African firms are the key to the economic transformation of the continent, but they need governments to create better conditions for them to thrive, according to the second edition of the African Union Commission’s (AUC) economic report produced in collaboration with the Organisation for Economic Co-operation and Development (OECD) Development Centre.
Without bold policy changes, most African businesses may not be ready for reaping the benefits of the African Continental Free Trade Area Africa (AfCFTA) which is projected to offer African firms the new opportunities of a 1.2 billion consumers strong continental market, says Africa’s Development Dynamics (AfDD) 2019 report.
The report released on Tuesday shows that Africa’s expanding domestic markets offer great opportunities for transforming production systems across the continent. Africa recorded 4.6 percent annual gross domestic product (GDP) growth between 2000 and 2018; with domestic demand accounting for 69 percent of it. The continent’s growth is projected at 3.6 percent in 2019 and should remain robust at 3.9 percent between 2020 and 2023. The regional demand for processed food has been growing 1.5 times faster than the global average. Large Pan-African firms and some dynamic start-ups are seizing these opportunities to grow, as highlighted in the report.
However, the report finds that Africa needs more dynamic enterprises to turn these opportunities into higher profits, more investment and new, decent jobs. This is especially true of small and medium enterprises in employment-intensive sectors:
Firms fail to tap the growth in neighbouring markets: exports of consumption goods to other African markets decreased from 0.8 percent of Africa’s GDP in 2009 to 0.5 percent in 2016. Currently, most African firms are losing out to new competitors both at home and in emerging markets. Only 18 percent of Africa’s new exporters survive beyond three years.
Productivity is not catching up. Since 2000, Africa’s average labour productivity has stagnated at around 12 percent of US levels. The Africa-to-Asia labour productivity ratio has decreased from 67 percent in 2000 to 50 percent in 2018.
“Accelerating the development of Africa’s productive sectors is critical to meeting the objectives of the African Union’s Agenda 2063. We must shake the structure of our economies to create strong, robust and inclusive growth, with new jobs and opportunities for all”, said Prof. Victor Harison, Commissioner for Economic Affairs of the AUC, while launching the report. Progress in quality job creation is too slow: in some countries, almost 91 percent of the workforce outside of the agricultural sector remains in informal and vulnerable employment.
AfDD 2019 puts forward a systemic approach to productive transformation by focusing on three sets of policies:
Develop effective clusters of firms, by providing them with business services that improve specialisation in niches, reinforce linkages between the most productive ones and the others, and address skill shortages.
Encourage the creation of regional production networks to generate economies of scale between African countries, attract new investors, develop complementarities within the value chains, and avoid a competitiveness race to the bottom.
Enhance firms’ abilities to thrive in new markets. Policies can provide extra support to exporters by removing non-tariff barriers to the continental trade, simplifying administrative procedures and custom services, and improving connective infrastructure – especially flights, roads and ports.
“The entry into force of the African Continental Free Trade Area in 2019 marks a strong commitment by African leaders towards productive transformation. But it will work if African firms are strong enough to compete in this new, enlarged market. They need bolder and smarter government policies to support them”, stated Mario Pezzini, Director of the OECD Development Centre and Special Advisor to the OECD Secretary-General on Development.
The report provides detailed analysis and recommendations for each of the five African regions.