Africa: Continental Unity and Industrialization?

analysis

"If it unfolds appropriately, the AfCFTA (African Continental Free Trade Area) could facilitate the emergence of regional value chains that allow the continent as a whole to move to a higher level of value-added production.

These would arise if its preferences facilitate the emergence of higher value-added productive activities in a number of countries producing components for an increasing range of "products of the African continent" supplied to consumers on the continent, as well as eventually also exported. ..

This would of course depend not just on a tariff regime but on programmes addressing the other barriers identified in the development integration paradigm - inadequate infrastructure and more effective cooperation to promote industrial development." - Rob Davies, former South African Minister of Trade and Industry, 2009-2019

Although the AfCFTA has now been formally signed by 54 African countries (out of 55), and will formally take effect in June 2020, its implementation with detailed regulations will be a long process, with the effects dependent on complex negotiations.

The outcome is highly uncertain, warns Rob Davies. If free trade is implemented on the standard model of most international free trade treaties, the result could be greater inequality between richer and poorer African countries, and a larger area within which outside powers could pursue their own economic interests with less regard for Africa countries.

The alternative scenario, Davies notes, relies on negotiations among African countries to enhance win-win scenarios between their economies. There must be policy space for national and continental planning to move towards industrialization rather than reinforcing Africa´s current dependence on exports of primary products for higher-value processing outside the continent.

One of the key industries where there is potential for advance is automobile manufacturing, where there is already a well-established base in South Africa, as well as production in Morocco and Egypt. Nigeria and Kenya also have significant potential.

But as of now, the percent of local content is low except in South Africa, and most of the rapidly growing market is serviced by used vehicles imported from outside the continent. Significant growth in African manufacturing capacity will require carefully planned cooperation across national boundaries within Africa to link value chains and serve larger consumer markets.

The Mobius II is designed and built in Kenya by Mobius Motors and is launching full production this year, selling at by only ½ the cost of an imported used Japanese SUV. Image credit: Africa Facts.

This AfricaFocus Bulletin contains excerpts from Chapters 5 and 6 on a new short book from the South Centre by Rob Davies, who has been a policy maker and analyst on these issues even before his most recent post as South African Minister of Trade and Industry, beginning in exile in Mozambique working as an academic researcher on regional integration before he returned to South Africa in 1990 and became an ANC member of parliament in 1994.

Among recent commentaries providing different views, Cambridge University researcher Michael Odijie argues that national and subregional industrial development must come first, and that freeing up continent-wide trade too rapidly could curb industrialization through lack of coordination among competing African nations. Kanzanira Thorington, at the Council on Foreign Relations, notes that "the agreement still faces an uphill battle for implementation."

Vera Songwe, the executive director of the UN Economic Commission for Africa, based in Addis Ababa, laid out the continent-wide potential in a research paper for the Brookings Institution and expanded on the prospects for East Africa in a recent speech to East African officials. And for the Brookings Institution blog, Brookings fellow Landry Signé called on African states to seize the opportunities, while industrial strategist Angelle B. Kwemo stressed the obstacles and the fact that the agreement was only the "first step of a long marathon.

For previous AfricaFocus Bulletins on economic issues, visit http://www.africafocus.org/intro-econ.php

Correction and Update

In the previous AfricaFocus Bulletin, USA/Africa: At Home in Maine, the years that the Lewiston Boys Soccer win the Maine state championship were misstated. The years were actually 2015, 2017, and 2018 (not 2016).

In addition, the Bulletin failed to mention that African refugees and Lewiston, Maine have also been featured in two earlier books Making Refuge: Somali Bantu Refugees and Lewiston (2016), by Catherine Besteman, and the edited volume Somalis in Maine: Crossing Cultural Currents (2011). While your editor has not read either of these scholarly works, they both rely extensively on voices of the refugees themselves and are highly recommended by reviewers.

Editor's note

The Politics of Trade in the Era of Hyperglobalisation: A Southern African Perspective

Rob Davies

South Centre, 2019

https://www.southcentre.int/book-by-the-south-centre-2019-2/

Excerpts from Chapters 5 and 6

Chapter 5 Regional Integration in Africa: A Tool For Industrialisation And Development?

