How a United Economic States of Africa Will Affect Tech Startups and Ecosystem.
Have you ever imagined what continental African economy would be if Africa is one united sovereign economy? Well, just go ahead and imagine that.
A new global trade player known as CFTA recently emerged from the African Union. CFTA — Continental Free Trade Area — seeks to drive development in Africa through a ‘radical’ integration of Africa economies. The draft agreement highlights its objective of creating a single continental market for goods and services in Africa through accelerating the establishment of a common Continental Customs Union. As ambitious as the agreement seems, it is a product of a historical desire of African leaders to build ‘deep’ connections among African economies. This desire dates back to early 1960s when President Kwame Krumah of Ghana proposed the United State of Africa. Could the CFTA be regarded as the economic version of the Kwame’s dream of a United State of Africa? That is not within the scope of this article. Anyway, it is a question worth giving a critical look.
In January 2012, African leaders at the 18th Ordinary Session of the Assembly of Heads of State and Government of the African Union agreed to establish a Continental Free Trade Area (CFTA) by 2017. The negotiations for the draft AfCFTA agreement took eight rounds beginning from 2015 to December 2017. On 21st March 2018, during the 18th Extraordinary Session of the African Union Summit held in Kigali 44 African countries signed the AfCFTA. Up to 50 African states have signed either the agreement or the Kigali declaration. 27 African nations also signed the complementary African Union Protocol on Free Movement of People.
The AfCTA is expected to come into effect 30 days after ratification from at least 22 African states. Consenting countries have 120 days to ratify the agreement after signing the framework. This brings great ‘excitement’ to inter-Africa trade. The AfCTA, if implemented across 55 African countries, will create a new continental market for 1.2 billion people with up to $4 trillion dollar market cap. However, the AfCTA has several challenges and criticisms.
The AfCTA has been criticized by some analysts who feel the agreement is focused on tariff removal and customs reform without addressing the core questions of economic integration. This group of analyst criticize the AfCTA by arguing that its framework is too shallow and devoid of critical indicators of a sustainable continental market.
Some sceptics expressed fear of domination of low economies by bigger economies. Liberalization opens up markets to stiff competition. According to the AU website, the AfCTA seeks to “enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.” To these sceptics, ‘total’ liberalization of African markets will make emerging businesses vulnerable and unable to compete with foreign conglomerates. For instance, the Nigeria Labour Congress disapproved the signing of the framework for fear of infiltration of cheap substandard goods into the Nigerian market.
Some analysts have expressed concern about the readiness of African countries for a continental market. It is expected that good domestic policies are initiated to prepare for the integration and challenges that may arise. A research paper released by UNCTAD explains that African government are likely to lose about $4.1 billion dollars in tariff reduction in the short term, but earn $16.1 substantial welfare gains in the long term. African governments need to implement adequate domestic policies to maximize the gains of a liberal continent market.
Meanwhile, UN Economic Commission for Africa is hopeful that the AfCTA is capable of setting a great pace in industrial growth in Africa. UNECA notes that the AfCTA is likely to boast inter-African trade by 52.3 percent. It is expected that inter-Africa trade is more likely to double upon further removal of non-tariff barriers.
What does a single continental market of such high market cap mean to a technology startup in Lagos, Cairo, Nairobi or Cape Town?
Credit: The Atlas
Africa, in the past few years, has witnessed consistent exponential growth in its technology ecosystem. More African startups continue to receive ventures backing and media mentions from leading companies globally. The recent strides in the ecosystem of emerging markets in Africa are not a sheer coincidence; it is a progressive success of collaborative efforts of technology enthusiasts in Africa. A question quickly comes to mind; what is the scale of startup collaboration in African markets beyond national boundaries?
There is need to determine the scale of collaboration among emerging companies in Africa’s technology sector beyond national boundaries. Recent ecosystem mapping research projects have not revealed reliable data to measure the scale of collaboration between startups in Lagos and their counterparts in eastern, southern or northern Africa and vice versa. However, it is obvious that a level of collaboration exists among technology ecosystems in Africa.
Talent exchanges and support among African ecosystems continue to grow. Developer communities are increasingly becoming more African in their scope and movement. For instance, Forloop is rapidly growing to become Africa’s largest independent developer network, closely following behind Google Developer Group (GDG). Other developer communities such as Andela Learning Community (ALC), Figma Africa, Devcenter, Open Source Africa etc are pushing their movement across developer communities in Africa. Similarly, startups, tech hubs and investment firms in Africa are leveraging business collaborations across the continent to exploit the continental market.
This brings to mind the likely impact of the African Continental Free Trade Agreement if implemented. The AfCFTA is expected to enable free movement of business persons and investments across the continent. The AfCFTA targets to completely remove tariffs and non-tariff barriers to continental integration in the long run. African technology startups and developer communities are likely to fully benefit from the trade agreement if properly implemented. The technology sector globally is built on collaboration, community engagement and market cap. The sector is young in Africa, but the culture is the same. While other sectors may face several challenges adapting to changes the AfCFTA will introduce into the market, the technology sector in Africa is likely to adapt quickly.
The AfCFTA will give a boost to the e-commerce and fintech sectors. In 2017, e-commerce spending in Nigeria is estimated at $12 billion market cap. By 2025, E-commerce would account for 10% of consumer consumption In Africa at a $1.3 trillion market cap, according to a report by Mckinsey Global Institute. There is a huge opportunity for African e-commerce startups to scale their businesses beyond national borders. The AfCFTA will focus on eliminating market access demand bottlenecks. While its forerunner development plan — Action Plan on Boosting Intra-African Trade (BIAT) is focused on removing intra-African supply chain impediments. These complementary goals can be harnessed to provide a wider market for startups in the fintech and ecommerce sectors.
African technology ecosystem already supports liberal and private sector practices with little to no government support. Private sector driven innovations are likely to thrive in a liberalized continental market. If the AfCFTA is properly implemented, African startups would have an open trading ‘field’ with limitless opportunities. Cost of travel and exchange of talents will be reduced. Government bottlenecks will become optional because startups will have available locations to set up their business.
However, one may argue that the AfCFTA, if implemented may be overwhelming for some African startups to exploit. There is also fear of possible talent emigration of best industry talents by venture-backed startups. Anyway, the AfCFTA will come with challenges but the gains will make up for the challenges in the long run.
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