Sponsored Contents | Nov 22,2021
February 26 , 2022
By Hippolyte Fofack ( Hippolyte Fofack, chief economist and director of Research at the African Export-Import Bank (Afreximbank). )
While many observers have touted the African Continental Free Trade Area (AfCFTA) as a game-changer for the continent, trade liberalisation alone will not necessarily guarantee economic success. Member countries must also implement robust trade facilitation measures, and engage with external partners as a unified trading bloc, writes Hippolyte Fofack, chief economist and director of Research at the African Export-Import Bank (Afreximbank).
The African Continental Free Trade Area (AfCFTA), which entered into force on January 1 last year, promises to accelerate the diversification of the region’s economies and reduce the impact of commodity-price cycles on growth. Whereas Africa’s external trade is dominated by primary commodities and natural resources, the first shipment under the AfCFTA – from Ghana to South Africa – comprised manufactured goods of the sort that largely drive intra-African trade.
Many therefore hope that the AfCFTA – by creating a single market of 55 countries with a total population of more than 1.3 billion and a combined GDP of 3.4 trillion dollars – will catalyse industrialization as firms take advantage of economies of scale to spread the risk of investing in smaller markets. To that end, the trade agreement will eliminate tariffs on 90pc of goods (the ultimate goal is 97pc liberalisation).
The AfCFTA will likely boost foreign direct investment across Africa – empirical evidence elsewhere shows that joining a free-trade area could increase it by around a quarter – and shift its emphasis from natural resources toward labour-intensive manufacturing industries. Moreover, the pact has the potential to transform African economies, significantly increase the continent’s share of global trade, and strengthen its bargaining power in international trade negotiations.
But while many have touted the AfCFTA as a game-changer for Africa, trade liberalisation alone will not necessarily guarantee economic success.
To be sure, the agreement has rightly attracted much attention in academic and policy circles. The World Bank, the International Monetary Fund, the United Nations Conference on Trade & Development, and the African Export-Import Bank have all compiled extensive studies on the AfCFTA’s potential impact. And the Journal of African Trade recently published a special issue on “The AfCFTA and African Trade,” which I co-edited with Andrew Mold of the UN Economic Commission for Africa.
All these analyses point to the agreement’s significant and positive impact on economic development. Specifically, the empirical results according to computable general equilibrium models – which allow for trade-diverting and trade-creating effects of tariffs and non-tariff shocks by exploiting countries’ comparative advantage and price adjustments – are highly encouraging. Aggregate headline estimates derived from these models show that the AfCFTA would increase Africa’s GDP by 0.5pc after full implementation in 2045, relative to a scenario without continental trade integration.
Real wages would increase for both skilled and unskilled workers, and especially for the latter, suggesting a shift toward more inclusive growth. The World Bank estimates that the AfCFTA could lift 30 million people out of extreme poverty and around 68 million out of moderate poverty by 2035, with women benefiting more than men. Trade integration could also have a significant impact at the household and corporate level: Combined consumer and business spending is projected to reach 6.7 trillion dollars by 2030.
Trade within Africa is expected to grow strongly under the AfCFTA, with intracontinental exports increasing by 34pc (equivalent to around 133 billion dollars annually) compared to a scenario without the agreement. Moreover, around two-thirds of intra-African trade gains will likely be realised in the manufacturing sector – historically the most effective elevator out of poverty. This would set the stage for a welfare-enhancing and mutually reinforcing relationship between intraregional trade and industrialization, resulting in the sustainable growth of well-paid manufacturing jobs while broadening countries’ tax bases and improving their external accounts.
But substantial non-tariff barriers, regulatory differences, and divergent sanitary, phytosanitary, and technical standards increase the costs of cross-border trade within Africa by an estimated 14.3pc, well above the average tariff of 6.9pc. Removing these constraints and deepening the integration of African businesses into global value chains will significantly boost intra-African trade and drive growth. The World Bank estimates that full implementation of the AfCFTA could raise Africa’s real income by seven percent (about 450 billion dollars) by 2035, with trade facilitation measures to cut red tape and simplify customs procedures responsible for 292 billion dollars of this increase.
