Economic Development in Africa Report 2021:
Reaping the potential benefits of the African Continental Free Trade Area for inclusive growth
- Inclusive growth is growth that reduces poverty and inequality
- Poverty levels declined in most African countries: On average, the proportion of African households with a consumption level below the 1.9$/day poverty line declined from 40% in 2010 to 34% in 2019. At below 3.2 $/day, the poverty rate fell from 63% to 59%; and at below 5.5 $/day, it fell from 83% to 80%.
- On the other hand, inequality has widened between and within African countries. The Gini index, measuring the distribution of income, ranges from 27.6% (Algeria) to 63.3% (South Africa), where 0% indicates that everyone has the same income and 100% implies that one household receives all the income.
- The pandemic has led to increased poverty levels in Africa
- Africa stands out as the most-affected region in the world in terms of loss of income of poor households: the 2021 poverty headcount rate (at $1.90 purchasing power parity (PPP)/day) is estimated to have increased by three percentage points because of the pandemic (compared to pre-COVID-19 estimates of poverty levels in 2021).
- While in 2019, 478 million people lived in extreme poverty, it is estimated that in 2021, 490 million people in Africa live under the poverty line of 1.90 PPP$/day, and this is 37 million people more than what was projected without the pandemic.
- Less than half of all African countries have experienced inclusive growth between 2000 and 2020
- Growth has been inclusive (poverty- and inequality-reducing growth) in only 17 out of 49 African countries in the sample; poverty-reducing, but inequality-increasing in 18 countries; and non-inclusive on either dimension in 14 African countries.
- Important elements of inclusive growth include better human development outcomes, greater social inclusion, creation of productive and formal employment opportunities and environmental development.
- Greater regional integration through the AfCFTA offers more opportunities for transformative and inclusive growth
- In 2019, Africa accounted for 2.8% of world trade. Africa’s intraregional trade accounted for only 4.4% of total continental trade.
- Africa’s extra-continental exports reflect a heavy dependence on primary commodities, making the continent vulnerable to external shocks such as global demand and volatile commodity prices.
- The share of processed goods in extra-continental exports is low at 17%. In contrast, 41% of intra-African trade is comprised of processed goods, suggesting higher potential benefits from greater regional trade for transformative and inclusive growth.
- Deeper regional integration has the potential to generate more opportunities to climb the technological ladder than extra-continental exports, as intra-African exports are technologically more advanced, as indicated by a larger share comprising medium and high technology manufactures.
- On one hand, the AfCFTA is expected to increase trade through tariff liberalization and the removal of non-tariff barriers, and on the other hand, the AfCFTA is expected to attract investment to build productive capacities, increasing Africa’s supply to serve the rising regional demand.
- Simplifying regional trade through the AfCFTA provides new income opportunities and reduced vulnerabilities for informal cross-border traders
- The informal economy, including informal trade and employment, matter for the continent. Informal cross-border trade (ICBT) plays a key role in terms of food security and functions as an employment of last resort for many vulnerable people, especially in border areas where employment opportunities are limited. It is estimated that informal employment on the continent constitutes the larger share of employment, accounting on average for 72% of non-agricultural employment and 98% of agricultural employment.
- Surveys indicate that ICBT can account for up to 90% of official trade flows at some borders; it contributes to 30% to 40% of total trade within the Southern African Development Community (SADC); and to about 40% of trade in the Common Market for Eastern and Southern Africa (COMESA).
- Without accurate ICBT data, it is impossible to paint a complete picture of intra-African trade. Monitoring informal cross-border trade is essential for determining sensitive products and corresponding tariff reduction modalities for which a country should actively seek enhanced market access under the AfCFTA.
- Tariff liberalisation by 2025 under the AfCFTA is expected to increase intra-African export potential by $9.2 billion
- The vehicle sector holds the greatest export potential under expected tariff liberalization, yet only a few large African economies are expected to benefit (e.g., South Africa accounts for 88% and Morocco for another 8% of the potential in that sector).
- The potential of the AfCFTA to strengthen regional value chains can increase African countries’ resilience in the post-COVID-19 era, especially in tackling shortages of medical supplies and facilitating and accelerating food trade.
- In food processing industries, where there is strong potential for the participation of women, and which show a high export potential through intra-African integration, almost all African countries have some productive capacities and the ability to increase intra-African processed food exports.
- Tackling non-tariff barriers to trade is even more important than tariff liberalization to promote more inclusive trade
- A key element of inclusive growth is to increase participation in economic activity and trade across income levels by increasing entrepreneurship and the employment of marginalized groups.
