How good governance can drive AfCFTA forward

International Trade is the bedrock of human progress, and a country cannot lead or stay with the tide of progress if it closes its doors to its neighbours. This unfortunately has been the case with countries within the African continent, which have traditionally imposed more restrictive trade measures on other African countries, preferring to trade with non-African countries.

In fact, in 2019 for example, approximately 14.4% of official African exports went to other African countries, a small fraction compared with the 52% in intra-Asian trade, and 73% between European nations in the same year. Fortunately, with the African Continental Free Trade Area (AfCFTA) becoming operational on 1 January 2021, and effectively also becoming the largest free trade area in the world, that trend will likely change with more integrated African economies.

Although AfCFTA does not go as far as to create a common market or customs union like the European Union (EU) and is not as comprehensive as either the US-Mexico-Canada-Agreement (USMCA) or the Regional Comprehensive Economic Partnership (RCEP), it is however a major step in those directions and would create significant benefits for any African government with a demonstrated practice of good governance.

Good governance creates real benefits

The benefits to a country that adheres to good governance are not only real, but also measurable. Though the concept of good governance is oftentimes difficult to define, there are certain characteristics that accurately capture its essence.

Whereas the actions that governments take to manage their affairs are called governance, which is often defined as “the process of decision-making and the process by which decisions are implemented”, good governance as embodied for example, in the control of corruption and the design and implementation of effective regulatory policies, significantly improves the ability of people to participate in and benefit from economic growth. Thus, at the centre of good governance, and arguably its most critical component, are people. Governments and strong institutions need competent people to make good policies and implement them; they are as such the means to accomplish good governance.

It naturally follows that African governments that effectively invest in their most important resource – their people – will benefit most from a more integrated trade arrangement under AfCFTA. There are countless examples from other multilateral regional agreements where this assumption has held true. The most salient example is the now rebranded USMCA, which was formally known as the North American Free Trade Agreement (NAFTA).

Investment in human capital drives economic growth

Although it is generally understood, based on a 2017 report by US Congressional Research Services that the Agreement more than tripled trade between Canada, Mexico, and the US, these economic benefits were not limited to corporate interest alone, but also extended to various aspects of the public interest. Whilst this increase in economic benefits was due to several factors, chief among them was a significant investment in human capital among the member states.

Specifically, although some lower-valued manufacturing jobs were outsourced to Mexico, many higher-valued skilled jobs remained, and in some cases increased in the US, according to foreign direct investment (FDI) data. For example, the US increased FDI in Mexico from $15.2bn in 1993 to $104.4bn in 2012, and from $69.9bn in Canada in 1993 to $352.9bn in 2015.

Mexican FDI in the US, while substantially lower than US investment in Mexico, increased rapidly, from $1.2bn in 1993 to $16.6bn in 2015, a 1283% increase. Although many of these FDI investments in the US were higher-valued investments compared to those investments into the Mexican market, the economic benefits to Mexico were nonetheless substantial as several capacity building programmes were developed so as to meet the needs created by new opportunities brought by NAFTA.

A similar trend in economic growth bolstered by investments in human capital has also been found in the rapid rise in Growth Domestic Product (GDP) among the 10 nations that make up the Association of Southeast Asian Nations (ASEAN) Economic Community.

For example, as Bruce Aitken and Ngosong Fonkem describe,  when Cambodia, Laos, Myanmar, and Vietnam joined ASEAN in the late 1990s, the issue of a “development divide” was raised, given the gap in GDP between the new and older members. This led to an initiative for ASEAN integration with regional integration as its policy goal as it sought to deepen its ties and capture a greater share of global trade. A critical part of that initiative took the form of capacity-building programmes tailored for the development of human capital projects. As a result, approximately 25% of the region’s exports of goods are now traded among ASEAN partners, a share that has remained roughly constant since 2003; and this total value is increasing rapidly as the region develops stronger cross-border supply chains.

ASEAN brings significant growth to member countries

As in NAFTA, the free flow of goods, workers and funds have undoubtedly benefitted ASEAN member states as a whole, with some members experiencing greater economic benefits than others. This was an ongoing trend even before the Covid-19 pandemic of 2020 and was attributable to a variety of factors such as a better distribution of investment from outside the region into ASEAN countries, the ongoing trade war between the US and China, stronger inter-industry relations among the members, and other reasons such as China’s economic integration with ASEAN member states as part of the ASEAN-plus-one free trade agreements (FTAs).

For example, although the growth in Thailand has slowed significantly due to continued political turmoil, and the growth in Indonesia also slowed due to reduced coal production and lower prices of energy commodities, which are the nation’s main export, Myanmar, Vietnam, and the Philippines, on the other hand, have experienced significant growth due to the growing number of labour-intensive businesses setting up shop within their borders (although growth in Myanmar has slowed significantly in the past two years dues to the ongoing civil war and US economic sanctions).

It is true that one of the main factors driving this trend is the labour cost in the latter countries, but the trend would not have occurred or have been as impactful were it not for the significant investments in human capital spurred by the ASEAN integration project.

Developing human capital is key for Africa

The issue of a “development divide” has similarly been raised as a major obstacle to integration under AfCFTA given the gap in GDP between African giants like Nigeria and South Africa and other least developing economies in the continent. As with the ASEAN model, these obstacles can be overcome with policies tailored to develop human capital.

The successes of the ASEAN model provides a welcome hope that such policies would likely be successful under AfCFTA, if implemented with the same enthusiasm and vigour as implemented under the ASEAN project, as the African continent is endowed with an abundance of natural resources compared with ASEAN countries.

Further, with a median age just under 20 years of age based on 2020 data and its projected population growth, the fastest-growing middle class in the world as of 2020 data, and six of the world’s 10 fastest-growing economies over the past decade, growth in business technology across the continent on the rise, a more integrated regional community is ripe.

In fact, due to the significant increase in Africa’s consumer spending from $860bn in 2008 to $1.4 trillion in 2020, according to the McKinsey Global Institute’s data, many leading analysts have concluded that the rate of return on foreign investment in Africa has been higher than in any other developing region in recent years. As in the economic environment in the ASEAN region from 1975 to 2001, the economic environment in the African continent is also the consequence of growing dynamism and intra-regional trade and investment. Thus, a replication of the ASEAN model with “African characteristics” would logically yield similar economic results.

Placing people first

Although AfCFTA arrived rather late compared to other regional free trade agreements, it nonetheless comes at a critical time. With the US relinquishing its dominant role in international trade since World War II; the disruption to global trade caused in large part and or accelerated by Covid-19 pandemic; the disruption to the global economy caused by current trade conflict between the US and China; and the ongoing seismic trade shift in focus away from transatlantic relations toward the Asia-Pacific region, caused in large part by the ongoing Russian-Ukrainian conflict, African nations like the rest of the world have to patch together workarounds so as to manage the impact of this disruption to their economies. In this regard, economic integration in the region with a strong focus on people development is even more critical today than in previous periods and will help to create a sense of common identity and destiny, and a strong economic stake in promoting regional trade and investment.

African governments with a demonstrated practice of good governance that places people first will be better placed to benefit from this economic integration.