Will greater economic integration make Africa more competitive?
The 2008/9 global economic meltdown was ample demonstration of how the fragmented African economies stand exposed to external economic shocks, especially emanating from richer economies, transmitted largely through changing trade dynamics, soft commodity prices and dwindling capital inflows.
A huge positive takeaway, however, was that this realisation helped underscore the need to hasten the completion of an initiative born as far back as June 1991 with the signing of the Abuja Treaty and the simultaneous formation of the African Economic Community (AEC).
Intra-Africa trade stands out as a sure proof shock absorber in times of distress and equally as a significant catalyst in propelling growth and hence Africa’s corporate world, among others, hold their breath in anticipation as African Head of States and Governments convene in Addis Ababa, Ethiopia later this month to launch a continent-wide free trade agreement.
Africa is pursuing an integration agenda as a collective development and transformation strategy leading to the eventual creation of a continental market. The pressure of globalisation is forcing firms and countries to seek efficiency through larger markets and enhanced competition. A modern manufacturing plant will have to produce a larger output which cannot be absorbed by the level of domestic demand that a single underdeveloped country has.
As such, pooling economies and markets together through regional integration provides a sufficiently wide economic and market space to make economies of scale possible.
Dominique Njinkeu, the World Bank’s chief economist for Africa, in his latest blog post entitled ‘Boosting Intra-African Trade: What Role for External Trade Regime?’ alluded to benefits of effective regional integration in Africa spanning from enhancing trade volumes to fostering sustainable economic growth with attracting investment in manufacturing standing out.
Analysts, however, fear that the differences and accompanying uncertainties in accessing major markets outside Africa could become a distraction and undermine the free trade area. Africa’s regional economic communities are adopting uniform trading policies among their members, yet they are expected to trade with the rest of the World under various international trade regimes.
For instance, in 2005, high-income World Trade Organisation members agreed to provide least-developed countries (LDCs), most of which are in Africa, with duty-free, quota-free (DFQF) access for at least 97% of their product categories. Non-LCD African countries, on the other hand, have to negotiate reciprocal free trade agreements with higher-income trading partners (Organisation of Economic Cooperation and Development “OECD” members) to obtain DFQF access. Put differently, two neighbouring African countries, only one of which is an LDC, will face differential access to OECD markets, and in return offer different market access to their own markets, making it difficult for them to form a supply chain or production network.
Intra-Africa trade initiatives face enough challenges without the complexities of individual economies’ access of the OECD markets. We are therefore of the opinion, like many, that the oncoming summit should focus on finding solutions to domestic issues that have been delaying integration thus far. Of note is the lacklustre implementation of regional integration commitments by member states and the inefficient transit regimes and border crossings procedures for goods, services and people.
With integration, Africa will be better poised to enter a phase of accelerated and more durable economic growth. The launch of the free trade area framework will certainly be among the top achievements of the continent in 2012, hopefully followed by a well structured implementation plan.
Imara is an investment banking and asset management group renowned for its knowledge of African markets.