African trade policies have to match its industrialisation imperative

By Carlos Lopes, howwemadeitinafrica.com

While the last 15 years have seen relatively high levels of growth driven by a commodity super-cycle and strong internal demand from a growing middle class, Africa is still dependent on commodities for most of its export earnings.

There is now broad consensus that, without diversified economies, Africa will remain prone to exogenous shocks and trapped in the paradox of high growth rates, coexisting with high levels of unemployment and extreme poverty. It is for this reason that the last four issues of the Economic Report for Africa

 have investigated the fundamental policy questions and challenges facing the transformation process and endeavoured to shed light on, and bring coherence to, policy priorities at national, regional and continental levels.

I continue to call for accelerated industrialisation as key to the structural transformation of African economies. The deep focus on industrialisation in Africa demonstrates our commitment to ensure that policy research and statistics are strategically relevant to African governments’ priorities. The new industrial policies being developed by several member states and regional economic communities have greatly benefited from the research, statistics and debates generated by our focus on this critical subject.

The key factors constraining trade and industrialisation in Africa are related to Africa’s narrow production and export base, which is dominated by low-value products such as raw materials and primary commodities. This is compounded by very high trade costs, tariffs and non-tariff barriers to intra-African trade and Africa’s access to international markets. We have no alternative but to increase our share of global exports. While in the 1970s, Africa accounted for 4.99% of world trade and East Asia 2.25%, by 2010, we had regressed to 3.33%, while East Asia had soared to 17.8%. Limited by poor infrastructure and inefficient logistics, lack of adequate skills and quality inputs, insufficient provision of credit and financial services, ours has become a story of lost opportunity. The time has come for us to awake. Africa’s current trade policy plays a major role in our inability to excel.

The 2015 edition of the Economic Report for Africa suggests that trade and industrial policies are now delinked from each other. As a result, African countries exhibit high levels of protectionism with no tangible benefits in terms of productivity improvements. This is exacerbated by rent-seeking behaviour which precludes the harnessing of dynamic comparative advantages. Accordingly, tariff structures often do not reflect industrial policy considerations, but are the unsystematic result of successive rounds of reforms. If one looks more closely at imported inputs, it is clear that tariffs are weighing very heavily on the competitiveness of African countries. They stimulate neither the supply responses upstream nor the competitiveness of downstream industries. When properly applied, tariff structures are an instrument for a coordinated strategic approach and for consistency between trade and industrial policy frameworks. I like to call such approach “smart protectionism” – better defined as making the rules work for you. Everybody wants it, but we have not succeeded in making it happen.

Pursuing trade reforms in a strategic manner is a means of promoting and strengthening a country’s competitiveness and creating favourable conditions for enhanced participation in value chains.

Where global value chains are concerned, there is a growing body of research that points to the relevance of the services sector in terms of both contribution to value addition and employment creation. Put differently, a dynamic services sector – think for instance of financial services or ICT – can exert wide-ranging spill-overs that lift productivity and enhance value along the chain. Within Africa, however, trade in services is still restricted by a number of (mainly regulatory) barriers.

Against this background, it is vital that negotiations for the continental free trade area also encompass intra-African trade in services. This would not only contribute to improve the scope for the emergence of regional value chains, but also ensure that the gains stemming from the creation of the Continental Free Trade Area are more fairly distributed among African countries, particularly those economies that are developing significant service hubs.

In addition, harnessing trade strategically means that African countries ensure that the sequencing of trade liberalisation is consistent with their transformative agenda and commitment to regional integration. In other words, the sequencing of trade liberalisation should prioritise the reduction of tariffs and removal of non-tariff barriers within Africa. The fact is that intra-African exports often face higher levels of protection vis-à-vis Africa’s exports to the rest of the world, and the situation may worsen. Our goal should be to have tariffs reduced between regional economic communities, in order to avoid offering lower tariffs to Europe than those within Africa, which could become one of the consequences of the Economic Partnership Agreements in the absence of an ambitious Continental Free Trade Area Agreement. Other limiting factors, such as non-tariff barriers, remain particularly pervasive and add to the burdens weighing on the competitiveness of African producers, as these barriers remain particularly high between regional economic communities.

Unilateral trade preferences alone can hardly enable the conditions required for the development of regional value chains. Let us realise that Africa can no longer afford to negotiate trade agreements as if industrialisation does not matter. We need to keep before us, as our lodestar, the message that trade can indeed support industrialisation, but that harnessing this opportunity requires a coherent policy framework.

Carlos Lopes is executive secretary of the United Nations Economic Commission for Africa. The article was first published on his blog.