Industrialisation is crucial for Africa’s development and the implementation of the African Continental Free Trade Area (AfCFTA) could provide crucial impetus in the coming years. Major challenges and opportunities for Africa’s transformation model present themselves continuously. African countries have responded to Covid-19 by resorting increasingly to digital solutions but to a lesser extent with greener, fiscal measures.
Prospects for African manufacturing at this year’s Africa Industrialisation Day appear brighter than last year when Africa was in the middle of the largest economic crisis for decades. While economic recovery is still slow, appropriate support linked to the implementation of the AfCFTA can boost manufacturing prospects significantly.
Progress in Africa’s manufacturing performance
In a paper published earlier this year, Carlos Lopes and I argued that discussions around premature deindustrialisation (a decline in the contribution of manufacturing to GDP ahead of its normal development path) were in fact premature in relation to many African countries.
Taking recent World Bank World Development Indicators (WDI) data for the subset for sub-Saharan African countries, the share of manufacturing in GDP in 2020 was 12%, the same as it was in 2002, but up from as low as 9.2% in 2010. Despite the downturn in 2020, annual growth in real manufacturing value added was 3.3% over the decade to 2020 (up from 3% in the previous decade), significantly better than the 2.8% (and 1.9% respectively) annual growth for the world as a whole.
Some countries have really transformed their industrial sector in recent years. Morocco surpassed South Africa as the biggest exporter of passenger cars on the continent in 2018. Unfortunately, though, conflict may now halt Ethiopia’s substantial garment manufacturing based on industrial parks and duty-free access to the US, which has now been withdrawn.
African manufacturing and the role of AfCFTA
The AfCFTA entered into force in May 2019. Intra-African trading under AfCFTA officially began in January 2021. However, few countries have so far implemented provisions already agreed and many other issues still need to be negotiated. For example:
- Tariff and services offers still need to be concluded and implemented. Few countries are actually trading under AfCFTA goods rules, and in some cases (e.g. East African Community) the tariff offer still has to be finalised.
- The Trade in Goods Protocol needs to be complemented by Rules of Origin (RoO) – i.e. when a product is eligible for AfCFTA treatment, and appropriate rules could support local content. So far nearly 90% of tariffs lines have an agreed RoO and further negotiations are taking place.
- Negotiations on investment are progressing but have not finalised and need further action. When implemented and translated into domestic law, investment provisions can attract more investment into the manufacturing sector.
- Negotiations on digital trade are yet to start in earnest, though initial brainstorms have been held. Embracing digitalisation and e-commerce more actively can help develop African manufacturing.
To benefit from AfCFTA liberalisation, many countries such as Nigeria and Ghana are developing much needed complementary industrialisation policies to develop regional value chains in automotives, garments, etc. In addition, countries need to raise their game on standards, customs procedures and other trade facilitation measures, as vital complements to make use of market access opportunities. This includes corridor approaches such as those pursued by TradeMark East Africa.
The pay-off can be large. Studies suggest full implementation of AfCFTA raises African incomes by between 1-7% and intra-African trade by between 50-132%. A World Bank study estimates that tariff liberalisation, removal of non-tariff barriers (NTBs) and trade facilitation measures can boost African GDP by 7% and boost African manufacturing exports by 62%. Regional integration also has long term effects by raising firm level productivity.
The AfCFTA links well to Africa’s green recovery. On the climate mitigation side, it can accelerate both liberalisation of environmental goods and services, and also technology diffusion through appropriate investment provisions and standard setting. On the climate adaptation side, it can transform and diversify economies towards climate compatible options.
The AfCFTA may also help the shift towards deeper integration where some previous efforts have failed. Nigeria signed and ratified the AfCFTA, which is a big step for a country which has been traditionally an integration sceptic. The same applied to Tanzania, which ratified in September 2021, and is now much more willing to engage internationally, which is already proving successful. The AfCFTA could perhaps also encourage nations emerging from or being in conflict such as Somaliland and Ethiopia to become more collaborative through corridor approaches.
Thus, AfCFTA negotiations and implementation can help countries to become more open to trade and investment, more collaborative, and also catalyse the design of complementary measures such as industrial policies or export promotion measures. There is much work to do for African governments, institutions and private sectors.
How might external partners help Africa’s industrialisation through support for the AfCFTA?
Donors have supported AfCFTA negotiations and implementation for some time. Deep integration brings development benefits and a more developed Africa is a more promising trade and investment partner.
Development cooperation support for the AfCFTA
Our recent consultations with donors suggest they are already supporting negotiations and implementation of the AfCFTA with projects worth £136 million (we do not count private sector or infrastructure development generally). These include large support programmes by the EU, GIZ and Canada to the AfCFTA secretariat and UNECA, and smaller programmes by the African Development Bank (AfDB), China, Denmark, Sweden, etc. The UK Foreign, Commonwealth and Development Office (FCDO) supports the negotiations through TMEA and ODI’s Supporting Investment and Trade in Africa (SITA) programme. This works inter alia with African official organisations AfCFTA, UNECA, and African thinks tanks such as ACET and UCT’s Mandela school.
Full implementation of deep integration provisions will benefit African economies, although adjustment support is required for specific segments such as small countries, import competing sectors, small and medium sized enterprises or women producers. A more integrated Africa that is more open for business will also attract investment from outside the continent. Increased trade and investment between Africa and other countries will benefit both.
The House of Lords recently commented that trade links between the UK and Africa are at historic lows and mentioned the importance of establishing a UK-Africa prosperity committee, led by UK and Africa leaders, to up the game in aid-trade-investment measures.
Trade and investment measures to support AfCFTA
Partner countries can go beyond aid measures. For example, they can ensure that their trade agreements (e.g. US, China, EU or UK) with individual African countries take into account AfCFTA provisions, which are still developing. One further way for the EU and UK would be to use GSP reform to offer preferences (in a WTO compliant way) to all African countries and using simple RoO that allow cumulation across all of Africa.
Another would be to encourage imports from Africa for development, but also security and commercial reasons. This can include value chain approaches and assessing standards and other factors affecting imports.
Partner countries can also actively encourage outward investment to Africa, particularly in those sectors beneficial for Africa’s sustainable and inclusive transformation. This may include encouraging FDI in backbone services which can be important for developing African manufacturing.
Development finance institutions such as CDC or IFC could play a role especially when they are more actively engaged in the projects in which they invest. One example could be to use port investments around which to develop corridors and build enterprise zones. It would fit into CDC’s new emphasis in looking for forward spillover effects.
Africa’s manufacturing prospects can be further enhanced by supporting AfCFTA’s negotiations and implementation, and this requires African actions followed by partner country actions. These and other issues will be discussed in meetings organised by ODI such as this meeting on 30 November in the margins of the next WTO ministerial.