Understanding private sector involvement in the Africa’s free trade area
By Stephen Karingi and Wafa Aidi
The narrative around a successful African Continental Free Trade Area (AfCFTA)—its potential to increase intra-African trade by 15 to 25 per cent, or $50 billion to $70 billion — is promising, but if African businesses do not efficiently utilize this landmark agreement, its ultimate success will be limited.
Since the private sector is directly involved in cross-border trade, it is a major stakeholder and beneficiary of the AfCFTA.
Thus, to better understand how African businesses are approaching the AfCFTA and, more importantly, how the AfCFTA can best support those businesses through trade, the United Nations Economic Commission for Africa (ECA) created the AfCFTA Country Business Index (ACBI).
The ACBI is a new AfCFTA-focused, ease-of-doing business index and is based on a robust theoretical framework and data collection process. It enables relevant policymakers to identify bottlenecks in intra-African trade at a country level, which informs the barriers impeding effective AfCFTA implementation from the perspective of the private sector.
It aims to inform African policymakers on the trade barriers and guide AfCFTA national strategies.
The ACBI aims to ensure that the African Continental Free Trade Area delivers on its projected sustainable development promises, especially for women-owned and small- and medium-sized businesses (SMEs).
The ACBI captures three dimensions relevant to the understanding of the AfCFTA and related negotiations:
- The ease of trading goods across Africa;
- Firm awareness and use of African free trade agreements (FTAs) and the AfCFTA;
- Business environment related to trade in services, intra-African investment, intellectual property rights, and competition policy.
For a robust discussion of the ACBI’s methodology, see the bottom of this blog.
Top ACBI findings: How do African businesses perceive trading within Africa?
The first round of the ACBI (which covered the seven countries of Angola, Côte d’Ivoire, Gabon, Kenya, Nigeria, Namibia, and South Africa) reveals several important trends in the understanding and utilization of the AfCFTA by African businesses. Here are the key findings:
Overall, the businesses surveyed reported feeling neutral toward their country’s environment for trading and investing goods across African borders, i.e., on average, firms feel neither positive nor negative on the ease of doing business within Africa (Figure 1).
Given that these seven member states have deposited their instruments of AfCFTA ratification, the bottleneck seems not to be on the legal side, but rather in the lack of enterprise support for identifying strategic interests and market opportunities to ensure that the private sector can fully benefit from the AfCFTA.
Notably, the survey also reveals that perceptions related to trade in goods (Figure 2) constitute significant challenges to trading within the continent.
Some of the most commonly identified bottlenecks include unauthorized charges (bribery at a country’s border posts or along transport routes) and other charges on trade (additional customs, border and product surcharges, price controls, reference prices, additional variable charges on goods, statistical taxes, import license fees, etc.).
Firms appear to have positive perceptions of the sanitary and phytosanitary measures and technical barriers—implying that these measures do not constitute an impediment to intra-African trade.
This finding is notable given that some experts have argue that these measures and barriers often constitute a main constraint to Africa’s trade competitiveness and international trade.
Concerning “awareness and use of the FTAs,” the survey found that most firms were highly aware of their country’s participation in different regional economic communities, but less informed of their country’s participation in the AfCFTA (Figure 3).
In other words, African businesses do not have a clear understanding of the AfCFTA mechanisms of operation and market opportunities at the continental level.
Importantly, the surveyed firms most often named compliance with an FTA’s rules of origin requirements, which determine how exported goods shipped to a country may qualify for free or preferential import tariffs, to be the most binding constraint to trading.
Businesses often face difficulties in conforming to these rules, and their complexity can be particularly onerous for informal traders.
The rules of origin need to be simple, practical, and business-friendly to enable African businesses to optimize the trade gains expected from the AfCFTA. At the same time, rules of origin must lead to a transformation process that generates value through intellectual property gains and/or new jobs.
Regarding “the commercial environment,” companies largely report being neutral in their perception of investment, competition, and intellectual property rights policies embedded in the AfCFTA.
