Integrate Africa: a multidimensional perspective
Regional integration serves as an essential conduit for overcoming barriers and harnessing complementarities across countries. It enables sharing of resources and assets among countries, and also expands the markets and opportunities for these countries.
Regional cooperation is of particular relevance in Africa as the continent is not only home to some of the fastest growing economies in the world, but also has 34 of the 48 Least Developed Countries. The small size, landlocked nature and fragile state of several economies create a case for greater regional integration, aimed at facilitating shared prosperity in a region characterized by heterogeneity and substantial disparity. The role of Governments as well as the private sector will be essential in achieving this.
Regional integration is truly multi-dimensional, encompassing regional infrastructure, trade integration, productive integration, financial and macroeconomic integration, and free movement of people. These dimensions, while standalone objectives in themselves, also reinforce each other. Efficient regional infrastructure is required for creation of value chains, and therefore it supports trade and production integration. Regional infrastructure in turn benefits from larger resources and innovation arising from financial and macroeconomic integration. Free movement of people also hinges critically on regional infrastructure, and further contributes towards strengthening of trade and production linkages.
Production and trade integration
Integration of Africa in Global Value Chains (GVCs) has been limited. The share of foreign value added in exports of African countries stood at 15 percent in 2013, which is not significantly different from its level of 10.5 percent in 1990. Regional value chains (RVC) can serve as a transitional solution for integration of African countries into the GVCs. The demand for goods and services in the region can be leveraged for optimal utilization of resources in the country, and improvement in the production processes. The countries can benefit from the complementarities in natural endowments and industrial structures to establish and strengthen value chains. RVCs will also positively influence the growth of micro, small and medium enterprises (MSMEs) in the African region.
Strategies for Production and Trade Integration
Regional Value Chain Development Agenda
Foreign investments are indispensable for creation of regional and global value chains. As infrastructural deficiencies are a reality, intra-regional investments can first be incentivised at the REC level, and then be scaled up for the entire continent as transportation and transaction costs gradually decline at the back of policy and investment measures. RECs can identify opportunities for value chains and recognize current policy bottlenecks which inhibit intensive value chain engagements. Based on this, a comprehensive regional value chain development agenda can be formulated in close consultation with key stakeholders, including the private sector. The agenda should be developed based on a rigorous assessment of local markets, connectivity, industrial base, existing supply chains, business environment, and availability of land and labour. The agenda should also include a thorough assessment of broad policies and procedures which inhibit private investment in the countries.
Overcoming Barriers to Trade
The share of intra-regional trade in Africa’s total trade has not changed much over the past two decades. Intra-Africa exports stood at 12.4 percent of the total exports in 1995 – not substantially different from the current levels. A host of reasons including tariffs, border inefficiencies, weak infrastructure, and nontariff barriers (NTBs) have inhibited the realisation of full potential for trade in the continent. Trade policy reforms and trade facilitation can alleviate some of the constraints.
Reduction of tariff barriers can enhance intra-regional integration. There is high modularity in some value chains such as automotive, metals, textiles and garment, leather and footwear, as a result of which the production process is highly fragmented and requires multiple cross-border movements. The effect of tariffs is therefore amplified in these value chains. For countries to form efficient RVCs in these segments, tariff reforms will be critical. According to OECD estimates, DR Congo, Cameroon, Djibouti, Rwanda and Nigeria would benefit the most from trade policy reforms. Further, GVC participation of North African countries of Morocco and Tunisia can increase by 15 percent or more if trade policies are further liberalized in these countries.
A major step taken by African countries in reducing the barriers to trade is the signing of the agreement for establishing the Tripartite Free Trade Area (TFTA), and ongoing negotiations for establishment of the Continental Free Trade Area (CFTA). The TFTA agreement acknowledges that intensification of trade linkages in the African continent hinge not only on tariff liberalisation but also on addressing issues pertaining to rules of origin, NTBs and trade facilitation. The NTB mechanism under the TFTA is already operational and enables stakeholders to report and monitor the resolution of barriers encountered as they conduct their business in the countries covered under the TFTA. One-stop Border Posts have also been proposed under the TFTA. These will enhance trade facilitation by reducing the number of stops incurred in a cross border trade transaction by combining the activities of countries’ border organizations at a single location with simplified procedures and joint processing and inspections, where feasible.
