Is the AfCFTA enough to advance Africa’s development?
Africa, more than anything else, needs economic integration to prosper. Economic integration is effectively the merging of African countries’ economies, which is the fundamental reason behind the creation of the Africa Continental Free Trade Area (AfCFTA).
A keynote event during the 2018 Kigali summit kicks off. The end of the summit saw the creation of the first free trade zone in Africa. (African Union, The Guardian)
The AfCFTA simply refers to the need for African economies to have a certain level of inter-connectedness of businesses and trade among countries on the continent. The AfCFTA would create a common market system in Africa similar to the European Union. The fundamental question is, will the AfCFTA be enough of a catalyst to advance Africa’s development? This depends on several factors.
Free movement of labor: Today, African economies are separated by region or country, with each country managing its own separate economy that are largely unrelated to one another. There is minimal trade between African nations with the exception of small regional trading blocks, some of whom have yet to distinguish themselves. The AfCFTA would allow for the enhanced movement of goods, services, and capital, between countries leading to a common market, and eventually to a common currency. But, will the AfCFTA allow for the free movement of labor? Without the free movement of labor, the AfCFTA will not achieve its full potential. The European Union was not just about economic integration, but creating a common labor market. Advanced economies like Germany and France quickly realized that Chinese goods were more competitive because of cheap labor. This created the impetus in Europe for integrating countries into an economic block, prime among them nations like Romania and Bulgaria, with the objective of bringing down the cost of labor, and making European manufacturing more competitive. Africa too needs to have free movement of labor not only because African labor is cheaper than Chinese labor, but there has to be a mechanism for giving African industry and agriculture a unique advantage. One thing that needs to be considered in the discussion of the free movement of lobor is the vastness of the African continent. Africa is a continent that occupies over 117 million square miles. Africa is the second largest continent in the world and accounts for over 1/5 of the worlds landmass. Several African countries are severely overpopulated, and several other African nations are severely underpopulated. Is Africa now ready to use the excess labor, the unemployed, in countries like Nigeria, Algeria and Egypt, for the benefit of pan African development? Africa is mired with countries that have unparalleled agricultural potential, but lack the labor force to realize that potential. This speaks directly to the need for free movement of African labor. But, just like in Europe, the decision to allow for the free, or relatively free, movement of labor on the African continent will be as much political as it will be a decision of economic rationalism.
Moroccan customs inspectors prepare to proceed with an overland container due for marine transport. (Safmarine)
A Common Currency: if the AfCFTA is to be successful, it must help African countries overcome its exchange rate uncertainty. This exchange rate uncertainty has been further highlighted in the last few months with unparalleled devaluations of major African currencies among them the Ghanian Cedi, and the Egyptian pound.
One of the problems with trading with other countries is that traders and investors never know which way the exchange rate will move. It may move in their favor, but it could equally move against them and end up costing traders and investors a lot more money than they expected.
This sort of uncertainty can hinder trade, particularly for smaller firms, and act as an obstacle to foreign and domestic investment. A single African currency gets rid of all this uncertainty within a single currency zone, and would encourage and stabilize both trade and investment. A common currency can also increase inward African investment.
Creating a single market in Africa would mean a population in excess of 1.3 billion consumers. The purchasing power of 1.3 billion consumers would potentially make a common African currency one of the most significant currencies in the world. Add to this the world’s unrelenting demand for Africa’s oil, natural gas, gold, copper, cobalt, diamonds, and its unparalleled natural resources that supply raw materials to industry across the globe. The days of unhinged and turbulent single currency movements among African states would effectively be over with a common currency.
This common currency would also significantly strengthen the possibility of increased foreign direct investment from the rest of the world into Africa. An African single currency can, in addition, increase competition and efficiency on the African continent.
A single currency would encourage greater competition as there is greater transparency in prices. This should help increase efficiency as firms are forced to remain competitive.
Finally, a common currency can increase price transparency in Africa. Prices in different currencies can be difficult to compare. How often do you travel to another nation with a calculator, to check the price of something to assess affordability? If everything in Africa is the same currency, price comparisons will be straightforward for producers, consumers and tourists alike. This may help African firms cut costs, as they will be able to find the cheapest intermediate inputs more easily promoting value addition and comparative advantage between African nations.
A single currency encourages greater competition through transparency and ensures an influx of FDI in each member state, as well as reduces monetary turbulence. (Ruth Esther Mbabazi/IMF)
So, can the AfCFTA finally be the impetus for the creation of a common African currency? If it can’t be, Africa’s economic development will remain mired in individual country exchange rate uncertainties.
Africa’s Infrastructure: One of the biggest challenges for economic integration in Africa, for the AfCFTA, is infrastructure.
Africa will need to invest heavily in cross country infrastructure that it doesn’t have now. This means developing transportation links that will cost over $1 trillion at best estimates and take decades to complete. Who will pay for this? How long will it take to develop the required infrastructure to promote intra-African trade? What this means is the AfCFTA will require not just finance, but commitment and longevity. Just like China’s Silk Road network continues to expand to this day, to open global trade opportunities for Chinese goods, Africa will need its own Silk Road to develop its trade routes on the African continent. The financing, the length of time, and the commitment required to create the infrastructure for intra-African trade should not be underestimated.
Blurring the distinctions between African economies is ultimately the key to unlocking the potential of the continent and for wealth creation. The AfCFTA correctly envisions an Africa where there is no African economy that functions completely isolated from other African economies. Creating an African common market will benefit all the continents economies. Through the creation of a mechanism like the AFCFTA, this will allow for the specialization of economies with integrated comparative advantage, stimulating trade, creating jobs, and enhancing wealth across the continent.
However, there are seven stages that lead to complete economic integration: 1. Preferential Trading Areas, 2. Free Trade Areas, 3. Customs Unions, 4. Common Markets, 5. Economic Unions, 6. Economic and monetary unions, and 7. Full economic integration. Africa has never really gotten beyond stages 3 and 4 of integration. To get to stages 5 through 7, to get to full economic integration, including the free movement of capital and labor, is ultimately the answer to advancing Africa’s development. This would be Africa’s big economic leap.
Clearly, the vision of the AfCFTA aims to achieve this important goal, but the question is are Africa’s 54 nation states all rowing in the same direction? More importantly, if and when they are, do they have the financing, commitment, and longevity to make full economic integration on the African continent a reality.