Overcoming Africa’s chronic infrastructure deficit – both physical and digital – will boost the power of trade creation and help to ensure the successful implementation of the AfCFTA. By tackling the continent’s supply-side constraints, policymakers can enhance both production and logistics in a region with more landlocked countries (16) than any other. As investors seek to capitalize on the economies of scale offered by the AfCFTA, integrating markets and improving connectivity must be a top priority.
Clarifying the AfCFTA’s rules of origin – which determine whether products are duty-free under the agreement – also is key to accelerating industrialisation and the development of regional value chains. Despite the challenges posed by COVID-19, negotiators have made significant progress on the rules-of-origin agreement, which should be concluded later this year. That will pave the way for phase-two negotiations on key drivers of future growth, including protocols on investment, competition policy, and intellectual property rights.
But, as the rush to conclude bilateral trade agreements with third-party countries suggests, Africa’s most important trade-integration challenge may be the perennial one of putting the region’s collective interest first. Although the AfCFTA does not bar member countries from entering such negotiations, bilateral deals with third parties could affect African trade patterns and set precedents for regional trade and investment rules. In practice, they could lead to trade deflection, given that the AfCFTA’s most-favoured-nation clause automatically extends tariff concessions granted to a third party to AfCFTA members.
As Jeffrey Sachs has argued, “Without a doubt, if Africa becomes economically integrated, it will be a global leader and the largest economic region in the world.”
As of this writing, 41 countries have ratified the AfCFTA. But if the pact is to become the launchpad for Africa’s deeper integration into the global economy, governments must complement trade liberalisation with robust trade facilitation measures, and strengthen regional coordination in order to engage with external partners as a unified trading bloc.
PUBLISHED ON Feb 26,2022 [ VOL 22 , NO 1139]
Sponsored Contents | Nov 22,2021
Fortune News | Nov 09,2019
Fortune News | Jun 04,2022
Fortune News | Oct 23,2018
Viewpoints | Jun 22,2019
Radar | Nov 02,2019
Fortune News | Nov 13,2021
Fortune News | Sep 08,2019
Commentaries | Feb 01,2019
Photo Gallery | 53175 Views | May 06,2019
Fortune News | 46026 Views | Jul 18,2020
Photo Gallery | 44933 Views | Apr 26,2019
Fortune News | 44793 Views | Sep 01,2021
Commentaries | Jul 02,2022
Life Matters | Jul 02,2022
My Opinion | Jul 02,2022
Sunday with Eden | Jul 02,2022
Agenda | Jul 02,2022
Editorial | Jul 02,2022
July 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
November 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
November 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
October 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
The pandemic, armed conflicts and natural disasters have again brought the importance...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country’s most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or tw...
July 2 , 2022
After nearly two years since the civil war broke out in northern Ethiopia, adversarie...
June 25 , 2022
It is not the best of times to be in charge of governance in Ethiopia, whether at the...
June 18 , 2022
Some of Ethiopia's economic policymakers may take solace from realising that inflatio...
June 11 , 2022
The stereotype many people have of parliamentarians is as clueless seat fillers who exist to rubber stamp legislative bi...
PM Abiy Ahmed (PhD) at a Gala Dinner Called for the Awarding of the Félix Houphouët-Boigny Peace Prize
May 6 , 2019
A couple of years ago, I was having a conversation with a friend and mentor who has...
The advertising industry in Ethiopia has come a long way. They are not only getting better and more creat...
In an economy that has slowed, where consumers are hammered by inflation, and the private sector is teetering on edge, one industry has a br...
July 2 , 2022 . By TSION HAILEMICHAEL
Getu Gelete has struck a deal to acquire a 40pc stake in Habesha Cement S.C., buying out Pretoria Portlan...
July 2 , 2022 . By BERSABEH GEBRE
Lake Ayalew, minister of Revenues, moved to address complaints about inflationary distortions on capital...
July 2 , 2022 . By BERSABEH GEBRE
The federal government is set to roll out a single-account treasury system for the coming budget year, co...
Or see contact page