Trade and Investment

The Challenge

Trade and investment is an essential component of economic growth and an important source of job creation and sustainable income for African countries, communities and producers.

Despite tremendous growth rates in 17 Africa countries over the last decade, sub-Saharan Africa has struggled to reap the benefits of global trade. In 1980, sub-Saharan Africa had a 3.6% share of world trade. By 1998, this share had dropped to just 1.3% and in 2011, it was 2.1%.

Similarly, foreign direct investment (FDI) to the region remains a small fraction of global FDI flows; however, the picture is improving. While the global financial crisis led to a general drop in FDI from 2008, sub-Saharan Africa has fared relatively well compared to the G8 countries. FDI flows in sub-Saharan Africa increased by 23% between 2007 and 2011, whereas they declined by 41% in the G8 countries. Prior to the crisis, between 2000 and 2008, FDI flows in sub-Saharan Africa grew nearly five-fold to $36.9 billion.

Africa’s economic growth also rebounded relatively quickly from the global financial crisis.  In 2011, economic growth in sub-Saharan Africa was 4.9%, and growth across 2012 and 2013 is predicted to average 5.4%; only the developing Asia region is predicted to have higher rates of economic growth during this period. 

Despite this progress, roughly one-third of the African population lives in poverty and building Africa’s capacity for global and regional trade is essential for creating a pathway to sustainable livelihoods. Sub-Saharan Africa faces some of the world’s greatest challenges in accessing local, regional, and global markets.

On the supply side, poor infrastructure for roads, bridges, and unreliable access to energy and under-developed telecommunications systems are significant barriers to trade and discourage investments. Other constraints include a lack of business training, capital to build competitive industries and financial services to help entrepreneurs bring their ideas to fruition. Combined with regressive import tariff policies in many developed countries (see below), these constraints contribute to a reliance on raw exports, such as minerals and agricultural products, rather than finished products. This presents significant challenges to expanding trade across the continent.

Sub-Saharan African countries also face external trade barriers, such as high import tariffs, which make it difficult for their products to compete in important markets like the U.S. and Japan. Even programs designed to give preferential treatment to African exports are often too complicated or restrictive to use effectively. Complex rules of origin, cumbersome quality and safety requirements, limited preferences for products in which African countries have a comparative advantage and preference erosion prohibit the full utilization of these advantages. To worsen the situation, wealthy nations pay subsidies – many of which are trade-distorting – to their producers, giving them an unfair advantage in the global marketplace. In 2011, agricultural subsidies in OECD countries reached $407 billion, which represents 0.95% of these countries’ GDP. This is more than ten times the ODA that DAC donors provided to sub-Saharan Africa in the same year.

Within Africa, poor regional integration – both in terms of infrastructure and government policies – poses a barrier to African countries benefitting from trade with each other.

The Opportunity

Inclusive economic growth, driven by trade and investment, will help end poverty in sub-Saharan Africa. Addressing the underlying imbalances in the global trading system and investing in the development of African infrastructure, energy access and regional integration are more critical than ever for Africa to achieve the Millennium Development Goals (MDGs) and build resistance to future economic shocks. However, development assistance has an important role to play in laying the foundations for growth by boosting resources for health, education and infrastructure, and building trade capacity.

Improving access to developed countries and neighboring markets, enhancing aid for trade to help countries address supply-side constraints and improve competitiveness, investing in infrastructure, increasing capital investment flows, and strengthening regional economic integration can make trade can work for Africa. Even if Africa captured only a small additional percentage of global trade, it would make a big difference. In 2011, 1% of global trade was worth $225 billion, more than six times the development assistance sub-Saharan Africa received that same year.

The ability to export products, particularly value-added products like processed foods, apparel and other manufactured products to regional and international markets can be a vital source of income for many sub-Saharan African countries. The European Union Everything But Arms (EBA) Regulation extends duty-free, quota-free access to all least-developed countries to the European market for all products. Other developed countries can replicate successes like this across the continent by removing duties and quotas for all African products, including all agricultural goods. This duty-free/quota-free access should be extended to all least developed countries (LCDs) and can be done bilaterally or as part of the ‘Doha Round’ of global trade negotiations at the World Trade Organization (WTO).

Another vital way that developed countries can help sub-Saharan Africa trade is aid for trade: assistance that addresses the continent’s constraints in customs and tax policy, infrastructure and telecommunications, energy access, financial services, adjustment costs, strengthening of regional trade entities, education and marketing. The combined contribution from G7 countries (Canada, France, Germany, Italy, Japan, UK and US) to aid-for-trade disbursed in sub-Saharan Africa in 2011 was only $2.8 billion, well below the estimated need. Infrastructure needs alone are estimated at over $30 billion annually for the next 10 years.

Finally, increasing trade and investment between sub-Saharan African countries could bring real benefits in increased trade, global competitiveness, employment and higher incomes – all driven from within the region itself, a prime example of African-led development. Intra-African trade currently accounts for about 10% of the continent’s total trade. This is far below the levels of intra-regional trade achieved in Latin America (22%) and Asia (50%). Yet there is now unprecedented momentum behind enhancing regional integration and internal trade. Earlier this year the African Union (AU) agreed an action plan on doubling intra-African trade and fast-tracking a continental free trade area. In 2010, almost half (43%) of African exports to Africa were in manufactured goods, in contrast with 22% of African exports to the rest of the world. Therefore, boosting intra-African trade would also bring about a move away from the traditional narrow reliance on primary commodity exports.

Regional trade corridors that connect countries through roads and railways, and provide access to ports and airports can help move goods to markets and connect people with employment opportunities. Economic integration that reduces cumbersome customs and border crossing procedures, as well as tariffs, can also enhance regional trade. The implementation of the African Union Programme for Infrastructure Development (PIDA) endorsed by the AU will be a key component to strengthening this regional integration.  A number of African countries have committed to promoting regional integration by creating regional economic communities (RECs). Trade integration amongst and between The East Africa Community (EAC), the Southern African Development Community (SADC), the Economic Community of Western States (ECOWAS) and the Common Market for Eastern and Southern Africa (COMESA) are at varying stages of implementation and operation with some working towards a full common market.