Structural transformation holds the key to success of Africa’s trade deal

Rachael Nsubuga and James Obuba argue that structural change in fundamental sectors of the economy must have taken place in all 44 or at least a few countries, for Africa’s trade deal to work.

African leaders representing 44 countries took a major step towards a long-held dream of the African Union (AU) and its Agenda 2063: free trade across the continent by signing the African Continental Free Trade Area (AfCFTA) in March 2018. The AfCFTA Agreement has the potential to bring over 1.2 billion people from 55 nations together into the same market, which would make it the largest trading bloc in the world. However, it isn’t all forward progress as 10 of the AU’s Member States (including South Africa and Nigeria) did not sign the Agreement. This brings to light fundamental issues that exist, which hinder regional integration in Africa. Part of the skepticism lies with fear of competition for both the infant, and the uncompetitive industries. The web of uncompetitiveness, and the policy dilemma facing many African countries pose a threat to the anticipated gains from the AfCFTA.

Mevel and Karingi estimated in 2012 that once the AfCFTA is implemented, intra-Africa trade is expected to increase by 52%  by 2022 from the then baseline of 16% levels. For this to work, the assumption is that all the six components of the AfCFTA; namely, the non-tariff barriers, rules of origin, investment and cross border movement of persons, trade in services, trade remedies and how all this will be monitored have to be negotiated right.

The AU 2063 Vision and the Boosting Intra-Africa Trade (BIAT) provides for reforms in trade policy, trade facilitation, developing productive capacities, development of trade-enhancing infrastructure, support towards trade finance, trade information and a comprehensive review of Africa regulatory framework to support free movement of factors of production for Africa’s transformation. This article argues that structural change in fundamental sectors of the economy must have taken place in all 44 or at least a few countries, for the agreement to fully achieve its objective of boosting Intra-African trade.

First, structural transformation in African countries is a key ingredient for AfCFTA to work. Sector-wise liberalization as supported by the history of Asian Tigers can help Africa develop the much needed industry. Starting with agriculture; which is a mainstay of most African economies and its economic performance accounting to nearly 70% of household incomes. African economies should focus trade policy towards more mechanization, value addition, skills and product development, land ownership reforms with productivity and inclusiveness, and accelerate implementation of the Maputo Declaration; where most African Governments committed to invest at least 10% to modernizing agriculture. Building partnerships especially with the private sector for development to leverage scarce resources is necessary. Research has shown that shifting resources from less productive sectors of the economy to priority sectors can foster structural change. There is need to ascertain what productive capacities and supportive infrastructure is needed to improve critical sectors for the economies in Africa, and investment in the same for structural transformation to occur.

Economic diversification from mainstay sectors like natural resources, manufacturing and traditional agriculture due to decreased productivity to other sectors like the service sector should be emphasized. A leaf or branch can be borrowed from BRICS countries (Brazil, Russia, India, China and South Africa) which endeavored to have labor relocation from traditional sectors like ancient Agriculture and mining to other vibrant service sectors to increase trade opportunities. Import substitution industrialization should be encouraged by advocating for the replacement of foreign imports with domestic production. This will reduce African countries foreign dependency through local production of industrialized products. An “Export Push model” can be emulated from East Asia countries like Cambodia for an explosive industrial growth resulting to increased voluminous Intra-African Trade. Embracing technology and E-commerce preparedness strategies will enable Africa to reap big from the services sector.

Second, simplifying rules of origin will enhance trust and predictability in implementing the AfCFTA. Nigeria, South Africa and nine other countries (Zambia, Botswana, Lesotho, Namibia, Burundi, Eritrea, Sierra Leone, Benin and Guinea Bissau) to sign the AfCFTA Agreement and the fear of employment losses are overt in the Upper Middle income category (Algeria, Botswana, Equatorial Guinea, Gabon, Libya, Mauritius, Namibia and South Africa). The challenge of harmonizing the different rules of origin regimes from the various regional groupings is also ahead. The value addition criteria versus the transformation of products to simply qualify in change in tariff headings all need to be aligned. Some counties like Zimbabwe and South Sudan are likely to be locked out of the AfCFTA Agreement for being net importers.

