By Hippolyte Fofack
In a world in which competitiveness is a key determinant of sustainable growth and trade performance, consolidating existing but fragmented economic communities has become essential. One major example is the Continental Free Trade Area, which will establish a common market in Africa and catalyse economic transformation and effective integration of the region into the global economy.
Earlier this year, 44 of the 55 African Union states signed up to the CFTA agreement. Five additional countries, including South Africa, joined during the 31st Ordinary Session of the Assembly of the African Union held in Mauritania in July 2018. The 49 signatories account for more than 86 per cent of total African trade and around 77 per cent of the continent’s GDP. Beyond enhancing the competitiveness of African economies, the CFTA has the potential to buttress the forces for convergence in the world economy.
The CFTA has emerged at a time when the impact of competitiveness on trade and development has increased significantly, reaching stratospheric levels in the era of globalisation. Several factors contributed to this emphasis on competitiveness, not least the increasing role of innovation and technological content of manufactured goods, as well as globalisation of economic opportunities and trade.
The CFTA is also coming together at a time of creeping protectionism, when leading economies are adopting mercantilist systems that treat the size of trade surpluses as a measure of economic performance. This has been illustrated recently by the escalation of punitive tariffs and retaliations, trade wars between large economies and the marginalisation of the World Trade Organisation as more countries move away from the rules-based system that has enabled robust, sustainable and free-fl owing global trade.
In this beggar-thy-neighbour global economic landscape, competitiveness has perhaps become even more important for countries striving to integrate into the global economy. Only the most competitive are expanding their share of the global market. These economies have emerged as ‘active globalisers’, those most able to take advantage of the benefits of globalisation to sustain their growth and trade performance.
In contrast, the least competitive economies have become ‘passive globalisers’, victims of globalisation that supply the raw materials and natural resources required to expand the manufacturing output of active globalisers. Passive globalisers are disproportionately more vulnerable to the adverse effects of globalisation.
These include such risks as the increased speed of global transmission of negative shocks, swings in commodity prices and longterm deterioration in the terms of trade for commodities. Over time, these risks have stifled the aspirations of lagging nations, most of which are locked in vicious cycles of excess growth volatility and structural balance of payment crises.
In Africa these risks have been exacerbated by a host of constraints to competitiveness and trade. These include non-tariff and regulatory barriers such as border delays, burdensome customs and inspection procedures, as well as multiple licensing regimes and the rise of national transit bonds along key routes.
In addition to a large financing gap and infrastructure deficit, African businesses have had to contend with these constraints that raise transaction costs and limit the movement of goods, services, labour and capital across borders. As a result, trading among African countries has been more costly and time-consuming than in any other region of the world.
While the average cost of importing a container within the region is around $2,500, the same costs $900 in the East Asia and Pacific region and $1,500 in Latin America and the Caribbean. Removing barriers Although the structure of production and the direction of trade inherited from the colonial model of resource extraction have played major roles, the prevalence and scale of non-tariff barriers and market fragmentation help to explain why African countries trade more with the rest of the world than with each other.
Intraregional trade accounts for around 15% of total African trade, against 68% in Europe and 58 per cent in Asia. Uniting Africa through the CFTA will establish one of the world’s largest free trade areas in terms of number of countries, people and market size. The agreement will cover a market of 1.2 billion people with a GDP of $2.5 trillion and combined consumer and business spending of more than $4 trillion. This will help raise the competitiveness of African economies and enhance their integration into the global economy as active globalisers.
Measures such as cross-listing firms on different stock markets and the establishment of credit reference bureaus could raise access to finance in a region where fragmentation has impeded private sector growth. Besides the implications for financial markets, consolidating regional economic communities to establish one of the world’s largest free trade areas could boost the competitiveness of African economies through other channels. These include technology transfers, crossborder investment and industrial development in a context of increasing economies of scale, diversification of sources of growth and the expansion of intra-African trade.
Preliminary estimates of the expected benefits of the CFTA for trade performance and regional integration are positive and significant. Intra-African trade, largely dominated by industrial products and manufactured goods, could increase by more than 52 per cent above the baseline a decade into the implementation of the CFTA.
It could even double over the same period if the reforms envisaged under the CFTA are complemented by robust trade facilitation measures. Economies of scale created by the establishment of a larger continental market could lower production costs and encourage inward foreign direct investment and cross-border investment. The benefits of this would include greater technology transfers and strengthened regional value chains in a context of expanding intraregional trade in intermediate and capital goods.
‘Factory Africa’
The development of regional value chains would raise African economies’ competitiveness and enhance their integration into the global economy. Data show that, despite the increased outsourcing of activities involved in the production of a good to several countries, much of the value-added distribution in global value chains remains in regional blocs.
‘Factory Europe’, ‘Factory North America’ and ‘Factory Asia’ are the regions where these value chains are primarily concentrated. In time, the emergence of ‘Factory Africa’ and the improved integration of Africa-based businesses into the global economy will help set the world on a path towards truly global value chains. Realising Africa’s potential has been markedly difficult, partly as a result of artificial trade barriers and the fragmentation of markets inherited from the colonial development model.
The CFTA will help overcome these limitations and boost the competitiveness and integration of African economies. Making this transition will depend on the speed and ability of countries and emerging corporate leaders to overcome hurdles on a path towards structural transformation.
Regardless of geography, technological advances as well as improved infrastructure have been fundamental for cost reduction and efficiency gains in the development of regional and global value chains. African countries must more vigorously adopt these innovations.
The benefits of regional integration will be greatly enhanced if the CFTA principles are supplemented by non-border reforms. These should include measures to liberalise services trade, investment provisions, intellectual property rights protection and the harmonisation of standards and regulations.
These are all essential for reducing trade costs between countries within the region. Beyond raising regional trade intensity, the CFTA could unleash forces for African dynamism and position the continent as a globally competitive export processing platform.
Hippolyte Fofack is Chief Economist of the African Export-Import Bank