Firms Must Drive Africa’s Transformation
With the launch of a new continental trade bloc, Africa is positioned to compete globally and accelerate its economic development. But success will depend on whether national policymakers and African firms can be mobilized to take advantage of the growth opportunities now available.
ADDIS ABABA – The African Continental Free Trade Area, launched at the 12th Extraordinary Summit of African Union Heads of State and Government in July 2019, is the largest multilateral trade agreement since the founding of the World Trade Organization. Comprising one billion people and accounting for over $2 trillion of the continent’s GDP, the AfCFTA promises to sustain the dynamism of Africa’s markets for years to come.
But if the AfCFTA is to fulfill its promise, African firms will need to prepare for a new, more competitive economic landscape. Between 2000 and 2018, the African market grew by 4.6% per year, and domestic demand drove 69% of that growth. But now is the time for the continent to reach its full potential with respect to economic development, job creation, and poverty reduction.
With around 22% of working-age Africans starting new businesses – compared to 19% in Latin America and 13% in Asia – Africa has the highest entrepreneurship rate in the world. But African firms will need to improve their organizational, productive, and technological capabilities. To that end, the upcoming second edition of the African Union’s flagship economic report, Africa’s Development Dynamics, produced in partnership with the OECD Development Centre, offers a three-pronged strategy for both business leaders and policymakers to follow.
First, providing high-quality products and services – whether in infrastructure development, administration, energy, or legal guidance – must become the primary objective for anyone crafting public policies or setting market priorities. African policymakers should do more to support local firms in improving their proprietary, industrial, and commercial performance.
While African firms now file three times more International Organization for Standardization (ISO) certifications per year than they did in 2000, Malaysian firms alone filed as many certifications in 2015. Matching grants or low-cost loans, which could help more innovative firms cover the costs of certification, would be well worth the expense. Evidence from 41 African countries shows that manufacturing firms with an ISO certificate have 77% higher sales per employee, and certified services firms have 55% higher sales per employee.
Moreover, the poor quality of Africa’s transport infrastructure accounts for an estimated 40% of logistics costs in coastal countries, and 60% in landlocked countries. Simply by adopting a regional approach to infrastructure reform, policymakers could eliminate many of the inefficiencies that are driving up costs.
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Second, governments need to focus their resources on supporting business services for firms that are clustered around one another. Clusters enable governments with limited budgets to make the most of their assets by concentrating investments in one place. Such outlays are especially effective when governments provide business services to improve specialization, linkages, and skills.
For example, since its creation in 2013, the Kigali Special Economic Zone (KSEZ) has contributed significantly to Rwanda’s economic development. Compared to similar firms outside the cluster, those in the KSEZ have already doubled their sales and value added and increased their staff by 18%.
At the same time, policymakers should ensure that clusters tap into regional production networks. Value chains under development in each of the continent’s five regions offer clear opportunities for ambitious firms. In Central Africa, key industries include wood processing and petroleum products, whereas East Africa is experiencing growth in tourism and digital services. In North Africa, textiles, garments, and aeronautics are among the leading sectors, and West Africa is investing in cocoa, shea butter, and cassava products. Southern Africa is developing its automotive and agro-processing industries, among others, and the Southern African Development Community (SADC) is implementing an Investment Policy Framework to optimize both outcomes and development benefits from foreign direct investment.
Finally, policymakers need to focus on reducing uncertainties that are preventing firms from accessing new markets. The most successful firms under the AfCFTA will be those that embrace intra-African and global trade to meet growing demand. Yet as matters stand, only 18% of the continent’s new exporters survive after their third year, compared to 22% of exporters in other developing countries.
By removing non-tariff barriers to intra-African trade, African governments can multiply the welfare gains from eliminating all tariffs by a factor of five, from 0.65% to 3.15% of GDP. The East African Community’s Single Customs Territory, for example, has reduced transit times by about 50% and costs by about 30% for goods entering from Mombasa.
Moreover, while intra-African exports markets are 4.5 times more diverse than exports to markets outside Africa, their total value is 8.5 times lower than African exports to China. These differences point to the need for targeted – not “one-size-fits-all” – approaches to export markets.
Pursuing reforms in these three areas will be crucial for triggering a virtuous circle of development and trade that will allow Africa’s firms to compete within the AfCFTA and beyond. The growth of African firms will contribute to the continent’s economic development and the wellbeing of its people, helping to realize the African Union’s Agenda 2063 vision of a prosperous and integrated Africa.