Joining the African Continental Free Trade Area may be Nigeria’s first step towards realising the potential of its business sector as a force in Africa, argues Dianna Games.
When Nigeria failed to occupy a seat at the African Continental Free Trade Area (CFTA) launch in Kigali last year, many asked why a country that has long considered itself a leader in African affairs would not be grabbing the mantle of leadership in a project of this scope and importance.
After all, the country has some form when it comes to regional integration, having been a leader in the establishment of the Economic Community of West African States (Ecowas) in 1975.
But nearly 25 years later, Nigeria was one of the last countries to sign the CFTA, alongside its tiny neighbour Benin and ahead of Eritrea.
As Africa’s biggest economy stalled at the starting gates of the initiative, questions were asked about its reticence.
The country has been a key promoter of the initiative since its launch in 2012. Nigeria continued to be closely integrated with the process leading up to the May 2018 Kigali launch and the Federal Executive Council, presided over by the vice-president, Yemi Osinbajo, had agreed that Nigeria’s signature would be on the agreement at the event.
However, it fell at the final hurdle when lobbying by policymakers, trade unions and local companies led President Muhammadu Buhari and his team to cancel the flight to Kigali, in response to accusations that the government had failed to consult widely enough on the potential impact on the economy. After further consultations and on the advice of local experts, Buhari signed it in July.
Nigeria’s central concern is that its market will be flooded by goods from other African countries, which will undermine local manufacturing and agricultural enterprises, many of which are performing well below their potential and may not survive competition.
Countries such as South Africa and Kenya as well as North African states are specific challengers given their relatively high levels of industrialisation and efficient supply chains.
Not much to show for protectionism
The CFTA has highlighted the soft underbelly of Nigeria’s protectionist trade policy, which it has employed for decades – without much to show for it.
Although the economy has made significant strides in some areas, particularly in services, the successes are few compared to the opportunities the policy has provided.
The share of manufacturing as a percentage of GDP, for example, has lingered at around 10%, rising slightly to 13% in 2018.
Economists say that under the right conditions, Nigeria should be able to increase this to over 40% by 2030. It is not yet clear whether the free trade agreement will help or hinder Nigeria’s ability to reach this target.
Meanwhile, the services sector has overtaken agriculture and industry to become the biggest sector in the economy, representing nearly 58% in 2017.
Import restrictions have been a trade policy instrument since the 1970s, when they replaced tariffs as an enabler of growth and a counter to the competition posed by imports to local producers.
The restrictions included outright prohibitions and import licensing.
In 1978, there were already 76 broad groups of import items on a prohibition list. In the 1980s, about 40% of agricultural and industrial products by tariff lines were covered by these prohibitions.
The line items have come and gone over the years but when items were removed from the prohibition list, they often quickly attracted high duties and tariffs to serve the same end. Smugglers enjoyed significant benefits, quickly moving into market gaps created by the restrictions, as Nigerians’ tastes for imports refused to be quelled by government fiat.
There is no doubt there have been legitimate beneficiaries as well, including Africa’s richest man, Aliko Dangote, who built an empire on the back of import restrictions and bans.
However, once thriving sectors such as textiles and leather, which were intended to be key beneficiaries, have been crippled by not only the country’s shift in focus to the lucrative oil sector in the 1970s, but also by the high cost of doing business in Nigeria.
This highlights the key weakness in the trade policy – the fact that governments, in imposing protectionist policies, have failed simultaneously to address the embedded dysfunction in the operating environment that has left so many companies unable to compete with imports or even meet local demand.
Companies battle against a host of challenges in manufacturing including expensive power, the high cost of money, an onerous regulatory environment, poor infrastructure, a volatile currency and inefficient ports.
In acceding to the free trade agreement, there are bound to be many positive outcomes for resilient Nigerian companies.
But the country may also end up paying the price of years of relying on restrictive trade policies, rather than investing in productive capacity, to grow the economy.
History shows the damage that was done to many companies across Africa during the liberalisation of African markets in the 1980s and 90s after years of surviving behind high tariff walls.
Signing the free trade agreement may be painful for Nigeria for a while but it also may be the first step forward in realising the enormous potential of its business sector as a competitive force in Africa.
Nigeria’s best chance of building a consumer class is not by making it difficult to get imports but by enabling the growth of a critical mass of efficient and sustainable companies.
Dianna Games is CEO of advisory company Africa @ Work
The rapid expansion of China-Africa economic ties led to questions about a new colonialist dependency. While concerns about debt and oversight persist, the relationship has evolved. Johannesburg-based African business expert Dianna Games argues that it is up to African countries to build the capacity to deal effectively with Beijing.
There is no narrative about Africa in this century that has not included a discourse about China. The Asian giant has played a critical role in African development over the past 20 years, creating a new dynamic in both state and private sector-led growth.
Although China and the continent have had a long relationship in the political sphere, with the Chinese supporting African countries’ struggle for liberation against colonialism, the economic relationship only came later. It began as a trickle in the late 1990s, becoming a flood less than a decade later. Trade and investment continue to spiral, and China has become Africa’s main trading partner, displacing the US and European nations.
