Africa has some of the world’s least competitive countries – but that could soon change

In the past few years, as the global commodity super-cycle reached a crescendo, seven of the 10 fastest growing economies were in Africa. This was largely fuelled by China’s voracious appetite for oil and minerals, the Gulf region’s need for cultivable land to feed its rising populations, and the consumer demands of a rapidly expanding African middle class migrating en masse to urban areas.

The combined increase in inward foreign direct investment and outward foreign trade created a new wave of global investors, banks and multinational corporations streaming to Africa to take a fresh look at emerging opportunities. It also created a new era of economic growth and afro-optimism.

But Africa was still home to some of the world’s least competitive nations. And as global commodity prices – particularly for oil – crashed, many African economies slowed considerably.

Where’s the value add?

For far too long, economic growth in Africa has been dominated by the export of unrefined raw material and unfinished products – from crude oil to cashews and diamonds to cocoa. Economies around the continent have limited our own potential by not building the internal capacity to add more value locally by making semi-finished and finished products.

This deprives Africa of the vast majority of the ultimate value inherent in raw materials. Instead, global companies from developed economies have long been the only viable – although far from ideal – alternative. This severely limits the resources and opportunities Africans are able to derive from our own natural endowments and slows the pace of development. More worryingly, these circumstances have created enclave economies and growth that is very often non-inclusive.

In Africa, manufacturing output per worker is six times that of agriculture, although this ratio would change if more of the continent’s agricultural products were processed within those economies rather than being exported upon harvest.

The lack of industrial activity and other value-adding processes has led many African countries to rely disproportionately on exports of traditional cash crops and other natural resources. One of the major challenges holding countries back is the relatively small size of their domestic market, making it exceedingly difficult to attract the type of long-term capital required to build the physical infrastructure and human capital industrialization requires.

Integrating Africa’s markets

It is only through greater integration that the vast majority of African markets, which on their own are small and uncompetitive, will be able to attract the kind of investment needed to develop value-added supply chains in manufacturing, agro-processing, large-scale assembly facilities, and general industrialization. This is essential if countries are to create the number and types of jobs required to drive inclusive growth and reduce inequality.

Mutually-beneficial trade between African economies would help address a number of the continent’s challenges. For example, similar to other regions of the world that have dramatically increased cross-border economic relationships, such as the European Union, an increase in regional trade is strongly correlated to expanding economies, rising incomes, and stronger and more peaceful, international relationships.

In sub-Saharan Africa, although significant progress has been made and intra-regional exports grew by a compound annual growth rate of 16% between 2004 to 2013, these trade flows still only represent around 17% of total trade flows, compared to Europe’s 66%, Asia’s 48%, North America’s 32% and Latin America’s 20%.

Research has found that crossing borders with commercial products in sub-Saharan Africa takes 12 days on average compared to only seven days in Latin America, six days in Central and East Asia, and only four days in Central and Eastern Europe.

For example, South Africa-based Shoprite, one of the fastest growing Pan-African supermarket brands, spends $20,000 a week obtaining import permits to transport goods from South Africa to its stores in Zambia, which requires between 100 to 300 single entry import permits. There can be up to 1,600 documents accompanying each loaded truck Shoprite sends across a border within the economic block that is the Southern Africa Development Community.

Accelerating the ongoing negotiations, harmonization and implementation of various African regional trade agreements (including the Tripartite FTA and the Continental FTA) in 2016 would greatly help African economies reduce our reliance on raw material or primary commodity exports and develop a greater capacity to compete. More importantly, it will help us capture larger value from the global market place and efficiently participate in global value chains.

Connected thinking

To do this, a paradigm shift in the aid, trade and investment relationship between African countries and global stakeholders is also required. Traditionally, the approach to development in Africa has been in silos – aid, trade and private investment – although each would benefit from the increased effectiveness of the other simply through better coordination of plans in the early stages of their design.

Stakeholders should not think of trade or investment solely in terms of countries or products in the manner that bilateral trade agreements do. Instead, they should focus on ways to boost the entire international trade ecosystem; this could initially be limited to those sectors with the greatest potential to be competitive exports.

Historically, donor governments have focused their development efforts on one country or sector. For example, when focusing on a particular agricultural product in a country, they are usually only actively involved with one or two elements of the ecosystem, although all of them need to function well or the ecosystem fails. This is where the goals of international trade partners, development agencies and international investors should converge.

According to the African Development Bank, the continent holds about 30% of the world’s known minerals and half its uncultivated arable land. Nearly every African nation has natural economic advantages that remain under-capitalized, presenting opportunities for robust commercial and developmental gains The key is to identify the natural advantage of a specific country – such as cocoa in Ghana, horticulture in Kenya, and cashews in Tanzania – and create a coordinated public-private sector approach to developing the value chain and international trade ecosystem that will allow the full and efficient capitalization of those natural assets.

In each of the countries mentioned above, the goals of those advocating for aid, trade or investment cannot be met alone. By bringing together the key actors from each sector with local African government leaders, to create a coordinated execution of national and regional plans, we can deliver more value for all.

Moving towards Africapitalism

Building African economies on these pillars of regional integration, local value creation and leveraging of financial flows will ensure that the resources, human and financial capital of each country are fully maximized in a way to deliver both commercial and social value.

This begins with the recognition that the fortunes of business and the communities in which they operate are intertwined and mutually dependent. I call this approach “Africapitalism”.

Action Agenda for Africa's Competitiveness: read the report here

This article is part of our Africa series. You can read more here.
The World Economic Forum on Africa is taking place in Kigali, Rwanda from 11 to 13 May.