Africa’s economic prospects have always been a topic of great consternation for local governments and international analysts and commentators. A continent rich in commodities (oil, diamonds, minerals), with favorable demographic trends, and the potential for economic growth has historically been “stuck in the muck.” Yet, things are turning around, and the past decade has seen consistent economic growth that is even faster than East Asia’s—a 200 percent increase in trade with the rest of the world, a decline in foreign debt by a quarter and budget deficits by two thirds, and a decline in inflation in by eight percent.
Although there is still a lot to be done throughout the continent, a recent article by The Economist (Africa’s hopeful economies: The sun shines bright) analyzed the emergence of Africa’s “Lion Economies.” However, the global financial crisis, which has crippled the U.S. and EU economies and is threatening global trade and commodity prices, could also derail Africa’s economic prospects and its significant progress to sustainable growth.
With this in mind, in January 2012 the African Union Heads of State and Government will hold their annual summit and focus on the theme of “Boosting Intra-Africa Trade.” The choice of the theme is both appropriate and timely, given the challenges facing the continent’s ability to continue to rely on global trade and high commodity prices for growth, and the need to come up with strategies to improve the situation.
On average over the past decade, only about 10 to 13 percent of African trade is with African nations; in comparison, 40 percent of North American trade is with other North American countries, and 63 percent of trade by countries in Western Europe is with other Western European nations.
To this end, African countries have established the African Union and created various Regional Economic Communities (RECs) to improve growth through trade. In this context, the RECs are pursuing integration through free trade, and developing customs unions and a common market. Eventually, these efforts are expected to converge in an African Common Market (ACM) and an African Economic Community (AEC), in which economic, fiscal, social, and sectoral policies will be continentally uniform.
Pooling economies and markets together through regional integration provides a sufficiently wide economic and market space to make economies of scale possible. Trade enables countries to specialize and export goods that they can produce cheaply, in exchange for what others can provide at a lower cost. Trade also provides the material means in terms of capital goods, machinery, and raw and semi-finished goods that are critical for growth.
More importantly, through such an economic marketplace Africa can strengthen its economic independence and empowerment with respect to the rest of the world. A united Africa can better negotiate for access to both foreign and domestic markets, commodity prices, foreign investment, and technology transfers with trading partners in the U.S. and the EU.
Even more important is the ability to negotiate better terms of trade with the BRIC countries, which operate more nationalistically in the global market then the U.S.-EU market economies (negotiating with governments vs. negotiating with corporations). A generation ago, Brazil, Russia, India, and China accounted for just one percent of African trade. Today they make up 20 percent, and by 2030 the rate is expected to be 50 percent. As the BRIC economies go, so will Africa’s economic prosperity—thus enhancing the negotiating needs of the continent vis-à-vis the BRIC countries.
A New Continental FTA
If trade is a vehicle to growth and development, removing the barriers that inhibit it can only help increase its impact. In order to address this trend, African leaders are making new commitments to boosting intra-African trade.
First was the landmark decision by the Common Market for Eastern and Southern Africa (COMESA), EAC (East Africa Community—Burundi, Kenya, Rwanda, Tanzania, and Uganda), and the Southern Africa Development Community (SADC) to establish a single Free Trade Area. The launch of this tripartite FTA initiative has galvanized interest towards a much broader Continental FTA, as it currently covers more than half of AU membership at 26 countries, a combined population of 530 million or 57 percent of Africa’s population, and a total GDP of $630 billion, or 53 percent of Africa’s total GDP.
A Continental FTA would enlarge markets for goods and services, eliminate the problem of multiple and overlapping memberships, enhance customs cooperation and broader trade facilitation, promote harmonization and coordination of trade instruments and nomenclature, and broader relaxation of restrictions on movement of goods, persons, and services.
The collaboration and cooperation of RECs through the Continental FTA would further improve regional infrastructure and consolidate regional markets through improved interconnectivity in all forms of transport and communication, as well as promote energy pooling to enhance the region’s competitiveness.
Export-Led Growth Alternatives
The one lesson from Southeast Asia that all developing countries and regions must never forget is that export-led growth will always produce desirable economic benefits. Focusing on existing areas where the continent has a comparative advantage (fuels, minerals, and even food products) will continue to generate valuable returns to be invested in those areas that need additional financing.
