Africa represents only 3% of global trade. It seems to have missed the boat on industrialisation.
A chain of countries winning independence has created a continent cut into pieces by borders, which now need to be overcome. Behind these borders economic thinking focuses only on a national level, which is far too restricted a scope for mass markets to emerge. And along with geographical borders come a number of other barriers, such as tariffs, taxation, customs and regulations. Encouraging growth rates seen over the last 15 years remain too weak to respond to the needs of a market representing 1.3bn people.
The demographic potential is there, but a vast gulf exists between the current state of affairs and the lofty goal of creating the world’s largest market. On 21 March 2018, agreements were signed to create an African Continental Free Trade Area (AfCFTA), in what might go down as a historic event. The stars have very much aligned, with the agreement coinciding with the launch of the AfroChampions initiative in October 2017, and the 4th Transform Summit Africa, held in Kigali in May 2018, which aims to accelerate the growth of a continent-wide digital economy.
For now, the AfCFTA exists only on paper and a lot of work remains to be done, but the roadmap is in place. It is an ambitious project, but importantly a coherent one. It calls upon all African stakeholders – such private sector companies, civil society, governments and pan-African institutions – to unite in partnerships, some of which have already started work.
Creating the champions of tomorrow
This is a process that has taken some time to get under way. The idea of the free trade area was decided by the African Union Commission in 2012, but negotiations didn’t being until 2015. In 2016, the idea of AfroChampions was born. This arose from the initiative of a number private-sector stakeholders from a range of African countries, who have just sealed a partnership with the AU. The approach and objectives of AfroChampions now appear to be a major strategic pillar for implementing the AfCFTA. The work of Africa’s economic champions is seen as a way to create fertile ground for the emergence of a number of SMEs and new champions, with the potential to compete with the world’s major conglomerates in the future. The largest conglomerates in Africa currently represent isolated cases of economic success. They have the wide-ranging task of creating the ecosystems needed to ensure that the promise of the free trade area project is fulfilled.
There are a number of challenges and obstacles in the way. One of these is the fact that the continent is divided into 55 countries, all of them unique in their geography and population, as well as laws and regulations. By the start of 2019, the signatory states will have had to create laws to liberalise trade on 90% of products. However, even before this, the parliaments of each of the 44 signatory countries will need to ratify the agreement, which is likely to take a number of months. There is also the hope that the countries that have not yet signed the agreement will do so in the near future, starting with Africa’s largest economy, Nigeria. Nigeria’s reluctance has been interpreted by some observers as a result of a lack of explanation and education, especially as a conglomerate such as Dangote, Africa’s leading cement producer, would have everything to gain.
A lack of reliable data
This is the reason why the AfroChampions initiative has launched continent-wide information events to convince entrepreneurs and governments about the opportunities offered by the AfCFTA, and the vital importance of joining together as partners to make the most of them. The first of these took place in West Africa in May, and others will follow. In every country, the first task will be to look at the tricky problem of statistical data, which is universally known to be poor. However, the data is crucial for identifying the sectors to target as a priority, i.e. the areas where things are currently working, as well as the most relevant stakeholders, the situation on the ground, turnover figures, useful work capacity, and regional integration. Africa’s technology is not yet at a level that would allow it to compete with global giants. Work needs to start with current consumer goods, such as agricultural produce.
The next step is creating a pan-African payment system that is sufficiently reliable for transactions to be effective. This will take place under the aegis of the AU, which is currently working on the issue. The AU is also seeking to create a system for overseeing changes in trade barriers other than tariffs, and a monitoring body for intra-African trade. The agreements to found the AfCFTA are not set in stone. A reasonable period of two to three years will be needed to assess the initial results and see what adaptations should be made to the treaty. Finally, the AU will assist in developing the infrastructure required for pan-African trade.
The weight of sovereign wealth funds
It goes without saying that trade is impossible if goods cannot be transported. What can be done to provide the enormous investments required to finance the infrastructure network that Africa so desperately needs? It isn’t the case that the continent lacks the money. However, the huge reliance on imports of consumer goods, which is a direct result of Africa’s lack of industrialisation, leads to an equally huge movement of available capital out of Africa and towards other continents.
The AfroChampions initiative suggests that, by working together, Africa’s sovereign wealth funds could reverse this trend. It doesn’t need to start with projects on a gigantic scale, rather it would be enough to take advantage of virtuous cycles, starting by creating new infrastructure that could encourage local markets to emerge.
The initial benefits from this could be used to fuel and perpetuate the virtuous cycles. Another way of contributing to the improvement is achieving open skies and creating a single African air transport market, as set out in the AU-backed SAATM programme, which so far has the commitment of 23 African countries behind it.
Making the digital economy work for Africa
Could this huge and universal movement, which still has a lot more potential, finally give Africa the chance to catch up with other countries and rejoin the globalised economy? Some of the continent’s limitations could be turned into the opportunity to come up with a new, original and tailored development model unlike the models used by other countries. This is especially the case as Africa doesn’t need to correct problems of excess, in particular in the area of the environment. By doing so, Africa could benefit from the digital revolution by completely bypassing the intermediate steps of industrial revolutions experienced by other countries in the past.
However, creating a single African digital economy comes with its own set of challenges. The first is the investment costs. Although the digital sector encourages trade through virtual exchanges and transactions, it still relies heavily on physical infrastructure, which comes at a price. Nevertheless, a single market would allow Africa to take control of its own destiny and bring down running costs. At present, African transactions typically go through foreign platforms, and the costs of using these can counterbalance the benefits in speed and competitiveness that the digital economy is supposed to offer. This was one of the first topics covered in the Transform Africa Summit, held in Kigali in May.
In order to function properly, the AfCFTA needs to be “intelligent”, so that it can succeed in galvanising the digital economy in Africa. In turn, the digital economy can help in making the AfCFTA a reality in the future, creating a virtuous cycle.