Africa has been infamously referred to as ‘passive globaliser’, for being the victim of globalisation. Economists and international organisations have tried to find a solution to the continent’s stunted economic growth but could not implement them for reasons more than one. African markets are known for their inefficiency that constrains economic growth. When it comes to competing in the global economy, African countries take seat at the bottom of the list. Nevertheless, today’s world is seeing many emerging African economies, including Rwanda, Côte d’Ivoire and Ethiopia.
They are increasingly witnessing positive growth trends. These economies are expanding their markets, working on their efficiency and are willing to improve their overall macroeconomic scenario. The key to the same is to defragment African markets. An African Free Trade Area was vouched in various conferences earlier. This came true with the signing of an agreement to establish a Free Trade Area in March 2019 alongside Kigali declaration and a Protocol of free movement. In the 32nd African Union (AU) summit held on 4th July at Niger, countries have discussed about the future of the African Continental Free Trade Agreement (AfCFTA) and its operations. However, the question of its success remains unanswered.
Integrating Africa: Benefits
The agreement seeks to unite 54 African countries with a combined Gross Domestic Product of around US$3.4 trillion. This is the largest free trade area since the creation of World Trade Organisation in the year 1994. Economists believe that Africa has missed out on the benefits that other continents gained through integration of trade. For instance, in the year 2017, the intraregional trade in Africa accounted for only 17 percent. In the same year, the intra-regional trade was 57 percent and 69 percent in Asia and Europe respectively. Competitiveness at the international level is one of the important determinants of the economic clout of a country. Competitiveness, innovation and trade go hand in hand, therefore effecting the GDP growth of these countries. On all these fronts, Africa is left far behind the rest of the world.
Some of the challenges that inhibit this growth include problems in border crossing, lack of proper infrastructure, petty corruption and intra-state disturbances. With the agreement, Africa will be transformed into a single largest market with free movement of goods and services. It also seeks to reallocate resources in order to boost competitiveness. Heads of states have expressed their hope of lifting people out of poverty and improving their standards of living through this agreement. Gradually, free movement of businesses and investments will also take place in the continent. Some of the commitments of members include reducing and eliminating tariffs on all good.
The IMF estimates that the trade will increase by 15 to 25 percent in the medium term due to these commitments. If the hurdles in the way of growth are effectively dealt with, the growth will be even higher than the estimates. The agreement will largely benefit the Small and Medium Enterprises that are responsible for 50 percent of Africa’s GDP and more than 80 percent of its employment.
MSEs: The Winners
According to the World Economic Forum, such an integration would encourage new and existing African-owned countries to enter various markets. This will boost their consumer base, pave way to innovation and therefore increase trade. Furthermore, this will increase the share of manufacturing sector in the GDP and transform traditional African economies into manufacturing hubs. An inflow of capital and foreign investments into the economy is expected, since many duties and tariffs are eliminated. Inflow of foreign capital will also help in improving the national banking systems and enhance local investments.
A reduction in the input costs due to reduced taxes and transportation costs will help in making African exports cheaper than its counterparts, thereby boosting its competitiveness.
Divergences in the convergence
Although this agreement is hailed as a game changer for the continent, there are various hurdles in the path to growth. There is whopping income variation in African countries. While 50 percent of its GDP is contributed by just three countries (Egypt, Nigeria and South Africa). While six of its island nations contribute only one percent to its GDP. The income disparities in this area are higher than in any other region, including that of ASEAN. Another major problem is that the continent already has many overlapping free trade areas including the EAC, COMESA and SADC. Only one of these agreements have been successful in driving growth. Even after the agreement, these groups will continue to trade amongst themselves and favour each other. This will compromise the whole idea of the AfCFTA, which is to liberalise the economies across the continent.
Although 54 states have signed the agreement, almost half of the states are yet to ratify yet. 22 parliaments have stalled the process of ratification, without which the agreement cannot come into force. The pressure of competitiveness will be felt in small agrarian economies, which have to compete with large-scale agricultural products from emerging economies like South Africa and Nigeria. It seems that the benefits of the membership are different for different countries and are completely based on their economic situation.
The increased production activity might take a heavy toll on the environment which is all more concerning at a time when temperatures are increasing at an alarming rate. This can also have a toll on the working conditions of the labourers, where they might be asked to work for longer hours without any increase in the wages. The legislations in African countries with regard to Intellectual Property Rights (IPRs) are weak or rather do not exist. This might create a problem as companies’ ideas might be stolen. Such weak laws will discourage SMEs from investing in research and development.
Unlocking the Potential
There are high hopes that the AfCFTA would exploit Africa’s latent potential. But this is not free from obstacles like corruption, border checks, instable political situation, poor infrastructure and ineffective bureaucracy. Moreover, the reaction of other emerging and developed countries on the agreement is still awaited. Without efficient institution, many African countries are bound to be left behind. Instead of being a point of convergence, the agreement will then act like a threat to African unity. The only way ahead is to make sure that the underdeveloped countries of Africa do not feel overpowered by the developed. The agreement would be a farce otherwise.