(Ecofin Agency) - The African Continental Free Trade Area (AfCFTA) could lower the vulnerability of Africa to external shocks through a dynamic intra-African trade. To get to that point, it is suggested that Africa improves its stability and boosts infrastructures as well as the digitalization of economies, especially customs services.

How can the AfCFTA become both the growth and industrialization catalyzer for the continent? It can do so mainly by providing a business-friendly environment for local and foreign investors. According to a report published on October 11 by the Foundation for International Development Studies and Research (FERDI), investing in the transformation of raw materials into semi-finished or finished products in Africa will serve an open, interconnected market of 1.2 billion consumers.

To underline the need for accelerated industrialization on the continent, FERDI notes that Africa remains the least industrialized continent in the world more than 40 years after the launch of the Industrial Development Decade for Africa (IDDA I) in 1980 with UNIDO support. Until now, African economies have only contributed a maximum of 1.8% to the global manufacturing added value. This indicates that what is produced on the continent remains at the lowest level of the global value chain, where there is little industrial processing. Currently, Africa's economic performance is primarily driven by the continued exploitation of raw materials, the rapid development of the service sector, and the provision of development aid.

This weak level of industrialization also explains why the continent’s footprint in world trade has never exceeded 3%, African countries are very trade-open, with exports and imports expected to account for around 65% of GDP by 2021. Also, intra-African trade is only about 16% of total African trade, well below the equivalent in Europe (60%), North America (40%), and within the Association of Southeast Asian Nations (30%).

The low level of regional integration and the inability of African countries to achieve a structural transformation of their economies based on industrial development make the continent extremely vulnerable to international shocks such as the COVID-19 health crisis and geopolitical tensions linked to the war in Ukraine.

A market of 1.2 billion potential consumers

The FERDI report stresses that the AfCFTA has the potential to drive the long-awaited industrialization of the continent, reduce its extreme vulnerability to external threats, and accelerate its economic and social development through a substantial increase in intra-continental trade. 

The main goals of this common market are to transform Africa into a unified and single market for Africans first and to eliminate trade barriers between the countries by harmonizing regulations and standards. This will make the continent more attractive to foreign investors. Indeed, being part of an integrated and open market will instill more confidence in African economies when seeking foreign investment. It will also facilitate the development of units for processing raw materials into semi-finished or finished products, and promote regional industrialization synergies through regional and continental value chains. Once fully operational, the AfCFTA is expected to boost intra-African trade by over 34% by 2045 (compared to a no-AfCFTA scenario). Ultimately, the continent will represent a highly attractive market of 1.2 billion potential consumers with a combined GDP of over $2,900 billion.

In the context of strong trade integration, industrialization that is solid enough to transform the rich natural resources of African countries into economic wealth is all the more possible as Africa possesses various assets for successful manufacturing transformation. It has close access to numerous raw materials, particularly minerals, as well as to raw agricultural, forestry, and fish products. Its predominantly young workforce is one of the most dynamic in the world and the emergence of the urban middle classes is also creating an attractive new domestic market. 

To take full advantage of the AfCFTA, the report recommends that African countries continue to improve stability and security to offer predictability and guarantees to investors. The countries are also suggested to attract strategic partnerships with financial institutions and investors to mobilize the resources needed to improve infrastructure and digitize economies (particularly customs systems) to reduce the costs of trade transactions.