Government and Institutions

Africa’s Free Trade Area is a step in the right direction, but the continent has more pressing economic concerns


SUGGESTED ARTICLES

Despite Africa containing five of the world’s ten fastest growing economies, its economic development continues to languish. The African Continental Free Trade Agreement (AfCFTA) aims to solve Africa’s growth problem through free trade. Signed on 21 March 2018, the agreement aims to revitalise African development by greatly increasing intra-continental trade. If all African states ratify the agreement, the AfCFTA will establish the world’s largest free trade area by population – encompassing 1.2 billion people. To date, 54 out of 55 African countries have signed the agreement.

This is a welcome and necessary step. African countries currently trade less with each other than the countries of any other continent, partly due to high non-tariff and tariff barriers, and partly due to a lack of adequate transport links between neighbouring states. For example, it is often easier to pass through Europe than to fly directly from one African nation to another. This poor connectivity within the region is, in part, a legacy of the infrastructure put in place by colonial powers, which was set-up to link countries to ports, in order to ship and extract commodities as efficiently as possible, rather than to link countries across the region. The AfCFTA hopes to boost intra-African trade by 52.3%, both directly, by cutting tariffs by 90% and harmonising trade rules, and indirectly, by encouraging the improvement of infrastructure linkage continent-wide. This should ultimately lead to the development of regional supply chains, cross-border investment and continental integration.

The agreement has grand ambitions to enable Africa to compete globally in export other than commodities. 43% of intra-African trade consists of industrial goods, compared to 75% of African external exports, which are commodities. The agreement would open up competition between African industries and allow industries to access a large market (becoming the fifth largest market in the world) with huge economies of scale. Fuelling African industrialisation and the improvement of African industries’ productivity should enable them to compete internationally, in the long run.

However, the pledge to have AfCFTA implemented by July 2020 appears optimistic. As of today, only 28 out of 54 states have ratified the agreement, whilst recent developments have threatened its goals. Nigeria has effectively issued a de facto ban on all trade from its borders, just three months after signing the AfCFTA. Nigeria’s new law forbids the movement of goods from the countries which it shares a land border with, Benin, Niger and Cameron. On top of this, Sudan has also closed its land border with Libya, the Central African Republic, and Kenya – this is hardly in line with the liberal spirit of the AfCFTA.

Nevertheless, let’s assume an optimistic scenario, under which the AfCFTA gets off the ground, even if some countries opt out and retreat into protectionism. How much of a difference could this realistically make? Would African countries finally join the ranks of the world’s newly industrialised countries? Could there soon be an “African Taiwan”, or an “African Chile”?

It’s an empirical question, but the answer is likely to be “No”. Although the agreement is likely to lead to an increase in African growth due to the benefits of free trade, specialisation, and economies of scale, for the continent to radically develop, Africa foremost needs widescale reform to its nation’s property rights systems. There exists a very strong relationship between property rights and economic development. These rights include the legal and political environment and ownership of intellectual and physical property.

The Property Rights Alliance recently published an index, the International Property Rights Index (IPRI), which measured the strength of intellectual and physical property rights across the globe, covering 129 countries and 98% of world GDP. Africa as a region ranked extremely low on the IPRI, and among the bottom 25 countries on the index, 13 were African, with 12 of the 13 located in Sub-Sahara Africa. These poor property rights systems are a major reason why extreme poverty remains prevalent in Africa and particularly endemic in Sub-Sahara Africa, with the World Bank estimating that this region of Africa will contain 87% of the world’s poorest people by 2030.

Property rights put in place the necessary free market incentives for entrepreneurial activity, ensuring that African producers have the right to produce, trade and profit. In their absence, individuals lack the incentive to put their property to productive use, or acquire property in the first place. This in turn hugely impedes investment and economic activity. Often the struggle for individuals to control property leads to intensely destructive competitive forces, as seen in Africa’s many civil wars. Land is the central productive asset held by African people, however most land in Africa has no registration of who has rights to use it, which has resulted in massive underinvestment in the region. These poor rights are a result of African countries’ dysfunctional judiciary and legal institutions.

Though the establishment of the AfCFTA will benefit African development, African countries must more importantly strive for continent-wide greatly improved property rights, by radically reforming their legal and institutional systems. Often effective property rights are considered a critical precondition for economic development, putting in place the necessary incentives and initiatives for entrepreneurial activity to thrive, and economic activity to flourish.

 

Joseph Douglas is a research intern at the IEA.


Leave a Reply

Your email address will not be published.


SIGN UP FOR IEA EMAILS