For AfCFTA to work, Africa must speak with one voice, says Afreximbank’s Hippolyte Fofack

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Dr. Hippolyte Fofack (pictured above), Chief Economist and Director of Research at Afreximbank, explains how the AfCFTA could trigger a virtuous circle leading to industrialization and prosperity for Africa. Interviewed by Stephane Williams.

New African: Please summarize Afreximbank’s performance over the past year.

Doctor Hippolyte Fofack: Prof. Benedict Oramah, Chairman and Chairman of the Bank’s Board, said 2021 had been an extraordinarily strong year.

The Bank’s impressive results are in line with historical records. As the quintessential systemically important development finance institution, the Bank has relied on well-calibrated countercyclical responses – expanding its balance sheet above trend growth to effectively support sovereign entities and corporates in its member countries during economic crises.

The response to the downturn of the Covid-19 pandemic was no different and the Bank returned to its tried and tested toolkit of countercyclical support.

Through its Pandemic Trade Impact Mitigation Facility (PATIMFA), it responded quickly and boldly, mitigating the economic blows of the pandemic and facilitating a rapid recovery in the post-lockdown phase.

It has also invested in the diversification of sources of growth, particularly in the pharmaceutical industry. Africa has rebounded strongly from its first recession in 25 years, with regional GDP growth of 6.9% in 2021.

One of the concerns expressed about the AfCFTA is that it could isolate Africa. Could this further marginalize the continent from the global economy?

I do not share this point of view for several reasons: if you take 2021 as a reference, Africa’s share of world trade was less than 3%, significantly below the level enjoyed by the region in the early years of the independence in the 1970s.

For example, despite having a population similar to that of Zambia, the contribution of Holland (one of the most advanced industrialized countries in the world) to world trade exceeds that of Africa as a whole.

Africa today represents more than 17% of the world’s population but only about 2.6% of world trade and less than 3% of world GDP.

The AfCFTA should reverse this marginalization. Although most research has focused on the potential benefits for intra-African trade, which has remained miserably low, World Bank estimates show that the AfCFTA would increase Africa’s exports by more than 560 billions of dollars, primarily in the manufacturing space.

How can Africa move away from the mere export of raw materials?

The persistence of the colonial development model of resource extraction and the long-term deterioration of commodity terms of trade have plagued African economies.

But the rules of origin, which are seen as the “passports” that will allow goods to move duty-free within the AfCFTA, have the potential to pull the engines of commodity-based industrialization and put the region on the path to higher manufacturing output. and increased trade intensity.

Rules of origin will accelerate the process of industrialization, including through the development of regional value chains that will allow African countries to better integrate into global value chains through value-added upstream activities.

Intra-African trade and industrialization are mutually reinforcing. The expected growth of intra-African trade under the AfCFTA will boost industrialization, as manufactured goods account for a larger and growing share of intra-African trade.

But investing in human resources, especially in science and engineering, will be essential to reaping the full benefits of the AfCFTA’s growth and development.

This is especially true in the age of artificial intelligence, where the success of the fourth industrial revolution requires solid investments and in advanced and modern technologies.

Can you identify other benefits of the AfCFTA?

The potential benefits are countless, but I will highlight two illustrative cases: The first concerns the creative industries, which were the main theme of the 2022 edition of the African Trade Report during the Annual General Meeting and commercial negotiations.

The cultural and creative industries have been key drivers of growth in Africa over the past decade, with Nollywood becoming the second largest film producer and exporter in the world.

The adoption of a strong intellectual property rights regime under the AfCFTA could engage these industries in a long-term virtuous cycle that would foster a creative renaissance and cultural convergence leading to the deepening of the integration process. economic. This has sparked spectacular successes in other parts of the world.

Two: Simultaneously, the AfCFTA has the potential to strengthen Africa’s bargaining power in international trade negotiations, shifting the frontier of fair trade for a more inclusive globalization process that works for all.

However, the first and most important test for our continent – which for too long has been at the end of the stick of international trade negotiations – is to resist the rush towards bilateral trade agreements, which often lead to trade diversion and weaken Africa voice globally or create dissonance.

Speaking with one voice in the AfCFTA era is perhaps the most significant challenge, amplified by the large number of countries that make up the continental free trade area, the world’s largest in terms of members. .

In essence, the AfCFTA is a necessary condition for economic development, but it is not sufficient on its own; countries will have to work even harder, and above all together, to reap all the benefits.

With hopefully more FDI in Africa, is there a case for creating infant industry protection in Africa?

Yes, one of the benefits of regional integration is increased FDI inflows and a change in its composition. So far, FDI flows to Africa have taken the form of what I would call vulture investment, where a “vulture investor” arrives from a foreign country and takes out the resources with royalties in return.

This model may have generated tax revenues and foreign exchange reserves for governments, but its social and environmental costs have been significant, reflected in consistently high poverty rates and structural imbalances.

This has led to what economists call impoverishing growth, with a deterioration in general well-being amid economic growth. According to the most recent estimates, Africa is home to the lion’s share of the world’s poor.

Under the AfCFTA, there will be a shift in the composition of FDI towards labour-intensive manufacturing industries, with firms taking advantage of economies of scale; as well as gains in competitiveness and productivity associated with the drastic reduction of the risks of investing in smaller markets.

This change in the composition of IDE entries is already underway. Take the example of Volkswagen, which established a manufacturing plant in Rwanda. Volkswagen’s decision was motivated not only by the very attractive investment climate that Rwanda offers investors, but also by the attractiveness of the whole East African market and, more generally, the growth potential associated with the continental free trade area.

But your question also implies the possibility of unhealthy competition between FDI and the growth of African businesses and small and medium enterprises (SMEs). Although the risk of crowding out infant industries in Africa cannot be completely ruled out, it is important to point out that FDI has also been a reliable vehicle for technology transfer.

Imagine a scenario where, prompted by rules of origin, the African automotive industry decides to source tires for all new cars from West Africa, a region that has all the necessary raw materials but lacks technology to manufacture tires.

This would not only enhance cross-border trade within the continent, but create the conditions for the effective integration of African SMEs into this automotive space.

Another example would be the development of New Energy Vehicles (NEVs) in the ongoing transition to green energy. If FDI is injected into the continent to produce VENs, then African SMEs could manufacture and supply lithium batteries and integrate into the global VENs value chain, not as raw material suppliers but through the bias of upstream activities.

But leveling the playing field to ignite the “animal spirits” (to use John Maynard Keynes’ famous term) of African entrepreneurs will be essential for the growth of regional SMEs and fledgling industries.

This will eventually lead to the emergence of African conglomerates in the global economic environment. Improving the business environment and addressing the myriad constraints facing African entrepreneurs are important steps for the region, where the consequences of non-tariff barriers have been just as costly for trade and endogenous growth as market fragmentation in the pre-AfCFTA era.

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