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Challenges To African Economic Development
 
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04-May-2018  
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Several reasons have been pointed at as responsible for the low rate of economic development and growth in African countries, including colonization, neo-liberalization, dependency, political instability and foreign interests among others.

Some economists have considered structural deficiencies and institutional weaknesses as mainly responsible for low levels of economic development in African countries.

These economists suspect structural failures and organizational weaknesses have contributed immensely to create the miserable conditions that keep African economies at low levels of development and expansion – and disinterested in trading among themselves, partly due to the trading patterns established in the colonial era, which have had profound implications for Africa’s low involvement in globalization.

Africa’s total trade has grown rapidly in value since around 2002 and according to The African Export-Import Bank, intra-African trade will be worth some US$180bn in 2018. However, this figure is still only 19% of the continent’s US$930bn total trade; and they attribute this to low industrialization, restricted movement of labour, poor infrastructure and high dependence on the export of unprocessed commodities in many African countries.

In contrast with other regions, trade among African states still plays a trivial role in the continent’s overall trade. To offer some viewpoint, intra-EU trade is measured at 65% of the region’s total trade; trade among the ASEAN+3 countries (the ten ASEAN members plus China, Japan and South Korea) reached 45% in 2017. The difficulties in moving goods within and between African countries discourages any enlargement plans of manufacturing, retail and distribution businesses.

Regional Fragmentation

Regional trade integration has long been a strategic objective for Africa, yet the African market remains highly fragmented. There remains an undergrowth of non-tariff and regulatory barriers that raise transaction costs which often drastically cripple the movement of goods, services, capital and people across Africa.

The Arab Maghreb Union (AMU) has had little success in economic integration and has been bedevilled by political deadlock and chronic disagreement over the union’s structure.

SADC has yet to establish a Customs union, which would allow free trade among member-countries and a common external tariff for the rest of the world. Five of the SADC members, however, are part of the South African Customs union, with the South African rand as the de facto currency.

COMESA established a Customs union in 2009, with member-states slowly implementing the required policy reforms. The Economic Community of West African States (ECOWAS) is one of the few RECs to have a strong peace and security component, implemented visa-free travel for members in 1980 and introduced a common external tariff in January 2015.

Some progress has also been made toward establishing a common currency, tied to the central bank of France.

Leaders are hoping to establish a common currency by 2020. Linguistic divisions between Francophone and Anglophone member-countries continue to challenge integration efforts, particularly with Anglophone Nigeria being a dominant player in the ECOWAS community.

Using Economic growth in Rwanda as an example

Trade between African countries has the greatest potential for building sustainable economic development and integration, says African Economic Outlook report 2017. Citing data produced by its economists and peer institutions, the report said trade among African countries expanded from 10% in 2000 to about 16% in 2014, reflecting the continent’s recent economic upturns.

Africa’s GDP and its internal trade expanded fourfold over the past two decades, according to the report, which suggests that intra-African trade is more resilient than exchanges with other regions of the world – largely because manufactured goods are less susceptible to price shocks which affect primary products that constitute over 50% of trade between the continent and other countries.

It cited low manufacturing and processing capacity as a major limiting factor for trade among African countries. Intra-African trade in manufacturing declined from 18% in 2005 to about 15% between 2010 and 2015. Most of Africa’s primary exports undergo little processing before they are re-exported, the report argues, citing cocoa beans from Côte d’Ivoire and Ghana and crude oil and petroleum products from Nigeria as examples.

However, in the tradition of “in every rule there is an exception”, IMF data on developing economies in 2017 mentioned Rwanda as one of the fastest-growing economies. It said the country recorded stable high economic growth for the past few years averaging 8 per cent, thereby enabling its economy to expand by 5.9 percent in 2017 and projected to grow by 6.2 percent in 2018.

The IMF data highlighted strong institutions and policies as major contributing factors to this robust growth rate. Rwanda is by this exceptional performance the most competitive economy in the East African Community and one of the top-three most competitive economies in sub-Saharan Africa, according to WB’s world competitiveness reports.

