6 minute read 9 Jan 2020
Colleagues waiting for the bus together in cape town

Why Africa is poised for economic success

By

EY Global

Multidisciplinary professional services organization

6 minute read 9 Jan 2020
Related topics Tax Global trade Growth

The recently ratified African Continental Free Trade Agreement encompasses 50 countries and is the largest free trade area in the world.

2019 will likely be remembered as the year that trade turned the global economy sour. Ongoing trade tension between the US and China has already scrambled and remapped existing trade routes, trade alliances and trade networks. And there is more to come because the issues at stake between the US and China include much more than balance of trade and current account deficit.

No one should expect a quick resolution to the ongoing tension. It will be years before we can definitively tally the full economic impact as well the winners and losers of this trade dispute. However, many companies, economists and other close observers of international trade already recognize some of the winners are emerging from unexpected places.

The bold step of AfCFTA and the work to come

On a positive note, 2019 will also be remembered as the year that Africa “got” trade. With the recently ratified African Continental Free Trade Agreement (AfCFTA), Africa commenced a bold journey that will stitch together currently disparate trade practices and rules and make it easier for goods and services to flow between more than 50 countries in the continent.

AfCFTA is a monumental commitment to create the largest free trade area in the world. If executed according to plan, the agreement will boost economic growth, produce employment, create and improve infrastructure, and foster the positive socio-cultural externalities that usually emanate from economic connectedness and integration.

AfCFTA trade community

US$2 trillion

Combined GDP of the 50 countries in the African Continental Free Trade Agreement.

Some observers will argue AfCFTA should have happened years ago, but an arrangement of this magnitude only happens when conditions are right. Other observers don’t give the agreement much chance of reaching even a small portion of its potential. But those who count out Africa’s determination should learn about the renaissance happening in Rwanda and other parts of the continent.

The most important work now begins as policymakers create the modalities of the agreement and the various rules that will undergird it. Negotiations will be hard, complex and lengthy as rule-makers seek to balance the interests of smaller economies against larger economies, in pursuit of the common good.

Vietnam success story

One of the lessons of the US-China trade dispute is that success in trade policy does not happen by pure luck. Success is what happens when preparation meets opportunity. One country that exemplifies the preparation required for success to happen in trade is Vietnam.

Most trade observers now count Vietnam as one of the most significant beneficiaries of the US-China trade dispute. A report published in June by the financial services group Nomura indicated that Vietnam gained 7.9% in GDP from trade diversion as western manufacturers sought alternatives to China. Temporary or not, that is a significant economic benefit. Going further, many trade economists believe the positive externalities of even a short-term benefit of this nature can be significant. 

Vietnam’s success story is the strongest reminder yet that growth and development seldom happen by accident.

For instance, some of the benefits will become permanent because companies that are scrambling to find alternatives to China are now fully aware of the risk of concentration. Their intent to mitigate that risk means that once they establish a presence in Vietnam, they are likely to remain there in capacity, depending on how quickly Vietnam climbs the production value chain.

To a casual observer, Vietnam’s proximity to China would seem to be the primary reason why it is now a trade dispute winner. In fact, Vietnam prepared painstakingly for this opportunity that finally came.

Vietnam prepared by implementing policies of close coordination between central and regional governments, including:

  • Fostering an environment in language and action that welcomes investment
  • Investing in infrastructure, including roads and power generation
  • Focusing on developing the skills required by employers
  • Improving transparency
  • Focusing on creating a regulatory climate, including tax and incentives policies, that make it easier for investors to commit to long-term plans
  • Lowering barriers to foster trade

In short, Vietnam focused on the items one would typically find on the World Bank’s ease of doing business index. All is not perfect, and Vietnam still has further to go on this journey. But the country is undoubtedly committed to do more.

A blueprint for Africa

Vietnam is a blueprint for African governments as they seek to reap the rewards of trade. Vietnam’s success story is the strongest reminder yet that growth and development seldom happen by accident.

Globalization has its faults, but no reasonable person would dispute that many Asian countries tapped into globalization to lift millions of their citizenry out of poverty, and to create economic opportunities that will make it easier for the next generation to remain home rather than emigrate. Without trade, there’s no telling where the Chinese economy would be today.

Given the right environment, Africa can be a winner during the current US-China trade dispute.

Vietnam is not special or unique. Many African countries provide even more compelling rationales for western companies to divert production to the continent. In addition to cultural and political affinity and proximity to western markets, many African countries already enjoy preferential trade arrangements with the US and European Union. These include the Generalized System of Preferences (GSP), the Africa Growth and Opportunity Act (AGOA) and the Economic Partnership Agreements (EPA).

Given the right environment, Africa can be a winner during the current US-China trade dispute. This is why AfCFTA and its quick implementation is so noteworthy. The benefits only begin with the elimination of the average six percent duty on imports. Any global company will be eager to do business with a trade community that includes more than 50 countries, with a combined GDP of US$2+ trillion and more than 1.2 billion potential customers.

Beyond the trade in goods, a continued expansion of the service and fintech sectors creates an opportunity for indigenous companies to become truly transnational. With all of this in mind, policymakers at the African Union must now focus on accelerating work on the enabling modalities that will make AfCFTA live up to expectations.

It is also important for each country to foster an environment and implement policies that encourage rather than discourage investments by home-grown and foreign companies. Particular emphasis should be placed on improving and expanding infrastructure that will make transit easier. This is the harder part. But economic history has shown time and time again that trade and investment is a sure path to development and economic progress. 

Summary

As the US-China trade dispute continues, dozens of countries in Africa could reap huge benefits thanks to the recently ratified African Continental Free Trade Agreement. African nations can also learn from Vietnam’s economic success story, which was driven in part by close coordination between central and regional governments.

About this article

By

EY Global

Multidisciplinary professional services organization

Related topics Tax Global trade Growth