We have argued in this chapter that the move towards the AfCFTA was both correct and an appropriate next step in advancing regional integration on the continent. The fact that it is now at a point of practical implementation is also a significant achievement taking it beyond the formal declaratory stage at which many earlier initiatives became stuck.

Potentially the AfCFTA holds out great promise as an element of a broader transformation of African economies towards higher value-added production. It could also provide the continent with a bulwark against unpropitious trends in the multi-lateral trading system and in the world economy. The real prize from continental integration, we have suggested, is not limited to the possibility of increasing intra-regional trade - although that is part of it.

If it unfolds appropriately, the AfCFTA could facilitate the emergence of regional value chains that allow the continent as a whole to move to a higher level of value- added production. These would arise if its preferences facilitate the emergence of higher value-added productive activities in a number of countries producing components for an increasing range of "products of the African continent" supplied to consumers on the continent, as well as eventually also exported.

Progress in this regard would be reflected, inter alia, in intra-regional trade taking on new forms, including involving more trade in intermediate products (which is both the largest and fastest growing part of world trade). This would of course depend not just on a tariff regime but on programmes addressing the other barriers identified in the development integration paradigm - inadequate infrastructure and more effective cooperation to promote industrial development.

But this is not the only possible outcome of processes currently underway. Several scenarios seem possible reflecting to a large degree the unselfconscious but very real contestation between different paradigms.

One scenario is that the AfCFTA becomes reduced to a conventional trade integration arrangement. If that were to materialise it would very likely entrench the competitive advantages, and polarisation in favour of the very few countries currently having significant capacity to export finished goods to the rest of the continent - South Africa, Egypt, Morocco and to a lesser extent Kenya.

This, of itself, would likely provoke others to push for weak Rules of Origin that could lead to a proliferation of low value-added, screw-driver type industries emerging in other countries, which we suggested above would amount to a new form of third country import penetration to the detriment of any real move to higher value addition. Such an outcome would be difficult to measure and would likely be masked by statistics recording a higher volume of possibly seemingly less polarised intra-regional trade.

South Africa plans to increase the local content of assembled cars to 60 percent by 2035 from around 38 percent now. Credit: Footprint to Africa.

Then there is the issue of how the AfCFTA will be viewed in relation to potential third party FTAs. The Nouakchott summit agreed to a recommendation from President Issoufou that there be a moratorium on negotiating third country agreements until the AfCFTA is in place. Some push back against this decision led to it being watered down to a decision that "member states wishing to enter into partnerships with third parties should inform the Assembly with assurance that those efforts will not undermine the African Union vision of creating one African market." It is clear that there is a line-up of potential parties looking to the AfCFTA as a stepping stone towards their own FTA ambitions.

They include the strong pressure within the US to replace the African Growth and Opportunity Act (AGOA) non-reciprocal preferences with reciprocal FTAs when the current AGOA ends in 2025.

A discussion paper issued by the Obama administration indicated that while this could potentially take various forms, the then administration's preference was for a TPP-type "high quality" agreement. In August 2019, officials from the Trump administration told delegates attending the AGOA forum in the Ivory Coast that the USMCA (the US-Mexico-Canada agreement that replaced NAFTA) represented their "gold standard" of an ultimate model.

This clearly implies something close to full reciprocity in tariff reduction commitments and an array of WTO plus rules on matters like investment, government procurement, Intellectual Property Rules and digital trade. China's "One Belt One Road" (OBOR) also envisages the negotiation of FTAs with partners, although this is not strongly pushed in the Forum of China Africa Cooperation (Focac).

All of these plus the unfinished process of negotiating Economic Partnership Agreements (EPAs) with the EU raise a question not currently answerable: will the AfCFTA become merely a stepping stone towards "open regionalism". Any such out- come would likely be at the expense of the necessary nurturing of nascent African industries and the emergence of regional value chains.

