How Africa Should Approach Trade and Industrialisation

NIMROD ZALKTHE AFRICAN Continental Free Trade Area, launched on 1 January, has been hailed as a ‘game changer’. By bringing together 55 countries – with a total population of 1,3 billion and a combined GDP of US$3,4 trillion – in a single market, many believe AfCFTA could fuel Africa’s recovery from the Covid-19 crisis, spur structural transformation, and drive rapid industrialisation.

The World Bank estimates that trade integration could raise Africa’s income by 7% by 2035, lifting 30 million people out of extreme poverty.

Unfortunately, lowering trade barriers alone will not enable Africa to fulfil them.

The AfCFTA will eliminate tariffs on 90% of goods and reduce non-tariff barriers. Liberalisation, the logic goes, will lead to a sharp increase in continental trade, with production – especially of manufactured goods – rising to meet growing export demand. And higher exports would encourage longer-term industrialisation, by bringing about more efficient allocation of resources and economies of scale. But there is a fundamental flaw in this logic. 

Tariffs are not the main impediment. In fact, trade tariffs are already low. Thus, much emphasis is placed on addressing non-tariff barriers, particularly infrastructure gaps and customs-related transaction costs.

AfCFTA-linked steps to streamline customs procedures and curb rent-seeking at borders will go some way toward boosting efficiency. But what is really needed is large-scale investment in physical customs infrastructure and modernisation of information-technology systems. The real problem is the continent’s underdeveloped production capacity.

Africa’s fixed investment, share of manufacturing in GDP, and agricultural productivity lag behind other developing regions, albeit with considerable cross-country variation. Moreover, the continent’s persistently low share in global exports exacerbates the balance-of-payments constraint to structural transformation, which depends on rising imports, particularly of capital goods needed to upgrade agriculture and manufacturing.

Likewise, the mismatch between exports (chiefly commodities and semi-processed goods) and imports (primarily consumer and capital goods) significantly impedes continental trade. Why would Ghana trade cocoa with Ivory Coast, if neither country can process it? Why would Zambia export its copper to the DRC, which also produces – but does not process – copper?

Thus, at least as important as AfCFTA’s trade-related provisions are macroeconomic and industrial policies that aim explicitly to accelerate structural transformation in agriculture and manufacturing and associated infrastructure investment. Some experts, including International Monetary Fund researchers, recognise that industrial policies are needed to make the most of AfCFTA. 

However, these measures are regarded as ancillary, rather than a prerequisite for progress that must be accompanied by broader investment in energy, water and sanitation, and transport infrastructure (roads, rails, and ports). Only then can intraregional trade really take off. As it stands, the African Development Bank estimates the continent’s annual infrastructure funding gap at between US$68 billion and US$108 billion.

To be clear, Africa can achieve industrialisation and structural transformation, despite what naysayers claim. Since 1990, manufacturing’s share of employment has grown in a number of African countries (though it has been accompanied by only modest value-added growth). African countries can build on their accumulated manufacturing experience to seize opportunities to produce for one another and the rest of the world. Heavy industries like basic metals, chemicals, and cement production can benefit from proximity to regional markets. There is considerable scope for processing agricultural output into food and beverage products for the region and beyond. 

Global shifts and shocks create opportunities for Africa to expand its participation in value chains, from apparel to automotive assembly and pharmaceutical products.

Structural transformation is not limited to manufacturing. As three eminent Africa scholars argue, the continent must also reverse its relative neglect of agricultural output and exports and close the agricultural productivity gap with other regions. This is essential to raise incomes in rural areas, where extreme poverty is concentrated, and to boost agricultural exports (thereby loosening the balance-of-payments constraint to growth).

In particular, high-value agriculture such as horticulture is labour-intensive and has the scope for productivity gains traditionally associated with manufacturing. Ethiopia and Kenya have proved this with their exports of fresh flowers and vegetables. South Africa has done the same with citrus.

For any of this to work, however, African leaders must look beyond the trade-related elements of AfCFTA and implement a broader strategy, based on developmental regionalism that aims explicitly to upgrade productive capacity. Only then can Africa achieve the structural transformation it so badly needs and kick-start trade in the process.

* Nimrod Zalk, industrial development adviser and former deputy director general at the South African department of trade, industry, and competition, is an adjunct associate professor at the University of Cape Town’s Nelson Mandela School of Public Governance.

– Copyright: Project Syndicate, 2021.

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