Integration critical to industrialization in Africa
by Babajide Sodipo
Africa is growing. Estimates are that the continent’s population will double in the next 50 years. Concomitant to this population boom will be an increase in the total working age population. This increase in the working age population creates a window of opportunity with the possibility of higher growth arising from the “demographic dividend”. This “demographic dividend” played a role in the “Asian Miracle”, where research shows that from 1965 to 1990, the 23 economies of the East Asia region grew faster than all other regions of the world, in part due to the increased number of the working population.
On the other hand, an increase in the working age population, with scarce employment opportunities, is a recipe for social unrest and tensions. This means that, without any major structural overhaul of African economies, the current social and development challenges being faced by African countries, could significantly worsen. This has led to the renewed calls for Africa’s industrialization as well as the push for the structural transformation of the continent’s economies. Such structural transformation entails moving from commodity export dependent economies towards industrialized and diversified economies.
The supply side constraints to industrialization and the structural transformation of economies are well known and well documented. However, there is also the “demand” side of the equation which is often neglected: the markets. After products have been transformed, the industrial goods must find markets and consumers. Some of the failures of state interventions for industrialization in the past can be attributed to the lack of attention to market issues. In the present dynamic, this is where the establishment of the Continental Free Trade Area (CFTA) comes into play.
The CFTA, launched by African Heads of States in 2015, aims to create a single market for Africa in line with the overall objective of the Abuja Treaty of establishing an African Economic Community, thereby establishing a market of over a billion people with a GDP of over US $3 trillion.
The majority of African markets are small and fragmented, with populations of fewer than 20 million and economies (in terms of GDP) of less than US $10 billion, and cannot develop the economies of scale to enable them produce competitively. This means that most of the firms never grow beyond their markets, and the case for attracting substantial and transformative investment flows becomes more difficult, as the markets are often too small to justify the returns on the investments.
Market size is also a challenge to the traditional approaches to industrialization on the continent. Some of the “infant industries” that are being protected will never grow due to the sizes of the domestic markets they operate in. Protecting an infant industry in a market of about 2 million people is very different from doing the same in a market of 80 million, 300 million or even a billion people. For example, Nigeria, with the largest population on the continent of about 180 million, cannot be compared with China at 1.35 billion and India at 1.25 billion, and Nigeria is by no means the average African country in terms of size as described above.
The establishment of the CFTA, therefore, is an attempt to address this challenge head on, affirming the principle of “One Africa, One market”. The CFTA will not, by itself, automatically integrate the entire continent, but it will assist in the facilitation of other continental priorities such as the development of regional infrastructure and the free movement of people, which are necessary to achieve integration.
While substantial progress has been achieved with the Regional Economic Communities (RECs), it is clear that the existing RECs are still not large enough to provide the economies of scale necessary to make African products competitive globally.
Studies have also shown that African markets are the major markets for African manufacturers. African exports to other African countries are more diversified and industrialized than exports to the rest of the world. For example, both Nigeria’s and South Africa’s exports to the Economic Community of West African States (ECOWAS) and to the Southern African Development Community (SADC), respectively, are much more diversified than their exports to the rest of the world in terms of manufacturers. However, this is also because most of these manufactured products are still not competitive on the global market.
For the CFTA to fulfill its promise in helping Africa to industrialize, some deliberate policy choices have to be made to create a conducive environment for the continent’s participation in global value chains, and in particular on rules of origin (RoO) and trade in services.
With regard to the RoO, there must be harmonization of these rules across the entire continent if Africa is to truly have a single market. While there are large areas of overlaps across products, there are some significant differences across some of the RECs, particularly with the SADC RoO. Also, the RoO must be as flexible and pragmatic as possible. Restrictive RoO tend to constitute trade barriers more than they facilitate trade.
As noted by the ARIA VI report, the CFTA RoO must take into account the reality of the continent’s dependence on imports, particularly capital and intermediate goods for manufacturing, as well as the major imbalances in development and productive capacity across the continent. The RoO should not simply favour the countries that are larger and which have more productive capacity for producing the components that go into manufactured goods. It must take into account the fact that other than a handful of countries, the vast majority of CFTA members will be countries that have very limited productive capacity. The CFTA RoO cannot afford to have onerous local content and value addition requirements, as that will simply disqualify the majority of African countries from being able to participate meaningfully in the CFTA.
With the increasing fragmentation of production manufacturing value chains, RoO that restrict the possibility of sourcing inputs globally will only work to shut Africa out of the global value chains.
With reference to services, the increasing “servicification of manufacturing”, referring to the role of services as inputs in manufacturing, emphasizes the importance of having a competitive services sector as a bedrock for industrialization. Services increasingly make up a larger share of the value of finished manufactured products. Consequently, the need for a competitive services sector is critical to any discussion on value addition on the continent include – both in terms of enabling products to be cost competitive and creating opportunities for value addition.
It is in this regard that the trade in services element of the CFTA negotiations is as important for Africa’s industrialization as is the trade in goods negotiations. The CFTA thus offers an opportunity for African countries to develop a more competitive services sector, as well as increase their services exports.
These are just some of the issues for African policy-makers to consider as they negotiate the CFTA. While, undoubtedly, the CFTA sets up a complex and heavy agenda for negotiations; more importantly, it provides an opportunity to address some of the issues that have bedeviled the continent’s development in the past decades, and perhaps it offers answers to some of the questions about the industrialization and structural transformation of the continent. The achievement of the CFTA in 2017 and the creation of a single African market will ensure the realization of the benefits of industrialization and Africa’s demographic dividend.
Babajide Sodipo is the Senior Trade Adviser to the African Union Commissioner for Trade and Industry, working on strategic continental trade and investment issues. He has previously provided advice on trade policy, investment and regional integration issues and policies in East and West Africa, working as an adviser with the Rwandan and Nigerian governments.