Transforming African economies through smart trade and industrial policy
In the 2015 Economic Report on Africa of the Economic Commission for Africa, a clear case was established for the increased and improved use of trade and trade policy as tools to drive the continent’s industrialization.
The present report builds on the recommendations of the report through a thorough assessment of what is required of African economies to industrialize smartly through trade. The assessment is informed by an analysis of whether current trade policies and tariff structures positively contribute to Africa’s broader industrialization policy.
Importance of industrialization
Africa’s experience with industrialization has been disappointing
Globally, the share of manufacturing in total output rises with per capita income until countries reach upper-middle-income status and then declines, as services become more prevalent at higher incomes. This has not been the case in Africa. In 2014, Africa’s average share of manufacturing value added in gross domestic product (GDP) was 9.8 per cent, 3 percentage points less than the 12.8 per cent figure of 1990. The share of manufacturing exports in Africa’s total exports similarly declined, from 25.6 per cent in 1995 to 18.9 per cent in 2014. Africa’s exports remain concentrated largely in primary commodities and raw materials (fuels, ores and metals and agricultural raw materials). The Herfindahl-Hirschman Index on product concentration shows Africa’s exports as less diversified than the rest of the world.
Both manufacturing and services sectors have key roles to play in Africa’s industrialization
Manufacturing is a high value-added sector in which labour can flow into and deliver high productivity. The sector has strong forward and backward linkages with other sectors of the economy, including agriculture and the external sectors. The services sector is gaining significant importance. It is the main contributor to GDP in the majority of African countries and has been the continent’s fastest-growing sector during the past two decades. A thriving service sector is essential for attracting investors into African businesses and driving growth in the manufacturing sector, given that it allows local sourcing of needed support services such as logistics, telecommunications and financial services.
Industrialization has gained increasing importance in African development policies and frameworks in recent years
The Action Plan for the Accelerated Industrial Development of Africa serves as the main agenda for Africa’s industrialization. Agenda 2063 of the African Union calls for the promotion of sectoral and productivity plans, and regional and commodity value chains to support the implementation of industrial policies. African countries, in recognition of this, have designated industrialization as the central pillar of the CFTA project. The continent’s regional economic communities also recognize that industrialization needs to take centre stage in regional integration and development agendas. The Southern African Development Community (SADC) and the East African Community (EAC) have standalone industrial strategies to guide the regional industrialization process.
Using trade as a tool to drive Africa’s industrialization
More fresh thinking is needed on how to achieve Africa’s industrialization objectives
Trade has a key role to play. Intraregional trade has the potential to facilitate increased economies of scale, diversification and value addition. In 2014, manufactured goods accounted for 41.9 per cent of intra-African exports, compared with only 14.8 per cent of Africa’s exports outside the continent. Intra-African trade, however, is underexploited owing to high trade costs in the region. Intra-African trade, as a share of total African trade, was only 15.3 per cent in 2015. ECA modelling exercises indicate that establishing the CFTA would boost intra-African trade in goods by 52.3 per cent. Estimated increases are highest for industrial products (53.3 per cent).
Although the idea of actively using trade and trade policy to support industrialization is not new, it has recently experienced a resurgence
Trade has greater prominence in the Sustainable Development Goals than the Millennium Development Goals, with trade-related targets included as a means of implementation. The African Union’s vision contained in Agenda 2063 calls for developing productive capacities, boosting intra-African trade, the establishment of the CFTA and improved regional infrastructure, among other trade-related priorities. African countries recognize the role that the CFTA can play in achieving its industrialization and have designated industrialization as the central pillar of the CFTA project.
Africa’s industrialization is influenced by non intra-African trade agreements
Preference-granting countries determine the products and terms for granting preferences covered under preferential trade arrangements
In many African countries, there is an imbalance between productive capacity and stringent rules of origin and product standards. This calls for improvements in the design of the preferential trade arrangements to support Africa’s industrialization and development.
Shifts towards greater reciprocity in preferential trade arrangements are expected during the coming decade
Rapid full liberalization risks reducing the competitiveness of African producers, which may undermine efforts to industrialize and diversify, if the adjustments that are necessary are insufficiently managed. This is because foreign products would be granted increasingly favourable treatment in African markets and, in some cases, more favourable treatment than products from other African countries.
