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
Low wages are Ethiopia’s main drawcard in attracting international investment for its manufacturing industry. Dianna Games examines the dilemma many African countries face in deciding whether to prioritise creating jobs or promoting higher wages.
Even as much of the world moves into high-tech mode, old-fashioned industrialisation is still an aspiration for most African countries.
Increasingly, the big differentiator is cheap labour. As wage packages rise in low-cost manufacturing destinations in Asia and elsewhere, international investors are looking for new countries where they can produce competitively for global markets.
One of the nations that has put its head above the parapet in this regard is Ethiopia. This fast-growing and rapidly liberalising nation has been courting international producers to realise its ambition as a manufacturing hub in Africa. The reformist government of prime minister Abiy Ahmed sees manufacturing as another way to attract FDI as it opens up previously closed sectors of the economy.
China is well represented in the numerous industrial parks that have opened over the past few years, and aims to increase its presence in the country as more such parks, which are a key part of Ethiopia’s future industrial planning, open their doors.
Ethiopia, like China before it, has focused on the garment sector with a view to positioning itself as a top sourcing and manufacturing destination for apparel. The government has admitted that this is a risky sector to choose to kick-start its industrial ambitions, given high levels of competition, but maintains that producing for export markets is a viable way to build industrial capacity.
It plans to boost clothing exports to $30bn a year from the current $145m. And the response to Ethiopia’s offerings has been positive, with many large Chinese enterprises investing in the sector and garments being produced for some of the world’s biggest fashion brands such as Calvin Klein, H&M and Tommy Hilfiger.
The country has many advantages in its quest for developing value chains internally. In its industrial arsenal it has duty-free imports of capital equipment, tax exemptions, cheap electricity, a thriving local airline with a large international footprint and duty-free access to the US market through the African Growth and Opportunity Act.
The main drawcard is cheap labour, which is not only a key competitive advantage but a counter to low levels of skills and productivity. However, critics have hit out at the level of minimum wages on offer, saying they will barely lift workers out of poverty. Attrition rates at the clothing factories in Ethiopia are high as semi-trained workers seek higher wages elsewhere after a stint in the workplace. This is pushing up training costs for companies operating there.
Among the critics is New York University’s Stern Center for Business and Human Rights, which details its concerns in a recent report. Made in Ethiopia: Challenges in the Garment Industry’s New Frontier puts Ethiopia at the bottom of a list of countries in the textile and garment sector with an average wage of $26 a month. Next on the list are Myanmar and Bangladesh at $95, Laos at $128, Lesotho at $146 and Vietnam at $180. South Africa comes in at ninth with $244 and China 13th at $326.
The report, which looked at factories in Ethiopia’s Hawassa Industrial Park, the country’s biggest, says international brands are benefiting from the misery of workers who cannot afford to live on these wages but want jobs.
Ethiopia’s case flags up the broader dilemma for African countries looking to industrialise – whether to prioritise jobs at any cost or develop more slowly with higher wages.
But wages are not the only issue affecting competitiveness in Africa. It is also undermined by a lack of political will to address impediments in the operating environment that make Africa, as a region, one of the most expensive manufacturing regions globally.
Ethiopia is not exempt, suffering from infrastructure and logistics challenges. The United Nations reckons that while the labour costs of making a T-shirt in Ethiopia may be a third of those in China, export costs means Ethiopian-made shirts will sell for the same in international markets as those made in China.
These are some of the reasons that manufacturing continues to play a relatively small role in African economies. Although manufacturing has increased, its share of Africa’s GDP has remained at around 10% over the last decade, according to the World Economic Forum.
Huge deficits in hard and soft infrastructure are a major part of the problem. Education and skills development are well below average, while African countries also lag their Asian counterparts in terms of technology, spending less than other regions on research and development.
Low wages are undoubtedly a positive factor for investors, but on their own they are far from adequate. African economies require structural change in order to build sustainable value chains that will deliver more quality jobs and higher wages over time.
The wage issue is contentious because of Africa’s large and growing labour surplus. It is tempting to believe that any job is better than no job. And building the labour-intensive industries that Africa needs in order to absorb labour is getting harder in a world where technology is already disrupting traditional, low skilled, jobs.
Ethiopia believes its low labour costs are vital to remaining competitive while it builds a more competitive supply chain and develops vertically integrated manufacturing hubs – a hopefully short-term trade-off between wages and employment.The government believes it has no option but to start somewhere in a country facing the challenge of youth unemployment estimated at more than 50% and with 150,000 graduates coming into the market every year.
