Fostering Intra-Continental Trade and Local Value Addition
As Africa navigates this era of economic liberalisation, our focus shifts towards enhancing local value addition and developing robust pan-continental value chains. This transformative approach aims to reshape Africa’s trade deficits, unlocking vast economic potential across the continent, as the expansion of local productive capacity creates vast opportunities for creating jobs and prosperity across the continent.
Since the 1980s and 1990s, African countries have embarked on economic liberalisation guided by Western institutions. However, these reforms have largely overlooked a crucial aspect: local value addition. It is only recently that African nations have recognised the need to focus on this area, crucial for their economic progression.
Historically, African economic policies have centred on trade liberalisation, diversification of exports, deregulation of foreign exchange markets, and attracting foreign direct investment. Despite these efforts, trade volumes have escalated, but so have imports, outpacing exports and widening trade deficits. This trend contradicts the neoclassical economic doctrine, which posits that currency depreciation should enhance export competitiveness.
In 2021, 37 out of 50 African countries recorded merchandise trade deficits. The continent’s US$35.27 billion trade deficit would have been more pronounced if not for surpluses from countries like Angola, the Democratic Republic of Congo, Libya, and South Africa. Notably, Algeria, Angola, Egypt, Nigeria, and South Africa account for nearly 60% of Africa’s total international trade, indicating a skewed trade structure.
This imbalance highlights the failure of classical economic solutions and underscores the need for local value addition. The focus is now shifting towards creating intra-African trade and supply chains. This approach aims to retain more economic benefits within the continent.
Ghana’s mid-1990s fiscal regime, influenced by the World Bank and the IMF, exemplifies the shortcomings of past policies. Tax incentives favoured companies importing production inputs for export-oriented manufacturing, inadvertently discouraging local value addition. This policy trend has been replicated across many African countries, leading to huge import dependencies.
Interestingly, about two-thirds of Africa’s imports are production inputs, not finished consumer goods. Therefore, increasing local value addition in manufacturing could significantly impact trade balances. In 2021, sub-Saharan Africa’s raw material, intermediate production inputs, and capital goods imports far exceeded its consumer goods imports.
Focusing on low-technology but inclusive manufacturing, particularly agro-processing, presents a viable solution. Many African countries have institutions capable of supporting cottage industries in this sector. Fiscal incentives and government commitment are crucial in leveraging this potential.
A prime example is the brewery industry in Nigeria and Ghana, which has replaced imported barley hops with locally cultivated sorghum, maize, and rice. Such initiatives have reduced import bills and provided sustainable livelihoods for thousands of farmers.
The African Continental Free Trade Area Agreement (AfCFTA) now offers a platform to extend these practices across the continent, creating supply and value chains that integrate various African countries based on competitive advantages. For instance, Unilever’s sourcing strategy across Africa illustrates the efficiency of such chains.
Intra-African trade, currently a fraction of Africa’s total trade, holds immense growth potential. Increasing local value addition will retain more economic benefits within Africa, creating jobs and conserving foreign exchange. The use of the Pan African Payments System (PAPS) as a payment platform will minimise forex exposures, vital in the current economic climate.
Engaging Africa’s public and private sectors in this new economic paradigm is key to transforming the continent’s economic landscape. This shift towards local value addition and continental trade collaboration is poised to redefine Africa’s role in the global economy.