Finally, there is the question of the approach to trade related issues envisaged for phase two of the AfCFTA process. These include intel- lectual property, competition and investment policy. The list has a remarkable resemblance to the "trade related" issues included in "mega regionals", like the TPP.

That again is not necessarily fatal, if it results in Africa dealing with these important matters in ways that respond to its own concrete needs rather than merely imitating provisions in allegedly "high quality" trade agreements from elsewhere. Nor should the selection of issues be at the expense of other matters likely to be even more important priorities for African development. These might include considering what policies and measures need to be adopted to promote a higher level of beneficiation before export of mineral commodities and policies and regulations to support digital industrial policy.

If the AfCFTA is to fulfil its promise as a tool for inclusive development, industrialisation and diversification it needs to embrace more of the perspectives of a development integration programme. This is not to suggest that the continent pauses to engage in a theoretical debate between paradigms.

Even if this were desirable, which it is not, it could result merely in the formal adoption of wording in documents. What is needed as the AfCFTA moves into operationalisation is that practical implementation processes become more firmly rooted in ad- dressing concrete development challenges and providing more opportunities for the continent to move towards higher value added production.

The insignificant progress recorded in industrial cooperation, whether at REC or AU level, should be a matter of concern. Industrial development cooperation needs to rise above the kind of consultancy-heavy scoping exercises that have dominated the work in formal bodies up to now and deliver forward thinking proposals for sectorally specific "win-win" outcomes taking into account the AfCFTA.

Ongoing work involving private sector players and some governments to produce an African "Auto Pact" is perhaps a pointer in this regard. This is addressing itself to the evident ambition of several countries to move into automotive assembly starting with "semi-knock down" (SKD) assembly. Rather than letting this lead to destructive competition between small scale operations that could see the continent's few completely knock down kit (CKD) manufacturers lose markets, this aims to find a "win-win" outcome that allows more of the activities of the latter to move towards the production of components to support SKD operations elsewhere, rather than these depending on components from extra-regional suppliers. Similar strategies are also being envisaged in railway equipment manufacturing as well.

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Chapter 6 Conclusion: Trade and Development

A fundamental issue underlying everything discussed in this study is the relationship between trade and development.

Development needs to be understood in two interconnected senses. First, it means human development - an improvement in the human condition. Every year since 1997, the United Nations Development Programme (UNDP) has compiled a "Human Development Index" (HDI) using a number of indicators - including per capita Gross National Income (GNI/capita), life expectancy, income distribution, employment, health, gender equity, education levels. The HDI listings record significant cases of deviation from the ranking based on per capita income alone.

Countries that have prioritised public health programmes, education, gender equity etc. have significantly raised their HDI ranking above that based on per capita income alone. In 2018 Cuba, for example, was ranked 41 places higher on its HDI than on its per capita income.

South Africa, by contrast, with its high levels of unemployment and inequality, is ranked 23 places lower than its GNP/capita ranking. Countries with large resource endowments and small populations - oil producers among them - have also been able to generate high per capita incomes and use resource rents to support human development programmes.

Several of these score high HDI rankings, generally in line with their GNP/capita rankings. But, with these exceptions, there is a strong correlation between ranking on the HDI index and the level of development of the forces of production - the second sense in which the term "development" needs to be understood. Apart from the oil producers, all countries in the UNDP's "Very High Human Development" category are industrialised, developed countries.

The strong correlation between human development and the level of development of productive forces points to a major lesson of economic history referred to in the introductory chapter. The vast major- ity of countries that have transitioned from low to high income, or from underdeveloped to developed, have passed through a stage of economic diversification involving a shift to higher value-added production. In other words, they have industrialised. Poor countries have stayed poor because they have remained trapped in the much lower value-added production and export of some primary product or products - agricultural or mineral. Most of these countries were at some stage in their history colonised. Several were subject to colonial laws explicitly preventing their development of industries - particularly those that could compete against industries in the "mother country".

