Africa opens world’s largest single market (3)

VOYAGE IN UNCHARTED WATERS comes with peculiar risks, mostly unknown to the seafarers. Although seafaring has been made easier, and the associated risks now far less due to improved exploratory and diagnostic technologies, the role of experience still remains preeminent in navigation. Weather signals equipment, acoustic detection equipment, visual equipment such as telescopes, or even the best of radar, won’t be considered useful for navigation any more than visionary ideas, good policies, plans, standard operating procedures, templates and guidelines are for programme implementers. What is important, however, is that a plan drawn at the very onset of a journey often turns out to be a set of mere guidelines. In reality, the seafarer may have to alter the course of voyage slightly in response to the realities on the sea, while still focusing – with the aid of the compass – on the final destination.

Africa’s new single trading platform is no different in terms, especially when considered against the backdrop of the seafarer analogy. Although the excitement, ecstasy, optimism and high expectation are all good, they need not end at the onset. A lot of energy and determination will be needed to steer the continental platform well through the long and tortuous paths into the future. Beyond the name, the size of the market and the uniqueness as a continental platform, promoters of the African Continental Free Trade Area (AfCFTA) need to brace for the unforeseen or disruptive realities. To begin with, AfCFTA will have to grapple with a large unregulated informal market that is hitherto mostly operated without reliable statistics, thus posing a lot of problems for Africa’s development. As a sector that generates an average of 40 per cent of Africa’s GDP and estimated by the International Labour Organisation (ILO) as a source of more than 66 per cent of total employment in Sub-Saharan Africa, the informal economy is a source of big business in Africa and the prospects look good, but that is if the right things are done.

Although the informal sector is both significant in the rural and urban areas, and is a large part of employment in a fast-urbanising Africa, with a growing number of cities, its economic activities fall outside the regulated economy. Comparative estimates from the International Monetary Fund (IMF) indicated a steady decline in the informal sector’s share of the global economy over the last decade, now at a weighted average of 34 per cent in Sub Saharan Africa, 9 per cent in North America and 15 per cent in the OECD countries. Difficulty in measurement of the informal sector has been linked in part to tax burden and social security contributions as major drivers, in which case the contributions of those not in the tax bracket are hard to measure as many individuals and households tend to move into the informal economy to avoid high taxes, and they go undetected. At some points, Nigeria appeared to have realised this shortcoming as part of the causes of subdued national revenue, probably a key consideration in 2014 when the country’s economy was rebased, thus propelling it to a new status of the largest economy in Africa.

As Africa operates a single regional market under AfCFTA, important decisions have to be made on global competition and how to navigate the competitive terrain. One of the areas requiring priority attention is the adoption of ICT, involving mobile communication and the internet. Applying these technologies will make the informal sector more visible, inclusive, as well as competitive and can lead to some structural transformation in which data capture becomes a lot easier. This presents new opportunities, prospects and risks for Africa. Without these transformative interventions, African countries could find it hard to connect to one another. The continent may find it difficult to compete globally and remain vulnerable to new and disruptive technologies that are already changing the economies of other parts of the world. Laws governing private enterprises remain weak in Africa and will require elaborate amendment to make them adaptable to prevailing and contemporary situations. The weak laws open avenues for monopolistic practices. Anti-competitive behaviours are problematic in the sense that it is unfair to limit competition in a market, particularly in a developing economy. AfCFTA will have to grapple with this reality in certain sectors of trans-boundary trade. Where there are no anti-monopoly laws, small and medium-sized businesses remain prone to overbearing and adverse influences of few big industries and the developing digital markets, both of which create unequal and asymmetrical distribution of wealth.

The quantum of trade on AfCFTA platform will remain low so long as it depends mainly on commodities. Manufacturing sector will have to experience real growth and expansion if trade in volume and value is to be worth the while. We are familiar with stories of hostile takeovers, mergers and acquisitions involving big companies gobbling up smaller competitors in the same sectors, thus limiting the options of players in the markets. The history of Africa’s deindustrialisation cannot be complete without some instances of such events, many of which sailed through simply because of the absence of strong laws, statutes or policies that prioritise industrial development in an organic manner to empower infant industries and strengthen weak indigenous ones. While many might be celebrating the ascendancy of a few big businesses owned by indigenous Africans, it is important to understand their unfair advantages to their local economies in many different ways. Some such conglomerates have subsumed other competitors and so are left alone to set the rules, which ultimately play to their own advantages. In many ways, these behemoths are no different from businesses run by foreign investors in terms of ability to put competitors at the periphery of the markets.

