Category: Trade

Policy lessons for the Africa Continental Free Trade Area

On May 30th, 2019, thirty days after the 22nd African state had deposited the instruments of ratification, the African Continental Free Trade Agreement (AfCFTA) came into force. For many, the AfCFTA is a cause for significant optimism. As the wider world (mainly the west) is increasingly questioning globalisation and integration, Africa is moving closer together. The AfCFTA is at the centre of that, a pan-continental free trade area that the African Development Bank thinks ‘will stimulate intra-African trade by up to $35 billion per year, creating a 52% increase in trade by 2022; and a vital $10 billion decrease in imports from outside Africa’.

The ambition is incredible, “a single continental market for goods and services, with free movement of businesspersons and investments”, but, as they say, the proof is in the pudding. Africa has tried this before (although on a smaller scale). There are a number of Regional Economic Communities (REC’s), around the continent. However, when it comes to trade, they have never quite hit their potential.

Figure 1: African Regional Economic Communities approved by the AU

 

For the AfCFTA to work we need to learn from the lessons that have held our own REC’s back as well as lessons from economic and trade areas such as the EU. Most important is that we must be the understanding that for the AfCFTA to meet its potential it must be designed with people at its centre and the social, economic and political realities of the diverse continent in mind.

1 – The Brexit lesson: a people-centred union

When it comes to trade unions, the elephant in the room is Brexit. One of the main drivers behind the Brexit vote was that it was seen as a project of the elite, benefiting certain people and groups while leaving another behind. If it is to work the AfCFTA cannot be seen as an elite project, it must be centred around the people that it is intended to serve this can be done in three critical ways.

First and foremost, African’s must be involved in the technical design of the AfCFTA. This means the team putting together the rules, regulations and policies that will govern the free trade area, must consult African people, civil society and business both big and small. Their input will be critical to ensuring that it is designed around the needs and aspirations of African’s.

Second, freedom of movement must not just apply to goods and money. If people cannot travel, meet, learn and engage with each other, the continent will not be able to pull together at a grassroots level. Thus, the AfCFTA must not just be about trade but about African’s coming together as well.

Third, it’s not just enough to sign a trade agreement, you must engage and educate people about them. In a previous post, I wrote about how good communication is a critical part of any policy this applies to the AfCFTA. People and business across the continent must be educated on what it is and how they can take advantage of it.

2- Learn from the EU: equality, flexibility and tempered ambition

After two devastating wars that had engulfed the world, integration was seen as the antidote to the rivalries and interstate competition that had been so destructive. As the world’s most successful trade union (despite its recent troubles) there is much that Africa can learn from the EU as it embarks on its own integration.

The first takeaway is matching ambition to reality. The first organised form of economic integration that emerged in Europe after the war was the European Coal and Steel Community. Which established a common market for coal and steel between 6 countries (France, Italy, Belgium, The Netherlands, Luxemburg and West-Germany). Though the Community was limited it went on to form the core of what we now know today as the EU, an ambition that the architects of the community held but knew they had to work towards. And therein lies the lesson for Africa. We are an incredibly diverse continent, with various countries pursuing development in their own way. Institution an all-encompassing trade union on July 1st, 2020 may be too much of political and economic shock for many to take. However, if – like Europe – we start a little smaller, with a group of goods and services that everyone can agree should be traded freely. We can, together, build the trust, institutions and relationships that will allow a wider system to succeed. This does not mean shelving the dream of a pan-African trade area, rather it means working towards it, building and expanding our common experience of it until it matches the vision.

Second, is that the political and economic power of the big countries must be balanced. As can be seen below the AfCFTA has the greatest levels of income disparity of any continental free trade agreement, and more than double the levels witnessed in blocs such as ASEAN and CARICOM.

This means that smaller countries must have genuine power in the institutional and decision-making design of the AfCFTA. The EU has historically faced a similar problem, Germany, France and the UK (though not for long) as the big political and economic powers in the union could dominate it. However, the political institutions of the EU are structured in such a way as to require consensus from all countries and that ensures that all countries have a say. It can be cumbersome and time-consuming but has been largely successful. Furthermore, the EU has been willing to be flexible, allowing some countries extra time to comply with certain rules, or like the UK to stay outside the Schengen and Euro. What this does is give some allowance for the political and economic realities of various states, thus making itself more acceptable to a wider section of the populace.

