Competitiveness is Key to Trade and Development in Africa

As World Bank President Jim Kim told the African leaders who gathered in Washington for the U.S.-Africa Leaders Summit this week: African countries have enormous potential to increase trade, drive growth, reduce poverty, and deliver jobs. They face constraints, to be sure, but the World Bank Group is working with our African partners daily to improve the competitiveness of their industries and boost the volume and diversity of their trade with the rest of the world.

At a high-level meeting at the World Bank on Monday, African ministers and delegations representing 51 countries had a pressing concern: the renewal and modernization of the African Growth and Opportunity Act (AGOA). A preferential program that enhances the access of qualifying African countries to the US market, the law is due to expire in September 2015.

In hosting the AGOA Ministerial, the World Bank underscored its commitment to the transformation of African economies through greater trade and investment. Critical objectives of the Bank Group’s Trade and Competitiveness Global Practice are promoting economic growth and job creation. African countries have enormous potential to expand trade, an engine that can drive growth, reduce poverty, and deliver jobs. Indeed, supporting the success of the Bank Group’s client countries in Africa will be central to achieving our twin goals: eliminating extreme poverty by 2030 and promoting shared prosperity. We believe that if the challenge in Africa is urgent, so is the opportunity.

Trade preference schemes such as AGOA can play an important role in helping Africa realize its potential. AGOA has had an impact. Exports from Sub-Saharan Africa to the US have more than doubled over the course of the 14-year program, and AGOA has been instrumental in boosting the apparel sector in countries such as Lesotho and Madagascar by increasing exports, attracting foreign investment, and generating new jobs.

But more needs to be done. Oil, minerals, and manufactures coming from very few countries continue to dominate US-Africa trade, and AGOA has not reached its full potential yet, nor have all countries taken advantage of it.

To better profit from AGOA and other economic opportunities, the great task for the continent’s policymakers and the development community is to find ways to overcome economic constraints and allow the private sector to generate jobs at a faster pace. Issues such as burdensome licensing requirement, poor trade logistics, and expensive and slow transport pose high indirect costs to firms. Countries must expand trade within Africa and throughout the world. This may be in the light-manufacturing sector, which could help African countries industrialize, diversify their exports, and create jobs. Recent analysis from the World Bank Group suggests that if this sector grows in Africa at the same speed it did in East Asia, it could create 7 million new jobs on the continent. Realizing export potential in agriculture and agribusiness is also essential to reducing poverty in many countries.

In general, one major hurdle for African countries is that firms in the formal sector generally stay small, according to Bank Group research: African firms in the formal sector tend to be 20 percent to 24 percent smaller than firms in other regions of the world, and labor productivity tends to be lower. In many cases, a small internal market prevents firms from gaining sufficient scale to become globally competitive. For example, the smallest countries – like Lesotho – need to rely on trade to grow in a healthy way. Moreover, African countries are losing out on billions of dollars every year because of high trade barriers with neighboring countries. In many ways, it is easier for Africa to trade with the rest of the world than with itself.

Recognizing these constraints, the World Bank Group is helping our client countries improve the strength of their formal firms with both technical and financial assistance. We are working on regional integration and also helping individual countries diversify their exports. To accelerate economic integration in Southern Africa, for example, we are working with five countries – Malawi, Mauritius, Mozambique, Seychelles and Zambia – to identify barriers to integration and set priorities for reform. In the Great Lakes region of Africa, we are working in critical border communities to create safer, more transparent trade environment. A recently launched, EU-funded, West Africa Trade Logistics regional integration program will focus on improving efficiency, transparency, and predictability for traders through regional coordination and standardization of customs and border agency requirements.

To promote industrialization and export diversification, we are helping our clients move away from dependence on minerals and commodities to broader-based, inclusive, trade-driven growth. For example, in Ethiopia and Madagascar we are helping policymakers to develop “special economic zones” and “growth poles” – geographic areas in which firms can learn from each other, develop synergies, and take advantage of government incentives, such as tax breaks or access to infrastructure. We are also working with policymakers in countries such as Liberia and Guinea to conduct diagnostics and identify strategies for connecting with global value chains and boosting economic diversification.

To improve investment in Africa – and to strengthen the overall business environment – our Investment Climate team in Africa supported 45 reforms last year that have yielded about $8 million in private-sector investment, the formalization of about 1,000 new businesses, and the establishment of about 2,400 new jobs within the past three years. In Burkina Faso, for example, an improved business registration process lowered the cost of opening a new business by more than 50 percent and greatly reduced the time required to open a company.

The Bank Group is also encouraging the entrepreneurs of tomorrow. In Nigeria, we supported the “YouWIN” business plan competition that generated about 1,200 business ideas in six key regions. Applicants received financial support, training and mentoring. We now have a similar project in Guinea-Bissau. Our multi-donor program, “ InfoDev,” is fostering high-growth entrepreneurs in agribusiness supply chains, mobile technology innovation and climate-related technology.

We are also helping client countries to establish and strengthen supply chains. Together we identify barriers and weak links in supply chains. In Sub-Saharan Africa, 18 countries are benefiting from trade-related projects designed to boost the investment climate.

In all these ways, and more, we are trying hard to support the trade and competitiveness agenda across Africa. We offer both analytical capability and financial products. Our solutions are integrated and holistic and designed to meet the specific conditions of each country and region. A tremendous amount of work remains to be done, but Africa is clearly on the cusp of many opportunities.