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Trade begins at home

Posted on Monday, 9 May 2016 15:41

Imagine you are a Malaysian truck driver. In the back of your truck is a big cargo of stinking durian fruit. The Singaporean border heaves into view. What will happen? Will you pull over and fill out some paperwork? Wait around to get the documents stamped – hours spent in the sun – with your precious durian rotting in the back? Of course not.

Africa needs to realise that its future lies within the continent

You whip out your smartphone and send your pre-filled cargo passage form. It is immediately routed through the relevant ministries in Singapore. The authorities e-stamp the form and send it back to your smartphone. Beep. Job done. No need to stop. You don’t even need to slow down. Welcome to Singapore.

The benefits of frictionless trading with neighbours seem clear. The farmer buys more inputs with the money saved on transporters, and the consumer gets fruit cheaper, allowing him to spend more on other items and boost the economy. The trucker also has more time to carry other loads.

Africa is not quite there yet, and border crossings often involve waiting. Of Africa’s total trade, just 11% of it is done within Africa, compared to 50% intraregional trade in developing Asia and 70% in Europe. The world economy is going through a period of slower growth, just as tens of millions of young Africans are entering the job market, so finding new markets in Africa is critical.

African Development Bank (AfDB) president Akinwumi Adesina tells The Africa Report that, given the volatility of commodity prices, the continent needs to stop focusing its economic activity on the export of raw materials to foreign markets. “Africa needs to realise that its future lies within the continent,” says Adesina. “The opportunities are here – growing population, rising consumer spending – but we can only start to reap the benefits when we start to integrate our economies.”

What can improve regional integration? It is partly about the physical infrastructure of trade – investing in intraregional infrastructure, connecting power grids, laying fibre and building roads and bridges across borders. Average transport costs in Africa are now double the world average, according to the United Nations.

Tear down those walls

Adesina says that inclusive growth is dependent on bringing down the barriers to Africa’s 15 landlocked countries. “I have just come back from Chad,” he says. “They need infrastructure. They need a rail link to Nigeria. We need to invest heavily in connecting the landlocked countries to the coast.”

Some of this is happening, particularly in East Africa. Electrical interconnections in the region are expanding at a fast pace as Ethiopia ramps up its power exports. New roads linking Addis Ababa and Nairobi have also helped to increase trade flows.

Improving intra-African trade, however, is also partly about “soft” infrastructure. On the border, that means getting rid of the endless stamps on documents and the bureaucracy that make customs officials rich and goods expensive. In economic jargon, these are known as non-tariff barriers to trade.

Dealing with this low-hanging fruit can galvanise regional commerce, according to a former governor of Katanga Province in the Democratic Republic of Congo, Moïse Katumbi. He waived the $50 entry visa, for example, and overhauled border crossing points.

“We went from $18m in customs receipts a year to $1.2bn” says Katumbi. “And it’s not just connecting countries with roads that helps […] but also inside the coun- try. It used to take months to get a truck from a mine to the border of Zambia in my province; now it takes five days.”

‘Soft’ Barriers

TradeMark East Africa, a donor-funded trade-facilitation organisation, has done a similar job for Mombasa port. “We got the private logistics players, the freight forwarders, the trucking associations, then all the government players – the port authority, customs, police and so forth – and brought them all together to dis- cuss port issues,” says Abhishek Sharma, director of trade logistics at TradeMark East Africa.

“And each of these associations or authorities signed clear pledges on improvement, and each of those pledges had a timeline which is monitored. The entire pledge is called the Mombasa Port Charter.”

The results are there. Since the deal was signed in 2014, the clearance time for cargo destined for Kigali has declined from 21 days to four days. The clearance time for cargo from Dar es Salaam to Kigali has also dropped from 25 days to five. Over the same time period, the cost of clearing a container has dropped from nearly $5,000 to $3,387, according to the organisation. Cartels can also add to trade costs, as illegal monopoly-style business agreements between freight operators keep transport prices high. Lowering barriers to entry for new logistics operators should help, says Sharma.