Some of its policies – like emphasis on home-grown solutions, prudent financial and fiscal policies, and import substitution-based trade and external aid policy – have resulted in sustained growth in per capita income and low inflation rates.

The performance of Rwanda’s economy has proven that constraints to growth are temporary barriers and provides the proof that strong institutions can help in overcoming such barriers and the blue-print to do so.

Suggestions and Way Forward

Africa’s trade and regional integration face several obstacles but must be gearing toward meeting the needs of the new concept of regionalism, which requires a broader approach to reducing administrative and transaction costs and overcoming market segmentation.

This poses challenges requiring scaling-up infrastructure investment to improve connections between and within African countries. Transportation and communication infrastructure for intra-African trade must be invested in – closer to those that connect Africa to the rest of the world.

To facilitate Intra Africa Trade, East Africa – touted as the fastest-growing regional economy in Africa (with GDP growth in 2014 estimated at 7.1%, according to the African Development Bank) – has to quickly fund the development of good quality cross-border road and rail links to feed into inland countries eager to connect into regional and global value chains – such as Rwanda and South Sudan as well as those in Kenya and Ethiopia waiting for new railways to reach their borders.

The situation must be replicated right across the African continent. Telecommunication and Infrastructure must be developed with alacrity in the ECOWAS region, especially among Ivory Coast, Ghana, Nigeria and Cameroon which now have quite stable democratic governments and would not require much political will to achieve this objective.

From 2007 to 2015, an AEO report says, the African continent’s light manufactured goods imports tripled to reach US$260billion. Africa’s prospects for greater regional trade are also highlighted by its consumer market of nearly one billion people waiting to be tapped into through increasing investment capital in strategic economic development and trade facilitation areas.

Eradicating all Colonial infrastructure that follows historical trading routes – developed to take raw materials out from the coast to the rest of the world and to bring consumer goods in, rather than to enable trade between African countries – will be the needed game-changer.

Dismantling internal and external constraints to trade among African countries is likely to help the continent focus on local markets and increase trade between states. Drawing on regional models of comparative advantage and trading regionally will help in securing good terms of trade among trading partners on the continent; and will also spur growth among African countries.

The good news is that some of these things have started taking shape already, with positive impacts. The transmission of electricity infrastructure from Ethiopia has been launched into Djibouti, Sudan, and Kenya. Also, an agreement has been reached for a regional railway network between Kenya, Djibouti, Ethiopia and Sudan recently.

Meanwhile, Ethiopia and Sudan have agreed to develop joint industrial parks and economic zones on the border. These are indications of the belief that, indeed, Intra-Africa trade will yield positive economic and social influence to propel development of the entire continent.

In South Africa, for example, the state-owned Public Investment Corporation (PIC) – the behemoth of African pension fund managers, with more than R1,000bn (US$114bn) under management – is planning to intensify investments across the continent with up to R50bn to deploy in other African states to build on their US$250m acquisition of a 20% stake in Ecobank – a pan-African group with operations in 32 countries.

The sound economic reasoning is that some of South Africa’s growth will be dependent on the development of its continental peers. The Ecobank deal is therefore a strategic acquisition that will enable the corporation to accelerate a broadening footprint across the continent.

Finally, on March 21, 2018 in Kigali, 44 African leaders (Nigeria excluded) signed an agreement to create the African Continental Free Trade Area (AfCFTA). If ratified by each country, AfCFTA will become one of the world’s largest trading blocs. The potential of a free trade area across the continent is significant, as it will create a single market of up to 1.2 billion people and a collective GDP of more than US$2trillion.

The United Nations Conference on Trade and Development also predicts that reducing intra-African tariffs – one of the conditions of AfCFTA – “could bring US$3.6billion in welfare gains to the continent through a boost in production and cheaper goods”.

For now, Africa’s overall economic performance remains too dependent on external factors, though intra-African trade is fast gathering momentum. The missing link is Intra-Africa trade, with which the continents economies will discover new ways to diversify their economies, industrialise, manufacture and provide modern services to satisfy its burgeoning population.

 
 
 
Source: Abu Issa Monnie/Broadcast Journalist/ International Economic Relations Activist
 
 

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