Those few underdeveloped countries that have more recently emerged as high income or "moderately prosperous" countries have all followed the same path as earlier industrialisers. Whether they were the East Asian Newly Industrialising Economies in the 1960s and 1970s (South Korea, Taiwan) or, more recently, China, their governments intervened to actively promote, nurture and protect nascent industries.

The industrialisation they experienced not only resulted in greater output and higher incomes for those directly involved in manufacturing, it also supported a host of related service activities that created higher quality, better remunerated and higher quality jobs than those that existed before. All of this created a generalised improvement in productivity that raised incomes throughout diversifying economies.

Erik Reinert argues that the reason luggage handlers, bus drivers, hotel personnel, barbers and shop attendants in Peru are paid less than their counterparts in Norway has nothing to do with lesser abilities or the nature of the work they perform. Both do the same job, and indeed those in Peru probably work longer hours than their counterparts in Norway. The reason for their different incomes lies in the fact that industrialisation in Norway generated an overall increase in incomes in that country.

The goal of economic policy has long been understood as improving human development. Depending on the specific circumstances in each country, this means the adoption of policy and programmes targeting a reduction of poverty through raising incomes, a reduction in unemployment by creating decent work and a reduction in inequality by promoting redistribution. Again depending on the specific circumstances of each country, economic policy needs to aim to develop the forces of production. In developing countries and least developed countries, this means setting them on a path towards higher value-added activities.

Trade, or more precisely engagement in international trade is, or should be, one among several potential policy tools to achieve these goals. At its most basic and mercantilist level, increasing exports means earning more foreign exchange. As industrial diversification and development unfold, an increasing proportion of foreign exchange earned would be expected to be deployed not on imports of finished consumer goods but on the acquisition of inputs needed to support higher value-added activities.

This would imply a change in the mix of the import basket, as the proportion of means of production and intermediate goods increases. Beyond this, increasing exports of value-added products generates higher productivity and learning. It allows production beyond the limits of the domestic market and thereby supports a concentration on a particular range of value-added products where competitive advantage can be acquired.

All countries that have made this transition have done so through the adoption of an asymmetrical trade policy with a phased approach to import liberalisation driven by and informed by industrial policy. As nascent industries are nurtured and supported in their development, they need to be shielded and protected against imports of competing finished goods.

As these industries begin to "outgrow" their domestic markets, developmental states need to take advantage of any opportunities available to promote exports. In the age of colonialism control of colonies provided colonisers with both access to cheap raw materials and captive markets for their finished goods - at the expense of development of local industries.

In the post-World War II period, cold war considerations allowed "Newly Industrialising Economies", like South Korea and Taiwan, to benefit from access to the US markets provided without their having to reciprocate. Local nascent industries could thus be protected in the local market while exports of their products were progressively built up in the major consumer markets of the developed world.

From the 1980s onwards, China was able to navigate a complex terrain involving taking advantage of the overall liberalisation of export markets in the era of globalisation (notably initially by seizing the opportunities for clothing and textile exports arising from the end of the Multi-Fibre Agreement), while carefully calibrating a strategic and selective "opening up" of its own markets, beginning with "Special Economic Zones" (that were in fact initially opened to investments and imports of means of production, rather than of finished goods).

Later, as indicated earlier, as industrialisers became more competitive they came to be more open to freer trade - often becoming proponents of "free trade" to the point of seeking to deny others access to the same policy tools they themselves deployed in their own development. But, as also indicated earlier, this adoption of "free trade" was never consistent.

The embrace of free trade was stronger in areas where proponents were competitive than in areas where they are not - notably for many of the current developed countries in agriculture. As circumstances have changed, moreover, so too have the relativities within "free trade" perspectives. This is reflected in the shift in western neo-liberal narrative on China, which has gone from a success story of globalisation to a disruptive upstart that succeeded by cheating and now needs to be curtailed.

What neo-liberal discourse did was to introduce an inversion into the rather conventional narrative outlined above. "Trade" became no longer a means to an end, but an end in itself. This was actually based on a conceptual elision. What was meant was not trade per se, but "free trade" - and beyond that perhaps even an agenda of free movement of capital in or out of any economy it chose. Against the evidence of economic history, neo-liberalism presented trade liberalisation as good for all regardless of their stage of development.

