Can African trade support economic recovery from the pandemic?

by | May, 2021

“Whatever the setbacks of the moment, nothing can stop us now!
Whatever the difficulties, Africa shall be at peace!
However improbable it may sound to the sceptics, Africa will prosper!”6

Thabo Mbeki, South African President (1999-2008)

Africa Day 2021 (25 May) comes at a challenging time for the people of the African continent. The impact of the pandemic, although highly uneven across the African continent, has generated major challenges – economic and social. On the economic front, both domestic and international demand, across many key commodities and products, have been disrupted. This has been further affected by complex logistics challenges, whether they be in moving goods across borders or through maritime trade, that have been further impacted by changing health considerations. These factors have interrupted critical imports that many countries depend on and added to existing problems of managing cross-border trade. Yet 2021 has also been the first year of the early stages of operationalising the African Continental Free Trade Area (AfCFTA)1 with many suggesting that progress on implementing the agreement will be key to the continent’s ability to bounce back socially and economically from COVID-19.

In our work at TWIMS we, together with manufacturing stakeholders, have been considering what progress on the AfCFTA might mean for South African and continent-wide manufacturing and trade prospects.  Whilst some of the bellwether economies of the continent have benefitted from an uptick in demand for some global commodities, for example copper prices are close to what they were in the middle of the commodity boom of a decade ago, a discernible recovery pattern has not been widely observed. For many, the pandemic might simply have added to the many factors that might see firms prioritise markets outside the continent. Under these challenging circumstances it is important to remind ourselves of the case for African firms, and firms from around the world, to take a strategic interest in the economic prospects of the continent.

The world needs a more prosperous and economically vigorous Africa

Whilst Africa still makes a marginal contribution to global GDP and global trade, few multinational firms, indeed for Africa-based firms, can afford not to have some sort of African strategy.  A key reason for this imperative is that maturing economic processes in many other global regions, and the economic processes of the already industrialised northern hemisphere, have generally shown very modest growth since the 2008 global recession.  This is best illustrated by the fact that over the past decade  African countries have been among the fastest-growing economies in the world 2.  Table 1 lists Ethiopia, Rwanda and Ghana as being amongst the fastest growers in the world across the past decade.  Although these rates of growth, at times above 5%, are often from a very low base, they have signalled that African markets are growing and that the demand for goods and services from the continent has helped support that growth. Increasingly this has meant opportunities for domestic economic actors, but this has also forced multinational firms to reappraise the geography of their value chains, even if initially only in somewhat shallow terms (for instance building some localized capacity on the continent to service these markets).

Rank of top 15 fastest growing economies in the past decade, GDP constant 2010 (US$) CAGR (2009 – 2019)

Table 1: Rank of top 15 fastest growing economies in the past decade, GDP constant 2010 (US$) CAGR (2009 – 2019) Source: World Bank (2021) National accounts data, and OECD National Accounts data files.

The engine of Africa’s demographic change will keep running

These pressures on firms to explore less developed markets have been supported by another feature associated with the continent – namely the unprecedented demographic changes that are not only remaking the continent but also have profound global implications.  As this century progresses, the continent will become host to a similar proportion of the world’s population as is presently contributed to by Asia. Furthermore, it will have many of the world’s fastest-growing cities and be host to the largest pool of younger working-age people on the planet. Companies seeking consumers and wanting to serve the needs of those consumers in a world where customisation is increasingly driving purchase trends will not be able to ignore the continent, even if its purchasing power remains somewhat thinly spread.  After all, the celebrated business thought-leader, CK Prahalad’s work on the so-called “The Fortune at the Bottom of the Pyramid”  still serves to remind us that companies that ignore large, low-income markets, do so at their peril. It is no surprise that recent years have seen a new generation of home-grown African multinationals making their presence felt in markets that they know better than anyone else.

