Today, African companies compete with producers from all over the world. African firms no longer produce within the protective borders of their own country, but rather are exposed to competition from producers all over the world. The use of new technologies, which could, in principle, trigger a surge in industrialisation, is limited by rising capital costs, a lack of research and development and low levels of human capital.
The consequences of lagging behind in global competition like this are manifold. African countries require more Foreign Direct Investment (FDI) in their agriculture and industry and also higher local investment. This inflow of FDI could bring foreign technology and knowledge. It could also create world market access, stimulate local entrepreneurship and lead to growth in medium-sized enterprises. FDI can stimulate industrial processes and promote the modernisation of agriculture. It can also promote linkages between foreign and domestic enterprises if the appropriate economic policy measures are taken at the same time.
FDI, however, still flows largely into the extractive sectors; these are large-scale investments that often have few linkages with local industries. The G20 Compact with Africa focuses on these capital-intensive investments and thus contributes to the formation of enclaves and the development of Special Economic Zones which also tend to have less of a positive impact on subcontracting to domestic companies. The data suggest that these investments will not facilitate any real catching up. Exports of manufactured goods are of marginal importance and their share in Africa has fallen rather than risen. Reducing the high trade and transport costs (ports, land transport) and the high non-tariff trade barriers in Africa, the EU, the USA and China will encourage export opportunities for African countries.
According to the recent IMF report, intra-African trade remains limited. The African Continental Free Trade Agreement (AfCFTA) could boost trade inside Africa. It is a huge opportunity and a big step in the right direction. If properly implemented, it will increase Africa’s economic growth and reduce extreme poverty more than any other single factor over the long term.
The conditions for expanding local industries are severely limited, companies are mostly small and medium-sized enterprises are only just beginning to gradually emerge. But there are many ways to promote rather than hamper African entrepreneurship. This can be achieved by removing the numerous obstacles, for example, putting a stop to favouritism, providing unrestricted access to electricity, improving financing opportunities and eliminating tax disadvantages for small and medium-sized enterprises, and by supporting start-ups, improving the Ease of Doing Business indicators, fostering Business Development Services and promoting industrial clusters.
The World Bank “World Development Report 2020” indicated that African companies are poorly integrated into global or regional value chains. However, a slight trend reversal has been observed for some years now. African enterprises have managed to join Global value Chains in the apparel, food, car production and automotive industries as well as in some business services. Global value integration is still constrained by traditional trade policy barriers. The African Continental Free Trade Agreement should thus make eliminating these barriers a top priority.
But African countries remain minor players in the global economy, accounting for just three per cent of global trade in intermediate goods. African countries’ exports tend to feature at the very beginning of Global value Chains where a high share of their exports enter the value chain as inputs for other countries’ exports, reflecting the still dominant role of agriculture and natural resources in their exports.
Industrialisation in Special Economic Zones is not really a panacea for most countries as the prerequisites for successful operations are usually lacking. But some countries, such as Ethiopia and Ghana, have shown that Special Economic Zones can be successful. Richard Newfarmer and Finn Tarp argued that it may be necessary to go beyond investment in the manufacturing industry with its low-skilled jobs and instead to invest in promoting qualified jobs in the service sector and in what are referred to as ›industries without smokestacks.
A breakthrough in Africa’s industrial development is unlikely to occur in the medium term. Many African countries have even deindustrialised, including some Compact with Africa countries. Most small countries, landlocked states, Least Industrial Countries and fragile states should not have high expectations of sufficient FDI or significant local industrial development, even if they pursue an industrial policy. Only a few larger Compact with Africa countries, such as Morocco, Tunisia, Egypt, Ethiopia, Ghana and Senegal may have the opportunity to develop industrial hubs. The stronger the local medium-sized enterprises, the better this will work. These companies will play a key role in economic growth and employment. FDI could play a complementary role in technology transfer through the integration of lo- cal enterprises into value chains.
There continues to be significant differences between the countries in Africa. There are some emerging countries, such as Ethiopia, Kenya, and Rwanda which are con- verging, or at least keeping up. The majority of countries, however, face low growth and high poverty. The Least Industrial Countries tend to stagnate, which is partly due to particularly high population growth in these countries. A convergence club of around 20 African Least Industrial Countries and/or countries with high or even rising poverty is emerging. It is also unlikely that many African countries will be able to create internationally competitive industries, which is linked to the fact that productivity growth lags behind that of other regions and global competition is extremely high. When it comes to the digital revolution and robotisation, Africa is failing to catch up.
