African consumer and business spending is projected to reach a combined $6.7 trillion by 2030, with some reports projecting $2.1 trillion in consumer spending as early as 2025.
While it is exciting to share the continent’s potential, it is not difficult to see the hurdles it faces: Heterogeneous economies, spotty development, widespread poverty, limited regional trade, a widening infrastructure deficit and weak institutions.
If the continent’s growing spending power will translate into economic development, there is an obvious imperative for bold, large-scale, holistic initiatives.
Will the African Continental Free Trade Agreement (AfCFTA) play such a role? For companies operating on the continent, and countries looking to ratify the agreement, what advantages do recent advancements in technology present?
Can these advancements potentially mitigate risks while increasing the scale of the agreement’s impact? Do these propositions present a unique opportunity for unlocking innovation, growth and productivity on the continent, especially for its SME segment?
African countries continue to trade with both internal and external partners despite the challenges they face, including poor infrastructure, political instability and conflict. While this should be positive, a deeper look at the composition of this trade unravels important questions.
The United Nations Conference on Trade and Development (Unctad) says that intra-African exports come in at least 40 percentage points lower than Europe and Asia. One of the consequences of this is a slowdown in the manufacturing sector, which contributes only 10 per cent of GDP.
Juxtaposing this with the fact that manufacturing typically contributes 24 per cent to 33 per cent of total jobs in other regions, we can see some structural challenges that have led to a young person on the continent — where over 70 per cent of the population is below 30 years old — being twice as likely to be unemployed.
The AfCFTA is the continent’s response to this challenge. It aims to harmonise trade and create a single market based on a framework for the free movement of people, goods and services.
The 55-member countries of the African Union are expected to sign the agreement, which would bring together 1.2 billion people with a combined GDP of over $3 trillion. One of the much-touted benefits of the agreement is that it could grow intra-Africa trade by more than half over the next four years.
Of course the AfCFTA is not a panacea for all of Africa’s economic woes. First, there are legitimate worries that the benefits from this free trade area will be unevenly distributed in addition to the loss of tariffs estimated at $4.1 billion a year.
Unctad research, however, shows that removing these would ultimately create an annual welfare gain of $16.1 billion.
Critics of the agreement caution that it places too much emphasis on cutting tariffs without considering the disparate production capacities of African countries — arguing that it will inevitably favour Africa’s advanced and more developed economies, deepening their advantages over the less developed countries and stalling growth.
Technology as a key enabler
Several key technology trends augur well for the implementation of the AfCFTA, and could help mitigate some of its risks.
Two major examples of these are the rising profile of digital commerce platforms and the combined impact of fields such as data analytics, artificial intelligence and blockchain technology in optimising the production and flow of goods and services between member countries, while enabling effective value-capture by harnessing economies of scale.
These digital platforms are effective conduits for the exchange of value either in the form of goods or services.
The impact of these platforms is even stronger when we consider that 95 per cent of firms in sub-Saharan Africa are SMEs. By aggregating demand over a wide geographical area, digital platforms give small and medium businesses the opportunity to enter new markets and identify not-so-obvious niches for their offerings.
This enables them to supply goods and services which would have otherwise been unlikely due to location constraints and prohibitive marketing costs.
The growth of the fintech sector on the continent effectively simplifies any transaction challenges, by creating multiple payment channels and giving buyers and sellers a range of options.
The AfCFTA now provides a continental framework that allows these technology benefits to be translated into actual value creation and trade by expanding what were previously national business clusters into a single continent-wide opportunity.
Critical to the success of these platforms and the cyber marketplaces they create is the optimal and efficient production and flow of goods and services.
One of the risks to the successful implementation of the AfCFTA is the non-tariff barriers. There is also the importance of ensuring that expanding supply and value chains do not create favourable conditions for rent-seekers and non-value-adding middlemen who deprive the centres of production of their returns.
This challenge is prominent in sectors such as agriculture, where information asymmetry between producers, middlemen and consumers has had a lasting negative impact.
It is in areas such as these that technology excels, enabling a more equitable distribution of accrued value to the different participants along the chain.
Whether it is in the adoption of blockchain technologies to drive transparency in trade flows (and reduction in the cost of trading) to the development of predictive models to ensure the efficient production of goods tailored to match market demand, technology is an essential part of creating a healthy single market on the continent.
This combination of digital platforms and technology-enabled market efficiency will eventually translate into jobs for the continent’s youth.
This sort of impact transcends any advantages that more developed economies on the continent may have, producing a plethora of unique market opportunities for market participants of various sizes.
Africa continues to show potential for growth and the AfCFTA is an important step on the journey to achieving this growth. It will alleviate poverty, grow local economies and give the continent better leverage as it engages with other regions.
However, the strategic deployment of technology as a tool for driving transparent, efficient and optimal outcomes both for nation-state actors and organisations on the continent will be essential to its success.
Digital transformation must be a keystone of the vision for a more integrated African economy.
Soromfe Uzomah is head of strategic partnerships at the Microsoft Africa Initiatives (4Afrika)