## tiiaea

## Source details

**Canonical URL:** [tiiaea](https://www.imf.org/-/media/files/publications/dp/2023/english/tiiaea.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/dp/2023/english/tiiaea.pdf.md)
- [Structured JSON version](/-/media/files/publications/dp/2023/english/tiiaea.pdf.json)

---

### Executive Summary — Overview and context
- The African Continental Free Trade Area (AfCFTA) was created in 2018 and established the world’s largest free trade area by population (1.3 billion) and with a combined GDP of $3 trillion as of 2022.
- AfCFTA objectives:
  - Expand intra-African trade in goods and services.
  - Increase competitiveness through economies of scale and diversification.
  - Promote industrialization and structural transformation.
  - Lay the foundation for a future customs union and single market.
- The analysis assesses prospects for African trade integration amid climate change, geopolitical fragmentation risks, technological progress, and Africa’s prospective demographic boom, and evaluates policies to maximize AfCFTA gains combined with complementary reforms.

### State of trade and integration in Africa — key patterns and constraints
- Aggregate and compositional trends:
  - Trade in Africa expanded from 49 percent of GDP in 2000 to 53 percent by 2019.
  - Intra-regional exports increased from 11 percent to 15 percent of total exports.
  - Africa’s exports to China and India rose from 5 percent of total African exports in 2000 to 23 percent by 2019.
  - The share of exports to the United States and the European Union declined from 65 percent in 2000 to 38 percent by 2019.
  - Services account for 16 percent of total exports in Africa compared with 25 percent globally; traditional services (travel and transport) account for 78 percent of services exports.
- Main constraints to deeper trade and GVC integration:
  - Fragmented trade policy landscape with multiple RECs, overlapping memberships, uneven enforcement.
  - Average import tariffs on intra-African trade of 6 percent (higher within some RECs: AMU 9 percent average within-bloc; ECCAS 12 percent; tariffs are zero within SACU, CEMAC, and WAEMU).
  - NTMs estimated to be equivalent to an import tariff of 18 percent on average for intra-African trade.
  - Challenging trade environment: gaps in transport networks, customs and border processes, telecommunication infrastructure, access to finance, human capital, institutions, and restrictive product and labor market regulations.
  - Significant informal cross-border trade that is hard to measure.
- Implication: Potential gains from building regional value chains, unifying trade policy, and strengthening the trade environment.

### AfCFTA implementation status and legal commitments (reported)
- Signatures and ratifications:
  - 2018: 44 African countries signed the agreement.
  - Agreement entered into force in May 2019 after ratification by 22 countries.
  - As of the reporting date: 54 African countries have signed (of 55, except Eritrea), and 46 have ratified.
- Goods liberalization commitments:
  - Eliminate tariffs on 90 percent of non-sensitive product lines within five years (10 years for LDCs) from January 1, 2021.
  - 7 percent of tariff lines (sensitive goods) to be liberalized within 10 years (13 years for LDCs).
  - Each member may exclude up to 3 percent of tariff lines that represent no more than 10 percent of its intra-African imports.
  - By July 2022, rules of origin agreed for 88 percent of goods; 46 countries submitted tariff schedules.
  - Commitments to reduce NTMs via institutional structures, reporting, and monitoring tools.
- Services liberalization commitments:
  - Protocol covers all services sectors and all modes of supply.
  - Member country proposals under way for national treatment and market access in business services, communication, transportation, tourism, and financial services; 25 countries have submitted services proposals.
- Phase II negotiations include intellectual property rights, investment protection, competition policies, digital trade, and women and youth in trade.
- Trade under AfCFTA rules started January 2021; commercially meaningful trade began October 2022 under the “Guided Trade Initiative” by seven pilot countries.

### Quantified impacts — AfCFTA scenarios and main numeric results
- Empirical framework: gravity model for bilateral merchandise trade flows with tariffs, NTMs, geographic/cultural distance, and trade-environment indicators (trade infrastructure, financial development, security).
- AfCFTA (baseline) scenario assumptions:
  - Tariffs on intra-African trade cut by 90 percent (average weighted tariffs cut to one-tenth).
  - NTMs cut by 50 percent.
  - Impacts on bilateral goods trade:
    - Tariff reductions alone: 7 percent increase.
    - NTM reductions alone: 12 percent increase.
    - Combined tariff and NTM reductions: 15 percent increase.
  - Country-level openness:
    - Median African country: trade openness rises by just under 1 percentage point of GDP.
    - One-quarter of small countries (population < 10 million): openness increase > 4 percentage points.
    - One-quarter of landlocked countries: openness increase > 3.5 percentage points.
  - Median real per capita income increase: 1.25 percent (assuming 1 percentage point increase in trade openness raises long-term real per capita income by 1.25 percent).
- AfCFTA+ scenario assumptions:
  - Adds uniform step increases in trade infrastructure, financial development, and security indices to bring African medians in line with the median of the next-best performing FTA (ASEAN for trade infrastructure and security; MERCOSUR for financial development).
  - Impacts on bilateral goods trade:
    - Median bilateral trade flow between African countries grows by 53 percent:
      - 15 percentage points from tariff and NTM reductions.
      - 38 percentage points from improvements in the trade environment.
  - Impacts on trade with the rest of the world:
    - Median African exports to the ROW grow by 29 percent.
    - Median African imports from the ROW grow by 7 percent.
  - Median real per capita income gains: 10.6 percent (long-term, within 10 years following policy change).
  - World Bank estimates under broadly similar scenarios: could lift 30–50 million people from extreme poverty.
- Services trade impacts from trade-environment improvements:
  - Strengthening trade infrastructure: services exports +23.6 percent.
  - Strengthening telecommunications infrastructure: services exports +16.3 percent.
  - Financial development improvement: services exports +10 percent.
  - Simultaneous improvement in all three indicators: services exports + about 50 percent.
  - Annex services policy experiment: combined improvement in three indicators to MERCOSUR median yields 26.6 percent growth in services exports with broader controls; 47.9 percent without broader controls.
- GVC integration:
  - Average trade agreement associated with a 39 percent increase in backward and forward linkages.
  - The average trade agreement in Africa associated with a 5 percent increase in bilateral backward and forward linkages (RTA * Africa interaction).
  - Country-specific factors account for the largest portion of gaps in GVC integration versus ASEAN/NAFTA/EU; trade agreements are the second-largest share.
  - GVC integration requires trade barriers to fall below a low threshold because intermediate inputs cross borders multiple times.

### Empirical elasticities, gravity, and annex regression highlights
- Trade elasticity and coefficients:
  - A 1 percentage point reduction in weighted average tariffs between a pair of African countries boosts bilateral goods trade by about 2 percent.
  - Trade-agreement dummy implies the average trade agreement raises bilateral trade flows by approximately 30 percent.
  - The tariff-equivalent impact of NTMs between African countries is three times as large as the impact of current tariffs.
  - A one percent reduction in the weighted average number of bilateral NTMs increases bilateral trade flows by 0.2 percent.
- Gravity regression core coefficients (selected exact estimates from Annex Table 2.1 and 2.2):
  - Log distance coefficients range across specifications, for example −0.836 (0.029)***, −0.933 (0.026)***, −0.736 (0.027)***, −0.761 (0.027)***, −0.686 (0.034)***.
  - Log (1 + bilateral tariff): −2.500 (0.785)*** (column (4)); −1.981 (0.726)*** (column (5)).
  - Log (1 + number of bilateral NTMs): −0.193 (0.042)*** (column (5)); −0.183 (0.042)*** (Annex Table 2.2).
  - Log exporter GDP and log importer GDP: 0.861 (0.021)*** and 0.826 (0.023)*** respectively in core regressions.
  - Interaction terms showing distance amplifies the positive effect of trade infrastructure and financial development on trade: Log distance * Pair average trade infrastructure 0.440 (0.227)*; Log distance * Pair average financial development 0.841 (0.235)***.
- Annex Table 3.1 services regression highlights (exact coefficients, columns (1)–(4)):
  - Trade infrastructure: (1) 0.018*** (0.003); (2) 0.015*** (0.002); (3) 0.011*** (0.003); (4) 0.008** (0.003).
  - Telecommunications infrastructure: (1) 0.018*** (0.002); (2) 0.015*** (0.002); (3) 0.009*** (0.003); (4) 0.008*** (0.003).
  - Credit to private sector/GDP: (2) 0.006*** (0.001); (4) 0.004*** (0.001).
  - Log GDP: (1) 0.692*** (0.023); (2) 0.678*** (0.023); (3) 0.705*** (0.025); (4) 0.695*** (0.024).
  - Landlocked dummy coefficients indicate services exports are lower for landlocked countries: for example (1) −0.177* (0.093); (3) −0.257*** (0.094).
  - R-squared values in services regressions: 0.884, 0.890, 0.892, 0.896 (by column).

