Trade & Investment

Trade and investment that boosts economic growth and creates job opportunities for the poorest people is key to fighting poverty.

The Challenge

Encouraging inclusive and sustainable growth are essential tools in the fight against extreme poverty. Creating an environment that supports trade and attracts investment are two key tools in promoting inclusive and sustainable growth. Through them, jobs are created, providing more stable sources of income and giving people more access to health, education and opportunities to create a better life for themselves and their families. Africa’s economic growth rebounded relatively quickly from the global economic crisis, reaching a high of 4.9% in 2013 but has since been in a steady decline topping out at only 3% in 2015. Growth was expected to slow even further to only 1.6% in 2016. Falling oil and commodity prices and are largely to blame for the slow down in growth. Despite the tremendous growth rates over the last decade, sub-Saharan Africa has struggled to reap the benefits of global trade. In 1980, sub-Saharan Africa had only a 3.8% share of world exports in goods. By 1998, this share had dropped to just 1.3%. The share increased constantly over the years but dropped again after 2011 (2.4%) to 1.7% in 2015%. However, this regional outlook is strongly skewed by 23 countries that rely heavily on commodity exports, that are struggling due to low commodity prices and overall slow growth. The remaining 22 non-resource-intensive countries however, continue to perform well; growth for this group as a whole is expected to come in at roughly 5.5% for 2016.

Foreign direct investment (FDI) to the region remains a small fraction of global flows, although it is also slowly increasing. While the global financial crisis led to a general drop in FDI, sub-Saharan Africa has fared relatively well compared to the G7 countries; FDI flows to sub-Saharan Africa increased seven-fold between 2000 and 2015, from $6.7 billion to $42 billion.

Sub-Saharan Africa faces some of the world’s greatest challenges in accessing local, regional and global markets. Almost half of the sub-Saharan African population lives in poverty and building capacity for global and regional trade is essential for creating the economic growth needed to support sustainable livelihoods. Poor critical infrastructure such as roads, bridges, ports, unreliable access to energy and underdeveloped telecommunications systems are significant barriers to trade and discourage much needed large investments. Other constraints include lack of financial services, business training and capital to build competitive industries. Combined with regressive import tariff policies in many developed countries, these constraints lead many African countries to rely on exporting raw materials, such as minerals and agricultural products, rather than finished products. Exporting raw materials means that these countries miss out on the higher levels of the global value chain.

Sub-Saharan African countries also face external trade barriers, such as high import tariffs, which make it difficult if not impossible for their products to compete in important markets. Programs designed to support African exports are often too complicated or restrictive to be used effectively. Rules of origin about proof of where different products (and all their components or ingredients) come from and complicated health and safety requirements are two examples of barriers that often put African products and producers at a disadvantage. In addition, rich countries often pay subsidies to their own producers, giving them an unfair advantage in the global marketplace. Agricultural subsidies in countries that are part of the Organisation for Economic Co-operation and Development (OECD) reached $585 billion in the years 2013-2015.

Sub-Saharan Africa’s rapidly growing population makes job creation an absolutely vital issue. Over the next 20 years the number of Africans joining the working age population (ages 15-64) will exceed that from the rest of the world combined. The IMF estimates that the region will need to create about 18 million new jobs per year until 2035 to absorb the growing labor force.

The Opportunity

Inclusive economic growth, driven by smart trade and investment, will help end poverty in sub-Saharan Africa. Alongside continued provision of crucial development assistance, 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 promoting economic growth in Africa and building resistance to future economic shocks.

Improving access to developed country markets, supporting increased intra-regional trade, 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 are all integral ingredients needed to make trade work for Africa.

The ability to export products, particularly value-added goods, such as, processed foods, clothing and other manufactured products to regional and international markets could 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 the European market for all products from least-developed countries. Similarly, the U.S. African Growth and Opportunity Act (AGOA) and Generalized System of Preferences (GSP) offer duty-free, quota-free access for most products from least developed countries in sub-Saharan Africa. Other developed countries should replicate successes like these across the continent by removing duties and quotas for all African products, including all agricultural goods.

Another vital way that developed countries can help Africa trade is through ‘aid for trade’: assistance that addresses the continent’s non tariff trade barriers; customs and tax policy, infrastructure and telecommunications, energy access, financial services, adjustment costs, strengthening of regional trade entities, education and marketing. It is estimated that for each dollar invested in aid for trade to a low-income country, exports could increase by as much as eight dollars. Aid for trade disbursements to Africa between 2006-2015 totaled $86.275 billion dollars.

Increasing trade and investment between sub-Saharan African countries themselves could bring real benefits in growing economies, increased global competitiveness, and higher employment and incomes – all driven from within the region itself, a prime example of African-led development. Intra-African trade currently accounts for a little over 16% of the continent’s total trade, far below the levels of intra-regional trade achieved in Latin America (21%) and Asia (50%). Yet there is now unprecedented momentum behind enhancing regional integration on the continent. In 2012, the African Union (AU) agreed to an action plan on doubling intra-African trade and fast-tracking a continental free trade area. Almost half (43%) of goods traded between African countries are in manufactures, in contrast to 22% of African exports to the rest of the world. Boosting intra-African trade would help bring about a move away from the traditional reliance on primary commodity exports and towards exporting manufactured products that are higher on the global value chain.

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. Integration that eliminates cumbersome customs and border crossing procedures and reduces tariffs, can help enhance regional trade. The implementation of the AU 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. 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. For example, the East African Community has received technical assistance from the United States Government and, as a result, has been able to decrease transit time for containers traveling from Mombasa to Kigali from 21 days to just 6 days. This has brought down associated transport costs by over $1,700 per container.

Africa has the potential to be one of the most dynamic economic zones in the world. Improving its investment climate and eliminating barriers to intra-regional and global trade are crucial for harnessing this growth and boosting jobs – an essential step in the fight to end poverty.