Africa’s diversity will require flexibility. We will not be able to move at the same pace, and the very real concerns that people have of being dominated by the two economic giants of the continent must be taken into account. Furthermore the aspirations and ambitions will differ from country to country, Kenya may want a trade deal with the USA but that shouldn’t mean it cannot trade with the rest of Africa within the framework AfCFTA. Flexibility allows for diversity, through which different countries and economies can develop different strenghts and specialisations. Combined, this diversity will boost trade within the contient, and beyond as Africa will be able to compete in a number of industries and products.

3- learn from ourselves: empower SME’s

Most businesses on the continent are Small or Medium Enterprises. If the AfCFTA is to be a success, it must learn from the existing regional economic communities, specifically what they fail to do – foster trade, by and between SME’s. The AfCFTA must put African SME’s front and centre. Doing this will require some imagination and bold policy moves as i have written about previously. This also ensures that the trade area won’t be the preserve of elite big businesses, and hopefully some of those SME’s will take advantage of the opportunity to grow.

Policy to make a dream a reality

I am not a sceptic. In fact, I am incredibly excited by the possibility that the AfCFTA can bring, I am in awe of the ambition and vision behind it and as an African, I am immensely proud that not only have we managed to get this far, but we are on the cusp of implementation.

However, the realist in me is afraid that if we do not get the design of the AfCFTA right it will be another in a pantheon of acronyms that litter the continent, shadows of the intent and ambition they were supposed to fulfil.

This need not be the case, if we learn the lessons from the failures of Brexit and the successes of the EU, and endeavour to keep the aspirations and endeavours of Africa’s people at its centre the AfCFTA can be the game-changer that we all hope it will be.

 

 

Warehousing African development

Amazon has built a trillion dollar business around them, farmers around the world rely on them, modern healthcare would be crippled without them, the manufacturing industry needs them to smooth out production and demand cycles and global trade needs them to work. They aren’t glamorous like railways and airports, nor are they as fulfilling for donors who prefer to build schools or fund feeding programs, but warehousing is critical to modern societies and economies and they will be crucial for the development of African economies.

Warehouses won’t make living conditions or livelihoods better by themselves, but they are a crucial enabler for things that will. What’s needed from African governments isn’t money or infrastructure, but rather the right set of policies that will enable businesses and individuals to build, and use warehouse facilities as they see fit, to the benefit of their businesses, communities, and the wider economy.

More than storage

Most people do not spend much time thinking about warehouses let alone their transformative power. To most of us, warehouses are just storage, inert spaces where goods and commodities are kept either in transit or until they are needed. I thought the same until I learned the role that certified warehouses (warehouses certified by the government or other trusted actor) and storage play in making the world that we live in. Which got me thinking about the role that certified warehouses could play in Africa’s development on several fronts.

Agriculture

The Food and Agriculture Organisation of the UN estimates that sub-Saharan Africa loses about 20 % of its cereals, 40%-50% of its tubers, fruits and vegetables, 27% of its oilseeds, meat, and milk, and 33% of its fish, to post-harvest losses. This is millions of dollars of lost income for African farmers and it is enough food to feed at least 48 million people, equivalent to the population of Angola, Zimbabwe, Swaziland, Namibia, and Malawi all together.[1] A significant contributor to this phenomenon is the lack of adequate and suitable storage for agricultural goods. This forces African farmers to sell whatever produce they can at whatever rates they can get (the much hated farmgate price) or simply to let their produce go to waste if they can’t find a buyer.

Available (within reasonable distance), affordable (reasonably priced) and suitable (the facilities can store perishables goods appropriately), could cut post-harvest losses dramatically, simply by giving farmers somewhere to store their produce. Thus at the most basic level, proper storage ensures adequate food supply and food security. In addition, it could significantly improve farmer incomes as they will be able to store produce and search for the best prices rather than be forced to take whatever is given to them.

