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Can Africa pick itself up by its own bootstraps? African trade and market integration could be the key

08 May 2017 Kathy Davey, Ashburton Investments
Kathy Davey, Africa fund manager at Ashburton Investments.

Kathy Davey, Africa fund manager at Ashburton Investments.

Intra-Africa trade and regional integration have been prominent themes at WEF Africa 2017 in Durban and seem to be obvious sources of growth for the continent.

However it must be said that this has been a theme at WEF Africa for a number of years now and although intra-Africa trade has grown over the past few years, this growth has been far too slow and still accounts for only 12-15% of the continent's overall trade.

Africa’s share of global exports is small at around 1%, however as its slice of the global supply chain grows, the continent seems to be integrating faster with the outside world than within its own borders. For instance, exports to Europe are around 60% of Africa’s exports. A key point was made by Ulrich Spiesshofer (CEO of ABB), a panelists on Day 2 of WEF Africa; he mentioned that Africa exports its raw materials where most of the value add creates employment outside of Africa and in addition, the continent's huge consumer base is satisfied largely through importing products that are made elsewhere.

The benefits of intra-Africa trade and regional integration were highlighted well by the Singapore’s Deputy Prime Minister Mr Tharman Shanmugaratnam when he compared South East Asia’s progress since the creation of the Association of Southeast Asian Nations (ASEAN), to that of the African continent. Over the past few decades, the region’s GDP per capita has moved from being on a par with Africa, to now being double that of Africa’s. Mr Shanmugaratnam believes that opening up its borders and encouraging trade and integration both regionally and globally has been a large driver of this growth.

In Africa, there are regional economic areas where cross border tariffs have been eliminated or largely reduced, however there are many other non-tariff barriers that affect trade and integration within the continent. It is estimated that the cost of transporting a product across Africa makes up as much as 40% of the final cost of a product which means exports are simply not competitive in a global context. Poor infrastructure, copious paperwork, onerous regulation, corruption and poor access to trade financing are just a few of the impediments that inhibit intra-Africa trade.

When we look at infrastructure in particular, many African countries simply do not have the capital to invest in efficient transport infrastructure such as railways. This makes the creation of functional regional economic areas so important as countries can work together to raise the necessary capital required to invest in more effective transport networks. Unfortunately Africa’s huge infrastructure deficit will require a large amount of capital and time to rectify and so there is a sense of urgency for government and the private sector to work together to achieve this.

Over the shorter term, Government can play a leading role in reducing the cost of trade through eliminating the red tape involved in cross border trading, reducing corruption and digitizing processes that are currently manual. Reducing manual intervention through technology would also largely reduce the opportunity for ‘under the counter’ payments at border posts.

Financial institutions should also be encouraged to lend more to SMEs wanting to do trade within Africa and not just support large multinationals. The rate of approvals for trade financing for SMEs is very low in Africa even though SMEs make up such a large portion of Africa’s overall GDP.

Finally, while one model does not fit all, Africa could certainly look globally to learn from both the successes and failures of integrated regions such as the ASEAN and the European Union. The advantages of regional collaboration and trading are plentiful, however Africa must be also be cognisant of the increased move towards protectionism that we have witnessed recently in the US and with events such as Brexit.

As President Edgar Lungu of Zambia rightly pointed out, that in order for intra-Africa trade to be successful, the benefits of trade must be shared by all.

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