According to UNCTAD 2016 report, 80% of  Least Developed Countries (LDC) countries (38 of 48) are in Africa and most of these who signed the AfCFTA Agreement are in development straps; low incomes, limited economic growth, high employment levels and high poverty levels. The same development anticipation most developing countries had while joining the WTO at its inception in 1995 without clear negotiation positions and offers is feared to be happening again with the AfCFTA. The trading ground is unequal; some African Member States have higher income threshold greater than US $ 1,230 like Egypt, South Africa, Morocco and Nigeria, while others still need many years to reach this gross national income level.

Third, sequencing and managing development is key. The comparative advantage zoning should be envisaged to strengthen gains from heterogeneous production of similar trade commodities, rather than considering it as a threat. Regional value chains and clusters that feed inputs into each other will enhance the industrialization agenda for Africa and increase productive capacity and increase intra-continental trade. A launching pad of this policy is the setting up of Industrial Development Zones (IDZ) in special demarcated zones part and parcel of economic processing zones. Setting up IDZ firms in African Member States will create incentives for both local and foreign investors to have a comparative advantage in each of their industrial exports, generating local employment and economic development. IDZ has been a success in South Africa, Mauritius, Madagascar, and Egypt: hence viable and achievable towards Intra- Africa trade.

Fourth, allowing ample time for negotiations cannot be over emphasized. The political ambitions and rush in most cases undermine economic aspirations and most regional integration agendas in Africa are at a standstill because of missed deadlines as a result of capacity challenges. Time is the litmus test for development, and each economy reacts differently. Therefore, important implementation lessons must be learnt before the continent locks itself in a new policy direction. The negotiation Agenda with 2020 deadline is loaded with customs union, competition issues, intellectual property and investment.

Fifth, policy coherence and employing the right mix of tools to grow industry and trade is critical. African Governments need to employ a robust trade policy regime that is forward looking to support the contemporary needs of our generation. Mainstreaming trade across all Ministries is key. Trade touches business development, rural and urban development issues, education, health, security, employment, technology, among many facets of society whose welfare our Governments struggle to improve. To build lasting solutions in pursuit of the Sustainable Development Goals, it is important not to look at trade issues as the responsibility of Ministries of Trade alone. Each key Government Agency and the private sector has a role to play every day in building sustainable cities, productive and well integrated communities, that connect to the rest of the world. Put together, all these are key for exports and imports.

While structural transformation of African economies is crucial, it is equally important to remove trade barriers discussed above for the AfCFTA to work. Trade facilitation is the life blood for trade and globalization to work; by bringing an economy closer to the world, and the world closer to the people of that economy. Physical integration through joint trade-supportive infrastructure is a must.  If each country in Africa cooperates in removing the walls that prevent economic integration and free flow of goods, services and factors of production, dynamic gains are surely anticipated. The ambition to negotiate the AfCFTA Customs Union by 2020 means that once a common tariff structure with how we trade with the rest of the world is in place, protectionism using non-tariff instruments may rise. This may stifle industries that need inputs for processing in Africa. Facilitating trade and being open to trade is a must to make globalization gains work for Africa.

It’s equally crucial for the AfCFTA to implement its “Sister Policy”  and the Boosting Intra-African Trade (BAIT) action plan, which has a comprehensive roadmap for longer term growth in Africa’s trade.  In particular, through sequencing a mix of policies that will increase productive capacities, improve regional infrastructure, accountable and transparent payment systems. Growth of urban agglomeration nodes in African cities to meet the future urbanization needs by expanding and creating newer special economies zones is also crucial for harnessing Intra-Africa trade. Evidenced based policy and investment in key sectors in Africa like agriculture and services should be promoted.  Ample time is required for both negotiations and monitoring of development outcomes to learn lessons that can influence policy decisions.

In conclusion, as Mr. Andrew Mold, the Acting Director for Economic Commission for Africa (ECA) says, “the greatest potential for graduating from LDC category is for the African Member States to embrace structural transformation of their economies.”

Rachael Nsubuga is the Managing Director of Trade Icon Group, and a consultant at ADRES Group

James Obuba is a research associate at ADRES Group