### Firm-level determinants of export propensity and GVC participation (Box 2 evidence)
- Dataset: World Bank Enterprise Survey covering >96,000 non-agriculture formal firms (about 24,000 firms in 45 African countries) between 2010 and 2022.
- Exporter and GVC participation definitions:
  - Exporter dummy = 1 if firm exports at least 10 percent of sales.
  - GVC participation dummy = 1 if firm exports ≥ 10 percent of sales and sources ≥ 10 percent of inputs from abroad.
- Key firm- and environment-level determinants:
  - Customs efficiency (clearance times) is especially important for GVC participation.
  - Other significant determinants: access to finance, infrastructure, human capital, competition from informal firms, rent seeking in government procurement.
- Policy determinants benchmarked to ASEAN show potential increases in African firms’ export propensity, GVC participation, and export intensity if determinants improve.

### Policy recommendations and implementation priorities
- Core trade-policy priorities:
  - Implement AfCFTA Phase I commitments fully: complete rules of origin for remaining 12 percent of goods; submit tariff schedules; advance services commitments in remaining sectors; systematically stocktake and reduce NTMs.
  - Advance Phase II (intellectual property, investment protection, competition policies, digital trade, women and youth in trade) and prepare draft protocols already developed for some areas.
  - Harmonize customs and border processes, simplify and automate customs, publish regulations online, adopt electronic payments of duties, and address trade-corridor obstacles.
- Complementary trade-environment reforms:
  - Substantially improve trade infrastructure (roads, rail, ports, air), telecommunications infrastructure, customs efficiency, and access to finance.
  - Improve domestic security and institutional quality.
  - Promote regulatory alignment: goods and services regulation, competition law, intellectual property, e-commerce rules.
  - Facilitate digitalization: electronic single-window systems, cargo scanners, electronic cargo tracking, cross-border payment systems, PAPSS interoperability.
- Macroeconomic and fiscal measures:
  - Sustain macroeconomic stability, maintain debt and external sustainability, avoid overvaluation of exchange rates, and support flexible exchange rates where appropriate.
  - Mobilize domestic revenue via broadening the tax base and improving tax administration to offset lower tariff revenue.
  - Phase out reliance on import tariffs for protection or revenue; phase out ad hoc export restrictions.
  - Strengthen customs administration to enhance revenue collection while maximizing AfCFTA benefits.
- Social and labor policies:
  - Invest in physical and human capital and vocational training to enable workers and firms to benefit from expanded trade and GVC integration.
  - Modernize social safety nets to protect the most vulnerable during transitions, using targeted, fiscally sustainable mechanisms (e.g., cash transfers during food price spikes).
- Digitalization and implementation enablers:
  - Improve ICT infrastructure, electricity supply, digital skills, and cybersecurity resilience.
  - Ensure effective governance and managerial reforms to realize digitalization benefits.
- Use the AfCFTA Secretariat as a multilateral anchor to support negotiation, implementation, credibility, and compliance.

### Resilience, climate, demographics, and technological context
- Climate and trade implications:
  - Rising average temperatures and more frequent natural disasters lower growth and exacerbate food insecurity; agriculture is particularly vulnerable.
  - Climate mitigation policies may reduce demand for fossil fuels, affecting hydrocarbon-exporting countries.
  - Regional trade integration can support diversification, resilience, and cross-border flows of climate-vulnerable goods.
- Geopolitical fragmentation:
  - Global protectionism and rebalancing of supply chains raise fragmentation risks; AfCFTA can help diversify export destinations and import sources and reduce export destination concentration.
- Demographic and technological opportunities:
  - Africa’s working-age population projected to rise from about 800 million in 2022 to more than 1.5 billion by 2050.
  - Median dependency ratio expected to decline from 0.77 currently to 0.60 by 2050.
  - Digitalization and technological progress can raise productivity and services trade; e-commerce and digital customs/payments reduce trade costs.
  - Job creation requires upgraded education and vocational training, private-sector-led growth, and modernized social safety nets.
- Social safety net trends:
  - Average number of new social safety net programs launched in Africa each year rose from 7 in 2001–09 to 14 in 2010–15.
  - Every African country has at least one social safety net program.

### Conclusions — synthesized implications
- Implementing AfCFTA tariff and NTM commitments combined with comprehensive trade-environment reforms could:
  - Significantly boost intra-African and overall trade (median bilateral trade +53 percent under AfCFTA+).
  - Raise incomes substantially (median real per capita income +1.25 percent under AfCFTA; +10.6 percent under AfCFTA+).
  - Support industrialization, diversification, services export growth (services exports up to about +50 percent under broad improvements), and GVC integration.
  - Increase resilience to climate, geopolitical, and commodity shocks and help lift millions out of extreme poverty (30–50 million referenced under similar World Bank scenarios).
- Realizing these benefits requires: full AfCFTA implementation, far-reaching improvements in trade infrastructure and facilitation, financial development, regulatory harmonization, digitalization, macroeconomic stability, and targeted social protection.

*Source: Executive Summary and chapter extracts from “Trade Integration in Africa” (IMF Departmental Paper DP/2023/003).*

### Executive Summary ...............................................................................................vii

### Executive Summary

### Overview and Context
- The African Continental Free Trade Area (AfCFTA) was created in 2018 and established the world’s largest free trade area by population (1.3 billion) and with a combined GDP of $3 trillion as of 2022.
- AfCFTA’s objectives include expanding intra-African trade in goods and services, increasing competitiveness through economies of scale and diversification, promoting industrialization and structural transformation, and laying the foundation for a future customs union and single market.
- The paper examines prospects for African trade integration amid climate change, geopolitical fragmentation risks, technological progress, and Africa’s prospective demographic boom, and it assesses policies to maximize gains from AfCFTA implementation combined with complementary reforms.

### State of Trade and Integration in Africa
- Recorded cross-border trade growth has been modest, with limited growth in merchandise trade and an unchanged share of services trade in GDP.
- Africa’s exports to the rest of the world are dominated by commodities; intra-African trade is more diversified and contains a larger share of processed goods.
- Key constraints to deeper trade and GVC integration include:
  - A fragmented trade policy landscape with multiple regional economic communities and still substantial tariff and nontariff measures (NTMs).
  - A challenging trade environment: gaps in transport networks, customs and border processes, and access to finance.
  - Significant informal cross-border trade that is difficult to measure.
- These patterns indicate potential gains from building regional value chains, unifying trade policy, and strengthening the trade environment.

### Quantified Impacts of AfCFTA Implementation
- Baseline AfCFTA tariff and NTM reductions:
  - A cut in tariffs on intra-African trade by 90 percent and NTMs by half could:
    - Increase the median merchandise trade flow between African countries by 15 percent.
    - Increase median real per capita GDP by 1.25 percent.
- AfCFTA plus comprehensive trade-environment reforms:
  - Combining AfCFTA implementation with substantial improvements in the trade environment could:
    - Increase the median merchandise trade flow between African economies by 53 percent.
    - Increase trade with the rest of the world by 15 percent.
    - Raise real GDP per capita in the median African country by more than 10 percent.
  - World Bank estimates of a broadly similar growth scenario suggest this would help 30–50 million people in Africa emerge from extreme poverty.
- Trade composition and value chains:
  - Broad-based reforms would shift trade toward more sophisticated products and support integration into regional and global value chains.
  - Improvements in the trade environment would boost services exports by about 50 percent.

### AfCFTA Implementation Status and Commitments (as reported)
- Signatures and ratifications:
  - In 2018, 44 African countries signed the AfCFTA agreement.
  - The agreement entered into force in May 2019 following ratification by 22 countries.
  - As of the reporting date, 54 African countries have signed on (of 55, with the exception of Eritrea), and 46 have ratified the agreement.
- Goods liberalization commitments:
  - Signatories agreed to eliminate tariffs on 90 percent of non-sensitive product lines within five years (10 years for least developed countries [LDCs]) from January 1, 2021.
  - 7 percent of tariff lines (for sensitive goods) are to be liberalized within 10 years (13 years for LDCs).
  - Each member may exclude from liberalization no more than 3 percent of tariff lines that represent no more than 10 percent of its intra-African imports.
  - By July 2022, rules of origin had been agreed for 88 percent of goods (remaining goods relate to automobiles, textiles, and clothing), and 46 countries had submitted their tariff schedules.
  - Signatories have agreed to reduce nontariff measures via institutional structures, reporting, and monitoring tools.
- Services liberalization commitments:
  - A protocol provides for comprehensive liberalization covering all services sectors and all modes of supply.
  - Member countries are making proposals for national treatment and market access in five key services sectors—business services, communication, transportation, tourism, and financial services.
  - So far, 25 countries have submitted their services proposals.
- AfCFTA also aims to harmonize regulations (goods and services), investment regimes, intellectual property, competition, digital trade, and to establish a dispute settlement mechanism and institutional framework for implementation.

