New African: Please summarise Afreximbank’s performance over the last year.
Dr Hippolyte Fofack: Professor Benedict Oramah, the President and Chairman of the Board of Directors of the Bank reported that 2021 had been an extraordinarily strong year.
The impressive results achieved by the bank were consistent with historical records. As a systemically-relevant development finance institution par excellence, the bank has drawn on well-calibrated counter-cyclical responses — expanding its balance sheet above trend growth to effectively support both sovereign and corporate entities in its member countries during economic crises.
The response to the Covid-19 pandemic downturn was no different and the bank went back to its well-tested toolbox of counter-cyclical support.
Through its Pandemic Trade Impact Mitigation Facility (PATIMFA), it responded swiftly and boldly, softening the economic blows from the pandemic and facilitating a speedy recovery in the post-containment phase.
It also invested in the diversification of sources of growth, particularly in the pharmaceutical industry. Africa bounced back strongly from its first recession in 25 years, with regional GDP expanding by 6.9 percent in 2021.
New African: One concern that is being expressed about the AfCFTA is that it may isolate Africa. Could it further marginalising the continent from the global economy?
Dr Hippolyte Fofack: I do not share that view for several reasons: If you take 2021 as the baseline, Africa’s share of global trade was less than 3 percent, significantly below the level enjoyed by the region in the early years of independence in the 1970s.
For instance, despite the fact that its population size is similar to that of Zambia, the contribution of Holland (one of the most advanced industrialised countries in the world) to global trade exceeds that of the whole of Africa.
Africa today accounts for more than 17 percent of the world’s population but only around 2,6 percent of world trade and less than 3 percent of the world’s GDP.
The AfCFTA is expected to reverse this marginalisation. Although most research may have emphasised the potential benefits for intra-African trade, which has remained dismally low, estimates from the World Bank show that the AfCFTA would raise Africa’s exports by more than US$560 billion, largely in the manufacturing space.
New African: How can Africa move away from simply exporting raw materials?
Dr Hippolyte Fofack: The persistence of the colonial development model of resource extraction, and the long-term deterioration of commodity terms of trade, have been the bane of African economies.
But the rules of origin, which are viewed as the ‘passports’ that will enable goods to circulate free of duty within the AfCFTA, have the potential to fire engines of commodity-based industrialisation and to set the region on the path towards higher manufacturing output and increasing trade intensity.
The rules of origin will accelerate the industrialisation process, including through the development of regional value chains that will enable African countries to better integrate into global value chains through value-adding backward activities.
Intra-African trade and industrialisation are mutually reinforcing. The projected growth of intra-African trade under the AfCFTA will drive industrialisation, since manufactured goods account for a larger and growing share of intra-African trade.
But investing in human resources, especially in science and engineering, will be critical to reaping the AfCFTA’s full growth and development benefits.
This is especially true in the age of Artificial Intelligence, where success under the fourth industrial revolution calls for robust investment in advanced and modern technologies.
New African: Can you identify other advantages of the AfCFTA?
Dr Hippolyte Fofack: The potential benefits are countless, but I will highlight two cases for illustration: The first one is the creative industries, which were the main theme of the 2022 edition of the African Trade Report released during the annual general meeting, and trade negotiations.
Cultural and creative industries have been major drivers of growth across Africa over the last decade, with Nollywood becoming the world’s second-largest film producer and exporter.
The adoption of a robust intellectual property rights regime under the AfCFTA could set these industries on a long-run virtuous cycle that fosters a creative renaissance and cultural convergence leading to deepening the process of economic integration. This has prompted spectacular success stories in other parts of the world.
Two: simultaneously, the AfCFTA has the potential to strengthen Africa’s bargaining power in international trade negotiations, shifting the boundary of fair trade for a more inclusive process of globalisation that works for all.
However, the first and most important test for our continent — which for far too long has been at the short end of the international trade negotiations stick — is to resist the rush to bilateral trade deals, which frequently lead to trade deflection and either weaken Africa’s voice at the global level or create dissonance.
Speaking with one voice in the AfCFTA era is perhaps the most important challenge, magnified by the sheer number of countries that comprise the continental free trade area, the largest in the world by membership.
In essence, the AfCFTA is a necessary condition for economic development, but it is not sufficient in and of itself; countries will have to work even harder, and most importantly together, to reap the full benefits.
New African: With hopefully greater FDI into Africa, is there an argument for creating protection for nascent industries in Africa?
Dr Hippolyte Fofack: Yes, one of the benefits of regional integration is greater FDI inflows and a change in its composition. Up until now, FDI inflows to Africa have been in the form of what I would call vulture investment, where a ‘vulture investor’ flies in from a foreign land and gets the resources out with some royalties as a counterparty.
This model may have generated some fiscal revenues and foreign reserves for governments, but its social and environmental costs have been significant, reflected in persistently high rates of poverty and structural imbalances.
This has led to what economists call growth, with overall welfare deteriorating in the midst of economic growth.
Under the AfCFTA, there will be a shift in the composition of FDI towards labour-intensive manufacturing industries as corporations take advantage of economies of scale; as well as competitiveness and productivity gains associated with the drastic reduction in the risks of investing in smaller markets.
That shift in the composition of FDI inflows is already happening. Take Volkswagen as an example, which has established a manufacturing plant in Rwanda. Volkswagen’s decision was motivated not only by the highly attractive investment climate Rwanda offers to investors, but also by the appeal of the whole East African market and, more generally, the growth potential associated with the continental free trade area.
But your question also implies the possibility of unhealthy competition between FDI and the growth of African corporations and small and medium-sized enterprises (SMEs). Although the risk of crowding out nascent industries in Africa cannot be ruled out entirely, it is important to point out that FDI has also been a reliable vector of technology transfer.
Imagine a scenario where, incentivised by the rules of origin, Africa’s automotive industry decides to source tyres for all new cars from West Africa, a region which has all the necessary raw materials but lacks the technology to manufacture tyres.
That would strengthen not only cross-border trade within the continent, but create the right conditions for an effective integration of African SMEs in that automotive space.
Another example would be the development of new energy vehicles (NEVs) in the ongoing transition towards green energy. If FDI is injected into the continent to produce NEVs, then African SMEs could manufacture and supply lithium batteries and integrate themselves into the global value chain of NEVs, not as providers of raw materials but through backward activities.
But levelling the playing field to ignite ‘the animal spirits’ (to use John Maynard Keynes’ famous term), of African entrepreneurs will be critical for the growth of regional SMEs and nascent industries.
Doing so will lead eventually to the emergence of African conglomerates in the global economic environment. Improving the business environment and addressing the myriad constraints facing African entrepreneurs are important steps for the region, where the consequences of non-tariff barriers have been just as costly for trade and endogenous growth as market fragmentation in the pre-AfCFTA era.