However, certified storage can do a lot more than simply bolster food supplies, farm incomes and cut losses. Certified storage can open the door to farmers gaining access to credit, having produce in a certified warehouse is an asset that farmers can use collateral for credit. Smallholder farmers produce almost 70% of food consumed on the continent, an improvement in their productivity would impact on poverty and living standards throughout Africa (something I cover in more detail here).  Providing smallholder farmers with access to credit is essential to unlocking long-term, sustainable gains in African agriculture. Without credit, farmers cannot afford inputs such as quality seed and fertilizer, they cannot purchase or rent tools that increase efficiency and reduce labour costs, they cannot afford training and support services. Certified storage can be the key to unlocking agricultural credit, as financial institutions will have collateral which they can sell if the farmer defaults, and farmers will not be rendered destitute as their primary asset, their land, will not be taken away as collateral. Furthermore, it could allow farmers access to financial instruments that farmers in the west have long had access to such as hedging (locking in a price for the next harvest) and providing themselves with some security.

The third thing certified warehouses can do for African agriculture is enable commodity exchanges, depositing agricultural produce in certified warehouses will allow that produce to be listed on commodity exchanges and traded, enabling farmers to sell their produce to buyers anywhere in their country, region, or even continent, and allowing consumers (through large purchases like millers and supermarkets) a larger selection of producers to buy from and thus a better chance of getting better prices.

Trade

Trade (both domestic and international) relies on finance, specifically trade finance. Formally its where banks and financial institutions provide credit, hedges, guarantees, and increasingly complex structured products to companies and people buying and selling goods across borders. On the informal scale, it’s the trader who borrows a bit of money (usually on a mobile lending platform) which he uses to buy produce or some other goods, which they then take to market and sell at a profit, paying back the loan with interest and keeping their profit margin. Fundamentally, both formal and informal, trade finance relies on trust. A key issue that hampers trade finance and thus trade across the continent is the lack of trust within the African trade ecosystem.

For instance, financial institutions (both big banks and mobile lenders) do not trust warehousing facilities and are thus unwilling to lend with those goods as security. Thus, financial institutions add a significant risk premium (high interest) to their financing which traders are unable to pay, or the few facilities that are trusted can charge exorbitant rates thus raising the cost of trade. Certified warehouses which issue verified receipts of the goods deposited in their warehouse could fill this gap and get rid of this hurdle to trade on the African continent because in the rest of the world this is precisely what certified warehouses do. Like in agriculture, having a place where you can store your goods verified by a trusted actor will kickstart trade by enabling their crucial lubricant, credit.

Healthcare

Markets and economics aren’t the only benefactors of proper warehouses. Pharmaceuticals are volatile things, they are carefully engineered chemical substances which need to be kept at stable temperatures and conditions. They need what’s called a cold chain, which is a series of refrigerated production, storage, and distribution facilities and capabilities. Refrigerated storage is a key link in that chain, as it would allow government and health systems to store medicines, smoothing out distribution chains, making public health campaigns (like vaccination drives) easier and allow health authorities to plan for contingencies, for instance, stocking vital medicines for a possible Ebola breakout. Storage isn’t just about commerce it’s a key enabler for health systems as well.

Warehousing policy

If storage is a key enabler in a number of developmentally key areas the question becomes what’s needed. The first thing that comes to my mind is to stay away from the solution that so many governments on the continent have tried, government-owned and operated storage facilities. Particularly in Africa they have become magnets for corruption and are often neglected to the point that it’s not worth storing anything in them.

The bare minimum that is needed from government is a legally enforceable framework that does two key things. First, it must put in place a trusted regulator who is able to certify warehouses. To be trusted it cannot simply be another government entity it must incorporate stakeholders from the private sector like the stock exchange, trusted multilateral institutions like the AfDB or TDB, independent bodies like central banks and industry associations to ensure that when it does issue a certificate everyone from farmers to banks will trust them. This regulator must have legally enforceable repercussions for those who violate standards and regulations set by the regulatory authority. Trust is not just about having someone in charge whom you have confidence in, it’s the certainty that when the rules are violated, for instance, someone’s goods are stored improperly, that those responsible are in fact held responsible, in this instance all affected parties are compensated.

