Expert views

Africa’s quest for a bigger role in global markets

19 December 2019
Hippolyte Fofack, African Export-Import Bank (Afreximbank)

Currently languishing in world rankings, the continent’s economies stand to make a dramatic step forward as AfCFTA comes into force

For decades the 55 nations of Africa have lagged in the highly competitive race for world market share. Taken together their economies made up just 4.3% of global trade in 1970, a share that sank to 2.4% by 2018. The Netherlands, with a population about the size of Zambia’s, accounts today for about 3.5% of global trade, more than all the countries in Africa combined.

Africa also compares unfavourably with other regions of the world on intra-regional trade intensity, with intra-African trade accounting for about 16% of total African trade against 69% in Europe and 59% in Asia.

The marginalization of Africa in the global trade arena has been caused by a combination of factors. One is the persistence of the colonial development model of resource extraction. In a world where trade has been largely driven by manufactured goods with increasing technological content, that model has confined the majority of African countries to the bottom of the global value chain as exporters of primary commodities and natural resources. Another is the fragmentation of markets, which has inhibited efficiency and constrained both economic growth and intra-African trade. A new trade agreement is in a position to change that.

The African Continental Free Trade Agreement (AfCFTA) has established the largest free trade area in the world by membership, with a market of 1.2 billion consumers and a combined gross domestic product of $2.5 trillion. It has the power to defragment Africa and boost productivity to enhance its integration into the global economy. It has been touted as an economic and globalization game-changer because it has the potential to transform African economies and significantly raise Africa’s share of global trade while strengthening its bargaining power in international trade negotiations.

Preliminary estimates support the agreement’s tremendous growth and transformational power. Intra-African trade could increase by half within a decade — double that if trade facilitation, rather than just tariff liberalization, is undertaken. National and regional value chains (RVCs) catalyzed by the AfCFTA could connect the region to global value chains (GVCs) and drive its industrialization and integration into the global economy.

Investment flows are also set to increase, with their composition and direction shifting away from natural resources towards labour-intensive manufacturing industries, as corporations take advantage of increasing efficiency and economies of scale. Real wages are expected to rise across the board for both skilled and unskilled workers, with the latter registering a much higher growth rate, in an apparent shift towards a more inclusive growth model. If the AfCFTA’s promise is fulfilled the years of ‘immiserizing growth’ – which can leave an economy worse off than it was without growth – could be relegated to the past.

The question is no longer whether the AfCFTA will be a growth-enhancer and a globalization game-changer. It is rather how to fast-track its implementation to begin to reap the benefits of the continental trade-integrating reform. This would meet the aspirations of Africans who have, for far too long, contemplated development outcomes that have remained elusive for too many, leading some to risk their lives crossing the Mediterranean Sea in a quest for better economic opportunities.

A necessary first step is removing the physically invisible, and yet very real barriers to cross-border flows, that have segmented African markets and made it difficult for companies to spread the risk of investing in smaller markets across the region. However, this is probably not sufficient to unleash the power of economies of scale and efficiency that will engineer the transformation of African economies and realize the aspirations of Africans.

The success of the continental trade-integrating reform will depend on the capacity of African governments and business leaders to establish a dynamic public-private partnership. Its aim should be to address the supply-side constraints and transform African economies, with a view to steadily increasing the domestic production of goods entering African households and then households all over the globe. In essence, this would set the conditions for the emergence of an army of industrialists, who will position Africa as the world’s next factory.

As the trade finance bank for Africa, the African Export-Import Bank supports the implementation of the AfCFTA to drive structural transformation through a wide range of products and facilities. It has significantly increased its commitment to finance intra-African trade, increasing its obligation to $25 billion on a revolving basis under its five-year strategic plan that ends in 2021.

The bank is also drawing on financial innovation and digitalization to address exchange and liquidity constraints and boost cross-border trade. Its Pan-African Payment and Settlement System (PAPSS) is designed to address challenges associated with the fragmentation of cross-border payments, along with settlement infrastructure inherited from the colonial era. Furthermore, the PAPSS has the potential to significantly raise efficiency by disintermediating correspondent banking relationships for intra-African trade payment flows, while at the same time integrating formal and informal cross-border trade to boost intra-African trade.

The bank is financing the development of industrial parks and special economic zones to address supply-side constraints and promote industrialization. This process is informed by the success of similar models, most notably in Asia, where such development was particularly effective at engineering the process of structural transformation when capital was scarce and labour abundant. Through its recently launched Fund for Export Development in Africa (FEDA), the bank is leveraging equity investment into productive sectors and driving the growth of small and medium enterprises (SMEs) in manufacturing supply chains.

The bank has also significantly expanded its guarantee programme to include both short and medium-to-long-term guarantee products. This expansion is designed to increase its capacity to de-risk African transactions to make them more attractive to investors. Under its new suite of products, investment guarantees are particularly well suited to this goal. They provide the incentive and risk mitigation needed by global investors and banks financing foreign direct investment (FDI) inflows into Africa. The region received just a tenth of total FDI channeled towards developing Asia in 2018, according to the United Nations Conference on Trade and Development (UNCTAD). Similarly, the bank’s inter-state guarantee will make it easier to move goods across borders and significantly boost intra-African trade.

Finally, working closely with the African Union Commission (AUC), the bank launched the Intra-African Trade Fair to boost trade and investment by improving access to trade information and promoting connectivity among African businesses. The inaugural fair in 2018 brought together more than 1,000 exhibitors and fomented more than $32 billion in trade and investment deals. The second, scheduled for September 2020, will allow companies to showcase their latest products and meet with industry partners and customers to examine recent market trends and opportunities.

These initiatives are designed to leverage the investment and trade landscape and ultimately enable the African private sector to draw on the power of economies of scale and efficiency associated with the AfCFTA to engineer the transformation of African economies and ultimately raise Africa’s share of the global market pie.

The power of scale has been tested in the past, most recently in China, which drew on it to dramatically expand industrial production capacities and aggregate outputs. Between 1988 and 2018, China dramatically raised its share of global trade, from less than 2% to about 12%, driven largely by the power of scale and efficiency enjoyed by increasingly competitive Chinese corporations. More Chinese corporations are part of the global Fortune 500 today than corporations from any other country, a perfect illustration of the difference that dynamic public-private partnerships can make in a context of increasing economies of scale and efficiency gains.

By defragmenting Africa, the AfCFTA has created the conditions for scale and efficiency gains necessary for growth. Supporting the emergence of African industries under dynamic public-private partnerships and completing the process of economic integration could create sufficient conditions to transform African economies. Perhaps, as the Chinese experience illustrates, it could also open the prestigious world of global Fortune 500 companies to African corporations, and eventually position Africa as the next factory of the world.