More than a year has passed since the ratification, to general acclaim, of the African Continental Free Trade Agreement (AfCFTA) on 30 May 2019. The purpose of the agreement is to liberalise trade across the continent by creating the largest free trade area in the world measured by the number of countries participating. The pact connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion. Most importantly, it has the potential to lift 30 million people across the continent out of extreme poverty. An additional benefit of the agreement may be seen in the expression of political will that it represents and that has finally been moulded into a concrete achievement. Organisations such as the African Union (AU) itself and the eight Regional Economic Communities (RECs) that are closely associated with it, are to be applauded for the way in which they set the agenda for change in Africa. The AU keeps discussion about the continent’s future at a high level and currently drives programmes for transformation under the “Agenda 2063” umbrella. Certainly, Africa will benefit from an integrated high speed train network, from a pan African e-network and from a high quality virtual and e-university – but the AfCFTA gives us the opportunity to put our money where our mouths are in the here and now.
The economic and political context of African countries is permanently changing. The conditions under which people live and the simple daily challenges of life differ between regions, countries and even within individual countries. But alongside this collage of local diversities there is an imperative to look outwards and to trade internationally. Generally, international trade is vital route to raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods. Inter African trade is a path not only to raising the economic standard of living in this way but also a means of expressing and living the values of political solidarity between our peoples. International trade has of course occurred since the earliest times, starting with barter and simple exchange – methods of trade that exist to this day. With the 16th and 17th centuries dominated by a “winner and loser” mentality to trade whilst liberalism was encouraged in the 18th century by Adam Smith’s seminal book on “The Wealth of Nations”. A turning point in international trade was surely the famous economist David Ricardo’s elaboration of the Theory of Comparative Advantage in 1817. He showed that if two countries capable of producing two commodities engage in the free market, then each country will increase its overall wealth by exporting the good for which it has a comparative advantage while importing the other good. The principle holds true today. And this is why international trade has become increasingly important in recent years with a larger share of world GDP created by exporting and importing. World Bank statistics show that on a worldwide scale, exports have increased from 12% of world GDP in 1960 to around 30% in 2019. A driving factor behind this growth in trade the desire of traders and marketers to give consumers a greater choice of differentiated products. In so doing, wealth is created for all participants in the trading environment. However, the share of Intra-African exports as a percentage of total African exports to the rest of the world (which was only about 10 percent in 1995) has increased to a modest 17 percent in 2017. This figure is low when compared to levels of Intra-European trade (69 percent), Intra-Asian trade (59 percent), and Intra-North America trade (31 percent). The potential to close the gap between these comparable statistics in Africa and the rest of the world is the main reason to expect that trade will be a key driver of long-term growth in Africa.
So what are these opportunities? The word “trade” conjures up images of physical goods, such as cars or clothing, moving around the world. But increasingly the growth in the service sector economy means that more trade is now in so called invisibles – such as services like insurance, banking and IT services. From an African perspective both physical and invisible trade is important as a source of wealth for all citizens. That is why the AfCFTA is such an essential development.
The World Bank forecasts that the impact of the AfCFTA will be felt differently in different regions of the continent. For example, trade in agriculture is growing fast in all parts of Africa except in North Africa. Here, under AfCFTA, trade is shifting toward manufactured goods in fields such as chemical, rubber and plastic products. But trade services, transport services and recreation services are also growing in importance in the north of the continent.
East African economies seem, on the whole, to be specialising more in agricultural products and services, with a move away from some manufacturing sectors and a resource shift aimed at taking advantage of more profitable opportunities in growing sectors. Under AfCFTA, trade in natural resources seems to be growing in Central and West Africa whereas it might decline in other regions.
Interestingly, trade in services is expanding across all regions of the continent – a phenomenon that is driven by increasing demand as incomes in Africa rise. As a result, according to the World Bank, Central Africa will see gains of some 275,000 jobs in recreational and other services. Indeed, in this region major gains in employment are expected in the agriculture sector (0.3 million jobs) and even wages for unskilled labour are expected to grow at a faster rate than average in West, East, and southern Africa. The increased wealth from these extra jobs is expected to reduce the overall number of people living in extreme poverty in Africa to 10.9 percent of the continent’s population. Yes, this is a human catastrophe but at least AfCFTA enables practical and positive progress towards extreme poverty eradication. What is encouraging is that all these effects are benefits of Intra-African trade that will be felt by people right across the continent.
