Africa can’t prosper without regional trade

On May 29, 2024, 8:00 AM

Despite aspirational narratives about “Africa Rising,” the continent has yet to achieve the prosperity increasingly found across large swaths of Asia and many other parts of the world. To attain genuine, inclusive prosperity (beyond aggregate GDP growth), Africa needs stronger trade performance, without which no country or continent has lifted its people out of poverty. Yet Africa’s share of world trade has long been stuck at around 3%.

Rather than continuing to depend on “global trade” with advanced industrial economies – a pattern that has kept it poor and undeveloped for the past six decades – Africa needs to build its intra-regional trade. We can think of this as Africa’s second decolonization. It is a necessary first step toward equipping the continent to engage with the world economy on its own terms. How Africa trades, and what it trades, will determine whether and how fast it can escape from poverty.

Most of what we call global trade is, in fact, regional. The continents that have prospered through trade have done so by trading with themselves. Nearly 70% of all trade by European countries stays within Europe, as does 60% of all Asian trade and 40% of North American trade. By contrast, only 13% of all of Africa’s trade is intra-African.

Moreover, African countries export mainly raw commodities – either natural resources or agricultural products – to their trading partners in Asia, Europe, and North America, from whom they then import vast amounts of finished, value-added goods. These are often more expensive and sophisticated products made from those same raw commodities. Examples include refined petrol from crude oil, chocolate from cocoa, jewels from raw diamonds and gold, and mobile telephones made with cobalt and coltan.

In recent decades, global trade has lifted some 1.5 billion people out of poverty worldwide. But with such disadvantageous terms of trade, it is little wonder that Africa has been largely absent from this story.

But Africa’s position is also complicated by two other realities. First, industrialized countries have been erecting protectionist barriers not just against value-added products from Africa, but also increasingly against one another. Second, over 70% of global trade is in manufacturing “value chains” – manufactured components of final products – whereas agriculture, in which Africa mainly trades, accounts for less than 10%.

Since the Doha Round of World Trade Organization negotiations to expand market access for African agricultural products collapsed, the answer is to boost regional trade. Given large volumes of unreported informal trade in commodities in several sub-regions across the continent, Africa can focus on building its own regional value chains.

This necessary pivot is already underway. In 2018-19, African governments formed a regional trading bloc through the African Continental Free Trade Area (AfCFTA), which builds on existing regional institutions such as the Economic Community of West African States (ECOWAS) and the East African Community (EAC). With 47 of Africa’s 55 countries having ratified the AfCFTA treaty, the agreement establishes what is potentially the world’s largest free-trade zone, comprising 1.3 billion people.

The AfCFTA aims to remove tariff barriers between African countries and create a single market for goods and services. The World Bank projects that, if fully implemented, it could lift 50 million Africans out of extreme poverty by 2035 and increase incomes by 9% ($571 billion).

But the path to implementation runs through the private sector, and three obstacles stand out. First, there are concerns that removing tariffs will create income shortfalls for African governments. Second, currency convertibility in the absence of a global currency like the US dollar or the euro remains a challenge. And third, many barriers to doing business in and between African countries remain.

Fortunately, Afreximbank, the continent’s multilateral trade finance bank, has stepped in to plug the income gap with the creation of an AfCFTA Adjustment Fund, and it has created a novel payments system for settling intra-African commerce in local currencies.

That leaves the problem of hostile business environments, which are marked by corruption, inefficient port systems and logistics, multiple taxation regimes, weak property rights, and insecurity in regions burdened by terrorism and extremism. To address these issues, private-sector coalitions, such as the Africa Private Sector Summit and the Pan African Chamber of Commerce and Industry, have been pressing African governments to adopt a private-sector bill of rights. This would help “to ensure a predictable, conducive investment climate in Africa,” thus creating the conditions for growth in intra-regional trade.

Only Africans can create African prosperity. The path to wealth on the continent may not always be smooth, but at least it is clearly marked. It runs through regional trade, a structural shift from raw commodities to value-added products, and a concerted effort to break down barriers to doing business.

Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria, is Chair of the Board of Africa Private Sector Summit and President of the Institute for Governance and Economic Transformation.

Story By Kingsley Moghalu