How Can the CFTA Help Africa Respond to its Economic Transformation Imperative?

15 February 2018

Despite the substantial growth of their economies over the last decades, many African countries are still struggling to transition to higher value-added economic activities. In a global trade context marked by substantial challenges, how can the CFTA support Africa’s structural transformation?


Notwithstanding the spectacular economic growth registered in the 2000s, economic transformation has eluded most African countries. Yet, Africa’s progress in achieving the Sustainable Development Goals (SDGs) impinges on changes in the structure of the continent’s economies. In today’s complex economic and trade environment, setting in motion such a transformation process is no easy task, and doing so will require Africa to address at least three central global challenges: the crisis of the multilateral trading system, declining commodity prices, and the restructuring of global value chains (GVCs).

The crisis of the multilateral trading system means that Africa’s priority issues are unlikely to be addressed in the short-term at the multilateral level. At the WTO’s Eleventh Ministerial Conference (MC11) last December, the lack of political will to reach a compromise resulted in nothing to show on core priority issues for Africa and lest developed countries (LDCs), namely agriculture, special and differential treatment, and fisheries. Looking ahead, there is no roadmap to continue advancing development issues in these negotiations, and the largest players are now focusing on whether and how to revive multilateral negotiations rather than addressing LDCs- or Africa-specific issues. One of the most significant outcomes of MC11 has been that discussions on e-commerce, investment facilitation, domestic regulations and MSMEs will continue notwithstanding the concerns and opposition of most LDCs and African countries. With these rather grim prospects for substantial outcomes at the multilateral level, most countries will pursue their trade objectives through plurilateral, regional, and possibly mega-regional initiatives, to which Africa is largely not party to.

At the same time, the commodity price boom is coming to an end. As a result, Africa’s current account deficit rose from -3.4 percent of GDP in 2013 to an estimated -7 percent in 2016. Between 2011 and 2016, Africa’s merchandise exports dropped by 11 percent per year, services exports by 6 percent and inward FDI dropped from 3.1 percent of GDP to 2.7 percent of GDP. These trends reflect the continued vulnerability of African economies to commodity price fluctuations, a persistent problem in the continent’s history. 

Finally, participation and upgrading in GVCs are becoming increasingly difficult because the structure of GVCs is changing. Services value added make up approximately 50 percent of world trade in value added, and cross-border e-commerce is expected to account for 30 percent of all global business to consumer transactions by 2020. Yet, services competitiveness and e-commerce are two areas where Africa lags behind other regions. Since the 2008 global economic crisis, lead firms have been consolidating their supply chains in favour of larger suppliers. Research by ICTSD studying GVCs in the apparel sector finds that global buyers expect suppliers to move into pre- and post-production tasks and meet increasingly stringent private standards, including voluntary sustainability standards.[1] As lead times and labour costs in China rise, an increasing number of buyers are shifting to regional suppliers. In 2016, more than two thirds of European exports and more than half of Asian exports were regional. African producers have struggled to insert themselves in these highly competitive regional value chains in Europe, Asia, and Central/North America. For example, IKEA, the world’s largest home-furnishing retailer, sources from about 1,220 suppliers in 55 countries, with only one major supplier country in Africa.

In this context, the CFTA offers a strategy to open new markets for African producers, which is particularly important in light of preference erosion in traditional markets. If negotiated and implemented successfully, such a continent-wide integration project can promote economic diversification away from commodities; unlock firm productivity through greater scale economies, agglomeration effects, and increased competition; and embed trade-related reforms in areas such as services, regulations, and trade facilitation to make African businesses more competitive in regional and global value chains.
 

Regional value chains for economic transformation

Regional value chains (RVCs) can help African value-added producers to enter and upgrade in export markets. African businesses can find it easier to enter regional markets characterised by similar consumer taste, less sophisticated marketing and distribution channels, less stringent standards, and fewer information asymmetries. In 2016, intra-African trade accounted for only 18 percent of African exports, but one third of exports of manufactured goods. Between 1998 and 2014, intra-African trade accounted for 57 percent of export growth for capital goods, 51 percent for processed foods, 46 percent for consumer goods, and 44 percent for processed industrial supplies.