### Policy Recommendations and Complementary Reforms
- To realize and sustain the gains from AfCFTA, complementary policies are essential:
  - Improve the trade environment: transport and telecommunications infrastructure, customs and border processes, access to finance, and domestic security to reach levels comparable to other regional FTAs.
  - Invest in physical and human capital to enable firms and workers to take advantage of expanded trade and integration into GVCs.
  - Strengthen macroeconomic stability and a business environment conducive to private sector-led growth.
  - Modernize social safety nets to protect and efficiently target the most vulnerable during the transition in a fiscally sustainable way.
  - Implement “behind-the-border” measures, including harmonization of regulatory frameworks and facilitation of digital trade, to support deep integration.

### AfCFTA as a Strategy for a Changing Global Environment
- Greater trade openness would help countries adapt to climate change and strengthen food security by improving availability and affordability of food supplies.
- More diversified, broad-based trade would reduce the impact of disruptions in specific markets and products arising from shifts in global trade patterns.
- Trade, combined with technological progress and digitalization, and a rapidly growing labor force, can create new and higher-paying jobs.
- Regional trade integration enhances resilience to shocks, including those from natural disasters and geopolitical fragmentation.

### Conclusions
- Implementing the AfCFTA, together with comprehensive reforms to the trade environment and supporting policies, could significantly boost intra-African and overall trade, raise incomes, support industrialization and diversification, and improve resilience.
- Realizing these benefits requires both trade policy implementation and sustained complementary reforms in infrastructure, regulation, human capital, social protection, and macroeconomic and institutional frameworks.

*Source: Executive Summary, “Trade Integration in Africa” departmental paper (AfCFTA executive summary and related implementation details as presented in the source content).*

### Box 1. (continued)

### Box 1. (continued)

### AfCFTA commitments and negotiation phases
- Signatories have agreed to pursue trade facilitation measures that improve trade procedures and expedite the movement of goods in accordance with the World Trade Organization Trade Facilitation Agreement.
- Commitments include harmonizing, simplifying, and automating customs procedures, publishing all the relevant regulations online, and adopting electronic payments of duties.
- Signatories intend to harmonize customs rules and take stock of, and address, obstacles to trade in a set of trade corridors.
- Phase II of the AfCFTA negotiations covers intellectual property rights, investment protection, and competition policies, as well as digital trade and the topic of women and youth in trade. Draft protocols have been prepared for the first three of these areas.
- According to the AfCFTA Secretariat, trade under AfCFTA rules started in January 2021; commercially meaningful trade began in October 2022 when seven pilot countries—Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, and Tunisia—started trading a set of goods duty free under the AfCFTA “Guided Trade Initiative.”

### State of trade and trade integration in Africa — aggregate trends
- Trade in Africa expanded from 49 percent of GDP in 2000 to 53 percent by 2019.
- Trade growth across the continent masks divergent country experiences:
  - About 60 percent of African countries experienced an increase in noncommodity merchandise and services trade openness between 2000 and 2019.
  - 36 percent of African countries enjoyed an increase of more than 10 percentage points in noncommodity merchandise and services trade openness.
- The share of manufactured goods trade remained stable at about 35 percent of GDP.
- Changes in merchandise exports by country largely reflected the share of commodities in their export structures: the biggest increases in merchandise exports (percent of GDP) were observed in commodity-dominated countries (fuel and other minerals); countries with relatively small shares of commodities in exports saw declines.

### Composition of trade and partner shifts
- Africa’s exports to large, fast-growing Asian economies increased markedly:
  - Exports to China and India rose from 5 percent of total African exports in 2000 to 23 percent by 2019.
- Traditional destinations’ share declined:
  - The share of exports to the United States and the European Union declined from 65 percent of total exports in 2000 to 38 percent by 2019.
- Intra-regional exports increased from 11 percent to 15 percent of total exports.
- Overall, exports to the rest of the world are dominated by commodities, while intra-regional trade is more diversified and more processed.

### Value chains and services
- Africa’s participation in regional and global value chains remains limited, with limited backward and forward value-added linkages between African countries.
- Some regional value-chain development has occurred (for example, South African retailers offshoring textile manufacturing to neighboring countries), but continent-wide hub dynamics like those seen in other regions have not emerged.
- Services account for 16 percent of total exports in Africa compared with 25 percent globally.
- Services trade as a share of GDP has remained broadly unchanged over the past two decades.
- Traditional services (travel and transport) account for the bulk of services exports (78 percent), while skill-intensive and high value-added modern services such as telecommunications and business services have been gaining ground.

### Challenges: policy, tariffs, non-tariff measures, and trade environment
- Regional economic communities (RECs) have uneven effectiveness in boosting trade due to design challenges, lax enforcement, and overlapping memberships causing complexity and uncertainty.
- Import tariffs on trade within Africa average 6 percent, higher than comparable tariffs in other regions; elevated tariffs mainly reflect imports from other RECs, although within-REC tariffs are substantial in some cases.
  - Within-bloc tariff rates average 9 percent in Arab Maghreb Union (AMU) and 12 percent in Economic Community of Central African States (ECCAS), while tariffs are zero within SACU, CEMAC, and WAEMU.
- Nontariff measures (NTMs) are relatively high in Africa:
  - For intra-African trade, NTMs are estimated to be equivalent to an import tariff of 18 percent on average.
- The largest factor weighing on intra-African trade is the challenging trade environment, which includes transport infrastructure (trans-border road, rail, port and air transport networks and border and customs procedures), telecommunication infrastructure, financial development, human capital, institutions, and restrictive product and labor market regulations.
- Based on a subset of trade-environment features, the (nontariff-related) cost of trading across borders in Africa is estimated to be about double that in East Asia and OECD countries.

### Implication
- Addressing key barriers to trade by implementing the AfCFTA and improving the broader trade environment could provide a substantial boost to trade and help narrow the gap with other regions in the role trade plays in lifting growth, living standards, and employment. These policies are explored further in Chapter 3.

*IMF DEPARTMENTAL PAPERS • Trade Integration in Africa — Box 1. (continued)*

### 3. Achieving Greater Trade Integration through

### 3. Achieving Greater Trade Integration through the African Continental Free Trade Agreement

### Summary of empirical approach and indicators
- Empirical analysis uses a gravity model for bilateral merchandise trade flows, including:
  - Geographic and cultural distance, bilateral tariffs, and nontariff measures (NTMs).
  - Country trade-environment indicators constructed from common components of multiple data sources:
    - Trade infrastructure: quality of roads and rail network, ports, and customs procedures.
    - Financial development: firms’ access to financing.
    - Security: risk of terrorism and domestic conflict.
- Annex 1 and Annex 2 contain data construction and estimation methodology details cited in the chapter.

### Key quantitative findings on goods trade
- Elasticities and comparative magnitudes:
  - A 1 percentage point reduction in weighted average tariffs between a pair of African countries would boost bilateral goods trade by about 2 percent.
  - The tariff-equivalent impact of existing NTMs between African countries is three times as large as the impact of the tariffs presently in effect.
  - Improvements in trade infrastructure, financial development, and security have significant positive effects on trade; trade infrastructure and financial development improvements matter more for longer-distance trade.
- AfCFTA scenario assumptions and impacts:
  - Scenario assumptions:
    - Average weighted tariffs cut to one-tenth of their current level.
    - NTMs cut by half.
  - First-order impacts on bilateral goods trade within the region:
    - Tariff reductions alone: 7 percent increase.
    - NTM reductions alone: 12 percent increase.
    - Combined tariff and NTM reductions: 15 percent increase.
  - Country-level openness impacts:
    - Median African country: trade openness rises by just under 1 percentage point of GDP.
    - Heterogeneity: one-quarter of small African countries (population < 10 million) would see openness increase by more than 4 percentage points; one-quarter of landlocked countries by more than 3.5 percentage points.
- AfCFTA+ scenario assumptions and impacts:
  - Scenario complements tariff and NTM cuts with uniform step increases in trade infrastructure, financial development, and security indices that bring the regional median of each indicator in line with the median of the next-best performing comparator free trade agreement (ASEAN for trade infrastructure and security; MERCOSUR for financial development).
  - Median bilateral trade flow between African countries would grow by 53 percent:
    - 15 percentage points from tariff and NTM reductions.
    - 38 percentage points from improvements in the trade environment.
  - Impacts on trade with the rest of the world (ROW):
    - Median African exports to the ROW would grow by 29 percent.
    - Median African imports from the ROW would grow by 7 percent.