Although Foreign Direct Investments (FDIs) is being encouraged and promoted in Africa, the desirability needs to be viewed critically. For instance, fiscal and financial incentives offered to foreign investors may do more harm than good.  Findings from a 35-year study, involving the effect of FDI on economic growth for 44 developing countries over a period leading up to 2005, has shown a negative effect on growth in developing countries. Many operators of FDI enjoy the undue advantage of cost of funds, usually borrowed at far lower interest rates from foreign banks compared with enterprises that depend on local sources of funds at far higher interest rates, with a lot of encumbrances, putting the latter at a competitive disadvantage. Enterprises running on funds raised from Nigerian commercial banks at 23 per cent interest rate cannot be as resilient or profitable as those that borrow from foreign banks at 2 or 3 per cent. They cannot grow at the rate of those funded with funds from foreign sources. The situation is not any different all over Africa, even in South Africa regarded as the financial capital of Africa where many foreign banks have strong presence.

Apart from the benefits enjoyed by FDIs, perverse incentives ostensibly created to encourage local enterprises to promote exports have also created their own unintended complications. Again, in Nigeria, a federal government incentive introduced over a decade ago, known as Export Expansion Grant (EEG), has proved to be a back channel for repatriating gains made by many foreigners who invested in Nigeria. For instance, an Italian who purported to be exporting Nigeria’s leather to Italy under the guise of EEG was simply abusing the incentive as he was merely collecting huge benefits for importing the leather to his home country. Such schemes, however, could not have sailed through without collusion with sleazy civil servants who facilitated such deals. It is possible to have foreigners taking undue advantage of any of AfCFTA’s incentives to the detriment of African investors. Examples have also been found under the ECOWAS Trade Liberalisation Scheme (ETLS), in which case some foreigners try to beat the system. An example is in cases of importers of palm oil from Asia into Nigeria through neighbouring West African countries where they set up tank farms and mini-processing firms from where they pretend to produce the palm oil. They cash in on ETLS rules to beat their path across borders and scale barriers under the argument of common regional markets. This is possible on a continental scale if AfCFTA is not vigilant enough.

If AfCFTA is to be a resounding success, Africa cannot afford to be on the side lines in the debates and policies on ICT as enablers of trade and economic development. Africa will need dependable ICT infrastructure and partners for seamless functions. The developed countries where the major global ICT industry leaders operate may no longer have to hold the monopoly of the market in the industry. African countries that derive their services mainly from these developed countries need to have a strategic rethink. It is obvious that hi-tech companies, leaders of the ICT world, had enjoyed years of regulatory complacency and are currently becoming dictators in the market space, moving gradually to the political space as seen in the events leading up to the recent presidential elections in the US, and the aftermath. Imagine a company’s social media official business handle being taken down suddenly for some inexplicable reasons. What impact is that likely to have on the enterprise’s bottom line? As countries in Europe, Asia and elsewhere are swiftly responding to these hi-tech monopolies, Africa too must rise up to the challenge.

Governments therefore need to act quickly and provide proportionate safeguards against potential and actual risks that these companies are creating to the market and to the whole of society and must be ready to deal with alternatives. Although moving many offline business activities online could boost economic fortunes and volume of trade under AfCFTA, it is important to ensure that those who conduct offline businesses are not strangulated by those who have heavy presence online. Extrapolating the arguments based on recent happenings could provide some insights. The overnight removal of Parler, a conservative online chat platform and an alternative to Twitter, by Amazon sends an ominous signal to the world about secured internet dependency. Alibaba, an Asian alternative cloud computing company to America’s Amazon, is currently under scrutiny by the Chinese government. Alibaba’s founder has been accused of trying to challenge the authority of the government of Chinese Communist Party, a dangerous adventure for a company that has risen to such a height. Africa therefore has to examine the risks and benefits as well as Strengths, Weaknesses, Opportunities and Threats of embarking on ICT-enabled intra-African trade. AfCFTA’s promoters therefore need to hedge their bets carefully and smartly in the precarious areas of critical success factors and determinants of sustainable development. These would require a clear peep into the future and good understanding of the challenges of the present time in Africa.