Second, is that governments must get out of the way and encourage innovation, particularly in agriculture. Where to this day, far too many African governments maintain outdated systems of produce boards whom farmers are compelled to sell to, and control prices and maintain substandard storage facilities.

Third, is to ensure that small farmers are accounted for in any warehousing policy, e.g having a requirement that warehouses devote a certain percentage of their storage space to small farmers, or cater for small farmers at a discounted price (e.g tax-free storage for small farmers)

In an ideal world, African government would go beyond putting in place a trusted regulator and getting out of the way of farmers, they would actively encourage the building the storage facilities. This could take a number of forms that again do not require significant taxpayer investment such as:

  • Making land available to warehouse developers in agricultural areas to ensure that farmers have access to storage facilities.
  • Allow goods in transit held in certified warehouses to be held tax free, to help the free movement of goods, development of commodities markets and encourage trade.
  • Set standards for databases and goods tracking so that all stakeholders will be able to track goods through the certified storage system, thus bringing more trust into the system.
  • Make available guarantees or funding to groups of smallholder farmers enabling them to build their own suitable storage facilities and engage in the market without fear of being taken advantage of.
  • Give tax incentives to developers willing to invest in cold-chain suitable storage facilities that could benefit the health system.
  • Take a holistic view of warehousing aligning it with other development efforts, such as ensuring that rural roads lead to warehouse sites, that electricity, mobile networks, and data cables reach warehouse sites

Conclusion

It may seem odd to focus on something as mundane as warehouses and storage. Unlike other development policies like universal healthcare, infrastructure or police it is not grand and flashy. However, not all of development policy is grand and flashy, often times to make the big things like agricultural reform, universal healthcare or intra-African trade possible, it requires investment in the mundane things, like a policy and regulatory framework for certified warehouses. Proper and certified storage is an enabler for a number of key developmental goals, my hope is that policymakers are aware of this, that if they want the new railways and roads, they are rushing to build across the continent to work and spur a new era of growth and trade they will require humble storage facilities, certifiably trusted and available to all.

[1] http://www.fao.org/africa/news/detail-news/en/c/445333/

Kickstarting Intra-African trade for SME’s and Entrepreneurs

This is the moment for the African continent. A free trade area for Africa is going to be like a flood. A flood that is going to lift all the boats. It is not about South Africa. It is more about all of us. All countries of Africa participating – big and small. Cyril Ramaphosa, President of South Africa

On March 21st, 2018, 44 African heads of state gathered in Kigali signed an agreement called the African Continental Free Trade Area (CFTA). The CFTA is big and ambitious. It seeks to create a single continental market for goods and services, as well as free movement of capital and people. Its primary goal is to boost intra-African trade and spur industrialisation by fostering a more competitive industrial sector, increased economic activity between African states and giving African companies a large market in which they can scale and become globally competitive (see figure 1 below).

Figure 1: Source UNCTAD http://unctad.org/en/PublicationsLibrary/presspb2018d4_en.pdf

In global trade Africa is a commodities exporter, selling raw materials and agricultural goods, while importing finished manufactured goods. Making the continent susceptible to swings in global commodity prices and perennially large trade deficits. Meanwhile intra-African trade is frustratingly small in comparison to Africa’s international trade (see Figure 2). The CFTA is potentially a first step towards rectifying that.

Figure 2: Source https://www.brookings.edu/blog/africa-in-focus/2018/03/29/figures-of-the-week-africas-intra-and-extra-regional-trade/

My goal in this post is not to talk about the big policy actions needed to make the CFTA a reality. Such as comprehensive ratification, regulatory alignment and the need for connecting infrastructure. That is well covered by the AU itself and numerous other commentators, institutions and policy documents. Instead I want to talk about policies actions that governments can to take to enable African SME’s and entrepreneurs to take advantage of a pan-African free trade area. SME’s are the lifeblood of the African economy, they are one of the continents biggest employers and sources of wealth. And entrepreneurs and investors willing to take risks are critically important to the continents future growth. If SME’s and entrepreneurs can succeed then Africa will succeed, and if the CFTA is to be a success it must serve not only big business but SME’s and entrepreneurs as well.

