Boosting trade facilitation and rethinking the foundations of Africa’s export diversification
Over the last two decades and till the year 2019, African economies have experienced a sturdy growth, averaging 4.3 percent (United Nations, 2023). However, the periods of growth were interrupted by shocks, amplified by the lack of diversity of African exports products. The full implementation of the African Continental Free Trade Area Agreement (AfCFTA) is anticipated to deliver increased production, more trade and investment levels with additional benefits, including the creation of decent jobs, higher incomes and therefore the opportunity for an inclusive growth. Through legal provisions attached to the protocol on trade in goods, AfCFTA is expected to impact on the time and costs of doing business by simplifying, modernizing, and harmonizing import and export procedures. The two main objectives of this policy brief are to shed light on the importance of diversifying exports through the implementation of trade facilitation measures, as well as highlighting key avenues and opportunities for African economies to achieve higher levels of diversification and competitiveness.
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A cure for the "Dutch disease"
The term "Dutch disease" was coined to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. With their economies relying on a limited number of commodities and becoming exposed to price fluctuations on international markets, several African countries face a similar situation. Highlighting this lack of diversification, a 2022 UNCTAD report shows that 80 per cent of African economies depend extensively on primary commodity exports in the agricultural, mining, and extractive industries. These economies must transform to recover from this affliction and grow. By facilitating trade between African countries and creating a unified market of 1.3 billion consumers, the African Continental Free Trade Area (AfCFTA) provides the opportunity to diversify African economies and unlock a virtuous circle of growth. The stability of export earnings increases purchasing power, encourages investments and leads to economic growth. The industrial sector could create high-value-added manufactured goods and fuel growth while integrating into the high-value segments of regional and global value chains. The full implementation of the AfCFTA will then deliver more trade and investment while increasing the creation of decent jobs, higher incomes, and, therefore, the opportunity for inclusive growth – a cure for Africa’s case of the "Dutch disease."
Mineral resources: a blessing or a curse?
When coupled with strong financial services, an economy’s reliance on mineral resources can be a blessing when price booms in international markets. Overall, however, poorly diversified economies are more exposed to shocks, such as fluctuations in commodity prices or technological changes that reduce demand. The volatility from this lack of diversification negatively impacts private and public investments, while negative price shocks lower domestic yield, reducing the return on investment and constraining the economy. As investors may consider non-diversified economies riskier, the situation could also reduce foreign direct investments. A natural resource boom, even during periods of high commodity prices, can also be a curse when the price spike reduces the competitiveness of domestic products, which could result in the appreciation of national currencies. Monetary, fiscal, and industrial policies could shift when a natural resource boom occurs, tilting the focus to the natural resource sector. The economy’s structure may gravitate towards the natural resource/commodity sector to the detriment of other sectors. Although there could be advantages, the reliance on natural resources presents more risks and is perceived as a curse rather than a blessing to African economies.
Export diversification: the virtuous circle
The impacts of the ongoing crises, including the war in Ukraine, the lingering effects of COVID-19, and climate change, have shown that export diversification boosts the resilience of African economies and provides buffers of alternative sources of revenue during periods of crisis. Export diversification changes the composition and structure of a country's economy. It occurs by exporting new products (product diversification), by exporting to new markets (geographic diversification) or by doing both simultaneously. To encourage the diversification of their economic activities, African countries must establish clear, transparent, and predictable business regulations while tackling high borrowing costs. This is particularly important in Africa since developing nations often pay up to eight times more in borrowing costs than developed countries. Africa should similarly address rising debt distress by increasing affordable and long-term financing. On this, the United Nations Secretary-General called for a "new Bretton Woods moment," as a key condition to achieve sustainable development.