The time for Africa to become a serious player in global value chains is now or never. With strong political momentum behind the African Continental Free Trade Area (AfCFTA), we have a window of opportunity to improve regional value chains and continue to move towards global value chains (GVCs).
The free trade area brings together 55 countries with a population of over 1.3 billion and a combined gross domestic product valued at $34 trillion and has the potential to lift over 30 million people out of poverty.
Since its launch, the AfCFTA Secretariat has made progress, the most recent being the launch of the Rules of Origin Manual and Electronic Tariff Book in July 2022.
Africa barely trades with itself at present. According to a UNCTAD report, Africa’s inter-regional trade currently stands at 15% compared to 47% in America, 61% in Asia and 67% in Europe.
Africa and Asia, however, are the only continents where inter-regional trade has increased since 2008, giving us the opportunity to reverse the trend. The AfCFTA can accelerate this growth by developing regional value chains as the foundation for Africa’s participation in global value chains.
Africa’s integration into manufacturing value chains is also dominated by the export of primary products, with only 1.9% of global manufacturing taking place on the continent.
The Economic Complexity Index (ECI), an indicator of a nation’s productive capabilities that also indirectly examines the range of sophisticated products a country exports, indicates that the continent still produces primary products with relatively low sophistication.
According to ECI 2021, countries like Japan, Germany, Singapore, USA and China rank 1, 3, 5, 12 and 17 respectively. These are countries producing sophisticated products and benefiting from rapid economic growth.
Most African countries are in the lower part of the ECI, with South Africa at 70, Kenya at 90, Senegal at 96, Ethiopia at 97, Côte d’Ivoire at 124, Ghana at 117 and Nigeria at 129.
According to economists, countries can only increase their economic complexity score by becoming competitive and increasing the number of technology-intensive, high value-added industries.
The World Bank’s report “Rethinking Policy Priorities in the Context of Global Value Chains” highlights an opportunity to rethink Africa’s policy priorities, leverage the CFTA and other trade agreements to expand the access to foreign markets.
What would it take for Africa to increase its value-added exports, strengthen its participation in manufacturing value chains and shift to knowledge-intensive industries? We need to develop and implement export-oriented industrial policies at the national level that are conducive to the AfCFTA taking into account regional value chains that can enhance scale and complementarities for processing high-value exports added.
Policies will require AfCFTA rules of origin that are simple, flexible, transparent, business-friendly and predictable to improve access to regional inputs. Integration will also be boosted by reduced trade barriers, reliable and efficient logistics and coordinated trade facilitation services.
Africa should further target the entry of value-added products into high-growth markets like Asia, Europe and America, further integrating the continent into global supply chains.
The second priority would be to tackle competitiveness and productivity. A positive step in the right direction will be the development of policies that address market failures and distortions to facilitate business entry, survival and growth, reduce business costs, facilitate licensing and meet the challenges of the business environment.
This includes reforming public bodies to minimize market distortions, providing the level playing field essential for growth.
Another priority is to invest in cross-cutting enablers such as digital, energy, transport and logistics infrastructure with funding and public-private partnerships. These investments in continental and regional projects will have a ripple effect beyond borders.
A reliable online payment system is also needed to enable cross-border e-commerce and manage complicated and time-consuming payments, aggravated by currency restrictions and controls. Trade agreements are not directly applicable.
They need good political economy and private sector involvement to succeed. The private sector in Africa accounts for about 80% of total production, 67% of investment, 75% of credit and employs 90% of the working age population.
The political economy and the influence of the private sector will therefore be the main drivers of the success of the AfCFTA. This requires a paradigm shift from a nationalist to a continental mindset, as a larger African market makes sense for business models, growth and sustainability.