The immediate challenge facing Africa’s new single market may be too little trade, but there is a looming danger of growing interstate inequality and uneven development

Tayo, Teniola

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Teniola Tayo June 18th, 2021Will Africa’s free trade area increase inequalities?0 comments | 21 sharesEstimated reading time: 4 minutesThe immediate challenge facing Africa’s new single market may be too littletrade, but there is a looming danger of growing interstate inequality anduneven development.Trading commenced under the African Continental Free Trade Area (AfCFTA)agreement in January. However the journey to increased intra-African trade will be along one, and some key protocols are still being negotiated. As Africa pursues trade-driven industrialisation, the process must be as inclusive as possible.One of the major criticisms levied against the deal is that gains will accruedisproportionately across Africa. This could happen between countries, withincountries, between  rms and among people. Pre-existing inequalities mean thatmore advanced countries, cities, manufacturing  rms and the African economic elitecould bene t the most from the trade increase.There are several reasons for this. The AfCFTA arguably has the highest incomedisparities between its member countries than other continental free tradeagreements. Together, Nigeria, South Africa and Egypt – three out of 54 countries –account for about 50% of Africa’s GDP. So the African single market brings togetherunequal economies with varying production capacities.South Africa, as the continent’s most industrialised economy, is at an advantage.Trade Map reports that in 2020 Africa imported US$20 billion worth of goods fromSouth Africa. It’s the sixth-largest supplier of African imports, after China, India,France, the United States and Germany.South Africa also dominates trade within the Southern African Customs Union. Tradebene ts may be disproportionately attained by its economy, thus enriching itsproducers and government more than other countries in the region.Another issue is the documented link between import exposure and a rise inprotectionism and xenophobia. An eventual  ooding of African markets with SouthAfrican goods could harm local industries and affect employment. This could growresentment against the AfCFTA and negative sentiments about its promised gains.Within countries, cities and urban areas are often better integrated into trade valuechains, and research shows that supra-national trade, if poorly managed, canincrease uneven development. This could widen income gaps between cities andrural areas – especially when trade leads to a move away from commodity exports,leaving commodity-producing rural areas behind.A similar situation can be found on the  rm level. Although there has been some talkand efforts to make it easier for small and medium enterprises (SMEs) to tradeunder the agreement, economies of scale mean that large manufacturing companieshave the advantage because they are more competitive.The high cost of transporting goods within Africa means that higher trade volumeswill reduce the unit cost of transportation. Large  rms like the Dangote Group ofCompanies could more affordably expand production and export their goods acrossthe continent. SMEs may also  nd it harder to meet the AfCFTA’s rules of originrequirements.Imbalances on the  rm level are linked to income disparities between rich and poorin some African countries. Pro ts from increased intra-Africa trade candisproportionately accrue to African industrial elites, expanding the wealth gap.Africa is already home to some of the world’s most unequal societies. Increasedcontinental trade will increase the demand for manufactured goods. Economic eliteswith higher ownership of the means of production are better placed to reap thepro ts from trade.In Nigeria, this applies to its industrial elites. A 2016 Oxfam report states that theincome Nigeria’s richest man could earn annually was su cient to lift two millionpeople out of poverty. In South Africa, high racialised income inequality means that asmall portion of its population with more production capital and assets maydisproportionately bene t from trade.In most African countries, economic power is closely linked to political power.Economic elites can co-opt production policies in their favour and perpetuate theirdominance. The tendency to retain reduced production costs as pro ts, threatensthe potential for more affordable goods for consumers.If the trade deal fails to bring tangible bene ts to the average African, populistelements may seek to mobilise people against the agreement. Its overarchingobjective is to bring prosperity to all Africans. An AfCFTA-driven increase ininequality could lead to more civil unrest in Africa, which is already at high levels.The agreement has attempted to put some measures – such as delaying full tradeliberalisation – in place to protect Africa’s less developed economies, but these maybe insu cient. Restrictions on labour mobility across Africa are a stumbling blockfor income redistribution, as workers marginalised by import exposure in poorercountries cannot simply move to richer ones.A more pragmatic approach is to map out the short-, medium- and long-term‘winners’ of the agreement as it’s currently designed and to  nd ways to mitigate thelosses of the others. Several AfCFTA signatories have either produced national andregional implementation strategies or are now doing so.The AfCFTA Secretariat should evaluate these strategies and identify opportunitiesfor creating complementary regional value chains that include smaller economies.Collaboration with the African Development Bank to identify and  nance criticalinfrastructure will help improve the production competitiveness of less advantagedeconomies and their attractiveness for investment.National AfCFTA implementation strategies must also integrate rural economies intonational trade economies and not focus only on cities. Large  rms should beencouraged to integrate SMEs into their supply chains to increase the distributaryeffects of trade, with women-owned SMEs given particular attention. Taxationstructures in some countries could be reformed to redistribute wealth andcapabilities, but without suffocating the productivity of industrial elites.National governments should lower  nancing barriers to entering key manufacturingsub-sectors to increase the economic actors in these spaces. Tracking indicators ofprosperity like job creation in tradable sectors and poverty reduction can providecritical data for measuring and improving trade returns.While there’s a real threat of too little trade under the agreement, tackling theseissues will ensure sustainable progress. The AfCFTA could be a game-changer forAfrican economies. It should be viewed as an opportunity to solve the continent’sproduction puzzle alongside its distribution dilemma.This article was  rst published by the Institute for Security Studies and funded by theGovernment of the Netherlands and the UK Con ict, Stability and Security Fund.Photo by Kelly Lacy from Pexels.About the authorPosted In: Development | Economics | RecentTeniola Tayo works as a Consultant with the Institute for Security Studies and isalso a Research Fellow at the French Institute of Research in Africa (IFRA-Nigeria). She was previously a Consultant with the West African Think Tank(WATHI) in Senegal. She has also worked as a Policy Analyst in Nigeria as wellas a Senior Legislative Aide to a past President of the Nigerian Senate. She is aChevening Scholar with an MSc in Development Management from the LondonSchool of Economics.Teniola Tayo

Will Africa’s free trade area increase inequalities?

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Will Africa’s free trade area increase inequalities?

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