AfCFTA: the world’s largest free trade area promising to revitalize Africa
In a historical period characterised by customs duties, nationalism and protectionist drives, Africa strikes a blow against the trend. After two years of intense negotiations, on 7 July last in Niamey, Niger, an extraordinary summit of the African Union marked a historic milestone, launching the operational phase of the African Continental Free Trade Area (AfCFTA).
What is AfCFTA?
The African Continental Free Trade Area (AfCFTA) is the agreement that aims to guide the development and economic growth of Africa, breaking down internal barriers between countries and projecting the continent to a future role as a global economic player. Ratified to date by 27 countries, the agreement has been signed by 54 of the 55 African countries (practically all except Eritrea) and in fact represents the largest free trade area in the world. The figures involved are impressive: the AfCFTA covers a market of one billion three hundred thousand people for a total GDP of 3,400 billion dollars.
The agreement has been set up to be implemented in several phases, where the achievement of one step becomes preparatory to the realization of the following one. The implementation of the agreement will therefore be gradual, as countries negotiate fee schedules and remove existing barriers to trade in goods and services. Thus, if on one hand, the agreement promises to unlock Africa’s economic potential, on the other, the process for implementation could take a long time.
The (ambitious) objectives of the agreement
AfCFTA aims to foster continental economic integration by creating a single African market for goods and services, with a progressive elimination of existing barriers (tariff and non-tariff) to trade and investment. The agreement therefore aims to facilitate African companies and industries, restart intercontinental trade and ensure employment growth. UNECA (United Nations Economic Commission for Africa) estimates that the implementation of the agreement could boost intra-African trade by 52% by 2022, even doubling it if non-tariff barriers are completely eliminated.
Existing barriers
The main problem of the continent is certainly the inadequate infrastructure network, which has a heavy impact on transport, logistics and, more generally, on all economic activities and social development on the continent. It is estimated to limit productivity by up to 40% and to reduce the continent’s GDP by about 2% per year. Several studies have shown that poor road, rail and port infrastructures increase the costs of goods being traded between African countries from 30% to 40%, negatively affecting the development of the private sector and the flow of foreign direct investment. Suffice it to say that only a quarter of the African road network is paved. Energy is another huge obstacle to the continent’s development. As many as 30 countries face regular power outages and only 38% of the population has access to electricity. Companies operating in most African countries where power supply is unreliable have resorted to purchasing diesel-operated power generators to cope with frequent and long blackouts, thus increasing operating costs (and air pollution).
To this is added the thorny issue of protectionist barriers between countries, a major obstacle to the development of inter-continental trade. Such policies have long generated paradoxes, forcing the import of extra-continental products, generally from Asia or Europe, rather than from neighbouring countries. Therefore is necessary a radical change of perspective from each individual country so that the AfCFTA could function properly.
Prospects for the future: flexibility and investment
Despite poor energy, water and transport networks, six of the fastest growing economies in the world in 2018 are African. Africa is rapidly urbanising. Its workforce is growing by 12 million a year. 70% of the population is under 30 years old. By 2034, it will have a larger potential workforce than China or India. It will probably be the most economically dynamic (and most populated) continent in the coming decades.
To sustain this growth, large volumes of investment are needed, not only intra-continental: African integration must necessarily be supported by external investors. The world should look strategically towards Africa, observing its economic potential and trying to make mutually beneficial agreements. Limiting the restrictions on foreign investment, this scenario is more than plausible. A foreign capital influx could also stimulate banking systems, leading to more investment and consumer lending.
But foreign investment alone cannot be enough. It is essential that African countries build an efficient, participatory and inclusive institutional architecture so as not to leave the weaker economies behind. Without sound decision-making and respectful treatment of the economies most at risk, AfCFTA could prove to be a force for divergence rather than for cohesion.
Investing in the creation of a business environment that helps improve the productivity and skills of businesses and workers is an essential element of structured development. This should be complemented by increased public investment to extend social protection coverage, improved education and health services. To increase the impact of the trade agreement, it is also necessary to implement industrial policies, in particular those concerning SMEs and manufacturing industry. Focusing on productivity, competition, diversification and economic complexity.
