On March 21, 44 African countries met in Kigali, Rwanda and signed an agreement aimed at creating the African Continental Free Trade Area (AfCFTA). Uganda’s Foreign Affairs minister, Sam Kutesa, signed on behalf of the Uganda Government. Some countries, notably Nigeria, did not sign this deal.
A Free Trade Area is usually the first step towards economic integration process. It comprises creation of a single market for goods and services, with free movement of business personnel and investments across partner states. AfCFTA is envisaged to expand intra–African trade based on same principles of existing regional economic blocks, namely East African Common Market, SADC, ECOWAS and COMESA among others. These economic blocs are built on an economic principle we call “the principle of 2nd best”.
What is the rationale? The reason for use of the “principle of 2nd best” is that in perfect market structures, it is assumed that all market information is well known to clients, who are also knowledgeable about the prices and quality of products on the market. Unfortunately, the reality reveals that all market structures whether perfect competition, oligopolistic, monopolistic and monopsonstic are riddled with so much imperfections that one would need to enhance ones level of knowledge and voice in order to remain a going concern and operationally competitive both in the short, medium and long-term.
It is on this premise that countries decide to create economic blocs. The signing of the AfCFTA in Kigali was a step in the same direction. The assumption was that under AfCFTA, there would be open borders among African countries to allow free flow of goods, services and investment in a continent of a market of 1.1 billion people and a total GDP of $3.4 trillion.
Such a market ensures economies of scale both in domestic production as well as export sector performance. This is due the capacity for a large market, which would attract big investments as well as command of a large export base to ensure constant supply to available export markets. This is clearly put in perspective given that in late 1990s and early 2000s, African countries secured export guarantees under AGOA (African Growth Opportunity Act) and EBA (Everything But Arms), but due structural impediments, particularly unsustainable production capacity, many African did not benefit from these trade agreements.
Why did some countries not sign the AfCFTA agreement? Despite the apparent benefits of AfCFTA, countries, including Nigeria, which did not sign the agreement. Their argument was premised on the contention that the open border provision under AfCFTA, would heavily constrain nascent industries in some countries. However, this should not be cause for worry. Even European Union started with only six countries, but it currently boasts of 28 countries with a combined market of 511,522,671 million people and a total GDP of $17.1 trillion.
Can countries be at the same level of development? It is untenable that all countries will ever be at the same level of development. There are always countries that are stronger economically than others. When God created the universe, He put in place the Sun, which shines more than the Moon. Actually, the latter only shines by reflecting the sun’s energy. Stars also in exist, but with relatively lesser light energy. But all of them (Sun, Moon and Stars) serve different purposes and are critical components of the galaxy. Take an example of EU.
The EU was created in 1957 with six member states, but today , it has gradually expanded to the current 28 members. Until 2011, no EU country ever sought to leave the EU umbilical code. Even countries such as Switzerland that are not EU member, crave to belong to EU institutions such as the European Commission.
This is due to the tremendous economies of scale, large market and other incredible socio-economic opportunities provided by EU.
What can countries do to build a strong and sustainable economic bloc such as AfCFTA? What has kept EU countries in this strong economic block is one basic element: each EU country positioned her-self to per-take of the EU benefits. Each country, from Germany the strongest economy in Europe (4th in the world), France, Netherlands, Spain, and Portugal, among others, has endeavoured to position her economy to benefit from the EU market. While Germany produces the best automobile, Spain provides the best resorts in Europe and reaps big from tourism.
What lessons can African countries learn? All the 44 countries that signed the AfCFTA agreement and the remaining 11 countries that did not sign the deal need to realise the need to position themselves so as to benefit from AfCFTA. To understand the intricacies of economic bloc formation, it is important to note that what, for instance, is called “a common market”, say the existing Common Market of countries under the EAC – Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan – does not literally mean that the market is “common.” The economic understanding of the word “common” here is that these six EAC member states agreed to open their borders for free movement of goods, services, labour and capital across these states.
What are the fruits of AfCFTA for Uganda? The country already has a competitive edge from the political environment for business development, excellent climate and soils for food production, hydro electricity generation, relatively high quality education and training capacity.
Other natural resources include: minerals including oil and gas, water resources and tourism potential. All these provide tremendous opportunities to effectively position the Uganda economy to benefit from AfCFTA. The Nigerians Fante have a saying that goes: “Oju an’t eye efo” (literally meaning that the sky is sufficiently large enough for all birds to fly without crossing each other’s path”).
Prof Nuwagaba is an international consultant on economic transformation in the African region.