This proposition had several incarnations. In the heyday of neo-liberalism, "trade" reduced to trade liberalisation (or even more precisely to import liberalisation) was held out as the route to "integration" into the world economy and, through this, as the royal road to development and prosperity. Freer trade became a proxy for progress and development. This led to many post hoc ergo propter hoc (after this therefore because of this) logical fallacies.

Because hundreds of millions of people had been lifted out of poverty during a period that saw widespread trade liberalisation, more trade liberalisation was touted as the route to raise living stand- ards of yet more poor people. This, of course, missed the point that most of those hundreds of millions were in China, which achieved its industrialisation by following a route more akin to that pursued by earlier industrialisers than that recommended by neo-liberalism to developing countries generally.

Trade ministers were presumed, by definition, to be in favour of trade. But with the reduction of "trade" to "trade liberalisation", many were cajoled or persuaded that this meant their main task was to pro- mote and support trade liberalisation - held to be as good for the poor and weak as it was for the rich and strong.

For ministers from developing countries, the ability to cite examples of autonomous liberalisation in their own countries became a "badge of respectability", and the way to be invited to assume a role in WTO Ministerial Conferences. Several were persuaded that their role on the domestic front was to become a champion for trade (read trade liberalisation) and sell its "benefits" to sceptical domestic constituencies. Whenever a new issue arose, the first presumption was that it needed to be responded to with a new multi-lateral rule - whose main content would be liberalisation.

The narrative of [global value chains], thus, sought to persuade trade ministers that their task was not just to promote exports but now also to actively work to unlock domestic barriers to imports, and support trade facilitation. The rise of e-commerce and the digital economy was likewise seen as requiring not so much programmes to address the digital divide and promote inclusivity, as new trade rules to entrench digital "free trade".

Through all of this, policy space was progressively reduced through a combination of ever tightening rules and pressure for autonomous action. When this point was made, it was sometimes met with a paternalistic reply that what was being curtailed was space for "bad policy". With the rise of nationalistic populism further steps to limit policy space are no longer being demanded in the name of being good for all, but in pursuit of an openly partisan agenda of rebalancing the system to the advantage of a declining hegemon in its competitive struggle against a disruptive upstart.

In 2007, Joseph Stiglitz and Andrew Charlton argued that "to date not one successful developing country has pursued a purely free market approach to development". In their book titled Fair Trade for All, they argued that a fair multi-lateral rules-based trading system required:

that the bigger and stronger economies open up their markets to products from poorer countries;

that policy space be created to allow developing countries to support developmental transformation; and

that restrictive Intellectual Property rules be amended to allow greater access to knowledge and technology.

In 2017 UNCTAD called for a "global new deal" to promote inclusive growth in the era of digitisation based on, inter alia, the following elements:

Ending austerity, enhancing public investment, finding new ways to raise government revenue and closing tax loopholes;

Providing a stronger voice for organised labour and other constituencies to counterbalance corporate power;

Taming financial capital and reining in corporate rentierism;

Significantly increasing multi-lateral financial resources for development, and

Respecting policy space for developing countries, including by revisiting restrictive Intellectual Property and Investment provisions in bi-lateral and multilateral arrangements.

Themes common to both are asymmetry and respect for policy space. Without these in an era of widening inequality and impending disruptive technological change, poorer countries will find making the transition to more diversified and higher value-added activity increasingly difficult. Continuing to be just producers and exporters of primary products will not provide a sustainable pathway to raise living standards of the world's poor.

Nor is it for the rich and powerful to prescribe to poorer countries what use of policy space is good or bad. That should be a matter of democratic accountability by governments to their electorates. Besides, the advice of the rich and the powerful, shaped as it is by corporate interest groups, is never disinterested.

While some of the policy space that needs to be reclaimed will permit more effective action by national governments, some will also be necessary to support more effective developmental regionalism. Without this the African continent's ambition to industrialise based on the creation of regional value chains will fall short of its potential.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org

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