Will the diversification of exports deliver a great economic deal for African countries?

Africa is a continent of immense contrasts. It has vast reserves of natural resources but suffers from severe economic inequality.

Nevertheless, the African Continental Free Trade Agreement (AfCFTA) has brought some reasons for optimism as it presents an important component for economic transformation.

Yet, such development must be coupled with clear regulations and guidelines if we are to have any hope of attaining the primary goal of boosting intra-African trade. This, from the beginning should be pioneered with the practical implementation of normative frameworks to support the course.

Part of this normative framework is a combination of innovative trends on exported products and intra-country trade which ought to be shaped by policies at the local, national and global levels. In order to optimally leverage on AfCFTA for collective progress and prosperity, we need governance frameworks, protocols and policy systems that ensure inclusive and equitable benefits. Most importantly, we need to embrace the fact that there is a disconnect when it comes to the goods exported within African countries by African countries vis-aʹ-vis the goods exported by African countries outside the continent.

To ensure that the member countries reap the benefits that come with AfCTA, this asymmetry ought to be addressed with utmost urgency.

According to a study by United Nations Conference on Trade and Development (UNCTAD), the share of intra-African exports as a percentage of total African exports has increased from about ten percent in 1995 to around seventeen percent in 2017. Meanwhile, only 13 per cent of Africa’s world imports were intra-Africa imports. With the AfCFTA, these numbers could be higher. However, the AfCFTA agreement will only succeed if countries produce what their trading partners are interested in buying. The AfCFTA should be about promotion of made-in-Africa products and with this, policies to promote manufacturing and value-addition are key.

A recent study conducted by World Bank estimate that Sub-Saharan Africa’s manufacturing output as share of a country’s economy is ten percent significantly lower than other developing regions. This means that the potential to increase manufacturing and value addition is high.

Take the example of the European Union (EU). EU Member States as a whole have traded goods more with other Member States than with countries outside the EU. The share of intra-EU exports as a percentage of total EU exports is 69% according to UNCTAD 2017 data.

In the EU internal market, international trade in goods is mainly manufactured products which constituted 80 % of total intra-EU exports of goods in 2017 as per Eurostat data. Current data from UNCTAD shows that intra-African trade has relatively higher industrial content than African countries’ trade with the rest of the world and this is promising.

However, Intra-African trade is currently dominated by a handful of countries, selling a handful of products. In 2017 UNCTAD data, 53 per cent of intra-Africa exports in 2017 were products exported from South Africa (34 per cent), Nigeria (7 per cent), Egypt (5 per cent), Ivory Coast (4 per cent) and Morocco (3 per cent) respectively.

As such, diversity of exports is important. The potential with diversification is significant because when countries manufacture a larger variety of products, there is a high chance that their trading partners will want those products. At the aggregate level, the export structure of African countries is generally dissimilar as evidenced by UNCTAD’s Export Similarity Index (ESI) which measures the similarity in the sectoral structure of exports. This means that there is sufficient scope for expanding intra-African trade.

While the issue of exports is resolved, it is also important to guard against the ‘race to the bottom’ where countries compete to offer the lowest tax rates and most attractive tax incentives, and in the process destroy their tax base. For policy makers, the dilemma lies in finding the right mix of accelerators, combining regulatory frameworks and government incentives that will create an investors heaven and in the process generate an economic boom that lifts the region. The hope is that with the AfCFTA, introducing lower tax rates will trigger a virtuous cycle of increased investments which will in turn drive the structural transformation of economies in the African countries.

With the right mix of accelerators – including regulatory frameworks and making available the right produce for exportation, – AfCFTA can lead to the economic transformation of individual member countries while simultaneously enhancing the quality, equity and sustainability of its own growth and development outcomes.

Anita Kundy and Aimee Dushime are Mandela Washington Fellows at Andrew Young School of Policy Studies (AYSPS).

The views and opinions are those of the authors and do not necessarily represent the views and opinions of AYSPS.

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