Also, the AfCFTA is not just a trade agreement because its scope is wider than usual trade agreements. It will not only reduce import and export tariffs among member countries but it also covers policy areas such as trade support and the reduction of technical barriers to trade. By providing a continent-wide regulatory framework for Intra-African trade it dovetails with existing subregional economic communities and trade agreements within Africa by offering a coordinating and integrating mechanism for practical trade and for trade policy.
Such regional integration helps the practical development of larger markets and so encourages greater competition. This in turn expands into an overall increase in peoples’ wealth. In addition, regional integration results in improved policy decisions in many areas of the long-term development agenda for the whole continent. This is important because whilst we are encouraging Intra-African trade, the pressure of globalization is forcing firms from around the world to seek efficiency by accessing larger markets – so globalisation is making Africa an attractive market. Thankfully, the AfCFTA gives us the platform to avoid being overwhelmed by firms from outside Africa. It encourages us to pool economies and markets together through regional integration. It prepares a wide economic and market space for African firms to take advantage of efficiencies that they build up by achieving economically viable levels of production. This is something that large non-African firms are already achieving – and we must compete with them.
Certainly, the AfCFTA will help our larger industrial companies to increase their Intra-African trading opportunities and to compete with non-African firms. However, it is estimated by the German Bertelsmann Stiftung that 60% of regional international trade in Africa is made up of informal cross border trade. This is usually conducted by small businesses and individual traders, especially women, who move either processed or non-processed merchandise (often agricultural produces) across borders. In doing this they often by-pass statutory border formalities such as customs clearance. Thus, this trade is often unrecorded and may be legal on one side of the border but illegal on the other.
So whilst encouraging large, let us call them “industrial”, movements of goods and services around our continent, we must not forget this fundamental trade. It may be of small transactional value, but it is a source of income for about 43 percent of Africa’s population. The AfCFTA surely gives us a framework to begin if not a complete formalisation of this traffic then at least a light regulation. This will ensure increased revenue in the form of customs tariffs and VAT payments to the governments involved.
This is important because there is a clear link between the revenue income of governments and their ability to pursue wider development goals across the continent. So filling this gap requires benign, yet encouraging, intervention pretty well at the border post as we begin to persuade traders to formalise their informal transactions.
I recognise that many of these traders do not have the capacity and resources to absorb the costs associated with formal cross-border trade. Therefore, to increase compliance levels, access to trade finance needs to be improved so that high Intra-African trade-related fees can be afforded by the trader. To this end, governments too should work within the framework of the AfCFTA in order to reduce fees for cross-border trade. This would make the legal requirements more transparent to the traders and would eliminate the incidence of bribery and corruption along trade corridors – to the benefit of all our societies.
As part of this effort, the documentation required for formalising trade should be simplified. The same should apply to communication channels between customs authorities and traders. After all, these active entrepreneurs often have low literacy levels, trade small amounts of low-value goods and have no formally registered firms – but in aggregate they are important for Intra-African trade and their importance should be recognised.
To achieve this goal, border posts must be made more efficient since to encourage small traders to use them. All too often they use unofficial routes, with no border posts, to avoid the bureaucracy involved of crossing a formal border. As a result, their trade remains undeclared, under-invoiced, misclassified or deliberately moved through channels that avoid public authorities.
There are examples of how improving conditions and service at border points helps increase formalisation of trade. The Zambian government recently opened a new one-stop border post on the border with Tanzania at Nakonde at a cost of $6 million which resulted in significant reductions in transport time and trading costs. The Busia one-stop border post between Uganda and Kenya also illustrates how well thought out and effective trade facilitation measures can help resolve the problem of informal trade.
The final piece in the jigsaw puzzle might lay in the banking systems of our countries. Perhaps banks could help by accepting “hot money” from informal, cross-border transactions. If traders could deposit their takings with proper banks, they would benefit from having the security and convenience provided banks. The banks may then in turn act as collecting agencies for the tax authorities – who might also consider their expectations from such informal trade. Naturally, the traders should be incentivised to make use of this system and to see the security and legal advantages of cooperating with the banking sector and the authorities.