AfCFTA must be about industrialisation, not just trade

23 Apr 2021
23 Apr 2021

by Vuyiswa Mkhabela

Originally published in Business Day, 9 April 2021

Industrial capacity, capabilities and competence vary across countries and regions, which can open countries to uneven trade dynamics.

On January 1, Africa officially started trading under the African Continental Free Trade Agreement (AfCFTA), thus taking a giant step forward towards fostering regional integration in Africa.

Enormous strides have been taken by heads of state, policymakers, trade negotiators across the continent and the AfCFTA secretariat to get the continent to this historic juncture.

Fifty-four of 55 heads of state have now signed the agreement’s consolidated text establishing the AfCFTA, and 36 countries have deposited their instrument of ratification. This means 36 sovereign states have provided their consent to be bound by the agreement, and accept and implement the obligations agreed on.

Implementation of the AfCFTA is under way; yet more action is required to transform policy into action. AfCFTA secretary-general Wamkele Mene shared these sentiments during the fourth instalment of the AfCFTA and transformative industrialisation webinar series hosted by the University of Cape Town’s Nelson Mandela School of Public Governance. Mene stated that “what is required [is] a set of harmonised action plans focused on industrial development, to be implemented on a continental basis, a pan-African basis and in each region”.

This is critical if the continent is to move from policy to realising the benefits of regional economic and market integration.

Historically, intra-regional trade flows in Africa have been limited. Intra-regional trade in Africa is about 17% of total trade, and the continent lags well behind Europe (69%), Asia (59%), and North America (31%). There are complex reasons for this. A primary factor underpinning this trend — despite a long history of efforts to foster regional integration — is the lack of productive capacity on the continent. Africa’s share of manufacturing in its GDP has been low compared to other developing countries in Asia and Latin America.

Additionally, a number of regions and countries have been faced with premature de-industrialisation, whereby their share of manufacturing in GDP has declined earlier in their development path than was previously the case. Many studies, including those undertaken by the UN Conference on Trade and Development (Unctad), have argued that building productive capacity is crucial for structural transformation and economic development in Africa. It is therefore fitting that the AfCFTA is aimed at facilitating industrialisation.
However, the agreement is fundamentally a trade policy agenda with the objective of boosting intra-regional trade. The successful realisation of a free trade area will rest on the development and implementation of co-ordinated industrial policies to ensure African states first have goods and services to trade, that constraints to industrialisation across the continent are acknowledged and addressed, and that implementation aligns with existing policies.
This needs to be done while identifying new, innovative ways for countries not just to industrialise for the sake of boosting trade but to pursue transformative industrialisation focused on economic diversification, structural transformation and technological development. This means the AfCFTA must become a tool of economic diversification, industrialisation and transformative development.

Many heterodox economists and economic historians, such as Dani Rodrik, Ha-Joon Chang and Joseph Stiglitz, have argued that industrialisation requires active industrial policy in which trade policy becomes a tool of industrial policy. Therefore, trade policies of African countries should be based on how they can support and facilitate industrialisation.

However, with regard to the AfCFTA, trade arrangements have been developed before industrial policy. Given the situation Africa finds itself in, former SA trade and industry minister Rob Davies, speaking at the same webinar on AfCFTA and transformative industrialisation, emphasised the importance of ensuring regional integration arrangements support industrial policy.

This is particularly important as industrialisation has long been on the policy agenda in Africa, but has mostly failed to materialise, despite countries and regional institutions making commendable efforts to boost manufacturing and industrialisation efforts in the past decade. For instance, the AU holds an annual Africa Industrialisation Week to further discuss structural transformation and industrialisation on the continent.

Countries such as Ethiopia, SA, Kenya, Botswana and Ghana have pursued active industrial policies in recent years. Some regional economic communities have developed and are implementing regional industrial policies, such as the Southern African Development Community (SADC) and its Industrial Strategy and Road Map 2015-2063. However, while these efforts are laudable, the reality is that success varies due to a lack of country-specific industrial policy, policy harmonisation, and co-ordination within and across each of the regional communities.

It is concerning that the AfCFTA has no programme governing industrial policy or a mechanism to deal with the lack of industrial policy co-ordination that is likely to occur at a continental level. Many participants at the webinar series shared this concern. In addition, some observed that trade policy has preceded industrial policy for many African countries, which also lack the institutional capability required to develop and implement industrial policy.

To worsen these concerns, industrial capacity, capabilities and competence vary across countries and regions, which can potentially open countries to uneven trade dynamics. Addressing these concerns thus requires that smaller and poorer African countries be allowed by their larger neighbours to implement the AfCFTA in a manner that safeguards and protects their nascent industries and sensitive manufacturing sectors.

The policy space this will create will enable these countries to use this time to develop new and innovative ways to build their competitiveness and pursue their unique path to transformative industrialisation by improving their value-added sectors and technological capabilities and diversifying their productive structure from a reliance on few commodities.
• Mkhabela is a master’s student at the University of Cape Town School of Economics specialising in economic development.