African governments are looking for the most feasible ways for their nations to flourish in the global economy while avoiding the susceptibility and economic anxieties created by volatility in commodity prices.
- African countries must establish innovative export strategies and policies
- Rendering more inclusive globalisation would need measures addressing disparity within developed economies
- Addressing trade obstacles to services within the AfCFTA will be critical to releasing the transformational role of services in increasing the range and complexity of African goods
Recent economic shocks and the crucial role of AfCFTA
African economies are commodity-reliant, with highly volatile income owing to the market’s price bust and boom cycle. African governments are looking for the most feasible ways for their nations to flourish in the global economy while avoiding the susceptibility and economic anxieties created by volatility in commodity prices.
The adverse effects of disruptions frequently exacerbate the vulnerability of African economies. The disruptions include the 2008-2009 global financial crisis and the 2020 coronavirus (COVID-19) pandemic. Perhaps the more recent political tensions in Eastern Europe (the 2022 war in Ukraine). These shocks cause disturbances in international trade, greater financial volatility, and food insecurity.
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The consequences of these crises have thrown light on an ancient developmental concern in Africa: commodity dependency, which indicates a high reliance on primary products in nations’ exports. When a country’s percentage of primary commodity exports to total merchandise exports exceeds 60%, it gets classified as commodity-dependent as per UNCTAD.
For a long time, the fundamental policy prescription for dealing with this situation has been for commodity-dependent nations to utilise their export revenues to design structural transformations that would lead to economic diversification. As realistic as this policy proposal may appear, implementing it will be challenging.
The African Continental Free Commerce Area (AfCFTA) got recently established to promote intra-African trade and industrial growth by diversifying exports and developing regional value chains. However, suppose the AfCFTA is to realise its full potential in diversifying and inclusively transforming African economies. In that case, countries must establish innovative export strategies and policies, identify fresh opportunities for export diversification, and work towards greater and much more diversified involvement in global trade.
Export diversification crucial for Africa
Many resource-rich economies in Africa have poor inclusive growth and development results. One defining trait of African resource richness is the lack of economic and export diversification. On average, the export structure of resource-rich nations in Africa is more concentrated than that of resource-poor ones.
There has been considerable economic progress in many regions of Africa. The observed expansion emanated from a commodities super-cycle for over two decades. Despite attempts and initiatives to address such concerns, many African nations have found it challenging to sustain robust development, particularly during times of shocks and other vulnerabilities, and, more crucially, to translate such progress into more inclusive change.
The necessary policies, laws, and institutional capabilities must be in place. On the contrary, various change factors might negatively impact African nations’ export diversification attempts and development results. African governments have acknowledged the significance of export diversification and have taken various steps to diversify their export markets and migrate into high-productivity economic sectors.
Many underlying issues, however, have hampered their efforts to achieve transformative export diversification and practical results of industrial upgrading and technological innovation policies. There is a significant opportunity for African economies to reform and achieve more diversification and competitiveness.
The practical implementation of the AfCFTA, the expanding middle class, the evolving consumer market, enhanced use of financial technology and services, and the efficiency of the vibrant private sector will all be enablers of African export diversification and long-term economic growth. Forward and backward connections, labour markets and human resources, knowledge and technological spillovers, and expanded access to financial services might contribute to improved integration and diversification degrees.
Africa must focus on making globalisation more inclusive
Since the first industrial revolution, which resulted in a spike in international commerce, Africa has generally stayed on the periphery of the global economic sphere. Early globalisation primarily benefited today’s industrialised economies, where industrial innovations arose. As a result, there is a “huge gap” in income levels between the Global North and South.
More recently, in the 1990s, introducing new information and communications technologies drastically reduced distance costs. This era ushered in a new phase of globalisation marked by the establishment of intricate global value chains (GVCs). These GVCs aided the recent period of rapid convergence by increasing industrial production in nations such as China, India, Indonesia, Poland, South Korea, Taiwan, and Singapore. As a result, GVCs allowed these nations to close the gap with advanced economies.
The repercussions of globalisation on Africa and its people have gotten significantly less attention, even though the continent will possibly become home to more than 40% of the world’s population by the end of the century. Africa’s portion of worldwide commercial trade has remained stable at roughly 3%, as has its share of global industrial production.
Rendering more inclusive globalisation would need measures addressing disparity within developed economies. Moreover, promoting living-standard convergence between Africa and high-income nations remains crucial. African governments can help by advancing regional integration and closing skilled labour and technological infrastructure gaps. Furthermore, developing a framework to hold and manage Africa’s digital data with the help of foreign partners cannot be overstated.
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Global trade diversification for Africa
The global economy is a growing resource that African countries cannot ignore. This is according to Ousmane Diagana, World Bank Vice President for Central and Western Africa. African exports substantially increased in the last decade. Nevertheless, the quantities remain low at 3% of global trade. Policymakers wishing to get more involved in international trade in the twenty-first century must look beyond old tactics and traditional markets.
More extensive and diversified global trade involvement is critical to achieving Africa’s economic transformation. African nations must increase and diversify their participation in international commerce and global value chains, to alleviate poverty and improve their economies.
The continent must move beyond raw material trade and connect its trade and production to the global economy. Consequently, Africa must capitalise on the endless demand and innovation throughout the supply chain. The change necessitates extensive and creative initiatives to improve Africa’s export market access. This way, the continent will diversify its markets to new countries and enhance regional commerce.
Unilateral trade patterns can support economic change via exports and necessitate evaluating and re-engineering trade with existing partners. The trade preferences must integrate with other measures to increase trade and investment between Sub-Saharan African nations, the United States and the European Union.
The integration involves combining preferences with foreign assistance policy tools to address structural issues that impede export capability. Recent programs, such as Compact with Africa (CwA), resonate with this complete strategy, emphasising improving the business climate, constructing infrastructure, and establishing good rules and institutions.
Deepening regional integration is critical to the continent’s economic change, scaling supply capacity and establishing regional value chains. The development of the AfCFTA provides significant prospects for promoting intra-African trade. The agreement improves production and export complementarities, generates jobs, and decreases the effect of commodity price volatility on stakeholders.
Conclusion
African nations must implement ambitious internal structural changes to increase the region’s supply capacity. The implementation may get accomplished by enhancing digital and physical connections. Furthermore, maintaining prudent macroeconomic management with stable and competitive currency rates and low inflation remains vital. Moreover, nations must strengthen the efficiency of regulatory, legal, and judicial institutions.
Regarding export diversification, Africa is one of the least diverse areas in the world. Commodities account for more than 60% of total goods exports in 45 of Africa’s 54 nations. Thus, the nations remain very sensitive to global commodity price shocks, thus jeopardising the continent’s equitable growth and development prospects.
Sustained economic development in Africa remains a challenge. This results from neglecting the potentially revolutionary role of high knowledge-intensive industries. These sectors include technology-based information and communication and financial services.
Addressing trade obstacles within the AfCFTA remains critical to the transformational role of services in the range and complexity of African goods. The effectiveness of African economic development initiatives requires policies that promote equitable access to new financial technologies. The move is especially crucial for small and medium-sized businesses. High-knowledge-intensive services boost productivity and competitiveness in the private sector. Consequently, the move will be critical to attaining greater value-added diversification and economic progress under the AfCFTA.
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