, countries must commit to its effect and superiority.

Finally, as Mr. Cyril Enweze (former vice-president of the African Development Bank) rightfully noted; to enhance intra-African trade, countries also need to attract the private sector, both domestically and through Foreign Direct Investment (FDI) . In many developing countries, the lack of credible macroeconomic policies keep industry away. Amid an already existing large research and data gap, policies change too frequently, and so “businessmen” do not know, from one day to the other, one week to the other or one month to the other, the potential outcome of events”. Respect for the rule of law as well as clear, consistent and predictable macro-economic policies are prerequisites for a suitable business environment required to ensure seamless Intra-Africa Trade and Industrialization on the great continent.