## A Competitive Africa

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### Overview
- Africa ranks near the bottom in global competitiveness due to fragmented markets that inhibit efficiency and constrain economic growth.
- The African Continental Free Trade Area (AfCFTA) framework was signed by 44 African heads of state in March 2018; five additional countries, including South Africa, joined in July.
- The AfCFTA requires ratification by the parliaments of at least 22 countries; seven have done so thus far.
- The AfCFTA aims to establish a single continental market for goods and services, with free movement of capital and business travelers.

### Drivers of competitiveness and integration
- Competitiveness is defined as the set of institutions, policies, and factors driving productivity and is a key determinant of sustainable growth.
- Active globalizers: economies with strong fundamentals, diversified growth, and policy frameworks that enable them to expand global trade share and mitigate integration risks.
- Passive globalizers: less competitive economies that primarily supply raw materials and are vulnerable to global shocks, commodity price swings, and protectionism.
- Innovation is identified as the largest single determinant of GDP growth in both developed and developing economies; Africa’s fastest-growing economies are also diversifying exports and improving competitiveness.

### Barriers to trade, market efficiency, and competitiveness
- Market fragmentation, nontariff and regulatory barriers, and inefficient goods and labor markets raise transaction costs and limit cross-border movement of goods, services, labor, and capital.
- Examples of barriers include border delays, burdensome customs and inspection procedures, multiple licensing requirements, and national transit bond requirements along key routes.
- Trading across borders in Africa is still more costly and time-consuming than in any other region.
- Key quantitative comparisons:
  - Average cost of importing a container in Africa: about $2,492.
  - Average cost of importing a container in East Asia and the Pacific: $935.
  - Average cost of importing a container in Latin America and the Caribbean: $1,488.
  - Intraregional trade in Africa: about 15 percent of total African trade.
  - Intraregional trade in Europe: 68 percent.
  - Intraregional trade in Asia: 58 percent.
- Supply-side constraints include a low manufacturing base, costly trade financing, limited access to information, and lacking or costly trade-enabling infrastructure.
- Overlapping regional economic communities are cited as a major constraint to a business-friendly environment.

### AfCFTA potential impacts and quantitative estimates
- The AfCFTA would create a market of 1.2 billion people with a combined GDP of $2.5 trillion and combined consumer and business spending of more than $4 trillion.
- Basic simulations assuming expanded and increased efficiency of goods and labor markets under the AfCFTA point to a significant increase in Africa’s overall ranking on the Global Competitiveness Index in both the short and the medium term.
- Over the long term, average competitiveness rankings for Africa could rise further if the AfCFTA catalyzes:
  - expansion of manufacturing bases,
  - sustained growth of agro-processing industries fit for value chain integration,
  - accelerated development and integration of financial markets.
- Potential financial-market outcomes include cross-listing of firms in different stock markets, development of nonbank financing, and establishment of credit reference bureaus to reduce information asymmetry and credit risk.
- The United Nations Economic Commission for Africa estimates that intraregional trade could increase by more than 50 percent and even double about a decade into the implementation of the AfCFTA, if envisioned reforms are fully carried out and complemented by robust trade facilitation measures.
- The requirement that participating countries remove tariffs on at least 90 percent of goods is projected to drive increases in intra-African trade.
- Expected economy-wide effects include economies of scale lowering overall production costs, stimulation of cross-border trade and investment within Africa, and attraction and reorientation of foreign direct investment toward industrial and manufactured goods.
- Anticipated attendant benefits: technology transfer and development of regional value chains that add value by turning raw materials into finished goods.

### Scenarios: “Factory Africa” and global value-chain integration
- Regional value chains could evolve into “Factory Africa,” analogous to “Factory Europe,” “Factory North America,” and “Factory Asia,” linking Africa-based production chains to global value chains.
- Benefits of regional value chains include lower transit costs and shorter supply chains by sourcing and manufacturing closer to target export markets.
- The emergence of “Factory Africa” would connect production networks from all continents and could facilitate Africa’s integration into global manufacturing processes.

### Policy implications and reform priorities
- Defragmenting markets under the AfCFTA is the first step toward boosting competitiveness and shifting nations from passive to active globalizers.
- Complementary reforms and trade facilitation measures are necessary to realize projected gains, including:
  - reducing nontariff barriers and streamlining customs and inspection procedures,
  - simplifying licensing requirements and removing onerous national transit bond rules,
  - investing in trade-enabling infrastructure and technological readiness,
  - deepening financial market integration and improving access to credit through nonbank financing and credit reference bureaus,
  - fostering innovation and diversification of exports, including value-addition and manufacturing expansion.
- Coordination to address overlapping regional economic communities is important to create a coherent, business-friendly environment.

### Conclusion
- If the AfCFTA succeeds in inspiring the needed reforms and trade facilitation, it could unleash forces for African dynamism, boost competitiveness, expand intra-African trade, and position the continent as a more effective participant in the global economy.

*Hippolyte Fofack, Finance & Development, December 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/december/afcfta-economic-integration-in-africa-fofack.pdf_