Food production in particular, along with beverages, tobacco, and other agricultural products, could be a boondoggle for African countries. Although the continent as a whole is a food importer (see chart from a recent Issue Paper prepared by the AU Commission for the 2012 AU Summit), Africa has 60 percent of the world’s uncultivated arable land. With rising populations in Asia, food is becoming more and more valuable, as global food prices are constantly rising. Africa more than Europe is in need of “Common Agricultural Policy” which puts real focus and energy—financing—behind this potentially very profitable segment of the economy.
However, as the Commission’s Issue Paper points out, the continent’s infrastructure and logistic shortcomings make all efforts to increase trade (export or intra-African) very expensive and uncompetitive. In particular, because of infrastructure bottleneck (roads, ports, telecommunications, and storage) transport costs are 63 percent higher in African countries compared with the average in developed countries, and constitute 14 percent of the value exported in African countries, compared against 8.6 percent in developed countries.
Furthermore, delays at African customs are, on average, longer than in the rest of the world—12 days in Sub-Saharan countries compared with seven days in Latin America, less than six days in Central and East Asia, and slightly more than four days in Central and East Europe. These delays add a tremendous cost to importers and exporters, and they increase the transaction costs of trading among African countries. Each transport day lost due to customs and related problems is equivalent to additional tax. In addition, delays and complicated procedures related to insuring goods and customs guarantee requirements raise the cost of exporting from Africa and compromise the continent’s competitiveness. For perishable food and agricultural goods, such delays can be devastating—leading to the loss of entire shipments.
The Road Ahead
For Africa, it often seems that the obstacles outweigh the potential for sustainable poverty alleviation and continuing economic growth. The current situation is hanging in the balance, especially after the global financial crisis and the recent political upheaval in the neighboring Middle East and North Africa.
But, incrementally, it appears that the leaders of the African Union are fully aware of the way forward—a Continental FTA that focuses on Intra-African trade. The road for regional integration is long and hard, but if the AU can build it then goods will come and go. Trade could do for Africa what it has done for Southeast and East Asia.
Nasos Mihalakas is currently an associate professor with the University of New York at Tirana, teaching International and Commercial Law. During the past 9 years he has also worked for both a Congressional Commission advising Congress on the impact of trade with China on the U.S. economy, and for the U.S. Department of Commerce investigating unfair trade practices and foreign market access restrictions. Contact: nasos.mihalakas@gmail.com
This article was originally published in the Diplomatic Courier's January 2012 issue.
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A Renewed Urgency for Regional Integration by the African Union
January 20, 2012
Africa’s economic prospects have always been a topic of great consternation for local governments and international analysts and commentators. A continent rich in commodities (oil, diamonds, minerals), with favorable demographic trends, and the potential for economic growth has historically been “stuck in the muck.” Yet, things are turning around, and the past decade has seen consistent economic growth that is even faster than East Asia’s—a 200 percent increase in trade with the rest of the world, a decline in foreign debt by a quarter and budget deficits by two thirds, and a decline in inflation in by eight percent.
Although there is still a lot to be done throughout the continent, a recent article by The Economist (Africa’s hopeful economies: The sun shines bright) analyzed the emergence of Africa’s “Lion Economies.” However, the global financial crisis, which has crippled the U.S. and EU economies and is threatening global trade and commodity prices, could also derail Africa’s economic prospects and its significant progress to sustainable growth.
With this in mind, in January 2012 the African Union Heads of State and Government will hold their annual summit and focus on the theme of “Boosting Intra-Africa Trade.” The choice of the theme is both appropriate and timely, given the challenges facing the continent’s ability to continue to rely on global trade and high commodity prices for growth, and the need to come up with strategies to improve the situation.
On average over the past decade, only about 10 to 13 percent of African trade is with African nations; in comparison, 40 percent of North American trade is with other North American countries, and 63 percent of trade by countries in Western Europe is with other Western European nations.
To this end, African countries have established the African Union and created various Regional Economic Communities (RECs) to improve growth through trade. In this context, the RECs are pursuing integration through free trade, and developing customs unions and a common market. Eventually, these efforts are expected to converge in an African Common Market (ACM) and an African Economic Community (AEC), in which economic, fiscal, social, and sectoral policies will be continentally uniform.
Pooling economies and markets together through regional integration provides a sufficiently wide economic and market space to make economies of scale possible. Trade enables countries to specialize and export goods that they can produce cheaply, in exchange for what others can provide at a lower cost. Trade also provides the material means in terms of capital goods, machinery, and raw and semi-finished goods that are critical for growth.
More importantly, through such an economic marketplace Africa can strengthen its economic independence and empowerment with respect to the rest of the world. A united Africa can better negotiate for access to both foreign and domestic markets, commodity prices, foreign investment, and technology transfers with trading partners in the U.S. and the EU.