### Macro income and poverty implications
- Translation of trade openness into income (elasticity assumption):
  - Assumed elasticity: a 1 percentage point increase in trade openness raises long-term real per capita income by 1.25 percent (midpoint of literature range).
- Estimated per capita income impacts:
  - AfCFTA scenario (tariff and NTM cuts): median real per capita income rise of 1.25 percent.
  - AfCFTA+ scenario (adds substantial trade-environment improvements): median real per capita income gains of 10.6 percent.
  - Timing note: these are long-term income effects expected to manifest within 10 years following the policy change; infrastructure upgrades may have longer lead times than tariff cuts.
- Poverty implications (referenced World Bank findings under similar assumptions):
  - AfCFTA implementation comparable to AfCFTA+ could lift 30–50 million people from extreme poverty by 2035.

### Findings on services trade
- Cross-country specification estimates the impact of the trade environment on services exports, controlling for exporter size (GDP), geography (landlocked vs access to sea), and price competitiveness (output-PPP index).
- Trade-environment indicators used for services:
  - Trade infrastructure.
  - Telecommunications infrastructure (particularly relevant for services).
  - Financial development (operationalized as domestic credit to private sector, percent of GDP).
- Main empirical findings for services:
  - Improvements in trade and telecommunications infrastructure have the largest impact on services exports, followed by financial development.
  - Improvements in trade and telecommunication infrastructure boost modern services exports more than traditional services exports.
  - Improvements in financial development have similar impacts on both modern and traditional services exports.
- Policy scenario for services:
  - Assumes median African score for each trade-environment indicator increases uniformly to the median of the next-best performing comparator free trade agreement (MERCOSUR for the three indicators), producing significant increases in services exports to both African partners and the ROW.

### Complementary evidence and literature alignment
- The chapter’s estimated per capita income gains are broadly in line with previous studies:
  - World Bank (2022): up to 109 percent increase in the value of intra-African trade; real income gains of up to 9 percent; lifting up to 50 million people from extreme poverty.
  - World Bank (2020b): 90 percent increase in the value of intra-African trade (with breakdowns by source: about one fourth from tariff reductions, one third from reductions in broadly defined nontariff barriers, and one half from improved trade facilitation); real income gains of 7 percent; lifting 30 million people from extreme poverty.
  - Abrego and others (2019): 80 percent increase in value of intra-African trade flows; mostly due to reduction in nontariff barriers; 2–4 percent increase in real income for the continent.
  - African Development Bank (Af DB 2019a): 132 percent increase in value of intra-African trade (table entry in source ends at this figure).
- Literature on growth gains from trade liberalization: average cumulative growth gains of 10–20 percent over the decade following liberalization (survey cited).

### Policy implications and priorities highlighted
- Implement AfCFTA tariff and NTM commitments together with far-reaching improvements in the trade environment to maximize gains in goods and services trade.
- Prioritize broad-based trade-environment improvements including trade facilitation, trade infrastructure, financial development, and domestic security to:
  - Amplify intra-African trade gains and increase trade with the rest of the world.
  - Support integration into global value chains (GVCs), strengthen manufacturing, realize economies of scale, and promote economic diversification.
- Pursue regulatory alignment on goods and services provision to deepen AfCFTA and unlock additional trade opportunities.
- Address long-standing barriers to integration, including reducing reliance on import tariffs for import substitution or as a substantial source of revenue.
- Anchor reform efforts within a strong policy framework that ensures macroeconomic stability and promotes a favorable business environment.

*Source: IMF staff calculations and analysis as presented in “3. Achieving Greater Trade Integration through the African Continental Free Trade Agreement” (chapter text).*

### 4.5 percent.

### 4.5 percent.

### Evidence from quantitative studies of AfCFTA impacts
- Is The African Continental Free Trade Area A Game Changer for the Continent? (IMF 2019) — gravity model estimating first-order impact of 90 percent reduction in tariffs on trade flows:
  - Increase in intraregional trade flows by 16 percent.
  - When trade liberalization is combined with effective structural reforms, real GDP increases by up to a third.
  - AfCFTA has limited and mixed effects on inequality, reducing the Gini coefficient by 3 percent for agricultural exporters and increasing it by 3 percent for manufacturing exporters.
- The Continental Free Trade Area: A GTAP Assessment (Jensen and Sandrey 2015) — CGE model estimating elimination of all tariffs and 50 percent reduction in nontariff barriers broadly defined:
  - Country-level trade impacts generally below 10 percent (effects on intra-African flows not reported).
  - Real GDP increases by 0.5–1 percent by 2025.
  - Employment increases by a quarter of percent.

### Impacts on services trade from improving the trade environment
- Strengthening trade infrastructure would have the largest impact on services exports: 23.6 percent.
- Strengthening telecommunications infrastructure would increase services exports by 16.3 percent.
- Financial development would increase services exports by 10 percent.
- A scenario in which all three indicators improved simultaneously would boost services exports by about 50 percent.
- Services trade liberalization would boost services trade and incomes further, but these gains were not quantified due to data limitations (bilateral services trade data and barriers to trade in services are available only for a small fraction of African countries).

### Impacts on integration into global value chains (GVCs)
- Empirical analysis using data for 186 countries finds:
  - Geography and country factors play a major role in explaining differences in GVC integration.
  - The average trade agreement is associated with a 39 percent increase in both backward and forward linkages between participating countries.
  - Deep trade agreements (for example, EU, NAFTA, ASEAN) have been more successful in stimulating GVC integration than more shallow agreements.
- Decomposition of the gap between average intra-African value-chain linkages and those within ASEAN, NAFTA, and the EU:
  - Country-specific factors account for the largest portion of these gaps (notably GDP size and output share of higher-end manufacturing).
  - Trade agreements account for the second-largest share of the gap, reflecting limited coverage and depth of Africa’s existing trade agreements.
  - A caveat: AfCFTA’s capacity to support GVC integration depends on trade barriers falling below a low threshold value, because GVCs require intermediate inputs to cross borders multiple times.

### Determinants of African firms’ decisions to export and participate in GVCs (Box 2)
- Dataset and scope:
  - World Bank Enterprise Survey data on more than 96,000 non-agriculture formal firms (including about 24,000 firms surveyed in 45 African countries) between 2010 and 2022.
- Firm export and GVC participation measures:
  - Exporter dummy: value of one if the firm exports at least 10 percent of its sales.
  - GVC participation dummy: value of one if the firm exports at least 10 percent of its sales and sources at least 10 percent of its inputs from abroad.
  - Export intensity: value of exports over sales.
- Trade environment indicators (eight groups): (1) energy and transport infrastructure; (2) digital technology and innovation; (3) financial development; (4) customs efficiency (time needed to clear imports and exports in customs); (5) product market conditions; (6) labor market conditions; (7) human capital; (8) security.
- Firm characteristics: firm size (number of full-time employees); age (years of existence); location (a large city); ownership structure (presence of women among owners, share of foreign ownership, part of a large firm).
- Key empirical results:
  - Customs efficiency is especially important for GVC participation.
  - Other economically and statistically significant determinants of export propensity and GVC participation include access to finance, competition from informal firms, rent seeking in government procurement, infrastructure, and human capital.
  - Results for export intensity are broadly similar.

### Policy recommendations and implementation priorities for AfCFTA and complementary reforms
- Complete implementation of phase I and advance on negotiation and implementation of phase II to establish AfCFTA as a deep trade agreement.
- Phase I priorities:
  - Agree on rules of origin for the remaining 12 percent of goods (relating to automobiles, textiles, and clothing).
  - Complete the process of submitting tariff schedules.
  - Complete efforts on the initial set of five services sectors and tackle liberalization in the remaining services sectors.
  - Make progress on lowering nontariff measures (NTMs), including systematic stocktaking of NTMs and devising a process for lowering them.
- Complementary reforms to realize AfCFTA’s potential:
  - Substantial improvement in the trade environment to achieve sufficiently large reductions in trade costs (customs efficiency, clearance times for exports and imports).
  - Strengthen trade infrastructure, telecommunications infrastructure, and financial development to boost services exports and lower trade costs.
  - Improve access to finance and reduce informality to support exports and GVC participation.
  - Tackle behind-the-border barriers arising from differences in national regulations (harmonization of competition law and intellectual property rights; agreement on rules for e-commerce).
  - Use the AfCFTA Secretariat as a multilateral anchor to support negotiation, implementation, and to bolster credibility of the trade integration agenda.