RVCs tap into fast-growing demand driven by urbanisation and the rise of the African middle class. It is estimated that the continent’s middle class will reach 1.1 billion people (42 percent of total population) in 2060, pulling demand for higher value-added goods and services. Some studies suggest, for example, that the rise of the middle class in Eastern and Southern Africa could drive a seven-fold growth in the consumption of high-value processed foods by 2040. African-based companies like Tiger Brands (South Africa), BIDCO (Kenya), Blue Skies (Ghana), and Camlait (Cameroon) are responding to the challenge by capitalizing on their market knowledge and established supplier and distribution networks. The rise and expansion of SMEs across the continent has been noteworthy too, in particular in processing and distribution of staple goods and dairy products, as well as in beer brewing. RVCs can also be important platforms to supply global markets, although this requires countries to develop complementary capabilities in the manufacturing of intermediary products, assembly, and logistics.
 

Opening up and deepening regional markets

Intra-African trade has grown, but this is largely reflective of trade in final goods from larger economies such as South Africa, Nigeria, and Kenya to their respective regional economic communities (RECs). However, building RVCs structured around growing intra-regional trade in intermediate products can deliver win-win outcomes across the continent. For example, in the Southern African apparel RVC, South African firms have invested in Lesotho and Swaziland, and Mauritian firms in Madagascar, to supply South African clothing retail chains.[2] Compared to firms supplying overseas markets, firms supplying regional markets have moved into more complex and profitable products and tasks. In Eastern Africa, agro-processing firms traditionally supplying EU supermarket chains have entered the supply chain of regional supermarket chains. In doing so, they diversified markets, reduced exposure to global market volatility, and successfully re-negotiated price and payment conditions with EU buyers.

Political will to create larger, competitive markets is essential to create real market access for established businesses and new entrants. Across most African RECs, at least four elements stand in the way of real market access in trade in goods: non-tarrif barriers (NTBs), cumbersome border procedures, complex rules of origin (RoO), and anti-competitive practices by incumbents. Research shows that while a CFTA that would only address tariff elimination would enhance intra-African trade, even more significant growth in exports and welfare would accrue from NTBs’ elimination and trade facilitation.[3] Trade facilitation would have a significant impact on both the value and level of sophistication of intra-African trade. On RoO, the CFTA process can draw key lessons from the RoO regimes applied in existing RECs. Compared to COMESA, the product-specific RoO regime implemented in SADC has proved restrictive and costly for the private sector, especially SMEs, without necessarily being more effective in preventing trade deflection.[4] TFTA negotiators have opted for the SADC approach, which is likely to hamper competitive sourcing strategies from businesses and strain the negotiating capacity of smaller economies. Finally, African domestic markets tend to be small and favour high industry concentration and dominant firms. Regional cartels have been operating in fertilisers, cement, and sugar, among others. Abuse of market power harms manufacturers operating downstream or upstream the value chain, deters new entrants, and discourages investment in better processes and products by incumbent firms. The CFTA could establish an effective continent-wide mechanism to address cross-border anti-competitive practices as well as enshrine reforms and build capacity at domestic level on competition policy.
 

Making the most of the CFTA                                                                 

African governments have adopted a comprehensive approach to the CFTA, for example by including competition policies on the negotiating agenda and by making it part of the broader Boosting Intra-African Trade (BIAT) Action Plan. Below are some policy recommendations to ensure that the CFTA promotes RVCs and economic transformation.

Ensuring a comprehensive and ambitious approach to negotiations

Coordination failures have been a well-known constraint to Africa’s industrialisation. African businesses need access to complementary markets and resources to be able to compete in RVCs and GVCs. Trade negotiators often sequence and pace negotiations based on technical considerations which do not correspond to the priorities of the private sector. Real market access for businesses should be unhindered by, among others, NTBs and unnecessarily restrictive RoO. Regional institutions on competition policies should overcome weak or absent institutions in most countries, and should address not only issues related to mergers and acquisitions, but also abuse of dominant positions, again with a potential priority focus on key sectors.

Services and e-commerce contribute a rising share of trade in value added. However, not all services are created equal. Research by ICTSD finds that the most important contribution to structural transformation and the SDGs comes from backbone services, namely infrastructural services. Africa’s exports of goods-related services such as freight and forwarding and aftermarket services have recorded a 9 percent per year growth between 2011 and 2016. Although this is good news, because the latter are closely associated to production and exports, other services exports have fallen during the same period. African value added producers need faster-growing backbone services. While services liberalisation can play an important role in unleashing the development potential of the services sector, complementing it with pro-competitive domestic regulations is essential in order to lower prices, increase product quality and variety, promote new entry, and widen access. At the technical level, this may require the CFTA negotiators to move beyond their confidence zone with regards to trade in services, for example with a negative list approach, and competition. African policy-makers could consider a complementary approach by combining services liberalisation with regulatory convergence (if possible), investment, and capacity building in services sectors that are essential for industrial development.

