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Friday, October 30, 2020

Why we must not let AfCTA fail

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Africa ranks near the bottom when it comes to competing in the global economy, held back by fragmented markets that inhibit efficiency and constrain economic growth.

Now a new player has emerged with the potential to defragment Africa and boost the productivity of its economies: the African Continental Free Trade Area (AfCFTA). It came into force on 30th May 2019. In April 2019, our country, The Gambia, ratified the agreement, bringing the total number of African Union member state ratifications to 22, the minimum threshold for AfCFTA’s implementation.

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In addition to increasing market efficiency and reducing the cost of doing business by offering opportunities for economies of scale, the AfCFTA could ease trade and investment flows and shift the composition and direction of foreign direct investment flows into Africa.

The big question is whether this effort will also elevate the competitiveness of African economies. Competitiveness—the set of institutions, policies, and factors driving productivity—is a key determinant of sustainable growth and provides a path for effective integration into the global economy.

The Global Competitiveness Index, a performance indicator generated every year by the World Economic Forum to benchmark countries, shows large variations in national competitiveness rankings. These have to do with the stage of economic development, the gap in physical and technological infrastructure between developed and many developing economies, and the inability of a number of developing economies to undertake the critical economic and institutional reforms needed to raise their market efficiency.

The few African countries that have emerged as the fastest-growing economies in the past decade have also been on an upward trajectory on the global competitiveness ladder. Increasingly, these countries (most notably Senegal, Côte d’Ivoire, Ethiopia, and Rwanda) are drawing on their improving competitiveness and macroeconomic environment to diversify their sources of growth and trade and, in the process, expand their share of the global market pie.

However, most African countries, like our own, are probably latecomers in the race to boost competitiveness. Lately, the global economic environment has been dominated by the rise of beggar-thy-neighbour nationalism and creeping protectionism. Leading economies are moving away from the rules-based system that has governed global trading arrangements for decades toward a new mercantilist system that measures a country’s economic performance by its trade surplus.

In this new reality, competitiveness is perhaps even more important for emerging market and developing economies. In Africa, the push to deepen economic integration and boost intra-

African trade under the AfCFTA is also likely to mitigate the costs of adverse global shocks. A larger effective domestic market acts as insurance against disruptions to global trade associated either with global volatility or with contraction in global demand.

Competitiveness goes hand in hand with trade performance, and therefore with economic growth. And the largest single determinant of GDP growth in both developed and developing economies is innovation. Africa’s fastest-growing economies are also making the greatest strides toward diversification of exports. The degree of innovation and efficiency in production processes may well be the fault line between developed and developing economies, as well as between active and passive globalisers.

The process of defragmenting Africa under the AfCFTA is therefore the first step toward boosting competitiveness and integrating African economies into the global economy as active globalisers. The continental free trade area will establish a market of 1.2 billion people with a combined GDP of $2.5 trillion and combined consumer and business spending of more than $4 trillion. Basic simulations that assume expanded and increased efficiency of goods and labour markets under the AfCFTA point to a significant increase in Africa’s overall ranking on the Global Competitiveness Index in both the short and the medium term.

For decades, Africa has been labeled as a continent full of potential—yet year after year, realising this potential has been one of its main challenges. If the AfCFTA succeeds in inspiring these reforms, the new free trade area could unleash forces for African dynamism and position the continent as a global competitor.

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