Trade and investment’s role in Africa’s post-COVID recovery

by Lesley Wentworth | Nov 12, 2020 | Blog

Older than modern civilisation, the concept of ‘globalisation’ really came into vogue around the turn of the millennium with what the Economist[1] refers to as the “sudden increase in the exchange of knowledge, trade, and capital around the world, driven by technological innovation, from the internet to shipping containers”. Today, no country has ‘escaped’ globalisation – and no doubt, there have been massive socio-economic benefits that have flowed from it.

International trade and foreign direct investment (FDI) are fundamental missions within globalisation and are key drivers of global value chains (GVCs). The global health crisis that started with the novel coronavirus in late November 2019 has had a profound effect on international trade and investment – precipitating an economic crisis estimated to be worse than the global financial crisis of 2008-2009. UNCTAD data from June 2020 showed a 27{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} drop in global merchandise trade for the second quarter and a 20{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} annual decline overall for 2020. Global FDI is estimated to have dropped by 49{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the first quarter, and in Africa, it is set to drop by between 25{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} and 40{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in 2020.

So, with the economic shutdowns across the globe, efforts to localise production, and the tangible rise of protectionism in the wake of the Covid-19 pandemic, is globalisation being pushed back?

At very least, it is being reshaped. We have seen aspirant nationalists abandoning political and economic interdependences; open borders; immigration; and supranational agreements. In the case of the UK (with Brexit) and the USA (with Trump abandoning the TPP and its trade war on China), of course this denunciation of globalisation began long before the pandemic.

Elsewhere, there also seems to be a return path to nationalism – and to an extent, regionalism. We are not sure of the permanence of this situation. As part of the globalisation movement – which may have been running out of steam even before the pandemic – there has been a sharp increase in South-South trade agreements among developing countries over the past decades. Often, these agreements were forged by countries facing steep competition from the Chinese ‘export juggernaut’. And when Chinese demand for foreign resources falls, as has been the case this year, this leaves the rest of the world flailing on the back of fallen commodity prices.

In their recent report, the OECD asserts that between 2009 and 2016 African consumption exports to other African markets decreased from $ 12.9 billion to $ 11.8 billion. This while imports of consumption goods from the rest of the world to Africa grew from $11.2 billion to $ 19.0 billion.

Trade networks in East Africa (EAC), Southeast Asia (ASEAN), and Latin America (Pacific Alliance and Mercosur) have been working towards strengthening their regional export capacity.[2] The pandemic has exposed the simple truth that “… what people thought was a global supply chain was a Chinese supply chain. … Companies do not just need suppliers outside China. They need to build out their choice of suppliers, even if doing so raises costs and reduces efficiency,[3] at least in the first instance.

This creates huge new opportunities for countries who can benefit from “near-shoring” opportunities, and in critical value chains where investors need to build in the redundancy of supply in multiple regions. On the flip side, the trend to “re-shore” manufacturing and services investments into domestic investments in developed countries, supported by increased levels of automation, is a threat that could reduce the future growth of FDI and trade with developing countries.

Theophanous and Katsourides[4] point out how the pandemic, and in particular its socio-economic consequences, has exposed the weaknesses of neoliberalism, polarising economic debates once again between neoliberal and Keynesian approaches emphasizing issues relating to social welfare and the role of the state. Whether these pressures will lead to the transformation required to address structural economic weaknesses in existing models remain to be seen.

Poor water and sanitation infrastructure has put more than half the world population at greater risk from the Coronavirus, according to the United Nations. The World Economic Forum, on the other hand, points out that better digital infrastructure, including artificial intelligence, and robust analysis of big data can greatly assist at various stages of the public health response. The digital space especially in developing countries needs the policy reform to add the necessary bandwidth, additional spectrum, and the implementation partnerships that bring infrastructure improvements that will allow equitable access to communications, education, trade, and investment, and work in times of crisis. Covid-19 has helped to advance the global digital sector significantly, yet the public – and private sector will be needed to make universal digital access a reality.

What has been highlighted during this year of crisis is the lingering inequality across Africa, no doubt this will be worsened before vaccines are rolled out. How then do we begin to reimagine new – more equitable, more sustainable – economic development models? What are the new partnerships that would allow our African economies to actively pursue the achievement of the Sustainable Development Goals as well as Agenda 2063? What new thinking is needed to reimagine African growth, industrialisation, and infrastructure development for the benefit of the African continent (for generations in perpetuity), and not simply for export to those regions craving our raw materials? And, what are the qualities needed in our leaders to make this happen? Collaboration is necessary, but political economies need to put their citizens first in the overall context of what is truly good and feasible for their growth and development path.

As Carmody[5] sets out, national development strategies must be locally designed and refined even where countries have deep experience participating in globalisation and regional projects. To achieve a solid national strategy requires an understanding of the changing nature and context of global value chains and how they are likely to be affected by the pandemic. Global value chains are dynamic, changing as the economic, political, social (and health-related) concerns evolve, which currently point away from deepening the connectedness.