Governments should also leverage the CFTA to develop a continental approach to e-commerce which suits the development needs of Africa, based on the mandate of Agenda 2063, namely to bridge the digital divide and build an integrated e-economy that aims, among other objectives, to increase broadband penetration by 10 percent and broadband connectivity by 20 percent by 2018, use information and communication technologies (ICT) for education, and provide venture capital to young ICT entrepreneurs and innovators.

Tapping into lead firms

African lead firms are driving the development of RVCs across the region. Policy-makers should engage with lead firms to maximise their contribution to regional value chains and industrial development across borders. Policy-makers in home countries, such as South Africa and Nigeria, can provide incentives to their lead firms to invest across borders in productive and trade capacity. Home and host countries can also partner with lead firms to promote supplier and skills development across the region. Finally, development finance institutions in the largest African economies and at the regional level should be given an explicit mandate to develop productive cross-border investment.

Domestic policies to complement the CFTA

At the domestic level, building RVCs requires effective industrial and agricultural policies backed up by strong political leadership, as well as a competent bureaucracy that is responsive to the private sector’s needs but also independent from it, cutting across ministries responsible for investment, skills, infrastructure, and heavily focused on implementation and monitoring. Implementation and monitoring are often the weakest elements in African policy-making, and yet they are critical to ensure institutional learning and adjustment.

Some policies likely to impact on RVCs are best implemented at the sub-national level, such as cluster development, technical and vocational education and training, and supplier development programmes in partnership with industry. For example, urban development policies can have a major impact on production and export competitiveness. African cities are home to one third of the continent’s total population, but account for 80 percent of its GDP.[5] This is where one finds the most productive firms, skilled workforce, dynamic entrepreneurship, and key institutions. Policy-makers thus need to seize the opportunities offered by the CFTA and RVCs also though more local economic policies, as well as regional corridors such as West Africa’s Growth Ring.

Gender mainstreaming needs purposive policies

The CFTA will have gender-differentiated welfare impacts, which will vary across countries.[6] Research by ICTSD shows that domestic policies to increase women’s access to resources matter, but also that gender equality is critical for upgrading into value chains because of the critical role women play in some of them. Examples such as tea plucking in Kenya and Sri Lanka, fish processing in Cambodia, and production supervision in the apparel industry in Myanmar are cases in point. CFTA negotiators should find innovative approaches to support trade and gender equality.
 

Author: Judith Fessehaie, Manager, Trade and Development Programme, ICTSD


[1] See Morris, Mike, Justin Barnes, and Moshe Kao. Global Value Chains, Sustainable Development, and the Apparel Industry in Lesotho. Geneva: ICTSD, 2016; Staritz, Cornelia, Leonhard Plank, and Mike Morris. 2016. Global Value Chains, Industrial Policy, and Sustainable Development – Ethiopia’s Apparel Export Sector. Geneva: ICTSD, 2016. Samah El-Shahat and Violante di Canossa. Opportunities for sustainable development in global value chains: A case study of Myanmar garment sector. Geneva: ICTSD, 2018 (forthcoming).

[2] Morris, Mike and Cornelia Staritz. “Industrialization Trajectories in Madagascar’s Export Apparel Industry: Ownership, Embeddedness, Markets, and Upgrading.” World Development 56, issue C (2014); Morris, Mike, Justin Barnes, and Moshe Kao. Op. cit.

[3] Depetris Chauvin, Nicolas, Ramos, Priscila, and Guido Porto. "Trade, Growth, and Welfare Impacts of the CFTA in Africa." 2016; Karingi, Stephen, and Simon Mevel. "Deepening Regional Integration in Africa: A Computable General Equilibrium Assessment of the Establishment of a Continental Free Trade Area followed by a Continental Customs Union." Paper presented at the 15th Global Trade Analysis Project Conference, Geneva, June 2012.

[4] Paul Brenton, Frank Flatters, Paul Kalenga. Rules of Origin and SADC: The Case for Change in the Mid Term Review of the Trade Protocol. Africa Region Working Paper Series No.83. World Bank, 2005; Peter Draper, Cynthia Chikura, Heinrich Krogman. Can rules of origin in sub-Saharan Africa be harmonised? A political economy exploration. German Development Institute Discussion paper 1/2016.

[5] UN-Habitat. The State of African Cities 2010: Governance, inequality and urban land markets. Nairobi, Kenya: United Nations Human Settlements Programme, 2010.

[6] Depetris Chauvin, Nicolas, Ramos, Priscila, and Guido Porto. Op.cit.

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