As Ethiopia’s former leader Hailemariam Desalegn said when asked about Ethiopia’s chosen path to industrialisation in an interview with the Brenthurst Foundation last year: “There is no silver bullet.”
Dianna Games is CEO of Africa @ Work, an advisory company focusing on African business
Revenue generation is an ongoing headache for African governments, but attempts to plug holes in the fiscus often amount to ad hoc measures that have unintended consequences.
Tax is a crucial revenue stream that governments must battle to get right.
Many African countries have a small tax base because of the informal nature of their economies.
But rather than putting in place sustainable, broad-based systems that deliver predictable revenues, governments often resort to ad hoc taxes on specific goods and services or disproportionately burden multinational companies.
A 2018 report from the International Monetary Fund (IMF) argued that African countries could increase their tax revenues by an average of 5% annually if comprehensive tax reforms were carried out.
In many countries, such action seems unlikely. In cash-strapped Zimbabwe, a deeply unpopular 2% tax on electronic transactions was introduced in 2018 in a bid to address tax shortfalls created by a shrinking formal economy.
After years of economic hardship, severe cash shortages have led to a spike in electronic transactions, putting most people in the catchment of the new levy.
It has hit everyone hard, but particularly small traders operating on tight margins.
In July 2018 the government of Uganda imposed a tax on social media and a 1% levy on all mobile money transactions, which affected some 5m people.
The move may bring more money into government coffers, but it has had other consequences.
The Uganda Communications Commission says that internet subscriptions declined substantially and the value of mobile money transactions fell by $1.2m in the three months following the imposition of the tax.
Multinational companies are easy targets because of their obligation to stay on the right side of the law.
The African Union and others have accused foreign companies of avoiding tax through transfer pricing and other complicated measures, but they remain the biggest taxpayers in most countries.
In 2015, Rwanda reported that 70% of its tax base came from multinational entities.
In Nigeria, it was 88%. In Burundi, one foreign company contributed nearly 20% of the country’s total tax collection.
This disproportionate reliance on multinationals means that tax avoidance has an equally disproportionate impact on national revenues.
Base erosion and profit shifting by multinational companies – defined as tax avoidance strategies to exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax locations – are often the outcome.
Failure to invest
The Organisation for Economic Cooperation and Development (OECD) is working with 100 countries to develop a country-by-country reporting initiative that aims to address this problem.
It will require multinationals with consolidated revenues to provide information relating to their activities in each country in which they operate rather than accounting as a single entity.
This will include information about revenue, profits, employee numbers, tax paid and tax payable in each jurisdiction.
But many of the problems with taxation in Africa are about something much simpler – the failure of governments to invest in institutions, skills and capacity to increase the size of the formal sector.
Nigeria, which has the biggest economy in Africa, also has the lowest tax-to-GDP ratio – just 5.9%, according to the International Monetary Fund.
The informal structure of the economy allows people to do business under the radar, often with the collusion of officials who turn a blind eye.
President Muhammadu Buhari has moved to change the situation with a targeted campaign against defaulters, which included a tax amnesty. By mid-2018 this had brought in $84m.
But in Nigeria, as in many other countries, officials have been overzealous in their attempts to remedy years of poor tax compliance.
Companies have complained about regular harassment, saying government is targeting those who are already compliant.
At issue is not just the principle of paying tax but related issues such as weak institutions and skills shortages, the ambiguity of tax legislation and the ad hoc and sometimes retrospective application of tax laws.
In Nigeria, as in most African countries, the public also resists paying tax because of a view that public money is either squandered on projects that offer little value to citizens, or misused by public officials.
Another issue is the cost of maintaining bloated public service wage bills and dysfunctional or bankrupt state-owned enterprises.
In Zimbabwe, the public sector swallows up a massive 90% of the national budget, leaving almost nothing for healthcare, education, infrastructure and other sectors.
In Kenya, public servants account for less than 10% of the population but their wage bill takes more than 50% of tax revenues.
But the solution is not only in tax reform but in improving the business climate to enable companies to grow.
It also requires building stronger institutions to ensure more accountability and transparency in government spending.
Greater trust may remove the need to use heavy handed measures to enforce tax compliance.
Dianna Games is CEO of Africa @ Work, an advisory company focusing on African business