FRANCOIS FOUCHE looks at the insightful comments from a recent IMF Staff Discussion Note, “the African Continental Free Trade Area: Potential Economic Impact and Challenges“.
Furthermore, in this series of AfCFTA-related content, we look at how African member countries can mitigate adverse distributional and employment effects of the AfCFTA?
“Policies promoting inclusive growth are critical for mitigating potential adverse distributional and employment effects of the AfCFTA.
As the AfCFTA raises income, member countries will need to adopt market-friendly measures to ensure that the key transmission channels to the population function efficiently. This could involve 4 mutually reinforcing initiatives:
- improving the functioning of product markets;
- improving the flexibility of the labour market;
- enhancing social protection programs; and
- encouraging investment and innovation, within the context of a well-defined transformation strategy.
More efficient product markets could help transmit broader benefits of trade liberalisation to the population.
Country authorities will need to guard against industry concentration that uses market power to block price reductions or the introduction of more variety of goods to the population as a result of the AfCFTA. This can be done through enhanced competition and the introduction of a fair trading and competition commission that can limit monopolistic practices. At the same time, reform of rules on firms’ entry into the market and exit, including modernising bankruptcy rules, should be considered.
More flexible labour markets could help mitigate the potential adverse employment effects of trade liberalisation under the AfCFTA.
Specific measures could include addressing distortions in labour costs and easing restrictions on labour reallocation across sectors, firms, occupations, and regions. A renewed emphasis on promoting education, training, and retraining would also be important. In addition, member countries will need to promote freedom of movement of labour and remove barriers to workers’ mobility.
Enhanced social programs would be necessary for a well-functioning AfCFTA.
These programs could include broadening and strengthening of social safety nets for the provision of targeted assistance to those adversely affected by trade liberalisation. Targeted training programs to ease worker mobility across industries and promote employment, along with other active labour-market programs, could help cushion the adverse short-term effects of economic adjustment and prevent negative long-term effects.
A well-designed transformation strategy, built on investment and innovation, could support economic growth and job creation.
This strategy should promote productivity growth and moving up the global value chain through greater innovation and investment (both foreign and domestic). This would increase firms’ ability to seize new opportunities made available by trade liberalisation under the AfCFTA and help expand employment opportunities. Efficient implementation of this strategy could be supported by ratification of the freedom of movement protocol of the AfCFTA and improvements in development and trade financing.
Better-functioning financial markets are needed.
These should make it easier to secure loans based on credit histories. In this way, credit markets could help facilitate a more flexible labour market. In addition, better-functioning credit markets will improve firms’ access to long-term competitive financing to expand production and facilitate more extensive trade. More generally, improvements in credit markets that provide expanded access to financial services to the wider population will increase efficiency and enhance gains from trade.
How can African member countries manage a potential adverse fiscal revenue impact of the AfCFTA?
Revenue mobilisation should be guided by country-specific reform strategies.
Some African countries, that have experienced significant increases in revenue mobilisation, have adopted measures to reduce base-narrowing exemptions through eliminating tax exemptions, revising investment codes, and getting rid of tax distortions. They have also invested in the basic building blocks of effective and modern tax policy and administration, including taxpayer segmentation. At the same time, once implemented, continuous improvements in the functioning of these systems are needed, especially through strengthening capacity and coverage.
Other revenue boosting measures could also be deployed.
These could include initiatives to reach sectors that are difficult to tax, by:
- introducing a simplified tax regime for small businesses;
- changing the value-added tax (VAT) threshold to better target high-value businesses;
- investing in (or expanding) digitalisation; and
- pursuing reforms in information and communication technologies.
This would help reduce compliance costs and simplify registration, filing (through e-filing), payment (through e-payment), audit, collection enforcement, and appeals. Developing (or leveraging) existing platforms to combine domestic revenue and customs operations and to simplify customs clearance operations and adopting automated systems across tax and customs administrations would also boost revenue.
Even without an adverse revenue impact from the agreement, African countries still need to mobilise additional resources to implement the AfCFTA.
Resources to finance investment to fill the continent’s infrastructure gap are needed. Additional public resources will also be required to strengthen social protection frameworks to address adverse distributional effects that may arise from the reduction in trade barriers. The fiscal space to cover these needs could come from revenue mobilisation or reprioritisation of expenditures. Other modes of financing, such as user fees or public-private partnerships, could contribute to fiscal space while mitigating fiscal risks.
To be successful, revenue-enhancing efforts will require a sustained political commitment.
At the same time, transparency and outreach will be needed to mobilise support for the reforms and help change taxpayer culture and improve tax compliance.”
Francois Fouche is the Director of Growth Diagnostics (in collaboration with the North-West University Business School).