Mega-regional trade agreements have implications for Africa’s industrialization agenda
ECA modelling indicates that the establishment of envisaged mega-regional trade agreements will result in loss of market share by African countries through preference erosion and competitiveness pressures. African economies will also find it more difficult to industrialize through building supply relationships with rapidly growing emerging markets such as China.
Africa faces significant constraints to industrialization through trade
Africa has less trade integration than other developing regions
Africa’s total trade as a share of GDP was 40.0 per cent in 2015, compared with 47.3 per cent for developing economies as a whole. Intra-African trade also underperforms, compared with other developing regions. Intra-African trade as a share of total African trade was 15.3 per cent in 2015, whereas, for example, trade among developing economies in Eastern Asia as a share of total Eastern Asian trade was 32.1 per cent.
Prevailing tariff rates significantly underestimate both Africa’s internal and external trading costs
The continent’s cost of trading with the world was 283 per cent in ad-valorem tariff equivalent in 2013, higher than that of all other regions except Central Asia, which has a higher share of landlocked countries. The reason for this is the prevalence of non-tariff measures and physical market access barriers, such as poor infrastructure affecting African countries.
Legitimate standards are important for Africa’s industrialization through trade
Compliance with standards helps to encourage industrialization through enhancing trade capacity and competitiveness, facilitating mutually beneficial trade in industrial products and the integration of firms into regional and global value chains, and improving the efficiency of production and trade. There is, however, an increasing trend in the misuse of overly burdensome technical barriers to trade as nontraditional protectionism measures. Meeting these standards have challenged capacityconstrained African countries with inadequate quality infrastructure.
Design of Africa’s industrial tariff structures is important
High industrial tariffs increase the costs of industrialization in Africa
Overall, the import-weighted tariffs on Africa’s imported intermediates are significantly higher than Eastern and South Eastern Asia (a region experiencing rapid industrialization) and the rest of the world. This difference is large for processed industrial supplies, parts and accessories of capital goods and parts and accessories of transport equipment, all of which are important inputs for manufacturing industries. The tariffs on intermediates imported into Africa from outside are significant. This limits their use in production processes and therefore reduces the possibilities for the export of transformed products.
There is a weak relationship between effective rate of protection and revealed comparative advantage
To assess the amount of protection granted to African industries by import tariffs, it is important to analyse both nominal tariffs and the effective rate of protection, which is a measure of the total effect of the entire tariff structure on the value added per unit of output in each industry, when both intermediate and final goods are imported. Higher protection of specific sectors is not always awarded to specific sectors in which countries have comparative advantages in production. This suggests that the targeting of high rates of effective rate of protection could be improved.
Comparative advantage and export restrictions can be useful tools for targeting smart industrialization through trade
Analysis of revealed comparative advantage can identify potential areas of specialization
Various studies use a region-revealed comparative advantage analysis to help to identify potential areas of specialization for a group of countries and individual countries in the regional economic communities. This can help to guide trade and industrialization strategies and maximize the mutual gains from regional trade. As an indicator of a country’s productive capacity, however, revealed comparative advantage is a static concept. As countries’ endowments change, productive capacities evolve. Targeted policy actions can help countries to shift their productive capacities towards goods that embody more value added and can generate more linkages with and spillovers to the rest of the economy.
Export taxes can help to encourage value addition by reducing or banning the export of raw materials and unprocessed goods
African countries do not make extensive use of this tool. Although export taxes can promote industrial development, they must target industries with comparative advantage and supported by other industrial policies to ensure that selected industries in Africa take off. Indefinite exports taxes, however, risk providing a permanent benefit to domestic producers, which could reduce incentives to improve competitiveness overtime.
The present report is a joint publication of the Economic Commission for Africa (ECA) and the Overseas Development Institute. The core team for the preparation of the report consisted of Lily Sommer, African Trade Policy Centre Trade Policy Fellow; Maximiliano Mendez-Parra, ODI Research Fellow; and Linda Calabrese, ODI Senior Research Officer.