How Free Trade Is Transforming Africa

SMITH BRAIN TRUST – Nineteen years ago, The Economist magazine took a sharp, critical eye to the continent of Africa, with a cover story that dubbed it “The Hopeless Continent.”

“No one can blame Africans for the weather, but most of the continent’s shortcomings owe less to acts of God than to acts of man,” the magazine wrote at the time.

That Africa is not today’s Africa. In fact, 13 years after the “hopeless” cover story, several African countries were among the fast growing in the world. In response, The Economist published a special report, “Africa Rising: A Hopeful Continent.”

The economic growth performance has also been sustained for the last two decades despite challenges. Among the challenges are small scale, segmentation and fragmentation of markets characterized by dismal intra-Africa trade. African countries have embarked on a bold vision of integrating these markets.

Today, Africa is set to become home to the largest free trade union in the world, both by area and by population. The Africa Continental Free Trade Area, or AfCFTA, formally goes into effect at the end of May, now that the Gambia has become the 22nd country to ratify the agreement.

It’s a milestone years in the making, one that will continue Africa’s transformation. It’s a transformation that Maryland Smith’s Lemma W. Senbet has been part of during his five years as executive director and CEO of African Economic Research Consortium.

“We have come such a long way across Africa in just 19 years,” says Senbet, the William E. Mayer Chair Professor of Finance at the University of Maryland’s Robert H. Smith School of Business,

Africa has 1.2 billion people – more than the EU and NAFTA combined. And its AfCFTA is broader in scope than other trade agreements like it, allowing free movement of people and goods across borders, but also integration of services – including finance – competition policies, and intellectual properties.

According to the terms of the agreement, signed by 52 of 55 countries (only Benin, Eritrea and, notably, Nigeria failed to sign), the deal would go into effect once ratified by 22 countries. “Twenty-two was the magical number. The Gambia was that 22nd country and now the agreement is binding for all of the signatories.”

“The agreement, if implemented correctly, will enhance economic diversity, it will enhance global value chain, and help us integrate more into the global economy,” says Senbet, who is a chaired professor of finance and is the founding director of Maryland Smith's Center for Financial Policy.

“If we have integrated financial markets in Africa, there is more of a chance of integrating Africa into the global financial economy.”

The pact will bring much-needed economic diversity to its members, many of which tend to be heavily dependent upon a single commodity. “There is a new movement of goods and services, but also an opportunity to enhance what is known as value chain,” says Senbet. It’s the ability to turn cocoa beans from Cote d’Ivoire into chocolate, without first shipping it to the Netherlands, and so on.

Nearly every African country sends more exports beyond Africa’s shores than it does within those shores. In 2016, for example, intra-African exports were just 18% of total exports. But, Senbet notes, African supply chains have been weak, and tariffs and non-tariff burdens have long restrained intra-African commerce. “This agreement creates opportunity for them to trade,” Senbet says. The prosperity that countries stand to gain from easier intra-African trade, he says, “is tremendous.”

As executive director and CEO of the African Economic Research Consortium (AERC) from 2013 until last year, Senbet has worked to bring “rigor and evidence” to economic policymaking in Africa, in hopes of tearing down those burdens and stimulating more intra-African commerce.

“Some of the advantages occur from the process of integrating,” Senbet says, describing how poor infrastructure creates non-tariff barriers. Overall infrastructure funding needs for Africa are estimated to be about $150 billion a year, roughly $40 billion more per year than is budgeted across the bloc, according to the African Development Bank’s infrastructure investment arm.

“What do you need to trade more efficiently between countries? One thing you need is good infrastructure, like roads. If countries partner in building roads, across national boundaries, this is going to create integration of infrastructure.”

And it can strengthen the bonds between countries, an advantage in good times and bad.

“The agreement enhances access of groups that had been largely left out. That means small farmers, small and medium-sized enterprises – or SMEs – women, basically it enhances what is called ‘inclusivity of growth’,” says Senbet.

The agreement, first signed by African Heads of AU Member states in Kigali, Rwanda, hosted by Rwandan President Paul Kagame (an AU Chairman) in March of 2018, has found its feet at an unlikely time in history, as countries around the world increasingly embrace economic populism and broader isolationism. “And that means that we now have an opportunity to learn,” says Senbet. “We can design and implement the agreement in a way that will benefit everyone and not leave anyone out, avoiding the troubles that have affected other trade blocs.”

It will take research, and that’s where AERC can help.

The nonprofit AERC is the largest and oldest economic research and training network in Africa, and Senbet worked to assure its sustainability while promoting inclusive capacity building and policy outreach of global best practices. In 2015, he lead the historic convening of governors representing twelve central banks in Livingstone, Zambia, which lead to the banks to become members of the Consortium, with a voice and representation on the AERC board, alongside representatives from the World Bank, non-African nations, such as Sweden, UK, Norway, and major foundations, such as the Gates Foundation. His movement was wholeheartedly embraced. “I regard this as among my most important contributions,” he says. AERC now ranks among the top organizations globally for influencing policy.

Senbet took a leave from his Maryland Smith teaching position to lead the Consortium. During his African tenure, he visited and led missions to 25 countries. Consistent with the Pan-African mandate of AERC, he rotated the flagship biannual research capacity building activities around key countries in the sub-regions: Senegal, Ghana, South Africa, Zambia, Tanzania, Kenya, Ethiopia and Mauritius.

He says the AfCFTA won’t solve all of Africa’s trade and finance challenges overnight, particularly as non-tariff barriers remain. “There’s a lot of work to do,” Senbet says. “But there is so much optimism, and so much reason for optimism.”