By Abdoul Salam Bello, Advisor to the Executive Director, Group Africa II, World Bank Group; Visiting Fellow, Africa Center, Atlantic Council; and Author of “La régionalisation en Afrique: Essai sur un processus d’intégration et de développement” (L’Harmattan 2017)
Learn more about this timely topic at the upcoming 18th International Economic Forum on Africa
The March 2018 signing of the framework agreement to form a continental free-trade zone throughout Africa is raising a lot of expectations. In fact, the African Continental Free Trade Area (AfCFTA) would be the largest free trade agreement since the founding of the World Trade Organization. It will include 1 billion people and up to USD 3 trillion of cumulative GDP.
Amongst the AfCFTA’s expectations is a significant boost in intra-trade. At just an 18% share of total trade, Africa has the lowest levels of intra-continental trade in the world. While the continent’s trading blocs have helped to improve these figures, the level of intra-trade in Africa is a far cry from the levels witnessed in Latin America (35%) and Asia (45%). Furthermore, Africa’s intra-continental trade has been substantially outpaced by trade with the rest of the world – often by as much as 90%.
So far, trade amongst African countries accounts for just 7% of the continent’s GDP. And Africa’s overreliance on commodities for extra-regional trade dangerously exposes it to commodity price shocks and the major ebbs and flows of global capital markets. For instance, only 13% of Nigeria’s exports went to other African countries in 2016, while Asia and Europe each accounted for 33% of the country’s exports. At the same time, only 4.5% of Nigeria’s imports came from other African countries. Similarly, Burkina Faso’s top export destinations are Switzerland, India and Singapore followed by Côte d’Ivoire and South Africa.
What could change the balance? Fostering intra-Africa trade would require developing country and regional trade-facilitation infrastructure (including roads, logistics, ICT and fintech), tapping into manufacturing value chains, and mobilising domestic savings to finance long-term credits for development.
In terms of infrastructure, developing and nurturing new trade routes and partners would be critical for the AfCFTA. Major African trade routes have been based on historical and colonial relationships designed to export raw materials in exchange for importing manufactured goods, thereby hindering trade within and between African countries. New estimates by the African Development Bank suggest that the continent’s infrastructure needs amount to USD 130 – 170 billion a year, with a financing gap in the range of USD 68 – 108 billion.
When it comes to fostering industrialisation and manufacturing, the continent needs to invest more in human development, research and technology. So far, very few scientists and engineers are involved in transformational sectors. In 2010, for example, 7.3% of college students in Burkina Faso and 3% in Burundi were in engineering, manufacturing and construction programmes. According to the 2015 UNESCO Science Report (1), in 2013, Africa’s gross expenditure on research and development (R&D) was about 0.45% of GDP, compared to 2.71% in North America, 2.10% in Southeast Asia, 1.75% in Europe, 1.62% in Asia, and 1.03% in Latin America and the Caribbean. Africa’s expenditure represents only 45% of the target of 1% of GDP recommended by the African Union (AU), which called upon member states in 2006 to raise their national science and technology budgets to 1% of GDP.
Some countries are beginning to take up this challenge. Between 2009 and 2013, Ethiopia increased its investment in R&D by more than 150%. In 2013, Kenya incorporated a commitment to spend 2% of its GDP on R&D in a new Science, Technology and Innovation Act. Despite these efforts, the share of GDP remains below the AU commitment and outcomes have been very little. For instance, the research sector has had little impact in West Africa because of a lack of national research and innovation strategies, low investment in R&D, little private-sector involvement, and little intraregional collaboration amongst West African researchers.
Another constraining factor is long-term and equity financing, which is especially rare in Africa. To date, about 60% of loans in Africa are short-term and less than 2% of loans go beyond a ten-year maturity. According to a study by the IMF, an increase in the African financial sector towards average world levels would allow a trade expansion of about 29%. However, appropriate macroeconomic frameworks need to accompany such an expansion to carefully manage associated risks.
Based on data in the African Economic Outlook 2017, Africa collected about USD 500 billion in tax revenue every year during the period 2011-2014. The continent received about USD 50 billion in official development assistance, USD 60 billion in remittances and over USD 50 billion in foreign direct investment inflows during the period 2011-2017.
African countries seeking financial resources enjoy a wide variety of options, well beyond foreign aid. Amongst others, remittances have vast untapped potential in terms of resource mobilisation. Entrepreneurs from the diaspora can be solicited to foster entrepreneurship in countries of origin either through direct implication or indirectly by leveraging their remittances to finance business investment. Diaspora contributions go beyond financial investment. They include knowledge and skill transfer as well as improved access to international capital markets.
Also in the picture are sovereign wealth funds and market finance. But illicit financial flows need to be addressed. According to the 2015 report published by the Mbeki High Level Panel on illicit financial flows from Africa, the continent lost more than USD 50 billion annually in illicit financial outflows.
Addressing all these issues is critical for the success of the AfCFTA. African policy makers must think hard about the long-term distributional consequences of the AfCFTA while navigating the long road to implementation so as not to fall into inequality traps, leaving some economies worse-off and blocked out of global value chains. Africa will need effective and coordinated institutions to make sure that the implementation of the AfCFTA is well articulated and aligned with other African priorities such as industrialisation, infrastructure and agriculture development.
Ultimately, these responsibilities fall under the African Union, regional economic commissions, governments, banks (including the African Development Bank), the private sector and African citizens. On the way forward, let us recall the words of Robert Schumann on 9 May 1950: “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.”
(1) UNESCO Science Report, Towards 2030
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