Why industrialisation is vital for the African Continental Free Trade Agreement to succeed

I was recently in Anantarivo, Madagascar for the 11th Private Sector Forum organised by the African Union Commission and its partners, in which one of the central themes was the African Continental Free Trade Agreement (AfCFTA). The AfCFTA, a landmark milestone on its own terms, was entered into agreement on 21 March 2018 by African leaders and ratified by 28 African countries.

However, there is a worrying lack of understanding among policy-makers and scholars about what the AfCFTA implies and demands. Instead, there is currently a sense of overblown euphoria about what it will achieve. Gains for the continent’s economic transformation may in fact be partial.

The outcome of the AfCFTA will depend on whether African countries embrace industrialisation and focus on increasing their productive capabilities in a highly competitive global landscape. Currently, intra-Africa trade is limited to 15% of Africa’s total trade, indicating that the intra-regional value chain is very weak in contrast to Asia, where it stands at 80%. The trade volume in Africa is also constrained by the relatively slow economic growth in the continent, which averages 4.6% since 2000 in contrast to Asia’s 7.4%.

Three ways the AfCFTA can succeed

In my view, at least three interventions are required for the AfCFTA to succeed as a development opportunity.

1. A commitment and strategic focus on industrialisation

The development of manufacturing is essential if African countries are to increase the production of value-added products, expand exports of such products, and reduce their trade imbalances. This approach improves economic diversification, which accelerates structural transformation.

Developing productive capacity requires both massive and new investments, a supportive industrial ecosystem, and skill acquisition in an intensely competitive environment. The decreasing trend of labour productivity (currently at 50% of Asia) must be reversed, as the competitiveness of African economies will be shaped by productivity gains.

2. Increase marginal share in global exports

While increasing intra-Africa regional value chains is necessary, African countries also need to increase their current marginal share in global exports, which currently stands at only around 3%. Increasing African exports will contribute to economies of scale, create decent jobs, and serve as a source of international learning to improve productivity. Africa’s booming young population means the continent needs to create 20 million new jobs annually. This is associated with investment in productive capacity and has significant political implications.

3. Invest in connectivity and infrastructure

The AfCFTA is constrained by infrastructure deficits and the fragmentation of supply chains. Currently, African countries are not sufficiently investing in connectivity and infrastructure, which significantly hampers regional trade. To reverse this pattern, a massive and strategic investment in connectivity and infrastructure is essential. The harmonisation of regulations related to different sectors (such as pharmaceutical products) and sub-regional blocks is needed to foster trade and a conducive business climate.

Industrialisation and economic transformation

There is no universal recipe for industrialisation. African countries need to design their own economic development strategy and industrial policy that fits their unique circumstances. However, African countries may be able to benefit by focusing on learning: policy learning by governments and technological learning by firms, making use of the latecomer advantage. A pragmatic approach to evidence-based policy-making would create better outcomes. Learning from the experiences of other regions and policy dialogue among African countries is especially important.

For instance, lessons can be taken from the new approach to building special economic zones and industrial hubs in Ethiopia. African countries could also leverage the economic ties they already have with their traditional partners and form new South-South cooperation. China-Africa economic ties have helped to catalyse economic transformation in some African countries such as Ethiopia.

Industrialisation and issues of economic transformation must guide the current narrative on the AfCFTA. As African Industrialisation Day is celebrated, it is important to emphasise that Africa’s future will be determined by focusing on industrialisation, and the transformation of agriculture and the economy. Policy-makers need to single-mindedly focus on industrialisation, as the hard truth is that there is no shortcut to economic transformation.