Whether the Compact with Africa countries end up forming a club of emerging Middle-income countries cannot yet be foreseen. They are characterised by high growth resulting from numerous reforms Nevertheless, the potential of most Compact with Africa countries is far from being fully exploited. The extent to which the high growth actually indicates a structural transformation is not certain. Structural change is slow, the modernisation of agriculture is sluggish, informality and thus the poverty economy prevails.
Despite the opening of African markets to a large extent, foreign trade has not developed favourably. There are still strong asymmetries, diversification in foreign trade has progressed only slowly and integration in value chains is weak. This means that knowledge and technology diffusion currently only play a marginal role at best, partly also because African educational efforts and research activities lag behind those in other regions. Africa’s efforts to innovate are limited to initial attempts to imitate the abilities of successful countries and to use growth successes by importing modern goods to generate innovations in local companies.
The implication could be to focus on the endogenous development that can be promoted by a developmental state through reasonable protective measures and incentive systems. In his book entitled “Premature Deindustrialization” Dani Rodrik stated that asymmetries between the world’s leading countries and Africa are deepening and, consequently, the postulate of ›endogenous development‹ will have to be revived through selective dissociation policies.
To summarise, the Compact with Africa takes into account the links between macroeconomic framework conditions, business frameworks and financial frameworks. The measures envisaged by the Compact with Africa are important building blocks for the development of infrastructure, the flow of FDI and the debt situation. However, the Compact with Africa does not adequately factor in the links between good governance, Ease of Doing Business and other similar indicators, and business dynamics. On the contrary, asymmetries are reinforced rather than addressed. The focus on large-scale investments leads to structural distortion rather than inclusive and sustainable growth, which would be necessary to help reduce poverty and unemployment.
Economic asymmetries in Africa
Ruth Girmay
Name: Ruth Girmay
Education: MA in special need education
Company name: Shamrock Leather
Title: Owner
Founded in: 2018
What it does: Designing different kinds of leather products
HQ: Addis Ababa
Number of employees: 4
Startup Capital: 2,000,000 birr
Current capital: 2,500,000 birr
Reasons for starting the business: Loving and interest of art
Biggest perk of ownership: Having interest in the field
Biggest strength: My own ability on the field
Biggest challenging: Getting accessories and machineries and skilled human labor
Plan: Building a company that can give chance to disable persons
First career: Own a training center for special needs
Most interested in meeting: Pop Francis
Most admired person: My mother
Stress reducer: Hearing religious songs
Favorite past time: Drawing and sketching
Favorite book: Bible
Favorite destination: Assisi, Italy
Favorite automobile: Hummer
Make Sub-Saharan African Countries Poor Again
By Miheretab Wolde
Sub-Saharan African countries on the Nile basin are under a threat of a secret war, which aimed to deepen their level of poverty. This wicked operation is being led by Egypt as the main perpetrator with the support of various interest groups. The long list of such groups include corrupt sub-Saharan African politicians, mercenary liberation fronts, unethical journalists and press agencies, ill-informed countries that are boycotting sub-Saharan African investors and countries that stand against the coercion diplomacy, countries who wished to gain reciprocal diplomatic success, and shortsighted African leaders who compromise their national interest to engage in a proxy war. State agencies such as Egyptian foreign ministry which is designated to disseminate false propaganda and misleading information are the main players.
The corrupt sub-African politicians put their personal interests ahead of their nations’ national interests. This hidden illegal act in the past was disguised as partnership diplomacy and artificial development support. The strategy kept the status quo, that the Nile river always belonged to Egypt. This diplomacy turned many upstream countries to compromise their long term benefit and to stick with their domestic issues.Tanzania and Uganda can be good examples of these facts. Until recently, these two countries used to be advocates of the Egyptian Win-Loss approach to the use of the Nile river. The Tanzanian government should be commended for identifying corrupt government officials and taking appropriate measures. Nowadays, those two countries have started exercising their rights and work on collective Nile Basin visionary initiatives. However, conflict-prone nations like South Sudan, Burundi, and the Democratic Republic of Congo are still under the control of this hideous tactic of Egypt.
Egypt has been playing a central role in recruiting, organizing, supporting, and scaling up liberation fronts’ groups which have been operating in various sub-Saharan African countries. Ethiopia is the primary victim of this hidden war. Egypt has always supported antagonist states, rebel groups and other militants’ against Ethiopia. The long-standing volatility in Ethiopia due to the ongoing civil wars and interstate wars, made the country to be one of the poorest countries in the world. This eventually made the country to be passive and act accordingly to the existing status quo of the Nile Basin colonial era treaty, which was solely based on a negative hegemony.