*Source: IMF staff.*

### Box 2. (continued)

### Box 2. (continued)

### Export propensity, GVC participation, and export intensity
- Box Figure 2.1 and Box Figure 2.2 illustrate the potential increases in Africa’s firms’ export propensity, GVC participation, and export intensity from improving firm-level policy determinants to the level observed in the ASEAN.
- Policy determinants shown include:
  - Infrastructure: Power outages losses (% of sales)
  - Product market: Rent seeking in government procurement dummy; Informal firms competition dummy
  - Human capital: Employees formal training dummy
  - Financial development: Credit line dummy; Working capital funded by banks and nonbanks (%)
  - Customs efficiency: Customs clearance of exports (log, days); Customs clearance of imports (log, days)
- Benchmark: ASEAN = Association of Southeast Asian Nations; GVC = global value chain.
- Source: IMF staff calculations.

### AfCFTA implementation and complementary reforms
- Key implementation priorities:
  - Rapid development and implementation of plans for harmonizing customs and border processes and delivering on trade facilitation commitments.
  - Phase out the use of import tariffs for protecting domestic industries or generating substantial fiscal revenue, and phase out ad hoc export restrictions.
- Rationale and risks:
  - Import substitution via elevated tariffs and NTMs historically aimed to protect infant industries but has generally underperformed in the longer term.
  - Ad hoc food export restrictions may temporarily limit domestic price increases but exacerbate shortages and price pressures in other countries and weaken agricultural investment incentives domestically.
- Policy recommendations to mitigate adverse effects of liberalization:
  - Provide targeted mechanisms for assisting poor households during high food prices—for example, through cash transfers—while limiting broad-based food price subsidies.
  - Sustain efforts to enhance domestic revenue mobilization by broadening the tax base and improving tax administration to compensate for lower tariff revenue and enlarge fiscal space.
  - Implement structural reforms in customs administration to enhance revenue while maximizing AfCFTA benefits.

### Enabling macroeconomic and structural conditions
- Factors that constrained past trade liberalization success in Africa include:
  - Adverse macroeconomic conditions, including contractionary policies.
  - Low investment in physical and human capital.
  - Limited property rights protection, governance challenges, and limited financial market development.
- Essential enabling conditions:
  - Sustained macroeconomic stability, including debt sustainability and external stability.
  - Mobilize domestic revenue and avoid overvaluation of exchange rates, supporting flexible exchange rates where appropriate.
  - Improve governance, increase efficiency and productivity of physical and human capital, and strengthen financial development to promote private sector-led investment and trade integration.

### Adapting to climate change
- Climate risks and trade implications:
  - Rising average temperatures are expected to lower GDP growth and exacerbate food insecurity.
  - Rising frequency of natural disasters will disrupt economic activity more frequently; agriculture, being mostly rain-fed, is particularly vulnerable.
  - Climate change could affect transportation costs via carbon pricing or more costly fuels.
  - Over the medium term, climate mitigation policies could lower demand for fossil fuels, affecting hydrocarbon-exporting countries.
- Role of regional trade integration:
  - Regional trade integration can support diversification and growth, boosting resilience by reducing overreliance on climate-vulnerable sectors.
  - Facilitating cross-border flows of goods helps diversify sources of climate-vulnerable products.
  - Regional trade integration can open opportunities for increased regional trade related to climate-related infrastructure, services, and finance.
- Reference: IMF’s Climate Change Indicators Dashboard provides comprehensive statistical indicators.

### Geopolitical fragmentation and resilience
- Global context:
  - Global trade openness peaked before the global financial crisis and has plateaued since (the “global trade slowdown” and “slowbalisation”).
  - Protectionism has increased, and new trade restrictions rose particularly during the COVID-19 pandemic and Russia’s war in Ukraine.
  - G7 intentions to rebalance critical supply chains toward closely allied countries add to fragmentation risks.
- Consequences and opportunities for Africa:
  - Geoeconomic fragmentation could have sizeable global consequences and disproportionately hurt low-income countries.
  - Increased global competition for commodities and critical minerals may deepen some African economies’ roles as upstream suppliers.
  - Fragmentation increases the frequency of shocks to bilateral trade relationships; AfCFTA can help diversify export destinations and import sources, increasing resilience.
- Empirical findings:
  - African countries exhibit above-average concentration of export destinations (Herfindahl-Hirschman Index).
  - Under the AfCFTA scenario from Chapter 3 (intra-African tariffs reduced by 90 percent, NTMs by 50 percent), most African economies would see a decline in export destination concentration, with larger declines for countries with higher initial concentration—implying greater diversification and resilience.

### Demographics, technological progress, and job creation
- Demographic projections:
  - Africa’s working-age population (ages 15–64) is projected to rise from about 800 million in 2022 to more than 1.5 billion by 2050.
  - The median dependency ratio is expected to decline from 0.77 currently to 0.60 by 2050 (UN 2022).
- Opportunities and requirements:
  - A larger working-age population and falling dependency ratio create opportunities for faster growth and more domestic savings, but require generation of many more jobs in coming decades.
  - Global technological progress and digitalization can raise productivity, competitiveness, and trade in services (e.g., accounting, advertising, IT).
  - Digitalization can facilitate goods trade through e-commerce, faster border and customs processes, and easier cross-border payments.
- Policy implications:
  - Trade integration can support growth of new industries that create jobs, conditional on enhanced education and vocational training (including for women and children).
  - Transition to higher private sector-led growth requires modernized social safety nets to support those adversely affected by the transition; social safety nets must be better targeted and fiscally sustainable.
- Social safety net trends:
  - The average number of new social safety net programs launched in Africa each year rose from 7 in 2001–09 to 14 in 2010–15.
  - Every African country has at least one social safety net program; by 2015 every country in the world was implementing at least one social safety net program.

*Source: IMF staff calculations and text from Box 2. (continued), tiiaea - Box 2. (continued).*

### Box 3. Leveraging Digitalization to Facilitate Trade

### Box 3. Leveraging Digitalization to Facilitate Trade

### Digitalization channels that lower trade costs
- Digitalization incorporates data and the internet into production, consumption, cross-border flows, and finance, facilitating:
  - More efficient customs processes.
  - Improved cross-border payments.
- These channels help lower trade costs and improve the structural trade environment for intraregional trade and trade with the rest of the world.

### Tools to speed customs and border processes
- Import/export platforms (electronic single-windows):
  - Allow lodging information and documents in a single-entry point to fulfil all import, export and transit-related requirements.
  - Shorten clearance times through simultaneous submissions of customs and other documents.
  - Reduce costs by limiting duplication of processes and the need to submit physical documents.
  - Help reduce errors by ensuring consistency and traceability of transactions.
  - Example: such a system helped keep trade and customs revenue flowing in Nigeria during the COVID-19 pandemic.
- Non-intrusive inspection technology (cargo scanners):
  - Speed up inspection and monitoring of containerized goods, replacing time consuming manual examinations.
  - Examples: Nigeria and Uganda are using such scanners successfully.
- Electronic cargo tracking systems:
  - Make it possible to monitor goods in transit.
  - Examples: In Kenya and Tanzania, such systems have improved border efficiency and reduced trade costs for private businesses.

### Cross-border payment systems and PAPSS
- Regional payment platforms have emerged that allow settling payments in local currencies within certain regions, replacing more complex and expensive correspondent bank transactions outside Africa.
- A key current limitation: there are as yet no links between these regional platforms, hindering trade between sub-Saharan African regions as well as between sub-Saharan and North Africa.
- Pan-African Payments and Settlement System (PAPSS):
  - Launched in January 2022 by the AfCFTA Secretariat and the African Export-Import Bank.
  - Cloud-based system aiming to link African central banks, commercial banks, and FinTech firms into a network to enable quicker transactions among the continent’s countries in their currencies.
  - Interoperability plans: The AfCFTA Secretariat and the Arab Monetary Fund announced plans to ensure interoperability between PAPSS and Buna, the cross-border multi-currency payment system in the Arab region.

### ICT infrastructure progress, disparities, and projections
- Africa is still the digitally least connected region, but mobile and internet connectivity are growing rapidly (ITU 2022, Alper and Miktus 2019).
- Sub-Saharan Africa internet and mobile connectivity trends:
  - Internet penetration has grown tenfold since the early 2000s, compared with a threefold increase in the rest of the world (IMF 2020).
  - More than a quarter of additional mobile subscribers by 2025 are expected to come from Africa (GSMA 2022).
- Persistent disparities:
  - The urban-rural gap is greater than in other regions: one-half of urban citizens have access to internet, compared with just 15 percent of the rural population.

