Africa Rising? An Economic Analysis of the CFTA

Image courtesy of: Embassy of Equatorial Guinea

Following two years of negotiations, a historic agreement that formally establishes the African Continental Free Trade Area (CFTA) was signed on 21 March 2018 by representatives of 44 member states of the African Union in the Rwandan capital. Once adopted, greater market integration on the continent will follow. Global competition is fierce and African nations face many challenges in maintaining their recent economic momentum and development. Nonetheless, the message emerging from the summit is clear: in standing united, Africa can prosper.

The CFTA creates an African single market that will encompass 1.2bn people with an aggregate GDP of more than USD 2.5 trillion. Establishing common norms, regulations and standards will eliminate major non-tariff barriers, while about 90% of existing tariffs will be eliminated. To date, businesses face an average tariff of 6.1% for moving goods within Africa, which not only curbs cross-border trade but also feeds an informal black market economy to disproportionate sizes.

As attractive as the goal of an integrated continent with free movement of goods and labour undoubtedly is, many obstacles still need to be overcome. The exchequers of the least developed African countries in particular, depend on the income generated by tariffs. Free trade agreements typically weigh long-term gains against short-term losses. Those gains and losses are likely to be distributed somewhat unevenly between participating nations. Yet the success of the CFTA will depend on how comprehensive and smooth its implementation will be. While 44 member states have signed the agreement, future disputes might still occur. Growing competition could potentially threaten locally underdeveloped sectors, and some tariffs will remain in place for now. Perhaps the biggest weakness is that 11 member states, including the key economies of Botswana, Nigeria and South Africa, did not sign the CFTA agreement in Kigali.

Post-colonial Africa can be seen as an ‘economic tragedy of the 20th century’, suffering from worsening poverty rates, among other deteriorating development indicators. It was only in the late 1990s that the overall growth trajectory began shifting. Trade with the rest of the world quadrupled between 1995 and 2015. This was also a period when China and India ― now Africa’s largest and second-largest bilateral trading partners respectively ― ambitiously strengthened their commercial ties with the continent. The intracontinental exchange of goods grew as well, accounting for 15.3% of total trade in 2015. To put this in perspective, EU member states conduct, on average, about 60% of their trade within the union. Consequently, the principal aim of the CFTA lies in spurring commerce between African nations.

As a means of achieving that, the CFTA is no stand-alone treaty but part of an integral and strategic development framework. An ‘African renaissance’ is the vision that Agenda 2063 proclaims, one built on the idea of an integrated, peaceful and prosperous Africa that shares common values. It is no wonder that adopting the CFTA is sparking high expectations. Vast economies of scale may open up, potentially improving efficiency and boosting productivity. According to UNCTAD estimates, while about USD 4.1 billion in tariff revenues would indeed be lost, this would be outweighed by a long-term economic gain of USD 16.1 billion. On this basis, the combined GDP  would be set to grow by in excess of 0.97% and employment by 1.17%. One common African market should lead to increased FDI inflows to the continent. The CFTA facilitates this as well, rendering African economies less risky and hence more attractive to integrate into existing global production networks.

Africa needs sustainable and inclusive growth. Three quarters of its international trade consists of raw materials, commodities that are often subject to stark price volatilities. Trading natural resources does not create much potential for adding value, and is also becoming less labour-intensive. This is particularly disadvantageous for Africa, given its young labour force, high fertility rates, and, hence, rapidly growing populations. In fact, the population of the entire continent is expected to double to 2.5bn people by 2050.

This population time bomb underscores the need for the CFTA to focus on the achievement of sustained economic development. As Paul Kagame (Chairman of the African Union) notes, the implementation of the CFTA will be observed with both ‘admiration and scepticism’ alike. Two particular properties the CFTA builds upon perhaps allows for more optimism than scepticism.

First, the CFTA is not a free trade agreement built entirely from scratch. Building from the foundation of eight existing regional economic communities, the CFTA mainly coordinates and harmonises. In theory, regional collaborations such as the Arab Maghreb Union or the East African Community would merge and create an all-encompassing African single market. In practice, challenges may arise from different communities accustomed to different degrees of integration.

Second, the CFTA should again be understood in its wider context, the Agenda 2063. In conjunction with the CFTA, the Action Plan for Accelerated Industrial Development of Africa (AIDA) aims to facilitate industrial upgrading. Innovation, knowledge transfer, and the development of key technologies are encouraged through targeted national development policies. Complementing AIDA, the Programme for Infrastructure Development for Africa (PIDA), which was adopted in 2012, focuses on building transnational infrastructure linkages. Staggering infrastructure inefficiencies cost Africa an estimated 2% growth annually. Trade liberalisation only translates into rising exports and imports if goods can be moved cheaply and quickly. PIDA requires vast infrastructure investments that can realistically only be raised on a collaborative basis. While the principal financier is the African Development Bank, both public and private participation is being encouraged as well. Meanwhile, Chinese (often state-owned) enterprises are among the largest international sponsors.

The fact that 44 member states of the African Union have agreed to establish the CFTA, one of the largest free trade areas worldwide, is an important milestone. As part of the ambitious Agenda 2063, there are still many pitfalls and challenges on the road ahead. Nevertheless, Africa certainly appears to be on a promising path at present, and its development and growth trajectory has never seemed brighter.

Image courtesy of: Embassy of Equatorial Guinea [CC BY-ND 2.0] via Flickr

Adrian Falk

About Adrian Falk

Adrian is a research student in political economy at the University of Bristol. Previously, he has been working for the German American Chamber of Commerce in New York after having obtained an MSc degree in economics from the University of Glasgow.

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