Trade and Investment

The Challenge

Trade is an essential component of economic growth and provides an opportunity for African countries, communities, and producers to make a living. After years of impressive growth, Africa has suffered a slow-down in the wake of the financial crisis, the effects of which have been compounded by the preceding fuel and food crises. Not only are African countries struggling to build their own markets and reduce poverty through trade, but they will have an even more difficult time with the decrease in investment, demand for African products, and remittances, and will rebound less quickly than developed and emerging economies.

For decades, Sub-Saharan Africa has struggled to take advantage of global trade. In 1980, sub-Saharan Africa had a 6% share of world trade. By 1998, this share had dropped to just 2%. Recently, this trend was reversing as Africa's GDP growth averaged between 5% and 6% from 2002 to 2008 and foreign direct investment (FDI) grew nearly ten-fold from 2000 to 2008 to $87.6 billion.  Although progress is evident and Africa's participation in global trade has since increased, its share remains the smallest of any region in the world. Similarly, FDI to the region remains a small fraction of global FDI flows. Furthermore, the onset of the global financial crisis threatens to diminish these gains.  Africa's growth is estimated to have dropped to just 1% in 2009, FDI is projected to decline by 36.2% to $55.9 billion and remittances are projected to fall by $2 billion between 2009 and 2010.

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) rather than finished products present significant challenges to expanding trade within the continent and with the world, and attracting investments. Sub-Saharan African countries also face trade barriers such as high import tariffs, which make it difficult for their products to compete in important markets like the U.S., Europe, and Japan. Even programs designed to give preferential treatment to African exports are often too complicated or restrictive to use effectively. Making matters worse, wealthy nations pay subsidies to their farmers, giving them an unfair advantage in the global marketplace. In 2008, the OECD estimated that farmers in developed countries received $219.4 billion in subsidies, almost eight times the amount that G7 countries spent in sub-Saharan Africa in 2009.  Subsidies give farmers in developed countries an incentive to overproduce, pushing down world prices or flooding local markets with cheap imports. Local farmers can't compete with these artificially underpriced goods in either local or global markets.  

Sub-Saharan Africa also faces significant supply-side challenges that need to be addressed so that even as the rules are improved, Africans can produce competitive products and transport them to markets. Poor infrastructure like roads, bridges, unreliable access to energy and underdeveloped 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. Poor regional integration also poses a barrier to African countries benefitting from trade with each other.

The Opportunity

Economic growth, driven by trade and investment, is the critical engine that will help end poverty in sub-Saharan Africa. Addressing the underlying imbalances in the world trade system and investing in long-term development of the trade sector are more critical than ever for Africa to recover from the global financial crisis, meet the MDGs, and build resistance to future economic shocks. 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 sustainable poverty alleviation.

By improving access to developed country 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, trade can work for Africa. Even if Africa captured only a small percentage of global trade it would make a big difference: in 2008, 1% of global trade was worth $195 billion, more than five 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. 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 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 to provide assistance that addresses the continent's constraints in infrastructure and telecommunications, financial services, adjustment costs, strengthening of regional trade entities, education and marketing. The combined contribution from G7 countries (Canada, France, Germany, Italy, Japan, U.K., and U.S.) to aid for trade projects in Africa in 2008 was only $6.9 billion which is believed to be well below the need. Infrastructure needs alone - just one component of aid for trade needs - are estimated at $25 billion annually for 10 years.

Finally, increasing trade and investment among sub-Saharan African countries through physical and economic integration could bring real benefits in increased trade, employment and higher incomes. 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.   A number of African countries have committed to promoting regional integration by creating regional economic communities. Entities such 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 even aiming to create a full common market.  "Development corridors" which help connect countries are being created in several African regions to simplify and harmonize requirements across countries and greatly reduce transportation time and costs.