1-   Creating awareness and links

Trade does not happen in a vacuum. People and businesses must be aware of the opportunities and how to take advantage of them. The first policy initiative that the AU and African governments should take is an awareness and education campaign targeting SME’s and entrepreneurs across the continent. Explaining what the CFTA is, which countries are a part of it and the key steps they need to take to be able to take advantage of it.

Secondly it is not enough to know there are opportunities in other markets. You must be in a position to take advantage of them, you need to have knowledge of and develop relationships in those markets. African governments are in a unique position to facilitate this. With embassies around the continent they can be clearing houses for information and networking hubs. Doing research on local regulations, market conditions building a database of local businesses which can be made available to businesses and entrepreneurs in their home countries. They can organise networking opportunities allowing businesses and entrepreneurs to connect both in the real world and virtually online for those unable to travel. Crucially this can work both ways not just to the benefit of the home country of the embassy but for those who are looking for opportunities in the other direction. European countries such as Germany and Holland provide similar services globally to businesses, African governments can start by doing so on the continent.

Creating awareness and links within and between African business communities is crucial to improving intra-African trade. The CFTA is of little good if people are not aware of it and if they have no entry points, networking opportunities and access to information in other African markets. African governments can fill this gap.

2-   Allow tech to move the money

Anyone who has travelled across Africa or done any cross-border business on the continent knows how much of a pain it can be to move money between countries. The laws vary, some countries have foreign exchange controls, others have currencies that can be difficult to convert, and the relative value of these currencies is always changing. All of these are significant barriers to intra-African trade especially for SME’s who unlike their larger corporate counterparts do not have legal and finance departments to navigate through the mess.

What’s needed is a simple way for business to acquire foreign currencies as and when needed. Thankfully the Fintech (financial technology) sector is already growing across the continent and can fill this gap. African governments should allow Fintech services to enter the currency market and allow SME’s and traders to buy and sell other African currencies and transfer payments to their suppliers and customers in whatever country they may be in. Many African countries now have mobile payments, mobile banking and mobile lending, there is no reason why these services should not be allowed to operate across countries.

The second area where Fintech can make a difference is in trade finance. Much of global trade is done on credit. Companies will borrow or access lines of credit, usually from banks, to buy goods and transport them to another market and repay the loan when the goods are delivered and paid for. Few SME’s or traders will have access to lines of credit with banks, but many do use mobile banking and lending for exactly this purpose. To fund the purchase of goods and pay it back when they are sold. If fintech firms were allowed to play this role on a continental level it could give SME’s and traders, the ability to fund cross-border business where traditional banks would regard the amounts of money being lent as too small and SME’s and traders too risky.

Fintech could play valuable role in intra-African trade. Providing SME’s and traders the means to fund their activities and the ability to conduct business in foreign currencies with reliable platforms with which to pay people. Trade needs money and a reliable means of payment. Fintech could play that role for the businesses and traders who are not on the radar of banks. What is needed is for African governments to come up with the right regulatory framework giving Fintech services the ability to operate across borders and mobile networks and the protect their customers from unscrupulous lenders.

Trade for all

Intra-African trade has the potential to be a game changer on the continent. Giving African investors, entrepreneurs, businesses and the wider economy access to new markets and new growth. More importantly it could change lives, not just through new jobs and opportunities, but through simple trade. In 2017 Nigeria experienced a tomato shortage, Kenya experienced a maize shortage both countries resorted to importing these foodstuffs from markets like Mexico and Europe. However, around the continent there were tomatoes and maize in plentiful supply in other countries. With a continental free trade area, these all to frequent shortages and price spikes need not happen. Retailers in Kenya or Nigeria noticing that their local suppliers are unable to meet demand and prices are going up could buy from other suppliers around the continent with little difference in price and consumers wouldn’t have to deal with the shock to their wallets.

There has been a lot hype and hope around the CFTA. However, it still has some way to go, only 3 countries having fully ratified the treaty, 22 are needed for it to come into effect. In the meantime, African governments need to ensure that it is not just a treaty for big business but is one that SME’s and entrepreneurs can also take advantage of. If that is done, it will help provide a shot in the arm to intra-African trade and make it so that all African’s can have a stake in and benefit from a new pan-African economy.