### Complementary reforms and implementation requirements
- Advancing digitalization requires reforms to:
  - Improve information and communication technology (ICT) infrastructure.
  - Strengthen foundational infrastructure, notably for electricity.
  - Build digital skills.
  - Enhance cybersecurity resilience.
- Implementation should be accompanied by effective governance and managerial reforms, as well as upskilling and training to achieve desired effects.

*IMF Departmental Papers — Trade Integration in Africa, Box 3.*

### Annex Table 2.1. Gravity Model Estimates

### Annex Table 2.1. Gravity Model Estimates

### Core gravity regression results (Dependent Variable: Log Imports)
- Columns reported: (1), (2), (3), (4), (5).
- Log distance:
  - (1) −0.836 (0.029)***
  - (2) −0.933 (0.026)***
  - (3) −0.736 (0.027)***
  - (4) − 0 . 761 (0.027)***
  - (5) −0.686 (0.034)***
- Common border:
  - (1) 0.440 (0.073)***
  - (2) 0.498 (0.073)***
  - (3) 0.484 (0.080)***
- Common official language:
  - (1) 0 .117 (0.069)*
  - (2) 0 .10 5 (0.067)
  - (3) 0 .10 4 (0.078)
- Common colonizer:
  - (1) 0.488 (0.133)***
  - (2) 0.431 (0.139)***
  - (3) 0.544 (0.174)***
- Trade agreement:
  - (1) 0.287 (0.052)***
- Log (1 + bilateral tariff):
  - (4) −2.50 0 (0.785)***
  - (5) −1.9 81 (0.726)***
- Log (1 + number of bilateral NTMs):
  - (5) − 0 .193 (0.042)***
- Log exporter GDP:
  - (all relevant columns) 0 . 8 61 (0.021)***
- Log importer GDP:
  - (all relevant columns) 0.826 (0.023)***
- Goodness of fit and sample:
  - R-squared: 0.62, 0.860, 0.890, 0.900, 0.89 (by column)
  - Number of observations: 21, 20 021, 20 021, 20 018,41212, 237 (as reported)
  - Number of countries: 182, 182, 182, 182, 181
  - Number of African countries: 51 across columns
- Fixed effects:
  - Country-importer: No, Yes, Yes, Yes, Yes
  - Country-exporter: No, Yes, Yes, Yes, Yes

### Key interpretive findings from the gravity estimates
- The trade-agreement dummy implies the average trade agreement raises bilateral trade flows by approximately 30 percent.
- Trade elasticity (percentage increase in trade flows for a percentage reduction in tariffs) is found to be around 2 (from column (5)).
- A one percent reduction in the weighted average number of bilateral NTMs increases bilateral trade flows by 0.2 percent.
- Tariff-equivalent NTMs computed by raising the NTM to a power that divides the NTM coefficient by the trade elasticity show that tariff-equivalent NTMs are orders of magnitude larger than tariff barriers across world regions.
- Introducing tariffs and NTM barriers explicitly shrinks the trade-agreement coefficient and renders it statistically insignificant, so trade agreement dummy is omitted in regressions that include tariffs and NTMs.

---

### Gravity Estimation with Trade Environment Indicators (Annex Table 2.2)
- Sample: 160 countries (indicators available for 160 countries); Number of African countries: 51.
- Columns: (1), (2), (3), (4).

- Key coefficients:
  - Log distance:
    - (1) −0.682 (0.034)***
    - (2) −1. 5 4 4 (0.089)***
    - (3) −1. 5 4 4
    - (4) −1. 5 4 4
  - Log (1 + bilateral tariff):
    - (1) −1.969 (0.713)***
    - (2) −1. 4 4 8 (0.631)**
    - (3) −1. 4 4 8
    - (4) −1. 4 4 8
  - Log (1 + number of bilateral NTMs):
    - (1) − 0 .18 3 (0.042)***
    - (2) − 0 .197 (0.041)***
    - (3) − 0 .197
    - (4) − 0 .197
  - Interaction terms (column (2)):
    - Log distance * Pair average trade infrastructure: 0.440 (0.227)*
    - Log distance * Pair average financial development: 0.841 (0.235)***
  - Importer-level direct effects (columns (3) and (4) when importer/exporter fixed effects excluded):
    - Importer trade infrastructure: −1. 491 (0.659)**
    - Importer financial development: −2.889 (0.226)***
    - Importer security: 1.675 (0.338)***
    - Exporter trade infrastructure: 0.418 (0.751)
    - Exporter financial development: −1. 4 53 (1.000)
    - Exporter security: 1.088 (0.680)
- Goodness of fit and sample:
  - R-squared: 0.89, 0.90, 0.59, 0.68 (by column)
  - Number of observations: 11,16 211,16 211,16 211,16 2 (as reported)
  - Number of countries: 160 across columns
- Controls and fixed effects by column:
  - Bilateral gravity controls: Yes for all columns
  - Multilateral gravity controls: No for (1),(2); Yes for (3),(4)
  - Country-importer fixed effects: Yes for (1),(2); No for (3); Yes for (4)
  - Country-exporter fixed effects: Yes for (1),(2),(3); No for (4)

### Interpretation and marginal effects
- Interaction terms imply that trade infrastructure quality and financial development have larger positive effects on trade with more distant partners.
- Security has a positive and statistically significant effect on imports; positive but statistically insignificant effect on exports.
- Marginal effect of an improvement in trade infrastructure or financial development equals the direct effect (importer or exporter) plus the interaction coefficient times log distance.
- Annex Figure 2.1 (described in text) shows:
  - For the vast majority of country pairs, improvements in trade infrastructure and financial development have a positive impact on both exports and imports.
  - The marginal effect is larger on trade flows with more distant partner countries.
  - Dashed gray and orange lines illustrate distributions of bilateral distances for all country pairs and pairs where the partner is in Africa.

### Policy experiments using gravity estimates
- First-order impact formula used (as reported):
  - ΔM_ij = M_ij_ = exp{ˆβ′(X_ij − X_ij^**) } − 1. (2.2)  (as presented in the source text)
- Treatment of coefficients: statistically insignificant estimates are treated as zeroes.
- AfCFTA scenario assumptions:
  - 90 percent reduction in tariffs
  - 50 percent reduction in NTMs
- AfCFTA+ scenario assumptions:
  - In addition to tariffs and NTMs reductions, trade infrastructure, financial development and security indicators are uniformly increased for African countries to bring the regional median in line with the median of the next-best performing FTA:
    - Trade infrastructure and financial development increased to set African median equal to median among MERCOSUR countries.
    - Security indicator increased to set African median equal to median among ASEAN countries.
- Note: Policy experiments do not account for general-equilibrium effects via changes in MRTs.

---

### Annex 3. Quantifying Obstacles to Services Trade

### Data and empirical specification
- Dependent variable: aggregate services exports of country i at time t (from IMF Balance of Payment Statistics as compiled by Loungani and others (2017)).
- Baseline specification (gravity-inspired):
  - Ln(Export_it) = a Environ_it + b X_it + γ_t + ε_it, (3.1)
    - Environ_it: set of meta-indicators capturing trade-enabling environment.
    - X_it: country characteristics (log GDP, landlocked dummy, log output-side PPP).
    - γ_t: period fixed effect where t refers to 5-year periods (2006–10, 2011–15 and 2016–19).
    - Period averages used for variables.
- Meta-indicators used (six):
  - Financial development
  - Trade infrastructure
  - Telecommunications network
  - Human capital development
  - Strength of institutions
  - Product and labor market efficiency
- Additional considered variable: credit to private sector/GDP (financial depth).