One possible explanation is that the AfCFTA protocols governing these policies are still under negotiation.
For this reason, negotiators and African governments should prioritize finalizing the design of implementation strategies concerning concrete measures to facilitate access to African markets, reduce the services costs, and harmonize regulations related to the business environment.
Finally, perceptions around trading differ widely between male-owned and female-owned businesses as well as between SMEs and large companies (Figure 5).
For example, female-owned firms and SMEs more often cited trading across borders as a major challenge to growing their businesses. This finding aligns with the literature: Female-owned businesses are, on average, more negatively impacted by tariff and nontariff barriers.
Conclusion and recommendations
ECA intends for the ACBI to be a monitoring and evaluation tool for African countries to understand and address the challenges encountered by businesses in their countries when implementing the AfCFTA.
The active involvement of the private sector is vital for informing AfCFTA National and Regional Strategies and, thus, realizing the expected benefits of the AfCFTA.
Rolling out the ACBI in all African countries will support the AfCFTA implementation by identifying the main trade restrictions at country and regional levels.
It is equally important to build strong partnerships with national and regional business associations to support the ACBI rollout and share best practices across countries and subregions.
The ACBI findings make a significant contribution to Africa’s development blueprint Agenda 2063 and to the 2030 Agenda for Sustainable Development by identifying bottlenecks in trade regimes that need to be addressed to ensure more inclusive trade under the AfCFTA.
Indeed, the ACBI results pinpoint the importance of complementing the AfCFTA with specific trade facilitation policies to ensure more inclusive trade under the AfCFTA.
In Africa, most medium, small, and micro enterprises are women-owned. It is therefore important to ensure a conducive national but also continental regulatory framework that allows them to participate in an efficient, effective, and competitive way.
Thus, African countries should design specific policy responses to support inclusive implementation of the AfCFTA.
Moreover, an important and immediate action point is to raise awareness on the AfCFTA opportunities and its mechanisms of operation both at national and continental level.
This ultimate objective can be achieved through deeper engagement with the private sector and business associations when developing country and regional AfCFTA implementation strategies and through wider dissemination of these implementation strategies once completed to create the required ecosystem for businesses.
ACBI approach and methodology: An index driven by private sector perceptions
The ACBI is different from other doing business and integration indexes as it 1) is based on the perceptions of the private sector gathered through primary surveys instead of secondary data and 2) focuses on Africa’s integration by targeting businesses based in trading (and investing) within Africa.
It is the first index based on a robust methodological framework and data collection process that translated the businesses opinion on the trade constraints under the AfCFTA.
The dimensions on which the ACBI focuses (see Table 1) are closely linked to AfCFTA negotiations and outcomes, all of which focus on deepening integration across the continent.
*** Source: ECA based on ACBI survey ***
The ACBI survey is based on a minimum targeted sample of 50 completed responses in each country and primarily undertaken through online channels, with telephonic and face-to-face interviews supplementing as needed.
Firm perceptions are collected through a perception ranking (Likert) scale, ranging from 0 to 10. The index, dimension, and subdimension scores aggregate these perception scores to provide an aggregate score for each country, ranging from 0 to 10, where a higher score implies that a country is perceived by businesses in that country to be “performing” better in addressing trade, investment, and integration issues in Africa.
For the ACBI, each dimension is equally weighted within the index, and each subdimension is equally weighted within each dimension. As a perceptions index, the results can be interpreted based on firm perceptions of various aspects relating to trading and investing across African borders.
A score of 5 reflects a neutral perception (i.e., on average firms feel neither positive nor negative about the specific area).
A score below 5 indicates that, on average, firms have a negative perception toward the area of interest.
Conversely, a score above 5 suggests that firms are positively regard that area’s impact on their business, or their ability to trade, and invest across borders.
Stephen Karingi is Director, Regional Integration and Trade Division – United Nations Economic Commission for Africa. Wafa Aidi is Economist, Regional Integration and Trade – United Nations Economic Commission for Africa. This article was first published by the Brookings Institution.