Even more important is the ability to negotiate better terms of trade with the BRIC countries, which operate more nationalistically in the global market then the U.S.-EU market economies (negotiating with governments vs. negotiating with corporations). A generation ago, Brazil, Russia, India, and China accounted for just one percent of African trade. Today they make up 20 percent, and by 2030 the rate is expected to be 50 percent. As the BRIC economies go, so will Africa’s economic prosperity—thus enhancing the negotiating needs of the continent vis-à-vis the BRIC countries.
A New Continental FTA
If trade is a vehicle to growth and development, removing the barriers that inhibit it can only help increase its impact. In order to address this trend, African leaders are making new commitments to boosting intra-African trade.
First was the landmark decision by the Common Market for Eastern and Southern Africa (COMESA), EAC (East Africa Community—Burundi, Kenya, Rwanda, Tanzania, and Uganda), and the Southern Africa Development Community (SADC) to establish a single Free Trade Area. The launch of this tripartite FTA initiative has galvanized interest towards a much broader Continental FTA, as it currently covers more than half of AU membership at 26 countries, a combined population of 530 million or 57 percent of Africa’s population, and a total GDP of $630 billion, or 53 percent of Africa’s total GDP.
A Continental FTA would enlarge markets for goods and services, eliminate the problem of multiple and overlapping memberships, enhance customs cooperation and broader trade facilitation, promote harmonization and coordination of trade instruments and nomenclature, and broader relaxation of restrictions on movement of goods, persons, and services.
The collaboration and cooperation of RECs through the Continental FTA would further improve regional infrastructure and consolidate regional markets through improved interconnectivity in all forms of transport and communication, as well as promote energy pooling to enhance the region’s competitiveness.
Export-Led Growth Alternatives
The one lesson from Southeast Asia that all developing countries and regions must never forget is that export-led growth will always produce desirable economic benefits. Focusing on existing areas where the continent has a comparative advantage (fuels, minerals, and even food products) will continue to generate valuable returns to be invested in those areas that need additional financing.
Food production in particular, along with beverages, tobacco, and other agricultural products, could be a boondoggle for African countries. Although the continent as a whole is a food importer (see chart from a recent Issue Paper prepared by the AU Commission for the 2012 AU Summit), Africa has 60 percent of the world’s uncultivated arable land. With rising populations in Asia, food is becoming more and more valuable, as global food prices are constantly rising. Africa more than Europe is in need of “Common Agricultural Policy” which puts real focus and energy—financing—behind this potentially very profitable segment of the economy.
However, as the Commission’s Issue Paper points out, the continent’s infrastructure and logistic shortcomings make all efforts to increase trade (export or intra-African) very expensive and uncompetitive. In particular, because of infrastructure bottleneck (roads, ports, telecommunications, and storage) transport costs are 63 percent higher in African countries compared with the average in developed countries, and constitute 14 percent of the value exported in African countries, compared against 8.6 percent in developed countries.
Furthermore, delays at African customs are, on average, longer than in the rest of the world—12 days in Sub-Saharan countries compared with seven days in Latin America, less than six days in Central and East Asia, and slightly more than four days in Central and East Europe. These delays add a tremendous cost to importers and exporters, and they increase the transaction costs of trading among African countries. Each transport day lost due to customs and related problems is equivalent to additional tax. In addition, delays and complicated procedures related to insuring goods and customs guarantee requirements raise the cost of exporting from Africa and compromise the continent’s competitiveness. For perishable food and agricultural goods, such delays can be devastating—leading to the loss of entire shipments.
The Road Ahead
For Africa, it often seems that the obstacles outweigh the potential for sustainable poverty alleviation and continuing economic growth. The current situation is hanging in the balance, especially after the global financial crisis and the recent political upheaval in the neighboring Middle East and North Africa.
But, incrementally, it appears that the leaders of the African Union are fully aware of the way forward—a Continental FTA that focuses on Intra-African trade. The road for regional integration is long and hard, but if the AU can build it then goods will come and go. Trade could do for Africa what it has done for Southeast and East Asia.
Nasos Mihalakas is currently an associate professor with the University of New York at Tirana, teaching International and Commercial Law. During the past 9 years he has also worked for both a Congressional Commission advising Congress on the impact of trade with China on the U.S. economy, and for the U.S. Department of Commerce investigating unfair trade practices and foreign market access restrictions. Contact: nasos.mihalakas@gmail.com
This article was originally published in the Diplomatic Courier's January 2012 issue.
