Economic Integration in Africa (AfCFTA) – IMF Finance & Development Magazine | December 2018
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- Authors: Hippolyte Fofack
- Published: December 1, 2018
Overview and premise
- Economic integration via the African Continental Free Trade Area (AfCFTA) is presented as a mechanism to defragment African markets, boost productivity, and position the continent as a competitive global player.
- Key milestones and status from the piece:
- "In March 2018, 44 African heads of state signed a framework to establish a single continental market for goods and services, with free movement of capital and business travelers."
- "Five additional countries, including South Africa, joined in July."
- "The AfCFTA still needs ratification by the parliaments of at least 22 countries; seven have done so thus far."
Drivers of competitiveness and major constraints
- Central argument: competitiveness (institutions, policies, and factors driving productivity) is the key determinant of sustainable growth and effective global integration.
- Principal constraints identified:
- Market fragmentation that discourages large-scale and long-term investment.
- Poor physical and technological infrastructure and the high costs of infrastructure development and technological catch-up.
- Weak performance on efficiency-driven competitiveness factors: technological readiness, market size, and efficiency of goods and labor markets.
- Persistent nontariff and regulatory barriers despite lower import duty within regional economic communities, including:
- Border delays, burdensome customs and inspection procedures, multiple licensing requirements, and requirements for national transit bonds.
- Supply-side constraints: low manufacturing base, costly trade financing, limited access to information, and costly or lacking trade-enabling infrastructure.
- Trade and competitiveness statistics preserved from the source:
- "The average cost of importing a container in Africa is about $2,492 compared with $935 in East Asia and the Pacific and $1,488 in Latin America and the Caribbean (Brenton and Isik 2012)."
- "Intraregional trade, though on the rise, is still relatively rare, accounting for only about 15 percent of total African trade, compared with 68 percent in Europe and 58 percent in Asia (Fofack, forthcoming; Afreximbank 2018)."
Expected impacts of the AfCFTA (short, medium, and long term)
- Immediate and medium-term channels through which AfCFTA could boost competitiveness:
- Increase market efficiency and reduce the cost of doing business through economies of scale.
- Ease trade and investment flows and shift the composition and direction of foreign direct investment into Africa.
- Mitigate costs of adverse global shocks by providing a larger effective domestic market that acts as insurance against global trade disruptions or contracting global demand.
- Quantified market size and spending under the AfCFTA:
- "The continental free trade area will establish 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."
- Simulation and projection claims:
- "Basic simulations that assume 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, the average ranking for Africa could rise even further" if AfCFTA begets a more dynamic environment that expands manufacturing, agro-processing for value chain integration, and financial market development (cross-listing, nonbank financing, credit reference bureaus).
- Specific trade and integration projections from United Nations Economic Commission for Africa (as cited):
- "Intra-African trade, largely dominated by industrial products and manufactured goods, could increase by more than 50 percent and even double about a decade into the implementation of the AfCFTA, if the envisioned reforms are fully carried out and complemented by robust trade facilitation measures."
- Policy instrument tied to this projection: "The requirement that participating countries remove tariffs on at least 90 percent of goods would drive this increase."
Structural transformation and "Factory Africa"
- Mechanisms for deeper transformation:
- Economies of scale lowering production costs and stimulating cross-border trade and investment.
- Attraction and redirection of foreign direct investment toward industrial and manufactured goods and intraregional trade in intermediate and capital goods.
- Technology transfer and the development of regional value chains that add value by turning raw materials into finished goods.
- Conceptual outcome: emergence of "Factory Africa"—regional value chains and production networks within Africa that could integrate with global value chains and mirror "Factory Europe," "Factory North America," and "Factory Asia."
Policy implications and priorities highlighted
- To realize AfCFTA benefits, complementary reforms and trade facilitation are necessary, including:
- Removal of tariffs on at least 90 percent of goods (as required under the envisioned AfCFTA commitments).
- Robust trade facilitation measures to reduce transaction costs (addressing border delays, customs procedures, licensing requirements, and transit bond requirements).
- Measures to expand manufacturing bases and agro-processing industries suited for value chain integration.
- Development and integration of financial markets to enable cross-listing, nonbank financing, and establishment of credit reference bureaus to reduce information asymmetry and credit risk.
- Policies and institutional reforms to enhance technological readiness, market size exploitation, and the efficiency of goods and labor markets.
- Expected attendant benefits from implementing these priorities:
- Lower overall production costs, increased intra-African trade in intermediate and capital goods, technology transfer, development of regional value chains, improved access to credit, and a sustained rise in competitiveness enabling more countries to become "active globalizers."
From "Economic Integration in Africa (AfCFTA)" by Hippolyte Fofack, F&D Magazine, December 2018.
Content in this bundle
- Economic Integration in Africa
- القدرة التنافسية لإفريقيا
- Экономическая интеграция в Африке