The government of Egypt spent much of its time on propagating false and misleading information on the issue of the Nile river. This tactic, mainly used to construct biased understanding around the issue and disseminating never ending false propaganda. This approach has been witnessed in the recent Ethiopian Renaissance Dam issues. The false information in relation to the dam has not only infected the entire members of the Arab league apart from Sudan, but also some of the developed nations.
It is hard to find a neutral journalist or press agency in the land of Egypt who stands for truth. A few days ago Egypt media as usual reported that Ethiopian community members in the diaspora showed support for Egypt in relation to the dam issue. They also indicated that the government of Kenya sided with Egypt as well. These are the typical deceptive misinformation that is being written and disseminated among the Egyptian public. These journalists are either corrupt, blindly biased, one sided or unethical. A professional journalist stands for truth, justice and cooperation; however, in recent few months the world witnessed how the Egyptian Media is filled with false propaganda.
Countries like Morocco are working with Egypt to sabotage investors in sub-Saharan African countries and investors in countries that stand on the justifiable principles and truth. In recent weeks, the Morocco government tried to boycott the Ethiopian born billionaire’s, Mohammed al-Amoudi, businesses that operate in its territory. Middle Eastern countries tried to pressure Sudan to change its stand related to the Nile dam. These countries along with Egypt work to stop and discourage investors from investing in countries like Ethiopia to make sure these nations remain the poorest of the poor.
Countries like the USA and Israel tried to advance their national interests at the expense of Ethiopia and Palestine. Nowadays, Trump and Egypt think that the ‘deal of the century’ could only be accomplished by using Ethiopia as their sacrificial lamb. Egypt is eager to legalize the colonial era agreement while Trump is eager to form his first major international deal of his presidency. Israel in its part, is eager to secure the whole Jerusalem. In the end, Egypt will ensure that the Middle East deal that’s being proposed by Trump, will gain the acceptance of the entire Arab League nations. This dirty politics is being unfolded to the entire world.
In the past Egypt used proxy wars to destroy the sub-Saharan Africa nations, but in recent times it is harder and harder to find a single country that’s willing to collaborate for the sake of Egypt’s gain at the expense of its citizens. The delegation war is an outdated tactic of the yesteryears. However, Egypt is still knocking at the doors of Ethiopian neighbors to wage proxy wars and pin down the entire region of the horn of African countries to deep poverty. For centuries, this has been the unwritten foreign policy of the Arab Republic of Egypt.
The writer can be reached via miheretab1@yahoo.com
The cost of coronavirus in Africa: What measures can leaders take?
By Dorothy Tembo
With the novel coronavirus COVID-19 having reached the African continent, countries are getting ready to manage the spread of the virus and ensure that their fragile health systems can cope. Images from China and Europe give many reasons for concern.
In addition to the health challenges posed by COVID-19, Africa is already feeling the effect on its economies. With industries shutting down in Asia, America and Europe demand for raw materials and commodities is declining, but it is also hampering Africa’s access to industrial components and manufactured goods (including medical equipment).
Initial actions in Africa have focussed on slowing viral contagion with measures, including the closing of borders. These actions come as the continent has been making bold moves to increase economic integration, with African Union officials recently swearing in the first-ever Secretary-General of the newly created Secretariat of the African Free Continental Free Trade Agreement. The coronavirus could represent a risk for the continental project but leaders could also turn it into an opportunity for stronger collaboration. If leaders fast-track specific policies, it may also represent an opportunity if certain policies are fast-tracked. Quick gains could be achieved by consolidating the regional integration initiatives they are already implementing.
The closing of borders, for instance, can send a very different signal depending on how governments do it. Where leaders of neighbouring nations close borders together, as those of Portugal and Spain have done, it is a symbol of partnership in the fight against a pandemic. Reducing flows of people while keeping borders open for goods signals continued faith in the importance of economic activities and trade in providing the goods people need to continue their daily lives. In Africa, such collaboration will be crucial, especially for the continent’s sixteen landlocked countries
The crisis may also provide African leaders with an opportunity to look at regional value chains differently. Reliable regional supply chains characterize North America, Asia and Europe. In Africa, however, integration in international markets mostly entails integration in global, not regional, value chains – with Africa providing the raw products for processing elsewhere around the world.