The TFTA Agreement will clearly provide an impetus to the process of formation and strengthening of RVCs in the African continent. However, the agreement requires 14 ratifications to enter into force, and is still far from the mark. The TFTA will serve as a stepping stone for the CFTA which will have a far wider impact on trade integration in the continent.
The large informal cross border trade (ICBT) in Africa also has implications for production and trade networks. Presence of ICBT not only reduces revenue collection of National Governments, but also impacts the planning and decision making process. Therefore, their formalization should be a priority area for Governments. An essential first step for African countries should be to outline a common definition of what constitutes the informal sector and estimate the size of informal trade across borders. This shall aid formulation of national policy for formalizing the informal trade links. Tariff liberalization and trade facilitation can further assist this process.
According to the African Development Bank (AfDB), the market for bank intermediated trade finance in African countries is close to US$ 330-350 billion, with the trade finance gap being close to US$ 110-120 billion. Other estimates peg the financing gap at US$ 225 billion a year. There are several reasons for this large unmet demand for trade finance, the lack of US dollar liquidity and limited financing capacity of banks being the chief ones. This unmet demand for trade finance through the formal banking system in Africa is hindering the development of production and export capacities in the continent.
New and innovative mechanisms will be required to bridge this trade financing gap. An innovative mode for addressing trade finance concerns is the warehouse receipt finance. It can be used for preshipment financing in the agriculture sector. Under this mechanism, producers/traders of agricultural products can avail of finance by using warehouse receipts, issued against commodities deposited in licensed warehouses, as collateral. Adoption of this model necessitates warehouse legislation and establishment of competent regulatory authorities, and therefore the commitment of National Governments will be crucial in this regard. Factoring can also be used as an instrument for trade finance in Africa. Jones (2010) defines factoring as a traditional product which allows suppliers to prefinance its receivables whereby the factor pays a percentage of the face value of the receivables based upon its assessment of the credit risk and the underlying payment terms. Several developing countries have used factoring facilities for improving access to finance for smaller suppliers. In Mexico, for example, the Cadenas Productivas program provides cash against receivables via a secure and online technology platform.
Effective cross-border payment systems can promote economic efficiency and reduce settlement risk, thereby encouraging producers to intensify trade engagements. Several RECs have taken steps towards upgrading payment systems, either by linking various national payment systems in a network or by setting up specific clearing and settlement mechanism dedicated to crossborder transactions. However, there has been varying level of progress across RECs towards establishment of efficient cross border payment systems. In RECs such as the AMU, there have been no initiatives for such payment systems. Even the models adopted by various RECs are not uniform. Therefore, there is a need for more coordinated efforts amongst RECs for ensuring lesser incongruity in transactions across RECs. Further, there is a need to increase awareness about these payment systems amongst bankers and exporters, so that greater levels of trade can be routed through these channels. Capacity building programs can be organized by Central Banks of respective countries for this purpose.
Role of India in Africa’s integration
As a traditional development partner, India is ideally placed to understand and appreciate the needs of the resurgent continent in myriad developmental areas, of which regional integration is a key dimension. A resurgent Africa and a rising India could create a new paradigm for South-South Cooperation. While trade and investment have lately become the catchphrase in India’s multi-faceted relationship with Africa, an ambitious and all-encompassing action plan is necessary to further strengthen the cooperation between the two landmasses, of which engendering regional integration would form a key component.
According to the ICA, India had committed US$ 524 million to African infrastructure projects in 2015, up from US$ 424 million in 2014. The Export-Import Bank of India (Exim Bank) has been among the principal agents for supporting India’s development partnership with the African continent in the infrastructure sector. The Bank has financed regional projects under its Lines of Credit program, an example of which is the electricity interconnection project between Cote d’Ivoire and Mali. The transmission line has helped Government of Mali to import power from Cote d’Ivoire at a much lower cost.
Manufacturing in Africa: a roadmap for sustainable growth
Africa is one of the richest continents in terms of natural resources, endowed with about 30 per cent of world mineral reserves, 10 per cent of petroleum oil reserves and 8 per cent of natural gas resources. However, despite having abundant natural resources, Africa remains the most under-developed continent in terms of per capita income, literacy, water supply, health conditions, and most importantly infrastructure. As per the United Nations Committee for Development Policy, around 34 out of 54 countries in Africa are classified as Least Developed Countries as of May 2016. Africa’s real GDP grew at an average of 5 per cent during 2000-2014 mainly on the back of its dependence on its commodity exports. However, growth was subdued at 3.7 per cent with a fall in commodity prices since 2014. The contribution of manufacturing value added to the GDP of Sub-Saharan Africa stood at an average of 10.5 per cent during 2005 to 2015.
