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Promoting investment for Africa’s industrialisation through economic integration

Written by Dirk Willem te Velde

Expert comment

Attention towards Africa’s industrialisation will receive renewed attention as part of Africa industrialisation week, which coincides with the African Union (AU) Summit on Industrialisation and Economic Diversification, held 20-25 November 2022 in Niger. This meeting is expected to discuss considerable progress around the African Continental Free Trade Area (AfCFTA). Several AfCFTA protocols affect investment and in this blog, we focus on the AfCFTA Investment Protocol, which was adopted by the African Union council of ministers last month. It can be instrumental in transforming the prospects of investment in Africa’s industrialisation as long as it is implemented comprehensively and leads to further targeted action building on and going beyond the direct language in the protocol. Structural transformation and industrialisation are important goals for African countries as Carlos Lopes and I discuss, but promoting industrialisation using AfCFTA requires focused attention from African governments and partners.

What is the AfCFTA Investment Protocol?

The AfCFTA is organised around two main phases of negotiations. Phase 1 covers commitments to liberalise and regulate trade in goods and services and some other issues such as the settlement of disputes. Much progress has been made with some issues still outstanding issues such as concluding rules of origin for the remaining 12% of tariff lines. This first phase received a significant boost through the implementation of the initiative for guided trade, as my colleague Max Mendez-Parra explains.

The second phase of negotiations includes wider trade-related issues such as investment, competition policy, intellectual property rights (IPRs) and digital trade, including e-commerce, and plans for a protocol on women and youth in trade.

The protocol on investment is expected to facilitate and protect intra-Africa investments with a view to foster sustainable development of the continent, while preserving the regulatory autonomy of states. The protocol establishes a continental legal framework for investment, building on the regimes of state parties and Regional Economic Communities (RECs) and the Pan-African Investment Code. Text-based negotiations started in 2021 and have recently been completed, in broad terms, through the adoption of the protocol by the Council of Ministers. ODI’s Supporting Investment and Trade in Africa (SITA) programme has supported the investment negotiations and their preparations since 2019.

Debates have centered around how to maintain regulatory space and balancing rights between states and investors, whether and how the protocol can replace or complement intra and extra regional bilateral investment treaties, and covering both inward and outward investor perspectives. In addition, there have also been debates on African forms of dispute settlement mechanisms and more centralised country level approaches towards investment facilitation.

How might an investment protocol support investment?

In our training sessions with African negotiators in 2020, we suggested several ways through which the AfCFTA may affect intra and extra-regional Foreign Direct Investment (FDI), as follows: income effects (higher GDP will increase investment), market size effects (a more integrated market will lead to higher extra-regional FDI), and the impact through predictable rules on investment. It is expected that such regional integration efforts could particularly attract FDI that can help industrialisation. This is because export intensive manufacturing, as well as business and transport services supportive of manufacturing, are expected to benefit from transparent investment rules. Indeed, they may benefit more so than natural resource initiatives seeking FDI, which has come to African countries for decades, often regardless of predictable rules on investment.

Crucially, the scope, extent and strength of new trade and investment rules matter for the level and depth of impact. The AfCFTA investment protocol itself may not attract new investments in its own right through new market access provisions for investors in the same way that the AfCFTA’s tariff reduction commitments can, for example, raise trade through better market access. The AfCFTA investment protocol is, however, expected to make an important contribution by speeding up approvals and clearances necessary for new investments to go ahead, and providing greater comfort to investors through Africa-specific investment protection provisions.

The main objective of the protocol is to facilitate intra-African trade and investment, but our analysis suggests that deeper and fully implemented regional integration through AfCFTA could also make Africa more attractive for extra-regional FDI, including for UK investors. Our initial estimations suggest that a deeply integrated and effectively implemented AfCFTA could lead to a boost of £12.5 billion, or a 25% increase, in the stock of UK FDI, and around a fifth could be due to stronger investment protection.

Both African and non-African investors in Africa face a multitude of barriers (e.g., infrastructure, skills, business environment, targeted co-ordination), and only some of these are linked to regional integration strictly speaking, but the implementation of AfCFTA could spur further actions in many of the other areas mentioned.

What are the next steps?

Following the resolution of some issues around annexes and legal reviews, attention will need to focus on implementation at the country level. What might this involve?

African countries interested in attracting FDI for sustainable development would need to follow three types of actions: aligning domestic law, implementation of all provisions, and targeted complementary action.

Firstly, alignment with domestic legislation. Analysis by my colleague Yohannes Ayele and the University of Addis Ababa suggests there are unresolved issues in Ethiopia around investor protection. Ethiopia has little to no experience or capacity around deep regional integration agreements. Analysis by Sherillyn Raga and Kenyan researchers also suggests that investors in Kenya feel more can be done around investor protection by improving domestic practice.

Secondly, governments need to devote more attention towards implementing a centralised approach towards investment facilitation. Countries have had trade facilitation committees to implement WTO commitments on trade facilitation, and African countries also need to implement centralised approaches towards investment facilitation, speeding up regulatory procedures and also support pro-active investment promotion agencies, which can focus on both inward and outward investment.

Thirdly, the benefits from the investment protocol will be enhanced once other policies are aligned around common inclusive and sustainable economic transformation objectives. The protocol is expected to lead to better implementation of approaches towards investment protection and facilitation, but this needs to go hand in hand with additional policies around skills, technology and infrastructure. For instance, an ODI-KNCCI survey indicates that Kenyan firms expect the implementation of AfCFTA to lead to enhanced public-private dialogue.

A number of countries considering the implementation of the AfCFTA have begun to institutionalise national implementation committees to implement national AFCFTA implementation strategies, with Ghana and Nigeria as two leading examples. With support from the UK FCDO, the SITA programme is currently working with the AfCFTA Secretariat to understand best practices and to scope collaborative approaches between the AfCFTA Secretariat and African countries. Such implementation committees could be a good starting point to co-ordinate the implementation of AfCFTA protocols.