African governments are embarked on a major campaign to reduce trade barriers between the continent’s countries, but while doing this, they had better take vigorous measures to boost their private sectors, a new UNCTAD report warns, or the gains from this streamlined trading system will benefit foreign firms more than African firms.
The Economic Development in Africa Report 20131 , released today, is subtitled Intra-African Trade: Unlocking Private Sector Dynamism.
The report welcomes the January 2012 decision by African leaders to eliminate intra-African trade barriers to boost regional trade.
The report notes that such attention is needed, because in recent years trends have been running the other way: the share of intra-African trade in total African trade fell from 22.4 per cent in 1997 to 11.3 per cent in 2011. Intra-African trade (both exports and imports) totalled US$130.1 billion in 2011. These statistics may be underestimates, given the prevalence of informal cross-border trade on the continent, but they are nevertheless low when compared to other parts of the world. For example, over the 2007–2011 period, the average share of intraregional exports in total exports was 11 per cent in Africa, compared with 50 per cent in Asia and 70 per cent in Europe.
The report argues that although the elimination of trade barriers is important, it will not have the desired impact if it is not complemented by efforts by governments to increase the variety and sophistication of the goods that their economies produce – the process that economists call expanding productive capacity. That involves measures such as upgrading infrastructure, improving the skills of domestic workforces, encouraging and enabling entrepreneurship, and increasing the size of existing manufacturing firms so that they can satisfy larger markets and produce their goods with greater economies of scale.
Having cleared the field for increased regional trade – and the economic growth that it promises – African nations need to provide the goods to sell to each other, or foreign competitors will fill the vacuum, the Economic Development in Africa Report contends. It also recommends that African governments strengthen the private sector by making finance more accessible and less costly, and by enhancing mechanisms for government consultation with the private sector.
Short-term unexploited opportunities for regional trade in Africa are to be found particularly in agriculture, the report says. Africa has about 27 per cent of the world’s arable land, and that can be used to expand agricultural production. And yet many countries on the continent import food and agricultural products from countries outside Africa. For the period from 2007 to 2011, the study notes, 37 African countries were net food importers, and 22 were net importers of agricultural raw materials. But only about 17 per cent of the continent’s world trade in food and live animals took place within Africa. The report argues that a key challenge for African policymakers is how to exploit these opportunities for regional trade, the so-called “low-hanging fruit”, and to ensure that the gains accrue predominantly to Africa.
But the greater long-term opportunity – and greater challenge – is to improve industrial capacities to provide the goods for which regional trade typically increases demand, the report says. The benefits of greatly expanding regional trade – amply illustrated in Asia – are that selling in nearby markets gives firms cost advantages through proximity, potentially reduced transport expenses, better knowledge that allows goods to be fitted to local conditions, and, if sufficient customers can be found, enough critical mass to justify expanding industry, the report notes.
Some of the potential is apparent in existing trade flows: African countries tend to export a higher percentage of manufactured goods to each other (43 per cent of all intra-African trade), while manufactured goods account for only 14 per cent of total African exports to overseas markets.
The challenge is clear, too. Africa accounts for only 1 per cent of global manufacturing. And manufacturing represents about 10 per cent of African GDP, compared to 35 per cent for East Asia and the Pacific and 16 per cent for Latin America and the Caribbean. The low level of manufacturing development in Africa means that manufactured goods – such as cars, machines, and electronic gadgets – must be imported from overseas, a problem that is also an opportunity. If various national markets can be effectively integrated into a larger regional market, the report says, there should be sufficient numbers of customers to support the expansion of industry within the region.
An additional challenge noted by the report is that Africa has some of the highest costs in the world for transporting goods. In Central Africa, transporting one ton of goods along the route from Douala in Cameroon to N’Djamena in Chad costs $0.11 per kilometre, which is more than twice the cost in Western Europe ($0.05) and more than five times the cost in Pakistan ($0.02).
The report contends that the nature of the goods produced and exported by African enterprises matters for the growth and expansion of intra-African trade. African countries produce and export a narrow range of goods, most of which are primary commodities such as oil, natural gas, and metals. Over the period from 2007 to 2011, two products accounted for over 80 per cent of exports to other African countries from Algeria, Angola, Mali, Mauritania, Niger and Nigeria. Africa’s lack of economic diversification and weak manufacturing base inhibit intraregional trade, the study says.
The report says that unlocking the trade potential of the private sector requires the distinctive features of Africa’s enterprise structure that inhibit regional trade to be addressed. For example, African firms tend to be very small, which makes it difficult for them to operate at the minimum scale necessary in order to be competitive. The average size of a manufacturing firm in sub-Saharan Africa is 47 employees, compared with 171 in Malaysia, 195 in Viet Nam, 393 in Thailand, and 977 in China. There are also weak linkages between small and large firms in Africa, making it difficult for small firms to benefit from the skills and innovation capabilities of large firms, with dire consequences for the growth of small firms. Other structural problems of Africa’s constellation of enterprises include a high share of informal firms, low levels of export competitiveness, and a lack of business innovation capability.
In addition, it is vitally important for African countries to maintain peace and stability as a prerequisite for strengthening private-sector development and boosting intra-African trade, the report says. Recent evidence, for example, has shown that the political conflict in Côte d’Ivoire that began in the late 1990s reduced intra-trade within the West African Economic and Monetary Union (WAEMU) by around 60 per cent over the period from 1999 to 2007.
Full report - http://unctad.org/en/PublicationsLibrary/aldcafrica2013_en.pdf