Africa’s population is expected to double to 2.4 billion by 2050. The rising population indicates a major need for employment generation for which a strong value-added manufacturing base would be required. At present, the situation is conducive for Africa to emerge as a manufacturing base with the supportive factors like abundant working age population, growing middle class coupled with rapid urbanisation, and significant contribution of services. Rapid urbanisation in turn gives rise to demand for consumer driven goods thus giving boost to industries like agribusiness, apparel and clothing, pharmaceuticals and automobiles.
Dependence on Natural Resources
Lack of economic diversification and excessive concentration on mineral resources makes the economy vulnerable towards global shocks. Crude and petroleum products are among the most important natural resources of Africa and crucial source of foreign exchange earnings for many African countries, and accounted for over 43 per cent of Africa’s exports in 2015. Crude petroleum oil and gas accounted for 37.3 per cent of Africa’s total exports whereas refined oil exports contributed to only 4 per cent of total exports. Oil producing economies of Africa like Nigeria and Angola, therefore, have been significantly impacted during the commodity price downturn. Other than crude and petroleum products, many African economies are dependent on mining activities. Copper accounted for around half of DR Congo’s exports (49 per cent of exports in 2015) followed by cobalt (23.2 per cent). Subdued global demand for these commodities post 2013 led to the fall of GDP rate of Democratic Republic of Congo from 9.5 per cent in 2014 to estimated 3.4 per cent in 2016 revealing its vulnerability. In a similar way, Zambia and Botswana were adversely affected by the fall in copper and diamond price, respectively. South Africa’s depleting gold reserves has led to loss of jobs thereby hurting the mining sector.
Potential Manufacturing Industries
Africa currently accounts for just 1.9 per cent of global manufacturing, and over 80 per cent of its workforce is in low productivity sector. Africa can move up the value chain, and thus have a sustainable growth, by focusing on the manufacturing sector, particularly agribusiness, textile and garments, automobile assembling and pharmaceuticals. These sectors have a potential to cater to the growing African market as well as can serve as an export base, making it attractive to international investors.
Agribusiness implies commercialisation of agriculture at different levels ranging from supply of inputs, processing, marketing and retail sale thus adding further value to it and driving growth of both forward and backward linked activities. According to the World Bank, the size of agriculture and agribusiness industry in Sub-Saharan Africa is projected to be at US$ 1 trillion by 2030. The growing urban population (350 million people are going to be added to the urban population of Africa by 2030) is expected to lead to further demand for processed food products. The potential sectors which are expected to grow in this process are rice, fruit and meat processing along with the traditional agricultural commodities of Africa like cocoa. Most of the African countries have comparative advantage in these commodities.
Beef production has been an attractive option in the Sub-Saharan African region due to its domestic demand. It is an important export product for Botswana and Namibia as they have preferential access to the European market. Sub-Saharan Africa accounts for 18 per cent of the global bovine herd and therefore large share of meat demand is met by domestic supply. Meat production still remains below global average leaving significant scope for further increase in productivity. The greatest challenge in the meat processing sector is investment, which limits production to generate export surplus, and therefore the Sub-Saharan region is still a net importer of meat. Processing facilities like slaughterhouses, cold storage warehouses and transportation ensuring proper condition would also be required. Import substitution might be aimed for only short term and once efficiency and scale of production is achieved export markets may be targeted.
• Textile and Apparel
The combined apparel and footwear market of Sub-Saharan Africa is around US$ 30 billion. The African textile industry has started to expand with African designs and fabrics showcased in international platforms like Paris, Milan, New York and London fashion shows. Africa has been the source of cotton production for international textile manufacturers with 10 per cent of global cotton being produced in Africa, but Africa accounts for only 16 per cent of global textile market.
Therefore, the need arises for Africa to produce value added products such as garments. The apparel sector faces challenges like lack of investment to develop production facilities, inadequate industry-specific skills, and lack of access to credit, lack of market information to cope with global market dynamics. Increased support and active participation by the governments of respective Sub-Saharan nations may help in improving the business environment and skill set of the workforce thus enhancing the competitiveness and integrating the industry with the global value chain. It will also result in equity distribution of employment opportunities as a substantial portion of the workforce in the textile industry comprises women.