You can have strategic sectors, sure, but they can’t be divorced from global realities

One of those barriers is market information. Another challenge is training new staff. It is easy for big companies like Bolloré to do in-house programmes but much harder for a company with just two trucks. “We are also supporting some infrastructure logistics so that these smaller companies can access third-party warehousing infrastructure so that they can provide the end-to-end solutions that only these bigger companies can currently afford to provide,” says Sharma.

Africa still replicates colonial trade patterns — and it’s not just because of the heritage of infrastructure, with railways snaking from mineral deposit to coast. Improving trade between African countries is also partly about tariffs. An African firm selling goods to another African country faces an average tariff of 8.7%, compared to just 2.5% abroad, according to the UN Conference on Trade and Development.
‘Smart protectionism’

There are a multiplicity of new free trade agreements that have been proposed in recent months – for example the Africa Free Trade Zone that links regional economic communities in the south, east and north. It would cover some 26 countries with a combined gross domestic product of $624bn.

There are already various regional economic communities, such as the East African Community, the Economic Community of West African States and the Southern African Development Community, which have worked hard to harmonise their tariffs.

But there is reasoned resistance to throwing open economies and an age-old tension between building up a strong domestic economy and allowing companies from other countries into the market. This tension is magnified when countries are still growing their industrial bases, as is the case with many African countries.

The British, to their shame, solved the problem with violence during their developmental years by sending gunboats to open markets while maintaining high tariffs on imports. There is no wonder why others are wary.

Beijing’s officials, for example, were privately horrified at what happened when Russia’s markets were flung open in the 1990s and resolved to sequence their own opening up more artfully. The Chinese government sometimes opens up sectors to bring in capital and technology, and sometimes it will protect them to build up local capacity.

The Singaporeans may well be at the top of the World Bank’s Doing Business rankings, but a top Singaporean official tells The Africa Report that the government could intervene in business if it was required. If faced by a hostile takeover of a Singapore company deemed critical, he says, “then we will step in.”

The government could use Temasek, a state-owned investment fund, if necessary, to protect those interests. France and the United States regularly invoke national security as a reason to block company takeovers, while South Africa and the United Kingdom have recently applied emergency tariffs to protect their steel industries from cheap Chinese imports.

Morocco’s finance minister, Mohamed Boussaïd, says that you cannot protect weak indus- tries forever: “In the long term, protectionism will incentivise laziness.” He adds: “You can have strategic sectors, sure, but they can’t be divorced from global realities.” He relates how Morocco’s textile industry was badly battered by a string of free-trade agreements and liberalisation. With help and intervention, the sector was able to reinvent itself and invest in technology.

The head of the UN Economic Commission for Africa, Carlos Lopes, advocates this kind of “smart protectionism” – where government industrial policy is meant to mediate rather than displace market forces. “The instruments available today are not the same as when Southeast Asia industrialised, so countries have to be very careful and they have to be pragmatic,” Lopes explains.

Creating value Chains

To get beyond these arguments about the openness of economies and kick-start meaningful regional integration, perhaps African leaders should look at building regional value chains. Asia, for example, captures a significant proportion of the value chain of an iPhone, with parts sourced from Indonesia and Taiwan that go to China for assembly. Apple has 349 suppliers in China, 139 suppliers in Japan and 42 suppliers in Taiwan.

In the long term, protectionism will incentivise laziness

While Africa may not be able to reach these heights today, there are significant value chains to be developed in the agriculture sector that are certainly in its reach – for example addressing Nigeria’s $6.5bn annual food-import bill. This is already happening, suggests the AfDB’s Adesina, pointing to a deal that will see Morocco’s national phosphate company OCP linking up with Nigerian natural gas providers and the Dangote Group to build factories to produce fertiliser. “The future billionaires of Africa will come from Africa,” insists Adesina.

And Jean-Louis Billon, Côte d’Ivoire’s commerce minister and a former agribusiness entrepreneur, points to palm-oil value chains and also some less well- known examples, such as for kola nut. “It is produced in the south of our country,” he says, “but is consumed across all of the Sahel, gets sold into logistics and sales networks, and creates a livelihood for many.” These are the sorts of projects needed to bolster Africa’s industrialisation and link neighbours into virtuous cycles of trade and investment. ●

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