Trade and Investment

The Challenge

In 1980, sub-Saharan Africa had a 6% share of world trade. By 1998, this share had dropped to just 2%.  Although Africa's share of global trade has since increased to 3.5% in 2008, its share remains the smallest of any region in the world. Similarly, although foreign direct investment (FDI) inflows to sub-Saharan Africa grew 78% between 2005 and 2007, FDI to the region remains a small fraction of global FDI flows (1.67%). Sub-Saharan Africa faces the world's greatest challenges in accessing local, regional, and global markets.  A lack of infrastructure and reliance on the export of raw materials (such as minerals and agricultural products) present significant challenges to expanding trade within the continent and with the world, and attracting investments into the country. Sub-Saharan African countries also face trade barriers such as taxes on imports, or tariffs, which make it difficult for their products to compete in important markets like the U.S., Europe, and Japan. Making matters worse, wealthy nations pay subsidies to their farmers, giving them an unfair advantage to selling agricultural products into developing country markets.

Although progress has been made in expanding access for sub-Saharan African products (often as a result of benefits extended through preferential access schemes), many African exports still face high tariffs when imported to developed countries. This is especially true for agriculture, which is the most heavily subsidised sector of many developed country economies. In 2007, the OECD estimated that farmers in developed countries received $223.5 billion in subsidies. This represented 23% of total farm income in developed countries and is equivalent to approximately a third of the GDP of all sub-Saharan African countries combined. Subsidies given to farmers in developed countries give those farmers incentive to overproduce, skewing world prices and often leading to "dumping" of excess products in developing countries. Local farmers can't compete with these artificially underpriced goods.

Sub-Saharan Africa also faces significant supply-side problems that need to be addressed so that even as the rules are improved, Africans can produce and transport products to markets. Poor infrastructure like roads, bridges and electricity are critical barriers to trade and discourages investments. The 2005 "Commission for Africa" Report estimated that transport costs can be three-quarters of the value of exports in landlocked countries. For example, shipping a car from Japan to Abidjan, Cote D'Ivoire costs $1,500, but shipping the same car from Abidjan to Addis Ababa, Ethiopia costs $5,000. As a result, intra-regional trade flows among African countries are lower than in other regions, accounting for less than 10% of the continent's total exports to the world (compared with nearly 20% in exports with the Western hemisphere, and more than 40% with Asia).

 The Opportunity

Economic growth, driven by trade and investment, is the critical engine that will end poverty in sub-Saharan Africa. Development assistance can help lay the foundations for growth by boosting resources for health, education and infrastructure, but in the long-term trade and investment will have a far greater impact on poverty alleviation. Even small percentages of global trade can make a big difference -- in 2007, 1% of global trade was worth $119 billion, more than four times the development assistance sub-Saharan Africa received from G8 countries that same year. A combination of enhanced access to developed country markets, stronger "aid for trade" commitments from donors to address sub-Saharan Africa's supply-side challenges and increased integration among African economies could dramatically expand opportunities for trade across the continent.

The ability to export products to international markets can be a vital source of income for many sub-Saharan African countries. Lesotho, for example, exports more than $300 million each year in clothing to the U.S. under the African Growth and Opportunity Act (AGOA), U.S. legislation that lifts duties for African countries who qualify.  Developed countries can help to replicate successes like this across the continent by dropping duties and quotas for all African products, including agricultural goods.  This duty-free/quota-free access should be extended to all African countries (including non-LDCs, or least developed countries), and can be put forth either by individual initiatives in developed countries or through the current "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 to provide assistance that addresses the continent's problems in infrastructure and telecommunications, financial services, adjustment costs, strengthening of regional trade entities, education and marketing. Recent analysis shows that Africa needs $12-13 billion per year in this type of assistance, often called "aid for trade." However, the combined contribution from G7 countries (Canada, France, Germany, Italy, Japan, U.K., and U.S.) to aid for trade projects in Africa in 2007 was only $6.1 billion.

Finally, increasing trade and investment among sub-Saharan African countries through economic integration could bring real benefits in employment and incomes. A number of African countries have committed to promoting regional integration by creating regional economic communities. Such entities as 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, but are all committed to creating a free trade area, with some going even further by aiming to create a full common market.  Across sub-Saharan Africa, efforts to improve investment climate are gaining traction. One example of such effort is the African Union and New Economic Partnership for African Development (NEPAD)'s Investment Climate Facility, which was originally endorsed by the 2005 Commission for Africa.  It is currently active in 10 African countries and is working on four pan-regional projects and two special initiatives.