In Less Trade Resides Economic Stagnation

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Africa hosts the oldest surviving trade union – the Southern African Custom Union (SACU). It is 40 years older than Europe’s equivalent. Whereas Europe shares a currency union, Africa trades less within itself than with the rest of the world.

Despite having 17 overlapping regional trade blocs, inter-African trade has stood at 11pc of the continent’s total trade for over two decades. At 2012 prices, this equates to 130 billion dollars, or 14pc of Africa’s gross domestic product (GDP) – the lowest in the world.  By comparison, 60pc of European and Asian, and 40pc of North American trade happens within their own continents.

Southern African Development Community (SADC) accounts for half of the inter-African trade, in which South Africa trades with its smaller neighbours. All six African countries that make up 30pc of their total trade in Africa are members of the SADC. Only Lesotho and Zimbabwe trade more than 50pc, both with strong ties to the South African economy.

South Africa itself sells 17pc of its industrial produce to its neighbours. Across the continent, 27 countries trade less than 10pc within Africa, and North Africa conducts almost all its trade with Western Europe.

The effect of this low trade between African countries is obvious. Those regions, including emerging ones, where regional trade is higher add more value to their exports and are, therefore, more competitive than Africa in global markets.

For example, Nigeria is the second largest producer of citrus fruits in the world, but still spends one billion dollars annually on importing juice. Many oil nations export crude-oil only to import refined products at a much higher cost.

Zambia and Ghana have copper and aluminium in profusion, with no industrial base to add value. Nigeria and Zimbabwe could supply uranium if only there was an African nuclear power plant. The Ivory Coast and Ghana still export raw cocoa.

Yet, Africa is ripe for regional trade. The continent is among the world’s fastest growing economic regions and return on foreign investment is the highest anywhere. McKinsey, a consultant, estimates that Africa’s GDP will grow from 1.6 trillion dollars in 2008 to 2.6 trillion dollars by 2020 – with an even stronger outlook beyond that. The International Monetary Fund (IMF) believes that 11 of the 20 fastest growing countries in the world will be African through to 2017.

More promising is Africa’s fast growing consumer market, propelled by the rapid urbanisation of a middle class. In 1980, just 28pc of Africans lived in cities compared to 40pc today. As less people depend on subsistence farming, and increase their income through higher paying jobs, the potential for inter-regional trade increases.  Twenty-seven African countries have already gained “middle income” status, where as much as 40 (75pc of countries in the continent) could be in this group by 2025.

Similarly, Africans spent 860 billion dollars on goods and services in 2008 – more than Indians (635 billion dollars) and Russians (821 billion dollars). This figure is projected to be 1.4 trillion dollars in 2020. By 2030, according to McKinsey, the top 18 cities in Africa could have a combined spending power of 1.3 trillion dollars.

And there are some promising efforts to take advantage of. In 2010, for example, the East African Community (EAC) – a customs union of five African countries – took full effect. Cutting out tariffs on goods sold within the region, trade between the countries has jumped by 50pc since 2005. Twelve members out of 15 in the SADC launched a free trade zone, removing import tariffs on goods from member nations. A customs union is currently under negotiation. There are positive signs that the Economic community of West African States (ECOWAS) will follow suit.

In 2012, Erastus Mwencha, deputy chairperson of the African Union, unveiled plans to create a continental free trade area by 2017.

The EAC has also vowed to reduce roadblocks – one of the major non-tariff barriers in Africa – in its transport corridors to boost business. Kenya’s President, Uhuru Kenyatta, reduced police roadblocks from seven to two recently, reducing the average number of days for goods delivery to its neighbours from 14 to four. The regional bloc hopes to cascade this further.

Given the potential, however, these are barely strides. Many countries have difficult import and export procedures, tariff and nontariff barriers, inefficient border control, corruption, unsupportive export policies and unpredictable government services.

