In May last year, African leaders launched the African Continental Trade Area (AfCFTA) with the intention of uniting 1.3-billion people and ushering in a new development era on the continent. The AfCFTA presents opportunities for African countries to grow economically through regional cooperation and integration as previously attempted through regional economic communities (RECs) such as the Economic Community of West African States (Ecowas), East African Community (EAC), Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (Comesa).
The integration anticipated under the AfCFTA aims to unlock manufacturing potential and facilitate industrialisation in Africa while driving economic growth and creating employment. The continent lags behind other developing regions in industrial performance, accounting for only 1.4% of global manufacturing output in 2019. In addition, the Africa Regional Integration Index (ARII) report highlighted that African countries are least integrated because of weak regional networks, poor planning, low levels of financing, and a lack of transparency among African governments. Below are some of the major difficulties that plague the continent and must be overcome to successfully implement the AfCFTA.
Propelling the African economy towards the easy and quick facilitation of people and goods will be difficult as a result of underinvestment in infrastructure. According to the African Development Bank the shortage of infrastructure across much of the continent is a major challenge to productivity. A major contributor to this is that most African economies were designed to export raw materials to their former imperial powers with little or no effort being made to develop trade within the continent. The continental economy needs to be re-engineered to encourage intra-continental trade.
The private sector can play an important role in bridging Africa’s infrastructure gap. It is critical for African governments to provide private players with incentives such as tax deductions, royalty waivers, rebates to develop infrastructure. In addition, private sector participants can be brought in as development partners along with government and development finance institutions. The African Union can also subscribe to global development strategies involving infrastructure development and investment. An example of one such initiative is the Belt and Road Initiative (BRI), which was adopted by the Chinese government in 2013. The BRI is a programme designed to connect Asia with Africa and Europe through land and maritime networks along six corridors with the aim of improving regional integration, increasing trade and stimulating economic growth.
Africa is characterised by economic disparities with more than 50% of the continent’s cumulative gross domestic product contributed by three nations — Egypt, Nigeria and South Africa. According to the International Monetary Fund intra-African trade flows are dominated by a few countries — Côte d’Ivoire, Kenya, Senegal and South Africa. South Africa alone is the source of about 35% of all intraregional imports in Africa (and about 40% of intraregional manufacturing imports). It is inevitable that the stronger economies will benefit the most under the AfCFTA.
The recent developments in the European Union offer important lessons for Africa as leaders on the continent forge ahead to establish a continent-wide free trade area. Britain’s exit from the EU teaches us that addressing the economic disparities will result in a sustainable trade area regardless of whether the stronger economies pull out. In addition, the Brexit crisis suggests that Africa should focus on strengthening key governmental institutions and reinforcing cultural alliances before pushing for integration. The process of the institutionalisation of the EU went hand-in-hand with significant pre-convergence and economic conditions that countries had to meet before qualification. The pre-convergence needs to happen in Africa before we can see further integration.
Regulation and policy
In addition to the infrastructural challenges, African borders are plagued with corruption. For example, an African country will find it costly to transport goods from Southern to Central African borders because “facilitation fees” will be levied at the borders. This adds substantial costs to the transported goods, which the final buyer has to bear. African governments need to scale up policies that eliminate corruption and unfair trade practices through the development of a robust, aligned, and forward-thinking plan that goes beyond political interest of each African state.
The enactment of the AfCFTA will not only strengthen trade ties but will prompt the development of supply chains within sectors such as agriculture and manufacturing, which are critical to food security and import substitution. The drive towards economic diversification is currently a common theme among African nations and, if executed efficiently, will result in the development of sustainable intra-continental trade. With the help of African governments, the AU should identify the commodities that Africans consume the most and build value chains to meet the local demand for these commodities.
A longer-term consideration of Africa’s multiple currencies and exchange rate regimes is also crucial. African nations should prioritise addressing exchange rate volatility, liquidity shortages and the inability to repatriate profits — problems that don’t encourage both intra-regional trade and trade with other non-African countries.
Beneficiaries of free trade and movement
An important lesson from the EU is that regional integration processes are as much about the citizens as they are about economic growth. African citizens are the key beneficiaries of the regional integration process intended by AfCFTA, through lower prices on goods, free movement and job opportunities across borders. But trade does not automatically lead to more inclusive and sustainable development, nor does it automatically translate into higher levels of employment. By shaping the space for regional value chains, well designed rules of origin can play a role in turning trade into more jobs that, in turn, can contribute to a more inclusive growth path. Policy decisions should be informed by a careful assessment of the direct and indirect effects of trade on the labour market in each member country.
Prioritising the introduction of an African passport, which will make it easier for Africans to travel, work and live anywhere on the continent without the requirement of a visa, will also be a key task for the AU. A problem that may emerge is increased emigration of job seekers from weaker economies to stronger ones. These may create problems in stronger African states if citizens feel threatened and resort to xenophobic attacks, as has been witnessed in South Africa. African governments must ensure that citizens are involved in the transition by holding public hearings to establish people’s concerns. Constant engagement and information with people on the mundane details of economic partnerships is crucial for building integrated economies.
The transition towards a digital economy between 2020 and 2030 is expected to increase productivity and value addition across the different stages of production supply chains at a global and regional level. Automation comes with the problem of labour replacement when certain jobs become redundant. Governments will also be faced with the challenge of redeploying resources, to acquire new skills to cater for jobs that do not currently exist on the continent. Although jobs will inevitably be lost to machines, others could be created through the development of industries that exist beyond traditional commerce such as entertainment and services. Africa needs to localise the use of the digital economy through the development of digital platforms that align with continental needs.
Sustainable intra-regional trade in Africa should be viewed as a long-term goal that requires a well thought-out plan, developed through years of research. The AU should learn more from the EU or the United States-Mexico-Canada Agreement (USMCA) on how to successfully roll out regional integration initiatives. The failures and successes of the EU and the USMCA can be leveraged to develop a winning formula, specific to the strengths and needs of the African economy. At present the AU has not invested as much time and resources as it should to reengineer the African economy and operative policies for long-term benefit. More still needs to be done from a policy development standpoint. In addition, key institutions such as the African Development Bank should redefine its mandate in the implementation of policies and development initiatives targeted at making regional integration possible.
Patience Panashe is a researcher with Birguid, a strategy, finance and enterprise development agency to Africa’s private and public sector organisations. She writes in her personal capacity