Opportunities for creating regional value chains exist, notably for making motor vehicles or in aerospace activities in Northern Africa. But designing regional strategies may mean agreeing on which component of the value chain is produced where, and can involve trade-offs that policymakers do not always find it easy to make.
But the exceptional nature of the pandemic could provide fertile ground for regional collaboration by policymakers in the fields of pharmaceuticals, disinfectants, diagnostic testing equipment or protective garments. Such decisions will have to be taken and implemented very rapidly.
African leaders can also act in unison in the fight against the economic consequences of the pandemic. Nobody knows how much the pandemic will affect global GDP, but any impact is sure to be significant. Estimated losses in GDP growth for the world as a whole – but also for Africa as a region – currently hover around between 1.5 and 2 percentage points. Those figures are most likely to be revised to include even greater losses.
The travel industry has been the first to be impacted. Airlines around the world are struggling, and tourism has been hit hard. The blow will not go unnoticed in African countries like Tunisia, Egypt and Kenya – where tourism represents around 14%, 11% and 10% of GDP respectively. For underperforming regional airlines, this could spell disaster.
Shutdowns in China and Europe, notably in the apparel, machinery and footwear subsectors, will significantly hit global supply chains – with consequences for Africa. Traditionally reliable sectors in Africa – like the cut flower industry – could also take a pummelling.
In countries that impose lockdowns, large parts of the services sectors are likely to suffer dire outcomes. The hospitality, sports and recreation sectors, and large parts of retailing, are among those most affected by partial or full lockdowns.
The drastic drop in oil prices – triggered by events independent of the coronavirus pandemic but now reinforced by the negative demand resulting from it – is set to compound these economic shocks. Oil exporters like Nigeria will see their revenues shrink.
Faced with this outlook, African policymakers may want to ask themselves how long businesses in their countries can survive in the absence of or with significantly reduced revenues and what the scale of job losses may be. For many micro, small and medium-sized enterprises (MSMEs), with fewer assets to ride out the storm, the survival rate may only be counted in weeks. That is why small businesses, more than larger businesses, will tend to go out of business or cripple their capacity to be competitive.
Yet, because MSMEs employ around 70% of the workforce in most countries, shedding workers will only aggravate the economic downturn brought on by the pandemic.
Knowing how small businesses act as a lynchpin connecting the pandemic to a broader economic recession, governments around the world have scrambled to reduce the operational stresses on them. They have introduced policies meant to help MSMEs cope with short-term financial risks and long-term business implications. This will, it is hoped, reduce layoffs, prevent bankruptcy, encourage investment and help economies get back on their feet as soon as possible. These measures include concessional financing; tax reductions and grants; employment incentives; technical assistance; and indirect measures.
Low-interest loans and other concessional financing, aimed at easing short-term liquidity issues, have been among the most popular policy measures announced to date. But the experience of the 1970s oil price shock shows that this can have a limited impact in the supply-shock, low-interest rate environments that exist today. Instead, the most effective way to prevent bankruptcies may be measures aimed at reducing costs for MSMEs – such as tax breaks. Investment in digital trade and investment facilitation must also continue – countries with such facilitating policies will be first off the mark in the post-crisis period.
All of these measures require funding. Countries with fiscal space will find it easier to introduce them than those without it. Unfortunately, global debt levels have continued to increase after the financial crisis over a decade ago. Though the bulk of global debt is held by the industrialized world, its increase has been more important in the developing world over the past decade. Concerted action among leaders may therefore be necessary in order for efforts to support small and medium sized businesses not to have negative repercussions on financial markets.
History shows us that cross-border collaborations often arise during or after significant crises. The First World War prompted the creation of the International Labour Office; the United Nations was formed in the aftermath of the Second World War. The construction of the European Union was also a reaction to that conflagration.
The African Union has already recognized that Africa will be stronger if countries are more integrated and unified with the birth of the African Continental Free Trade Area. A similarly strong commitment to joint action by leaders on the continent would undoubtedly benefit the fight against the coronavirus pandemic and its economic consequences for Africa.
These actions should include a recommitment to the Sustainable Development Goals, to multilateralism and a pledge to help those that will be most affected by the economic downturn: small businesses, women, young people and vulnerable communities. The International Trade Centre (ITC) with its mandate to build the competitiveness of small businesses in developing countries, emphasizing women-owned businesses and people at the base of the economic pyramid, stands ready to support these efforts.
Dorothy Tembo is the Acting Executive Director of the International Trade Centre, a joint agency of the United Nations and the World Trade Organization.
