Trading without borders: The key to unlocking Africa’s economic potential?
Ongoing uncertainty in the global economy has drawn more attention to economies on the African continent and their potential to provide higher returns for investors. These economies have been more resilient to change and have consistently outstripped the growth of more developed economies, but despite this, Africa hasn’t fully reaped the benefits of renewed global investor confidence in the region.
The African continent has over 1 billion consumers and is projected to house a middle-class income that would rival that of India. Couple this with the fact that there will be more than 250,000 dollar millionaires on the continent in the next five years and it comes as no surprise that Africa is a continent with a tremendous amount of ‘untapped’ economic potential.
But why haven’t we been able to unleash this?
The simple answer is that African nations continue to export raw materials and import finished goods, from outside the continent, as opposed to trading, manufacturing, and adding value within their borders or with other African nations. With about 10% of total trade classified as intra-African, the continent is considerably off the pace when compared to regions such as Europe who complete more than 80% of trading within the borders of its member countries. In order to understand how to unlock Africa’s economic potential, we need to understand the deeper issues hindering intra-African trade.
Investing in inter-country transport infrastructure
The 2010 African Union Summit in Kampala highlighted transport infrastructure backlogs, technological constraints, and inefficient and inadequate border processing as some of the key issues facing economies on the continent. For some, these issues are more pertinent than others and, in spite of a few nations having adequate intra-country transport networks, underdeveloped inter-country networks remain a concern, particularly for landlocked countries with greater distances to market.
With growing congestion at border posts, risks associated with the transportation of goods by road, and the damage caused to the road network by trucks, governments also need to rely more on rail and air freight networks. Sadly, the lack of viable railway networks and cost-effective air freight between major ports and inland countries has been one of the stumbling blocks for intra-African trade over the years. Investing in transport infrastructure should therefore, be seen as paramount to developing trade links to facilitate regional production chains allowing raw materials to be processed and traded within the region.
In recent years, the continent has done well to strengthen inter-country links particularly along the North-South and East-West transport corridors. Transnet’s recent drive in developing inter-country freight rail transport infrastructure is a testament to this with the state-owned enterprise entering into an agreement with the copper rich nations of Zambia, Zimbabwe, and the Democratic Republic of Congo to facilitate inter-country trade and movement of export material through its port in Durban.
Historically though, much of the development has been driven by Chinese investment in Africa. As Africa’s largest trading partner, China has made a concerted effort to help the continent achieve the “African dream” by unlocking opportunities through cumulative investments of over US$15 billion. The downside, though, of many of these infrastructure investments, is that they are financed primarily through Public-Private Sector Partnerships, due to a lack of government financing, resulting in end user fees which only adds to already high inter-country transportation costs. Lowering transportation costs is vital to promoting intra-African trade and is one of the reasons that governments are exploring initiatives to enhance capacity utilisation and reduce end user fees.
Breaking down the barriers for inter-country trade
Investing in infrastructure development cannot be viewed as the sole driver for enhancing intra-African trade and needs to be addressed in conjunction with reducing trade barriers across different countries on the continent. At present, industries in various countries are more regulated than others which force countries and businesses to create separate supply chains thereby increasing the costs of trading on the continent. Reducing these barriers to market is crucial to facilitating the easier movement of goods, labour, and capital within Africa allowing businesses to benefit from the cost-effective manufacturing of products in distant locations and facilitating the trade to countries that were previously inaccessible.
Breaking down the barriers for intra-African trade will not only help diversify African economies, but will also benefit the free trade areas of the East African Community, the Common Market for Eastern and Southern Africa, and the Southern African Development Community in the short terms and pave the way for a Continental Free Trade Area over the next 5 to 10 years. With a fast-growing working-age population, high rates of urbanisation, rising disposable income, and a strong consumer base, few can argue that this will position Africa as the focal point of global growth in the years to come.
This post originally featured on the KPMG Africa Blog
