Question

Why do you think free trade areas established so far in Africa have not lived up to their expectations? How can this time be different?

Answer 1

Regional Trade Agreements (RTAs) have been proliferating in the past three decades,reflecting among other things the increasing involvement of developing economies in international trade. In Africa, particularly in sub-Saharan Africa, the first RTAs were established as mechanisms that would facilitate the continent's unity in post-colonial times. Even today, the majority of African RTAs go beyond the economic objectives of increased industrialisation and trade, aiming at promoting democracy,preventing regional conflicts,harmonsising institutional development,etc. The economic performance of most African RTAs has not met the expectations of member countries,partly due to below-potential market integration that reflects high trade barriers.However, beyond the removal of trade barriers,when combined with political benefits, the potential deep integration outcomes of RTAs in Africa can substantially contribute to the inclusion of these economies in global value chains.

From a physical and economic geography perspective,regional integration is generally expected to result in higher gains the smaller an economy is. When small markets are combined,regional integration leads to economies of scale.

How have African RTAs performed?

Studies show that trade, investment and growth usually increase following reductions in protection levels (e.g.Warcziarg and Welch 2008). For African RTAs studies on the link between integration and economic growth have been inconclusive so far,mainly due to identification problems related to high growth volatility and internal and external economic shocks. However, we can infer some first round effects of RTAs based on the evolution of intra-regional trade before and after an agreement is signed. Data reveals that for the main RTAs in Africa,intra-regional imports represent less than 10% of total regional imports,and this share shows an increasing trend post establishment of an RTA only for the Pan-Arab Free Trade Area (PAFTA) and the South African Development Coommunity (SADC). Another way of inteferring the performance of RTAs is through estimates of a "gravity model of trade" which show the potential trade flows between two countries.Gravity models are consistent with two well established stylised facts:

• Exports increase proportionally with the size of the destination market and imports increase proportionately with the size of the trade.
• There is a strong negative relationship between distance-a proxy for trade costs-and bilateral trade.

The sub-optimal effects of African RTAs on trade and incomes can be explained by many factors including:

• large cost differences between the most efficient member in the region and lost cost external producer,because of which an RTA results in welfare-decreasing trade diversion
• low trade complementarity between members of a RTA,which results in stagnant inter-industry trade in the region
• high non-tariff barriers in the bloc (high trade costs),related to both "hard" infrastructure,like transport costs,and "soft" infrastructure like harmonised rules and regulations;and
• a high degree of diversity among members of an RTA(resource abundant vs. resource poor landlocked vs coastal,artificial borders etc.) which results in very diverse interests for different members.

African leaders signed a framework establishing the African Continental Free Trade Area,the largest free trade agreement since the creation of the World Trade Organisation.

The free trade area aims to create a single market for goods and services in Africa. By 2030 the market size id expected to include 1.7 billion people with over USD$6.7 trillion of cumulative consumer and business spending - that is if all African countries have joined the free trade area by then. Ten countries, including Nigeria, have yet to sign up.

The goal is to create a single continental market for goods and services,with free movement of business persons and investments.

The agreement has the potential to deliver a great deal for countries on the continent. The hope is that the trade deal will trigger a virtuous cycle of more intra African trade,which in turn will drive the structural transformation of economies-the transition from low productivity and labour intensive activities to higher productivity and skills intensive industrial and service activities-which in turn will produce better paid jobs and make an impact on poverty.

Some studies have shown that by creating a pan-African market,intra-African trade could increase by about 52% by 2022. Better market access creates economies of scale. Combined with appropriate industrial policies,this contributes to a diversified industrial sector and growth in manufacturing value added.

Manufacturing represents only about 10% of total GDP in Africa on average. This falls well below other deveoping regions. A sucessful continental trade area could reduce this gap. And a bigger manufacturing sector will mean more well-paid jobs,especially for young people. This in turn will help poverty alleviation.

The Continental Free Trade Area is expected to offer substantial opportunities for industrialisation,diversification,and high-skilled employment in Africa.The single continental market will offer the opportunity to accelerate the manufacture and intra-African trade of value-added products,moving from commodity based economies and exports to economic diversification and high-value exports.

In other words,governments must create enabling conditions to ensure that productivity is raised to international competitiveness standards. The goal must be to ensure that the products manufactured in African countries are competitively traded on the continent and abroad, and to diversify the range and sophistication of products and services.

Diverse African economies such as South Africa and Egypt,are likely to be the drivers if the free trade area, and are likely to benefit from it the most. These countries will find a larger continental market for their manufactured products. They will also use their know-how and dense industrial landscape to develop innovative products and respond to market demand.

But the agreement on its own would not deliver results.Governments must put in place policies that drive industrial development,particularly manufacturing. Five key ones stand out:

• Human Capital - A strong manufactiring sector needs capable, healthy, and skilled workers.Policymakers should adjust curriculum to ensure that skills are adapted to the market.And there must be a special focus on skills and building capacity for enterpreneurship and self-employment. This should involve business traning at an early age and skills upgrading at an advanced one. This should go hand in hand with promoting science,technology,engineering,entrepreneurship and mathematics as well as vocational and on-the-job training.

• Cost - Policymakers must bring down the cost of doing business. The barreirs include energy,access to roads and ports,security,financing,bureaucratic restrictions,corruption,dispute settlement and property rights.

• Supply network - Industries are more likely to evolve if competitive networks exist. Policymakers should ease trade restrictions and integrate regional trade networks. In particular, barriers for small and medium-size business should be lifted.

• Domestic Demand - Policymakers should offer tac incentices to firms to unlock job creation, and to increase individual and household incomes.Higher purchasing power for household will increase the size of the domestic market.

• Resources - Manufacturing requires haecy investment. This should be driven by the private sector. Policymakers should facilitate access to finance,especially for small and medium enterprises. And to attract foreign direct investment,policymakers should address perceptions of poor risk perceptions of poor risk perception.This invariably scares off potential investors or sets excessive returns expectations.

The continental free trade area facilitates industrialisation by creating a continental market,unlocking manufacturing potential and bolstering an international negotiation bloc.

Finally, the continental free trade area will also provide African leaders with a greater negotiating power to eliminate barriers to exporting. This will help prevent agreements with other countries, and trading bloc,that are likely to hurt exports and industrial development.