- Tackling recent intra-regional trade barriers, such as trade frictions from non-tariff measures (NTMs), regional infrastructure gaps and inadequate market information, can unlock an additional $21.9 billion in the short-term:
- $8.6 billion of untapped trade potential can be realized through tackling current market frictions (such as NTMs), regional infrastructure gaps and inadequate market information.
- $13.3 billion in untapped export potential is driven by GDP and population growth, which are expected to translate into increased supply and demand within the next five years.
- However, the 33 African least developed countries account for only 16% of the untapped potential - the major African exporters hold the largest share: South Africa (36%), Egypt (15%) and Morocco (6%).
- The regulatory burden of non-tariff measures tends to negatively impact small businesses with limited information and financial resources disproportionately.
- Digitalization of cross-border trading procedures and the adoption of e-certificates of origin procedures have a great potential to foster inclusiveness.
- Yet, the implementation of paperless trade procedures is yet to take off: so far, only five countries have implemented more than half of the digital trade-related commitments.
- Tackling structural gender inequality is key for women to leverage their full potential and benefit from the AfCFTA.
- There are inherent challenges and obstacles that informal cross-border traders (women in particular) face that prevent them from leveraging their full potential and make them more vulnerable to shocks and crises. Due to abrupt pandemic-induced border closures by African governments, cross-border traders have experienced a significant depletion of their savings and have struggled to provide necessities for their families, as most of them have no alternative business ventures.
- The COVID-19 pandemic and related border closures have widened gender disparities as women, on average, tend to trade more perishable goods and have been hit harder due to unsold goods and higher costs of doing business.
- In the manufacturing sector, only 7% of businesses, on average, are owned by women (based on data for 45 African countries obtained from World Bank Enterprises Surveys); the majority are solely owned by men.
- Gender differences in performance outcomes and the competitiveness of women-led micro, small- and medium-sized enterprises (MSMEs) are often driven by gender-specific constraints, compounded by their concentration in the informal sector.
- Supply-side challenges are factors hampering the capacity of traders to scale up their businesses and trade in higher-value-added goods. Lack of access to affordable finance and credit facilities is one of the most pressing challenges for traders, especially women.
- A practicable and effective dispute settlement mechanism must be in place to foster mutual trust, accountability and the rule of law
- The resolution of barriers to trade often requires a long period of time. For example, within the tripartite free trade area, the time needed to resolve issues varies between 46 and 2,082 days.
- One of the common non-tariff barriers, namely, issues related to rules of origin, takes on average 536 days to be resolved.
- With a view to reducing the costs associated with physical representation, dispute settlement under the AfCFTA could digitalize trade dispute resolution by using online mechanisms when possible and practicable. Such an online mechanism could make the process more accessible to states that have stringent financial constraints.
- It is essential to empower small and medium-sized enterprises, women and young entrepreneurs and informal cross-border traders to raise their voices in the dispute settlement process through regional and national platforms.
- Better data on informal cross-border trade can help create greater transparency and help to avoid or at least facilitate dispute settlement linked to uncertain origin of informally traded goods, which has been an issue in the past.
- Trade policies alone are unlikely to support inclusive growth
- Some of the most significant matters on the African integration agenda – building productive capacities and regional value chains – are being addressed in Phases II and III of the AfCFTA negotiations.
- For the African continent, the announced value of cross-border greenfield projects dropped by more than 6%, from $77 billion in 2019 to $29 billion in 2020 due to the pandemic.
- Investment agreements, both bilateral and regional, play a crucial role in regulating provisions and the obligations of investors to ensure sustainable investment. Yet only a few agreements exist between African countries – by 2020, only 141 of the 733 bilateral investment treaties signed by African countries were intra-African investment agreements.
- The Investment Policy Protocol under the AfCFTA has the potential to harmonize investment policies and promote targeted investments in sectors relevant to the realization of the UN Sustainable Development Goals (SDGs). By 2020, less than 50% of UN member states had policy measures that promote investment in SDG-related sectors such as infrastructure, water, sanitation and health.
UNCTAD is the UN’s trade and development body. It supports developing countries to access the benefits of a globalized economy more fairly and effectively and equips them to deal with the potential drawbacks of greater economic integration.
It provides analysis, facilitates consensus-building and offers technical assistance to help developing countries use trade, investment, finance and technology as vehicles for inclusive and sustainable development.
 Supply is captured by the African exporter’s global market share and demand by the African market’s imports. A forward-looking assessment of export potential accounts for the expected evolution of supply and demand on the continent, based on October 2020 forecasts of GDP and population growth.
 The Tripartite Free Trade Area is an agreement between the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development Community.
 Rules of origin refer to the criteria needed to determine the nationality of a product.