• Automotive Industry
The African automobile industry is mainly characterised by assembling of vehicles. Africa’s automotive market is relatively small compared to its other counterparts like Latin America, Developing Asia, Oceania and Middle East. One of the biggest challenges of the automobile sector of Africa is the heavy import of second hand vehicles as a result of limited purchasing power. At least 8 out of 10 vehicles imported are second hand in countries like Nigeria, Kenya and Ethiopia. Access to credit for purchasing new vehicles is limited across the continent thus reducing the number of potential buyers of new vehicles. Developing a local manufacturing base is required for uninterrupted and price competitive supply of auto components. Considering the overall present scenario, the automotive industry in Africa is still at a nascent stage. The rate of motorisation is low compared to its peer countries. This leaves an immense scope for further development and tapping the untapped potential.
• Pharmaceutical industry
Africa currently accounts for around 2 per cent of global pharmaceutical industry. The African pharmaceutical industry has grown from US$ 4.7 billion in 2003 to US$ 20.8 billion in 2013 and is projected to reach US$ 60 billion by 2020.The African pharmaceutical industry faces the challenge of inadequate capacity for research and design required for producing drugs locally as a result of absence of investment. The African pharmaceutical industry also suffers from long delays in receiving international orders, poor logistics and storage facilities accompanied by high costs involved in transportation and distribution. In addition, with the absence of proper regulatory measures, people tend to settle for poor quality drugs thus adding little to curing the existing health issues. Scaling up of production is necessary to increase the access to essential medicines of standard quality and ensuring sustainable health systems. Focus on industry specific training and education would also be required to get a skilled workforce.
Potential for Enhancing India’s Engagements in the Manufacturing Sector of Africa
India’s imports from Africa are mainly dominated by primary commodities like mineral fuels, oils and products of their distillation, followed by pearls and precious stones, and ores slag and slash. On the other hand, India mainly exports products like processed petroleum products, pharmaceutical products, automobile components, machinery and mechanical appliances.
During the period 2010-11 to 2016-17, Africa has received investments worth of US$ 21.1 billion in the manufacturing sector, which accounted for 44.6 per cent of the total investment received by Africa (US$ 47.3 billion) from India. Other than Mauritius, countries receiving Indian investment include Tunisia, South Africa, Morocco, Libya and Ethiopia, Ghana, Zambia, Egypt and Nigeria.
India’s Role in Facilitating Manufacturing in Africa
The study on the manufacturing sector of Africa tries to identify the potential manufacturing industries for Indian investors, while at the same time focuses on mutually beneficial outcome from such collaboration. Following are the areas where India can assume a development partnership role to facilitate growth in manufacturing sector of Africa.
Skill Development: With a significant increase in working population in the continent, one of the biggest opportunities for Africa would be development of skilled manpower to engage in manufacturing activities. India may engage with other African development institutes to enrich the human resource through various skill development programmes in manufacturing.
Knowledge sharing: India’s manufacturing sector is essentially dominated by Small and Medium Enterprises. Indian manufacturing associations could tie up with their African counterparts to develop respective sectors of their specialisation through collaboration. This could include building common resource centres for disseminating market and business related information, common quality testing labs for their products, among others.
Designing educational programmes: One of the important initiatives essential for development of African pharmaceutical industry is building a pool of professionals for clinical research. Similarly, in the case of textile industry, educational programme relating to technical know-how, efficiency in production, designing, packaging and marketing, among others, would be essential to develop countries in the continent as garment manufacturing hubs. India may collaborate with relevant educational institutes in African countries to deliver diploma programmes or vocational training for such sectors to train the workforce.
Credit Access: Another major challenge for the African manufacturing sector is access to credit for investment, especially in case of textiles and agribusiness as these are mainly characterise of small holders. Indian financial institutions and banks could contribute to enhancing credit access by collaborating with financial institutions and banks in the African region.
Organising B2B Meets: Enhancing of two-way trade and investment flows could not be sustained without vibrant people-to-people contacts. There could be various rounds of consultations among business fraternity, with special focus on dedicated sector/s in each round thus promoting exchange of ideas and business propositions among entrepreneurs and investors.
The above Working Papers were prepared by the Export-Import Bank of India for the AfDB’s Annual Meetings in Ahmedabad on 22-26 May 2017. Other working papers in the series include (registration required to download): (i) Power sector in Africa: prospect and potential (No. 67); (ii) Feed Africa: achieving progress through partnership (No. 63); (iii) Water, sanitation and healthcare in Africa: enhancing facility, enabling growth (No. 64).