As African countries – and indeed other developing economies – face the post-pandemic era, it will be critical that they take a more resolute stance on building their domestic broadband and digital infrastructure while deepening their domestic capacities to analyse their comparative advantage in regional and global value chains. For those with robust trade, investment, and value chain development skills, along with the governance systems to build on them, the Covid-19 pandemic offers real opportunities. Those unable or unwilling to make the infrastructure investments, and without the skills and commitment to grasp the opportunities, will no doubt face additional threats to their trade and FDI growth prospects.

[1] When did Globalisation Start? 23 September 2013. Economist. https://www.economist.com/free-exchange/2013/09/23/when-did-globalisation-start

[2] Daniella Donno, July 2020 in Special Issue: Covid-19 and Political Change: Towards a paradigm shift?

[3] The changes covid-19 is forcing on to businesses.” 11 April 2020. Economist.

https://www.economist.com/briefing/2020/04/11/the-changes-covid-19-is-forcing-on-tobusiness

[4] In Special Issue: Covid-19 and Political Change: Towards a paradigm shift?  July 2020

[5] Meta-trends in global value chains and development: interacting impacts with COVID-19 in Africa in Transnational Corporations, Volume 27, 2020, Number 2

Business and the AfCFTA

by Lesley Wentworth | Mar 26, 2019 | Blog

To date, 52 African Union (AU) Member States have signed the Agreement Establishing the AfCFTA, and 19 have ratified the Agreement. The AfCFTA Agreement is a framework agreement, covering Trade in Goods and Services, Investment, Intellectual Property Rights and Competition Policy. The Protocols on Trade in Goods, Trade in Services, Investment, Intellectual Property Rights, and Competition Policy, as well as Dispute Settlement, form an integral part of the Agreement.

Africa’s latest and largest trade agreement, the African Continental Free Trade Area (AfCFTA) has been pronounced the ultimate “game-changer” in the move towards an African economic union. Analysts predict that it will shift the current relationship between African economies and their non-African commercial partners – in such a way that African economies become more self-sufficient, rely less on the West, and begin to acknowledge our own unified market of 1.3 billion in population.

The AfCFTA project has seen overwhelming support across Africa, as well as amongst our Western partners. The anticipated benefits of the integration agreement include a cumulative gross domestic product (GDP) of approximately $3.4 trillion. While paling in comparison to the EU’s cumulative $19 billion GDP, Africa certainly looks more like a global economic player once viewed as a large unified market. As a large unified market, the AfCFTA could be expected to attract in the region of $4 trillion in consumer spending and business investments and could increase intra-African trade by 52{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the medium term.

A work-in-progress of long duration, the AfCFTA negotiations were concluded about a year ago with the signing of the AfCFTA Framework Agreement in Kigali, Rwanda. However, just how the negotiation process had unfolded over several years remains a mystery to most in the private sector space. Trade and investment agreements are typically negotiated and concluded amongst public sector legal teams in each of the African Union Member States. Businesses – the intended recipients of these hard-won compromise positions – are often brought in only once the agreements are faits accomplis.

What has been encouraging, especially for African business, in the AfCFTA process, has been the emphasis on stakeholder engagement – in technical terms, Paragraph 11 of Ext/Assembly/AU/Dec.1(X) in the adoption of the AfCFTA. Simply put, there is the intention to “undertake broad-based national awareness campaigns so that all stakeholders” including “ordinary citizens and business people across Africa own the AfCFTA.” This was followed by the call by Heads of State and Government at the AU Summit in Nouakchott, Mauritania (July 2018) for the establishment of National Committees on the AfCFTA. Yet, the efficacy of these committees will depend on their representativeness across public and private sectors, as well as their ability to appropriately and thoroughly engage stakeholders on African trade policy issues.

In the various African regional economic communities (RECs), regional business associations have been able to promote cooperation amongst the private sector across some industries. Limiting factors have been the size, trade-capacity and degree of sophistication of the difference private players and the lack of a common frame of reference. However, within the context of the AfCFTA and the Boosting Intra African Trade Initiative (BIAT), all African businesses should be encouraged to be part of the economic integration narrative, and to benefit from understanding the provisions of these agreements aimed at supporting beneficiation of primary production, greater value addition through processing (or manufacturing) value chains with free movement of business, people and investments. This can be done by exploiting the markets in our respective backyards, rather than sending raw material out of the continent through export, only to re-import their associated value-added developed products. Larger players have opportunities to use SMEs in their supply – and value chains in upstream and downstream activities.

Policymakers working at a continental level are hard-pressed to ensure they put forward their national perspectives, while also ensuring sensitivity to regional and continental positions. Businesses operating across the continent have vast practical experience based on daily navigation of complex regulatory obstacles. Ongoing dialogue between policymakers and the private sector can overcome the divide in understanding between policy and practice.

Public-private dialogue in trade policy processes is gaining some ground in the regional and even AU spaces. Clearly, governments (as the initiators and negotiators) are way more advanced in their understanding of trade policy. Unfortunately, the private sector is brought into discussions so late during – or even after negotiations have concluded – so they have little chance to influence the agreement provisions or their unintended consequences. Still, even by understanding the dynamics of these agreements and how best to apply them in specific industries or in the course of their business, private sector players can benefit. Moreover, the engagement with policy makers and government administrators offers the opportunity for cross-pollination of experiences and ideas.