### Results (Annex Table 3.1)
- Regression columns: (1), (2), (3), (4).
- Coefficients and standard errors (robust SEs in parentheses):
  - Financial development:
    - (1) 0.004 (0.003)
    - (2) − 0.001 (0.003)
  - Credit to private sector/GDP:
    - (2) 0.006*** (0.0 01)
    - (4) 0.004*** (0.0 01)
  - Trade infrastructure:
    - (1) 0.018*** (0.003)
    - (2) 0.015*** (0.002)
    - (3) 0.011*** (0.003)
    - (4) 0.008** (0.003)
  - Telecommunications infrastructure:
    - (1) 0.018*** (0.002)
    - (2) 0.015*** (0.002)
    - (3) 0.009*** (0.003)
    - (4) 0.008*** (0.003)
  - Human capital development:
    - (1) 0.007* (0.004)
    - (2) 0.008** (0.004)
  - Strength of institutions:
    - (3) 0.012*** (0.004)
    - (4) 0.011*** (0.004)
  - Product and labor market efficiency:
    - (3) 0.005 (0.004)
    - (4) 0.003 (0.004)
  - Log GDP:
    - (1) 0.692*** (0.023)
    - (2) 0.678*** (0.023)
    - (3) 0.705*** (0.025)
    - (4) 0.695*** (0.024)
  - Landlocked:
    - (1) −0.177* (0.093)
    - (2) − 0 .18 3 * (0.094)
    - (3) −0.257*** (0.094)
    - (4) − 0 .248** (0.096)
  - Log output-side PPP:
    - (1) − 0.0 51 (0.097)
    - (2) −0.099 (0.083)
    - (3) −0.220 (0 .159)
    - (4) −0.239 (0 .16 4)
- Model fit and sample:
  - R-squared: 0.884, 0.890, 0.892, 0.896 (by column)
  - Number of observations: 440, 432, 392, 384 (by column)

### Interpretation and key findings for services trade
- The empirical model explains almost 90 percent of the observed variation in services export flows.
- Trade-enabling meta-indicators (financial development, trade infrastructure, telecommunications) have positive and statistically significant coefficients, indicating higher levels are associated with higher services exports.
- One percent increase in GDP is associated with 0.7 percent increase in services exports (consistent with cited literature).
- Being landlocked adversely affects services exports: services exports by landlocked countries are on average a fifth lower than countries with direct sea access.

### Policy experiments for services exports
- Annex Figure 3.2 (described in text) shows Africa lags other FTAs in all six meta-indicators except product and labor markets; largest gaps are in trade infrastructure and financial development; large gaps also in human capital and institutions.
- Policy experiment assumptions for services:
  - Median African scores for financial development, trade infrastructure and telecommunications are increased to the median of the next-best performing FTA (MERCOSUR).
- Quantitative impacts:
  - With broader controls (human capital, institutions, product and labor market efficiency) included, the combined improvement in the three trade-enabling indicators yields 26.6 percent growth in African services exports.
  - Under the scenario without the broader trade-enabling meta-indicators, the combined improvement yields 47.9 percent growth in African services exports.

_Italic: Source: IMF staff calculations._

### Annex Figure 3.2.Trade Environment and

### Annex Figure 3.2.Trade Environment and

### Backward and Forward Linkages: definitions and data
- Backward linkages (BL): foreign value added contained in a country’s exports, as a share of its exports.
- Forward linkages (FL): a country’s value added used in foreign countries’ exports, as a share of its exports.
- Source database: Eora Global Supply Chain database (Lenzen and others 2012), international input-output tables for 189 countries over 1990–2021.
- Matrix expressions:
  - FL = X^(-1) V (I − A)^(-1) X
  - BL = X^(-1) [ V (I − A)^(-1) X ]'
  - The Leontieff inverse is (I − A)^(-1).
- Note: The matrix of forward linkages is the transpose of the matrix of backward linkages.
- Interpretation: Along the diagonal the country is the same (domestic dimension); the international dimension is captured by off-diagonal elements.

### Stylized facts for African economies (2021)
- African bilateral linkages are generally less developed, indicating limited integration into GVCs.
- Unlike other regions that have strongest bilateral linkages inside their home regions, African economies’ strongest bilateral linkages are with North America, Europe, and Asia.
- African countries’ forward linkages tend to be more important than their backward linkages (they supply goods with relatively little transformation rather than import inputs for intermediate or finished products).

### Empirical methodology
- Regression specification (log-linear) for bilateral BLij and FLij in 2019:
  - ln Yij = α̂i + ρ̂j + γ̂' Gij + β̂' Tij + ε̂ij, where Yij ∈ {BLij, FLij}.
  - α̂i: origin-country fixed effect; ρ̂j: destination-country fixed effect.
  - Gij: bilateral geographic variables from CEPII (Conte, Cotterlaz and Mayer 2022):
    - log of bilateral kilometer distance (population-weighted distance between major cities).
    - dummy = 1 if share a border, 0 otherwise.
    - dummy = 1 if on same continent, 0 otherwise.
    - dummy = 1 if same country, 0 otherwise.
  - Tij: trade agreement variables:
    - dummy = 1 if i and j are part of same regional trade agreement, 0 otherwise (from CEPII).
    - interaction terms allow RTA effects to differ (1) in Africa and (2) for four major RTAs: EU, NAFTA, ASEAN, MERCOSUR.
  - Purpose of fixed effects: control for country-specific drivers (size, specialization).
  - Purpose of geographic variables: capture bilateral geography facilitating or hindering value chain integration.

### Key regression results (summary of Annex Table 4.1)
- Number of observations: 34,596.
- Number of countries: 186.
- Number of African countries: 51.
- Fixed effects: destination-country and origin-country fixed effects included.
- R-squared:
  - Log Backward Linkage models: 0.95 to 0.97.
  - Log Forward Linkage models: 0.95 to 0.97.
- Selected coefficient estimates (robust standard errors in parentheses; ***, **, * indicate significance at the 1%, 5%, and 10% levels):
  - Log distance: −0.506 (0.010)*** (Backward), −0.433 (0.010)*** (Forward).
  - Common border: 0.963 (0.039)*** (Backward), 0.915 (0.039)*** (Forward).
  - Common continent: 0.130 (0.016)*** (Backward), 0.053 (0.016)*** (Forward).
  - Same country: 5.615 (0.077)*** (Backward), 6.130 (0.079)*** (Forward).
  - RTA (regional trade agreement): 0.327 (0.016)*** (Backward), 0.326 (0.016)*** (Forward).
  - RTA * Africa: −0.284 (0.038)*** (Backward), −0.277 (0.038)*** (Forward).
  - RTA * MERCOSUR: 1.136 (0.198)*** (Backward), 1.137 (0.198)*** (Forward).
  - RTA * ASEAN: 0.493 (0.097)*** (Backward), 0.494 (0.097)*** (Forward).
  - RTA * NAFTA: 1.914 (0.355)*** (Backward), 1.915 (0.355)*** (Forward).
  - RTA * EU: 0.822 (0.039)*** (Backward), 0.823 (0.039)*** (Forward).

### Main empirical findings (from results section)
- Country fixed effects alone explain a very large share of variation in bilateral backward and forward linkages.
- Geographic and trade agreement variables affect backward and forward linkages similarly in economic and statistical terms.
- Geographic variables are highly statistically significant with expected signs:
  - Distance impedes bilateral value chain integration.
  - A common border and being on the same continent facilitate it.
  - Domestic value-added content of exports tends to be larger than foreign value-added content.
- Average effect of a trade agreement:
  - The average trade agreement is associated with a statistically significant (e^0.33 − 1 ≈) 39 percent increase in bilateral backward and forward linkages.
  - The average trade agreement in Africa is associated with (e^(0.33 − 0.28) − 1 ≈) 5 percent increase in bilateral backward and forward linkages.
  - Backward and forward linkages within NAFTA are more than (e^(0.33 + 1.91) − 1 ≈) 830 percent larger than the average linkage not subject to a trade agreement, after controlling for country effects and geography.
- Heterogeneity: large differences across regional trade agreements in their association with linkages (e.g., NAFTA, EU, ASEAN, MERCOSUR differ markedly).

### Variance decomposition of lnYij
- Using decomposition based on regression estimates:
  - 89 percent of the variation in backward linkages is attributed to country effects.
  - 90 percent of the variation in forward linkages is attributed to country effects.
  - 9 percent of the variation in both backward and forward linkages is attributed to geography.
  - 1 percent of the variation in both backward and forward linkages is attributed to trade agreements.
  - The remainder of variation is unexplained.

### Counterfactual / gap decomposition across country pairs
- For any two pairs of countries ij and kl:
  - lnYij − lnYkl = (α̂i + ρ̂j − α̂k − ρ̂l) + γ̂' (Gij − Gkl) + β̂' (Tij − Tkl) + (ε̂ij − ε̂kl).
  - First term: portion of gap due to country effects.
  - Second term: portion due to geography.
  - Third term: portion due to trade agreements.
  - Fourth term: unexplained portion.
- This decomposition approach is used to construct cross-pair comparisons (e.g., Figure 6 in Chapter 2).

### Visual summary (Annex Figure 4.1)
- Heatmap (Percent of gross exports) shows bilateral backward and forward linkages for select economies, 2021.
- Warmer colors indicate stronger linkages (greater cross-border value chain integration).
- Data labels use ISO country codes.
- Figure confirms: African countries’ bilateral linkages are generally weaker, oriented outside their home region, and characterized by stronger forward than backward linkages.