The increase in trade between Africa and China has been nothing short of meteoric. It stood at US$10.5 billion in 2000, jumping to US$40 billion in 2005, US$166 billion in 2011 and more than US$200 billion in 2018. Air traffic between China and Africa has jumped 630 percent in the past decade.
In terms of diversified exports, the trade is not balanced. China exports manufactured goods to Africa while absorbing the continent’s unprocessed commodities, a fact that has led critics to accuse China of replicating the colonial patterns of the past. African commodity producers have quickly become dependent on Chinese business and as a result, China’s fortunes have a significant impact on the continent.
Like any other relationship, China-Africa ties have gone through phases. In the early 2000s, they were close. African governments welcomed a partner that did not carry the historical baggage of the Western development finance institutions and multilateral organizations, and that was not constrained by onerous lending processes and conditions, especially relating to governance and human rights.
The historical underpinning of political support led some governments to believe that China’s more recent interest in Africa was altruistic. This impression was bolstered by the easy money Beijing offered for unproductive vanity projects such as sports stadiums in the early days. As a result, China’s engagement escaped proper scrutiny from Africans themselves.
China knows what it wants and how to get it. It will be up to African countries themselves to make sure this growing engagement becomes more of a relationship of equals.
In time, a more critical tone emerged in the relationship. There was pushback from Africans who felt the Chinese in their businesses were cutting corners in the areas of workplace safety and environmental issues, and they objected to Chinese companies importing labor rather than building skills locally.
There was also unhappiness about the flood of cheap Chinese imports that undermined domestic industry and sucked up limited disposable incomes. A further complaint was China’s “no conditions” aid and loans to African governments, which undermined demands by citizens for better governance.
Africa was urged by Western commentators to set its own agenda with China and develop an equal partnership to end a growing sense of exploitation as the initial euphoria about China’s easy money faded.
The relationship then moved to a more open era of real collaboration forged by lessons learned in past engagement and a more assertive tone adopted by African governments. The discourse shifted from one of exploitation to shared value. This change was also a result of new, and mostly younger, leaders who sought a change in the way things were done in Africa.
They started shifting the focus of continental organizations such as the African Union from politics and conflict to economic issues. Political bureaucrats began engaging in discussion about disruption and entrepreneurship and seeking ways to make the continent more financially self-sufficient.
China’s engagement also shifted. While its state-owned enterprises have cornered the lion’s share of infrastructure projects in Africa, there is more private investment coming to Africa and many smaller Chinese companies have invested in the continent, putting down roots. Large Chinese investments are flowing into mushrooming industrial parks and zones across the continent, boosting Africa’s attempts to industrialize and providing much-needed jobs.
But concerns persist in Africa about how this deepening engagement will play out. Doubts about China’s goodwill towards the continent linger. The earlier notion of China’s business with Africa being a helping hand rather than a hard-nosed quest for its own development and advantage has now faded.
China’s ambitious Belt and Road Initiative (BRI), despite its potential to transform economies, has raised concerns about growing debt in Africa related to Chinese-funded infrastructure projects, already an issue for many countries that have borrowed heavily on international markets to fund economic projects. The concerns were given impetus by the case of Sri Lanka, which according to some reports had to cede its Chinese-built, Beijing-funded Hambantota port to China after the government was unable to meet its debt commitments for the project. [There are differing views on the situation in Hambantota and on Sri Lanka’s debt – readers may find a selection here, here, and here.]
Kenyans criticised the deal for not having proper scrutiny or oversight. The president defended the deal, saying it was a government-to-government affair, which allowed normal procurement processes to be bypassed. But at US$5.6 million per kilometer for the track alone, Kenya’s line cost close to three times the international standard and four times the original estimate.
The government says repayment of the debt is on schedule. But Kenya used the assets of the Port of Mombasa, a lifeline for the country’s economy, as collateral for the initial funding deal. Because they are not protected by sovereign immunity, the concern is that Chinese lenders could lawfully seize them if the debt is not repaid.
The details of Chinese financing are generally opaque but one estimate by Johns Hopkins University’s China-Africa Research Initiative puts Chinese loans to Africa between 2000 and 2017 at US$143 billion. This lending was largely subject to easier terms than those required by the World Bank and other Western donors but without the oversight those lenders typically demand. Africa citizens are concerned that, although everyone gets to benefit from the infrastructure this money is buying, future generations will have to deal with this debt legacy long after the current crop of leaders who are negotiating them are gone.
There is no doubting China’s seriousness in its engagement with Africa. Pledges of aid and financing coming out of the Forum for China-Africa Cooperation (FOCAC), a special vehicle established in China to meet every three years to forge and enable a more effective and coherent foreign policy with Africa and to build African capacity to deal with the Chinese, have been formidable.
President Xi Jinping pledged US$60 billion in 2015, recommitting this amount last year. The FOCAC meetings have been routinely high level, dazzling affairs that are better attended by governments than many African Union meetings.
China has certainly been a key enabler of African development and an important partner, despite some areas of concern. This is not just in terms of hard infrastructure but also engagement in many other areas such as skills development, funding for education, technology transfer and others. It has provided Africa with welcome alternatives to meet its development objectives and opportunities.
China knows what it wants and how to get it. As the China-Africa relationship matures, it will be up to African countries themselves to make sure this ever-growing engagement becomes more of a relationship between equals than one that still carries more than a whiff of exploitation.