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An African grand free trade area?

Article by Foreign Policy Centre

October 19, 2011

In June 2011, African leaders unveiled concrete plans to create an African-wide free trade area when they announced that 26 African nations will join the three existing, but often overlapping regional trade blocks. Their ambition is to create a duty and quota free movements of goods, services and business people by 2016, and an Africa-wide economic and monetary area by 2025.

There are very obvious advantageous of an African free trade area. Pooling their markets may help African economies better take advantage of new growth opportunities offered by the rise of powerful new emerging powers. It may also help African economies overcome new challenges caused by the decline of some of the old industrial powers in the aftermath of the global financial crisis.

Given the debt crises in the US and the EU it becomes even more important for African countries to integrate closer and quicker, because better intra-regional trade can provide a protective buffer from global shocks. Furthermore, it may provide a protective wall to African countries to beneficiate their economies from single-commodity dominated ones and nurture new manufacturing and services industries.

Many African economies are so tiny they are unviable on their own. Pooling African economies will bring larger economies of scale and markets which has the potential of expanding production and demand. Currently African countries trade more with the rest of the world, mostly former colonial powers, than with each other.

What should be done differently to prevent the idea of an African grand free trade area turning into a grand failure?

The first requirement is political will – at the heart of many African development failures.

There are a number of regional trade blocs in Africa, all with different rules, regulations and are at different stages of integration – all which could slow the building a free trade area.

Whatever the level of integration within these regional groupings, all of them have struggled to free the movement of goods, labour and services.

There are high levels of protectionism between African countries. Restrictive trade permits requirements and frequent bans on imports from neighbours persist. Economic disparities between African countries are further obstacles. Smaller countries fear domination by bigger neighbours, while bigger ones, fear a grand free trade area would lead to domination by South African produce. Non-trade tariffs such as travel restrictions, poor physical infrastructure, incompetent public administrations and rampant corruption are major stumbling blocks.

Political instability in many African countries is a major problem. Most of African economies are one raw material or agricultural product-based economies. African countries typically export raw materials abroad and buy the finished products at higher prices.

Africa’s rising growth has mostly been because of a boost in mineral exports’, increase local demand at home due growing domestic markets fuelled by a rising African middle class, and increased trade with new emerging powers, such as China, India and Brazil. However, Africa’s current growth spurt is following the old pattern of being based on exporting raw materials instead of diversifying into manufacturing, services and value-add products. Former UN Secretary General Kofi Annan rightly calls this African growth spurt, ‘low-quality’ growth. The growth has remained “inequitable, jobless, (and) volatile” and if continued on current patterns unlikely to lead to widespread job creation and poverty reduction. A report by the Economic Commission for Africa (ECA) and the African Union (AU) released in July 2011, titled “Economic Report on Africa 2011,” urged Africans to diversify production and exports through improving “competitiveness by tackling supply-side constraints as well as improving infrastructure and productive capacities, among other things”.

Weak logistics and supply chains, and scarce bank finance are other obstacles.

Africa imports most of the manufacturing and services it could arguably produce at home from abroad – this will have to be rectified.

The challenge is for individual African countries within a grand free trade area to specialize: one country must produce what another country can’t, but needs. In fact, each African country should pick the manufacturing and service sectors they may have competitive advantages, and then trade or barter with each other. At the moment if one African country needs manufactured products, few neighbours can provide it.

Each African country should be required to cobble together an industrial policy which at its heart should have diversifying from one agricultural product or commodity to value-added products.

All the individual country industrial policies must feed into a regional industrial policy; which in turn should be connected to a continental-wide industrial policy for Africa. Developing regional supply chains for products can help African economies against global shocks, such as the current debt crises in the Eurozone and US. The bulk of the indigenous sectors of most African economies are in the informal sector, that’s also where most of the jobs are being created. A free trade zone among Africans will be useless unless it includes small traders in the informal sectors, who are often face formidable bureaucratic barriers.

The existing regional blocs should be turned into regional economic growth zones. Infrastructure – power, transport, telecommunication networks and so on – should be developed within each country, within and between the regional economic growth zones.

A continental infrastructure grid must connect the regional economic growth zones.

Up to this day most infrastructure networks in most African countries have not changed since colonialism. Colonial powers constructed infrastructure networks in the countries under their control from the small areas that produced the one commodity or agriculture product to the coast for export to the ‘mother’ country. The colonial infrastructure networks rarely connected neighbouring countries.

Sadly, African countries during the post-colonial period have left such infrastructure arrangements untouched and even unmaintained.

All the regional blocs must work towards macro-economic convergence – setting basic prudent standards for fiscal and monetary policy. Exchange rate volatility – often because of poor monetary policies – has been a particular problem in Africa.

Convergence of macro-economic policies will be a challenge given the history of African countries over-emphasising political and economic sovereignty.

Most African countries have trade agreements with former colonial powers which often undermine integration with other African countries. The European Union’s economic partnership agreements (EPAs) demand that African countries declare the EU as ‘most favourite nation’. Under the United States African Growth Opportunities Act (AGOA), the US signs trade arrangements with individual African countries – rather than with regional blocs. This undermines African regional integration and the formation of regional supply chains.

It would naïve to think that the new emerging powers such as China and India would suddenly open their markets for African products. In reality it is very difficult for African manufactured products and services – to penetrate China and Indian markets.

African countries will have to trade more smartly – together – with their new emerging market friends as well as with old industrial powers. Given the impact of the global financial crisis on industrial countries it is unlikely that high tariff barriers and subsidies in industrial nations and new emerging powers are going to decline significantly – in many cases they may become more protective and cut development aid.

It will also be silly to think that if industrial nations and new emerging powers suddenly lift tariff barriers and subsidies to African products that many African producers will be able to compete. Most African countries are uncompetitive – compared to industrial nations and some new emerging market players – when it comes to manufactures and services. However, African produce and services may perhaps be uncompetitive for whatever reasons in industrial markets – but African countries can trade these products with each other, if they off course can bring down the costs of infrastructure, red tape and corruption.

For another, the big challenge also for Africans is going to be to set out a legally binding mechanism – and penalties – to get signatories to the free trade area to stay the course. Africans will also have to set up more effective dispute resolutions to deal with inevitable trade disputes between members. Lastly, better African leadership and greater democracy remains a crucial barrier in creating an effective free trade area. African citizens – farmers, traders, civil society and individual citizens’ – must actively participate in building a grand free trade area, if it is to be durable.

William Gumede is Honorary Associate Professor, Graduate School of Public and Development Management, University of the Witwatersrand, Johannesburg. He is the co-editor of The Poverty of Ideas, Jacana.

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