*Source: IMF staff calculations; Eora Global Supply Chain Database; CEPII; data and results as presented in the supplied content.*

### 2021. Geneva.

### Trade Integration in Africa—Unleashing the Continent’s Potential in a Changing World

### References and thematic coverage
- Trade policy and liberalization:
  - Irwin, D. A. 2019. “Does Trade Reform Promote Economic Growth? A Review of Recent Evidence.” PIIE Working Paper 19-9, Peterson Institute for International Economics, Washington, DC.
  - Irwin, D. A. 2020a. The Rise and Fall of Import Substitution, PIIE Working Paper 20-10, Peterson Institute for International Economics, Washington, DC.
  - Rodrik, D. 1999. “The New Global Economy and Developing Countries: Making Openness Work.” Policy Essay 24, Overseas Development Council, Washington, DC.
  - Rodrik, D. 2005. “Growth Strategies.” In Handbook of Economic Growth, edited by P. Aghion and S. Durlauf, Amsterdam: Elsevier North-Holland.
  - Topalova, P., and A. Khandelwal. 2011. “Trade Liberalization and Firm Productivity: The Case of India.” The Review of Economics and Statistics 93 (3): 995–1009.
  - Wacziarg, R., and K. H. Welch. 2008. “Trade Liberalization and Growth: New Evidence.” The World Bank Economic Review 22 (2): 187–231.

- Global Value Chains, vertical specialization, and value-added trade:
  - Koopman, R., Z. Wang, and S.-J. Wei. 2014. “Tracing Value-Added and Double Counting in Gross Exports.” American Economic Review 104 (2): 459–94.
  - Timmer, M. P., A. A. Erumban, B. Los, R. Stehrer, and G. J. de Vries. 2014. “Slicing Up Global Value Chains.” Journal of Economic Perspectives 28 (2): 99–118.
  - OECD. 2015. “Participation of Developing Countries in Global Value Chains: Implications for Trade and Trade-Related Policies.” OECD Trade Policy Paper 179, Paris.
  - UNCTAD. 2013. Global Value Chains and Development: Investment and Value-Added Trade in the Global Economy—a Preliminary Analysis. Geneva.
  - World Trade Organization (WTO). 2021b. “Global Value Chains Development Report 2021.” Geneva.
  - Yi, K.-M. 2003. “Can Vertical Specialization Explain the Growth of World Trade?” Journal of Political Economy 111 (1): 52–102.
  - Yi, K.-M. 2010. “Can Multistage Production Explain the Home Bias in Trade?” American Economic Review 100 (1): 364–93.
  - Jithin, P., S. Ashraf, and Z. Umar. 2023. “Does Global Value Chain Participation Induce Economic Growth? Evidence from Panel Threshold Regression.” Applied Economics 55 (24): 2788–800.

- Trade costs, non-tariff measures, and trade facilitation:
  - Kee, H. L., and A. Nicita. 2022. “Trade Fraud and Non-Tariff Measures.” Journal of International Economics 139: 103682.
  - Portugal-Perez, A., and J. S. Wilson. 2008. “Trade Costs in Africa: Barriers and Opportunities for Reform.” World Bank Policy Research Working Paper 4619, World Bank, Washington, DC.
  - Lesser, C., and E. Moisé-Leeman. 2009. “Informal Cross-Border Trade and Trade Facilitation Reform in Sub-Saharan Africa.” OECD Trade Policy Working Paper 86, Organisation for Economic Co-operation and Development, Paris.
  - Perez Azcarraga, A. A., T. Matsudaira, G. Montagnat-Rentier, J. Nagy, and R. J. Clark. 2022. Customs Matters: Strengthening Customs Administration in a Changing World. Washington, DC: International Monetary Fund.
  - World Trade Organization and International Finance Corporation (WTO/IFC). 2022. Trade Finance in West Africa: A Study of Côte d’Ivoire, Ghana, Nigeria and Senegal. Geneva.

- Regional trade arrangements, continental integration, and African trade policy:
  - Jensen, H. G., and R. Sandrey. 2015. The Continental Free Trade Area – A GTAP Assessment. Trade Law Centre, Stellenbosch, Western Cape, South Africa.
  - Woolfrey, S., and B. Byiers. 2019. “The African Continental Free Trade Area and the Politics of Industrialization.” ECDPM blog, November 18.
  - World Bank. 2020b. The African Continental Free Trade Area: Economic and Distributional Effects. Washington, DC.
  - World Bank. 2022. Making the Most of the African Continental Free Trade Area: Leveraging Trade and Foreign Direct Investment to Boost Growth and Reduce Poverty. Washington, DC.
  - Yang, Y., and S. Gupta. 2005. “Regional Trade Arrangements in Africa: Past Performance and the Way Forward.” IMF Working Paper 2005/36, International Monetary Fund, Washington, DC.
  - Wignaraja, G., J. Zhuang, M. Mariasingham, and M. Dumaua-Cabauatan. 2017. “Changing Patterns of Trade and Global Value Chains in Postcrisis Asia.” ADB Brief 76, Asian Development Bank, Manila.

- Country and sector studies relevant to Africa and Asia:
  - Pham, D. M., C. H. Hollweg, B. Mtonya, D. E. Winkler, and T. Nguyen. 2019. Vietnam: Connecting Value Chains for Trade Competitiveness. Washington, DC: World Bank.
  - World Bank. 2019. Vietnam Development Report 2019: Connecting Vietnam for Growth and Shared Prosperity. Washington, DC.
  - World Trade Organization (WTO). 2014. “Zambia: Diagnostic Trade Integration Study Update.” Geneva.
  - World Trade Organization (WTO). 2019a. “Kenya: Trade Policy Review.” Geneva.
  - World Trade Organization (WTO). 2019b. “Tanzania: Trade Policy Review.” Geneva.
  - World Trade Organization (WTO). 2022. “Ghana: Trade Policy Review.” Geneva.

- Empirical methods, gravity models, and trade elasticity:
  - Santos Silva, J. M. C., and S. Tenreyro. 2006. “The Log of Gravity.” The Review of Economics and Statistics 88 (4): 641–58.
  - Simonovska, I., and M. E. Waugh. 2014. “The Elasticity of Trade: Estimates and Evidence.” Journal of International Economics 92 (1): 34–50.
  - Sequeira, M. S. 2016. “Corruption, Trade Costs, and Gains from Tariff Liberalization: Evidence from Southern Africa.” American Economic Review 106 (10): 3029–63.
  - Jafari, Y., and D. G. Tarr. 2017. “Estimates of Ad Valorem Equivalents of Barriers against Foreign Suppliers of Services in Eleven Services Sectors and 103 Countries.” World Economy 40 (3): 544–73.

- Trade, productivity, and growth literature:
  - Irwin, D. A., and M. Terviö. 2002. “Does Trade Raise Income? Evidence from the Twentieth Century.” Journal of International Economics 58 (1): 1–18.
  - Loungani, P., S. Mishra, C. Papageorgiou, and K. Wang. 2017. “World Trade in Services: Evidence from a New Dataset.” IMF Working Paper 2017/077, International Monetary Fund, Washington, DC.
  - Taglioni, D., and D. Winkler. 2016. Making Global Value Chains Work for Development. Washington, DC: World Bank.
  - Timmer, M. P., et al. 2014. “Slicing Up Global Value Chains.” Journal of Economic Perspectives 28 (2): 99–118.
  - Topalova and Khandelwal 2011; Yi 2003 and 2010 (see above entries).

- Trade and broader macro/contextual sources:
  - Lewis, L., and R. Monarch. 2016. “Causes of the Global Trade Slowdown.” IFDP Notes, Board of Governors of the Federal Reserve System, Washington, DC.
  - Irwin, D. A. 2020b. “The Pandemic Adds Momentum to the Deglobalisation Trend.” VoxEU.org, May 5.
  - Yellen, J. 2022. “Special Address by US Treasury Secretary Janet L. Yellen.” Presentation at the Atlantic Council, April 13.
  - Lenzen M., K. Kanemoto, D. Moran, and A. Geschke. 2012. “Mapping the Structure of the World Economy.” Environmental Science & Technology 46 (15): 8374–81.
  - United Nations (UN). 2022. 2022 World Population Prospects. New York.

### Document identification and provenance
- Title as presented: Trade Integration in Africa—Unleashing the Continent’s Potential in a Changing World
- Identifier on the provided content: DP/2023/003

*IMF DEPARTMENTAL PAPERS • Trade Integration in Africa*

---


_Source: https://www.imf.org/-/media/files/publications/dp/2023/english/tiiaea.pdf_