African trade tariffs are among the highest in the world. On average, they are 50pc higher than Latin America and Asia. It cost Africans 2,000 dollars to export a container from Africa compared to just 900 dollars from South-East Asia. Furthermore, whereas it costs 935 dollars to import a container from South-East Asia, it costs almost 2,500 dollars to import the same container from Africa. It takes 39 days to import goods into Africa compared with 25 days in Brazil, Russia, India and China (BRICs).

African also has a fragmented market. Most trade blocs remain blocked for outside business, where a significant amount of trade takes place between member countries. Barriers between blocs are extensive, prompting many countries to be part of multiple trade agreements. Most African countries belong to more than one; some, like Kenya, belong to three. Only 12 are in a single bloc.

At a micro level, although best placed to serve the continent, firms face small market sizes. Given the local presence, they have shown that they can tailor their businesses in a manner that overcomes poor roads, low technology reach and numerous other limitations in many countries. Limited markets, however, hinder mass production and the delivery of goods and services, affecting cost and efficiency.

Thus, only 24 firms headquartered in Africa are in the top 2000 companies on the Forbes list, with none in the first two hundred.. Of the 75 best known brands in Africa, according to the African Business Magazine, only 18 are African.

To take advantage, Africans have alternatives. Creating larger regional markets by merging the currently scattered regional blocs is a good start. Through increased market size and manufacturing base, counties and firms could specialise on their competitive advantage. Firms could produce for local and regional markets where they have the advantage of local knowledge. They could build African brands, shape industry policy, consumer preference and advance new technologies tailored to Africa’s realities.

This would also enable diversified and stable economies to be less dependent on natural resources. For example, Africa’s four advanced economies (Egypt, Morocco, South Africa and Tunisia), where manufacturing and services make up 70pc of the GDP, have a steady growth in Africa. In contrast, Africa’s oil giants do not.

Algeria, Angola and Nigeria, the three largest producers, earned one trillion dollars from 2000 through to 2008 from oil exports, compared to just 300 billion in the 1990s. However, manufacturing and services account to just a third of their GDP.

Africa also needs to focus on some key industries where its competitive advantage lies. McKinsey argues that four areas hold this promise: telecoms, banking, agriculture and infrastructure, with potential revenue of 2.6 trillion dollars a year by 2020 – one trillion dollars more than current levels.

With rapid population growth and urbanisation, telecoms and banking are growing rapidly in Africa. Banking assets have doubled since 2000 and mobile telecoms revenue has grown by 84pc since 2004. Having inside knowledge, African born companies tailor their products to local realities and grow their business with it.

The Kenyan telecoms company, Safaricom’s mobile phone money transfer service (M-PESA) is a good example. Similarly, Ecobank successfully runs in 29 African countries, MTN in 21, Shorite in 17 and UBA in 16.

Agriculture probably has the most potential, with Africa currently importing food worth 40 billion dollars a year. Africa’s spending on food and drink is projected to increase to 544 billion dollars by 2020 – an increase more than any other consumer category.

Furthermore, agriculture has the most potential for value addition. Africa houses 60pc of the uncultivated arable land in the world – a green revolution in waiting. If Africa is to develop just 500,000 hectares a year, it could raise its production by over 200 billion dollars by 2030. If yield increases to 80pc of the world’s norm, where Africa’s fertiliser use is just a quarter of world average, it could increase its production by another 200 billion dollars.

The major stumbling block for inter-Africa trade, infrastructure, might also hold fruits of its own revival. The World Bank estimates that Africa needs to invest 118 billion dollars a year just to clear its infrastructure backlog, which is 46 billion dollars over current investments. But, Africa’s private investment in infrastructure is the lowest in the world – 13pc of the total by emerging markets. This, although challenging, presents an opportunity for African firms and countries with a potential return of as much 10 billion dollars a year.

Noting the usual forerunners, such as political stability, macroeconomic prudence and political will, regional trade could provide Africa with its next growth spurt. Ignored, the continent risks missing out on yet another opportunity.



By Binyam Mesfin
He is an independent investment advisor. He can be contacted by binyammesfin@yahoo.com –
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