 

UN Projections of population by region, 1950 - 2100

UN Projections of population by region, 1950 – 2100 Source: United Nations (2019)https://ourworldindata.org/grapher/population-of-all-world-regions-including-the-un-projection-until-2100?country=OWID_WRL~Asia~Africa~Europe~South+America~Northern+America

 

The continent is barely out the starting blocks

For some observing the continent, the backsliding of some political and market stability3 is not a cause for optimism.  However, a close look at a wide range of issues that have been a thorn in the side of domestic and international businesses will show that in many contexts that tide is continuing to push a reform agenda that will itself unlock new growth opportunities. In 2019, World Bank Doing Business reported that it is the sixth year in a row that Sub-Saharan Africa lead with the highest number of business regulatory reforms4. Already, the past decade has seen steady progress in many countries and regions on matters of business regulations, infrastructure delivery, trade administration, access to services and the availability of local skills and suppliers to name but a few.  In fact, a number of these efforts at transforming the business environment of the continent have also served to generate new business opportunities for local and international firms.  Whilst the pace of change might, in some cases, be frustratingly slow, the direction of reforms is often one that supports economic growth.

The potential of the African Continental Free Trade Agreement (AfCFTA)

Together these dynamics are not only likely to encourage firms to keep the continent on the radar of local and global firms, but the trend for many firms is no longer simply to observe from afar.

TWIMS recently hosted a webinar, titled. “Anticipating the impact of the African Continental Free Trade Agreement on South African industrialists” with guest speakers Dr Trudi Hartzenberg, Executive Director of the Trade Law Centre (TRALAC), Dave Coffey, CEO of the African Association of Automotive Manufacturers (AAAM) and Xavier Carim, Deputy Director General in the Department of Trade and Industry (DTIC) of South Africa. Dr Hartzenberg highlighted that despite some widespread scepticism, the AfCFTA has been signed by all except one country and the majority have either endorsed AfCFTA in the parliaments or are due to do so relatively soon. Phase 1 tariff negotiations are almost concluded, 41 countries have made tariff offers and about 81% of rules of origin are complete, with 34 services commitment offers. In fact, the beginning of the year heralded a move by some countries to already start trading under the terms of the agreement. Ambassador Carim emphasised that they expected a growing interest from firms seeking to access South Africa’s market and also South African firms seeking to utilise the AfCFTA to secure access to markets. Dave Coffey cautioned that there remained much work to be done in areas of industrial policy, infrastructure and in dealing with non-tariff matters such as customs capacity at borders. He indicated these issues were key to enabling initiatives to develop a greater African presence in automotive value chains.

Positive long-term trends

Whilst the AfCFTA agreement still has to prove itself, the signs are that it will start to have some important impacts in the next few years. Intra-African trade has almost doubled in the past decade, showing the enormous potential for great levels of economic integration. The opening up of continental markets has also been accompanied by growth in African Manufacturing Value Added as a share of GDP, growing by 2% since 2012 to reach around 12%, and crucially there has also been some growth in the share of medium and higher-tech exports in total exports5. That means that the growth of trade between countries has also stimulated more complex processes associated with manufacturing in fields as diverse as food, beverages, building materials and automotives. Of course, these changing conditions are not only good for African-based firms but also for overseas multinationals seeking to gain access to new markets.  For this reason, the growth of investment from manufacturing businesses from China, Turkey, France, and others will bring new competitive pressures to bear on markets that have simply been too small or too unattractive to many non-African investors in the past.  Local African firms will need to stay on their toes, and policy-makers will need to craft appropriate policies to support these local firms.

TWIMS’ mission

A key part of TWIMS’ mission is working to support processes of sustainable African industrialisation. The Institute has already secured partnerships with organisations that share this mission and is working hard to support participation in its Manufacturing MBA and in its Executive Short Courses for senior management working in the manufacturing ecosystem from across the continent.

TWIMS will be hosting an Executive Short Course on African Trade and Industrialisation in August 2021 for manufacturing leaders eager to look more closely at emerging business dynamics on the African continent. For further information click here.

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