The African Continental Free Trade Area (AfCFTA) agreement, which came into effect on 1 January 2021, is an ambitious plan to achieve economic development through regional trade integration. The agreement covers a single market with 1.3 billion consumers and a combined GDP of $2.2 trillion.
According to the United Nations Conference on Trade and Development (UNCTAD), the AfCFTA could generate welfare gains of $16.1 billion and boost intra-Africa trade by 33% from the current 16-18%. The agreement has been signed by all African countries except Eritrea.
Key events leading up to this milestone achievement:
- 1991: Treaty establishing the African Economic Community signed (Abuja)
- 2012: Agreed to establish a free trade area by 2017 (Addis Ababa)
- 2018: 44 member countries signed the agreement establishing AfCFTA (Kigali)
- 2019: the AfCFTA Secretariat is opened in Accra as an independent institution responsible for implementing the agreement
- 2021: trade can commence
Three reasons why AfCFTA could succeed
1. Regional integration can deliver significant benefits
The European Union framework is credited with increasing bilateral exporting relationships among member states. The total intra-Europe trade is estimated at around 60% though individual country estimates vary. Africa’s target of 50% is not unreasonable.
Other regions are following the same approach. The AfCFTA was meant to be the largest free trade area in the world but the honour goes to the Asia-Pacific region following the signing of the Regional Comprehensive Economic Partnership (RCEP) on 15 November 2020. The RCEP has 15 members including Australia, China, Japan, South Korea and Singapore who represent 30% of the world’s population (2.2 billion people) and 30% of global GDP ($26.2 trillion).
2. Demographics will drive future growth
Africa has a population that is 2.6x bigger than Europe. The demographics alone are stacked in Africa’s favour. Africa also has the world’s fastest growing middle-class and it is estimated that the number of Africans living below the poverty line will be just 33% by 2060.
This middle class will be the key driver of Africa’s future economic growth as we saw in China. China’s economic reforms lifted 600m out of poverty which increased domestic consumption of Chinese-made commodities.
3. Exploiting Africa’s comparative advantage
Africa has a natural comparative advantage in the production of agriculture commodities, metals & minerals and tourism. Despite having 60% of the world’s arable land, Africa is now a net importer of food. Import substitution of food products such as rice imported from India and fish from China could be some of the quick wins for the region. This will in turn spur the growth of regional manufacturing.
Three reasons why AfCFTA could fail
1. Execution failure
Africa has eight Regional Economic Communities (RECs) that have been in existence since 1964 when the Economic Community of Central African States (ECCAS) was established and includes the dormant Arab Maghreb Union (AMU) that has not had any meetings since 2008. The jury is out as to whether these RECs have achieved their main objectives.
This is one of the reasons cited by Eritrea for not signing the AfCFTA agreement. The country’s Information Minister, Yermane G. Meskel, tweeted that they wanted to “focus on incremental/achievable results i.e. nurturing first the building blocs or RECs”.
The AfCFTA agreement is light on the detail as negotiations between countries are yet to conclude. There is a lack of clarity about what the tariff reduction will be based on (tariff lines or total trade), how market access will work in practice and how to level the playing field between larger and more established markets like Nigeria, Ghana and smaller countries. India pulled out of the RCEP agreement because key concerns were not addressed and the net costs seem to outweigh the benefits.
This begs the question: have countries adequately evaluated the benefits of joining AfCFTA and who is keeping them honest?
There is little publicly-available evidence of these discussions.
2. Economic integration without political integration cannot succeed
The EU’s greatest advantage is that it has both political and economic integration and respects the rule of law on which its treaties are founded. As a result, Brussels wields enormous power and influence in ensuring that countries comply. The African Union does not have the same level of influence which will make the AfCFTA’s Secretariat’s job much harder.
The counterargument is that Asia’s RCEP does not include political integration. However, Asia has a track record of delivering results and the RCEP has better odds of succeeding than AfCFTA. The RCEP is built on the success of the ASEAN Free Trade Agreements which have eliminated 98.6% of tariff lines. Intra-ASEAN trade in 2017 was 23% for the region and varied by country from 50.8% for Laos to 10% for Cambodia.
3. African countries need to produce goods that Africa imports
A new regional body will not fix the underlying structural issue: intra Africa trade will only increase when Africa starts producing commodities that countries need.
Africa mainly imports motor vehicles, computers and IT products, pharmaceuticals, food and electronics. African consumers would rather buy a second hand 15 year old Toyota Hilux than a brand new and affordable vehicle produced by African automobile companies such as Innoson Motors (Nigeria), Wallyscar (Tunisia), Kantanka Cars (Ghana), Mobius Motors (Kenya) and Kiira EV (Uganda). This problem will become more severe when European countries ban petrol and diesel cars in 2030 (please look out for a future blog post on this subject).
Three key enablers to realise the ambition
1. Strong Command Centre
The AfCFTA Secretariat needs to ensure the timely delivery of AfCFTA which was realised four years later than originally agreed in 2012. The Secretariat will also need to set clear and specific objectives that are linked to publicly available performance indicators. One of the challenges in assessing the performance of regional blocs in Africa is the lack of transparency about objectives and performance.
The African Union will need to step up its role in resolving roadblocks and managing the 54 heads of state who may agree with the common goal but have different agendas. AU’s power and authorities are currently drawn from goodwill which does not work when things go wrong as seen recently in Ethiopia and Mali. The AU can take the learnings from Europe to enhance the legal framework around treaties and make them more enforceable.
This remains a huge impediment and many questions remain unanswered:
- How will goods, services and people move around Africa?
- How will the AU and AfCFTA ensure that countries are building roads and rail that connect Africa and who will pay for it?
- How will manufacturing plants be set up and operated if basic utilities such as water and electricity are unavailable?
Power, water, roads, rail and affordable air travel are the basic building blocks to economic development and need to be sorted out urgently.
It is good to see the positive reaction from leaders such as Akinwunmi Adesina, President of the African Development Bank (AfDB), who won an award for his contribution to AfCFTA. Multilateral institutions such as AfDB, African Export-Import Bank (Afreximbank) and Trade & Development Bank (TDB) will be the financial engines that will help realise this ambition.
3. Skilled labour
If Africa aims to start manufacturing motor vehicles, computers and other high-tech products which the continent currently imports, there needs to be a radical change in higher education curriculums and skills training.
A quick google search on robotics and AI at universities in Africa shows that few universities outside of South Africa are raising the education bar to match that of Asia, Europe and Americas. Ministries of Education need to work hand in hand with Trade and Finance to provide the necessary human capital to support AfCFTA.
The AfCFTA is doomed to fail if the responsibility for achieving the main objectives remains solely in the hands of politicians and African Union technocrats.
Africa has been too reliant on the public sector to lead economic development – a costly mistake as evidenced by the number of loss-making parastatals that dominate most economies.
It is time for a radical shift in the cockpit with the private sector and multilateral agencies taking the co-pilot seat and the AfCFTA and African Union retaining the captain and flight engineer seats, respectively. Bringing in the private sector will support the creation of industries, jobs and ultimately increase the GDP of Africa.
Identify leading African corporates from every country to support implementation will increase the likelihood of success. The Dangote Group announced last week that AfCFTA will allow them to expand their footprint. Dangote already operates in 10 markets and will be expanding to five more.
Large pan-African corporates will be the clear winners from AfCFTA. It is up to the AfCFTA Secretariat to ensure that the benefits extend to small and medium enterprises as well as ordinary citizens in order for this initiative to be a true success.
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