New World Bank research shows the agreement among 54 countries would likely draw more foreign direct investment, amplifying its benefits
Imagine that a large African textile company wants to set up a new factory in a neighboring country to help establish a regional value chain for its production. It would likely face many months of cumbersome paperwork to obtain the necessary approvals and receive an investor license. Visa restrictions may make it difficult to bring in specialists to train local staff, while other staff may not even be allowed to work because their professional degrees are not recognized. Even after it is operational, the firm’s shipments of components could be hindered by traffic jams at border crossings, duplicative paperwork, and countless rounds of inspections.
These are just some examples of the frustrations encountered by businesses seeking to invest and trade from one African country to another. Small wonder, then, that
But Africa’s fractured internal market has prevented it from benefiting fully from this trend. The African Continental Free Trade Agreement (AfCFTA) aims to be a game changer. For the first time, it would create a single, continent-wide market that unites 54 countries with a combined population of 1.3 billion and GDP of $3.4 trillion. It would reduce barriers to trade and investment and boost competition, raising the attractiveness of Africa for regional value chains and to investors.
World Bank research suggests that the agreement has the potential to bring significant economic and social benefits in the form of faster economic growth, higher incomes, and less poverty. It would help Africa diversify and industrialize its economy and reduce its reliance on exports of a small number of commodities – such as copper, oil, and coffee. Women and skilled workers would be among the biggest beneficiaries, albeit with variations across countries.
But much depends on whether the agreement’s most ambitious goals are successfully negotiated and then carried out in full. Effectively implementing the commitments of the AfCFTA on the ground should become a priority for members. This will require political commitment and leadership.
The first phase of the agreement, which took effect in January 2021, would gradually eliminate tariffs on 90 percent of goods and reduce barriers to trade in services. That alone would expand trade and could raise real income by 7 percent by 2035, reducing the number of people living in extreme poverty by 40 million, to 277 million, according to a World Bank report published in 2020. About two-thirds of the $450 billion in potential income gains would result from removing long delays along borders and lowering trade costs, making it easier for African businesses to join regional and global supply chains.
Now, a new study looks at two scenarios to show that the benefits could be even greater when we look not only at the benefits from freeing up trade, but from increased investments and deeper trade agreements which address investment and behind the border issues. The first scenario accounts for the additional foreign direct investment (FDI) that the trade deal is expected to attract from within Africa and from overseas. FDI is important because it brings capital, technology, and skills. Further, FDI should link with domestic investment and help Africa’s economies diversify into new sectors of agribusiness, manufacturing, and services for domestic, intra-Africa and extra-Africa markets. In that scenario, real income could rise further, to about 8 percent in 2035 (US$506 billion), and the number of people living in extreme poverty would fall by 45 million.
The second scenario looks at the impact if the agreement is expanded, as planned, to harmonize policies on investment, competition, e-commerce, and intellectual property rights. Deeper integration in these areas would help build fair and efficient markets, improve competitiveness, and attract even more FDI by reducing the risks of shifting regulations and policies. This scenario would bring income gains of 9 percent by 2035 (US$571 billion) and reduce the number of people living in extreme poverty by 50 million (a 16 percent drop relative to the projected number of extreme poor in 2035 without AFCFTA).
The agreement faces several challenges, however. The African private sector, including SMEs that could benefit from AfCFTA, should become more familiar with the different chapters of the treaty and learn how the topics addressed – such as the liberalization of trade in services – can be leveraged to boost their businesses. That was the case in Central America, where the private sector became organized under Central American Integration System, a federation of Chambers and Associations of Exporters which regularly follows up on the implementation of trade commitments.
In addition to Ministries of Trade involved in the negotiations, other government agencies in each country should also become familiar with AfCFTA and learn the key role they may be called to play in its implementation on the ground. So is reducing barriers to trade in services, because each country has its own regulations covering industries such as logistics and transport, financial services, tourism, and communications.
So signing the agreement is just the first step. It will take much more to unlock AfCFTA’s potential gains in trade, investment, and jobs. African nations will need to support the AfCFTA Permanent Secretariat, based in Accra, Ghana, which is charged with administering the agreement. Domestic laws and regulations will need to be harmonized with the agreement’s protocols on investment, intellectual property rights, competition and digital trade. And to deal with longstanding structural challenges, African nations will also need to:
- Encourage progressive liberalization of cross-border trade and investment policies in line with AfCFTA protocols to establish the groundwork for regional value chains in Africa;
- Streamline customs and border procedures and upgrade infrastructure to reduce long delays at borders, which have slowed the movement of goods and raised trade costs, and develop effective logistics hubs;
- Strengthen cross-border trade and investment in services, by facilitating trade in digital services, removing FDI restrictions, and liberalizing the movement of workers.
It is now up to the member states – and champions within to lead - working together with the private sector and civil society, to ensure that the promise of the AfCFTA can finally be a game changer for Africa and reap its many benefits for its people.
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