Much to gain as an African economic single market

Saturday March 17 2018

The container depot at Nakawa, Kampala.

The container depot at Nakawa, Kampala. Much intra-Africa trade currently occurs between neighbouring countries. PHOTO | NMG 

By ANDREW MOLD
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A statesman once compared regional integration to riding a bicycle — you have to proceed in a forward direction and maintain velocity, or you will fall off!

The EastAfrican recently argued that the East African Community has been losing momentum, and is in danger of “falling off the bike”.

This may be unfair — generally speaking, policymakers are still fully aware of the importance of pursuing the regional agenda. But certain economic realities cannot be denied.

For example, by continental standards the EAC has achieved a relatively high level of intraregional trade, but in recent years that share has stagnated and even declined slightly, to just under 20 per cent.

One of the ways to energise regional integration is by taking action to a different level. That is what political leaders will be doing in Kigali at the AU Summit on March 20-21, when they will (hopefully) endorse the formation of the African Continental Free Trade Area (AfCFTA). This agreement is the fruit of three years of painstaking negotiations.

The agreement gives new impetus to regional integration across Africa. Treated as a single market will give the continent a lot more political and economic clout.

Since its formation 60 years ago, the United Nations Economic Commission for Africa has supported pan-African initiatives. When Uneca’s very first meeting was convened in Addis Ababa in December 1958, there were only 10 independent African countries.

It was, as former executive secretary Adebayo Adedeji put it, “the first major gathering of Africans, under the auspices of the UN, to discuss African problems on African soil”.

Even at that time, member states were clear that the key objectives were, first, for the other countries to shake off the shackles of colonisation and, second, to pursue an agenda of pan-African economic and social transformation.

The formation of AfCFTA is a major milestone towards making the pan-African aspiration a reality. Uneca has estimated that if fully implemented, the AfCFTA could boost intra-African trade by more than 52 per cent.

If simultaneous efforts were made to reduce infrastructural and other non-tariff barriers, then it could double. Yet most intra-African trade currently occurs between neighbouring countries of the same regional bloc. It is perhaps time to increase the share with other African trading partners.

The conventional wisdom is that Africa trades too little with the global economy, and too little with itself. Neither is quite accurate. First, in comparison with the size of their economies, African economies are fairly open traders. EAC member states typically trade around 40 to 50 per cent of their GDP (around the same as the average for upper income countries and almost double the amount of the US).

The second conventional wisdom — that Africa trades too little with itself — is true up to a point, but is also the logical outcome of the fact that many countries are principally exporting commodities like oil and minerals, and agricultural commodities, like tea and coffee, to high income countries.

The true challenge for African countries is that too many countries are import-dependent, exporting excessive amounts of unprocessed commodities, and as a consequence running up large trade deficits. This slows down the pace of economic growth and development.

The AfCFTA represents an opportunity for African countries to rapidly increase the share of industrial goods in both production and exports. Within the EAC, for instance, only 20 per cent of exports are manufactured goods, and the rest are primary commodities.

But for intra-EAC trade, over 60 per cent is manufactured goods. If we wish to pursue a faster route to industrialisation and the diversification of our economies, then promoting greater intra-regional — and intra-African — trade, is the way forward.

As in any agreement involving multiple parties, some countries will be worried about transhipment (goods produced outside Africa being imported through neighbouring countries). Some members may benefit disproportionately. Uneca’s work suggests that this is not the case, and that the whole continent will benefit, albeit some to a larger extent than others.

Lessons to learn

In the negotiating process, lessons should be learned from the fate of The Free Trade Area of the Americas which was launched in 1994 and was supposed to create, by 2005, the world’s largest free-trade area, comprising of 34 economies of the western hemisphere.

In the end, the negotiations failed, and the FTAA process was terminated. As a consequence, intraregional trade remains even lower in the Americas than in Africa, at just 16 per cent of exports. In Africa, intra-regional trade currently stands at 18 per cent — the AfCFTA would boost that closer to 30 per cent.

African policymakers spend much time negotiating trading and economic relations with regions outside the continent. The Economic Partnership Agreements with the EU are an example. The geography of regional trade has changed.

Whereas at the beginning of the millennium, the EU was the EAC’s single largest export market, now the intra-African market is twice as important as the EU.

The AfCFTA represents an opportunity for the EAC to get back on the saddle, and regain momentum. It is an opportunity that should be seized.

Andrew Mold is the acting director, ECA sub-regional office for Eastern Africa.

The views expressed in this article do not necessarily reflect those of the ECA or the UN