7 PM | A shot at economic logic | 9th July, 2019

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Context: The promising impact of free trade agreement between African nation.

More in news:Recently 54 of 55 African nations have signed the African Continental Free Trade Agreement (AfCFTA).

What is Free Trade Agreement?

Trade agreements are when two or more nations agree on the terms of trade between them. They determine the tariffs and duties that countries impose on imports and exports. All trade agreements affect international trade. Examples of Free Trade Agreements (FTAs) in the world are: the European Union (EU), the North American Free Trade Agreement (NAFTA).

African Economy:

• Africa population is equivalent to 16.64% of the total world population and has the highest rate of population growth among major areas, growing at a pace of 2.55 per cent annually in 2010-2015. 
• Sub-Saharan Africa’s growth is projected to reach 3.1 percent in 2018, and to average 3.6 percent in 2019–20.
• UNCTAD forecasts a substantial increase in GDP per capita for Africa by 2030. In economic terms, this implies reaching a GDP per capita of $3,249 in 2030, growing at a compound annual growth rate of 3.5 per cent from 2016. The average value of GDP per capita in Africa was $2,008 in 2016.

African Continent Free Trade Agreement (AfCFTA):

• It will create an African Common Market of 1.2 billion people and GDP of over $3.4 billion (Comparable metrics to India).
• The AfCFTA would be largest FTA in world and with the huge market base for global trade, it will create a huge impact.

Hurdles in viability of AfCFTA:

• African Union’s past record: The African Union (AU) is a continental body consisting of the 55 member states that make up the countries of the African Continent. It was officially launched in 2002 as a successor to the Organization of African Unity (OAU, 1963-1999). The organization has largely been ineffective in dealing with the Continent’s major problems like decolonization, underdevelopment, Islamic terrorism and the Arab Spring.
• Logistics challenges:The national economies in Africa are generally weak with very low manufacturing base. The present intra-Africa trade is just one sixth of Africa’s total trade.

Africa accounts for only 3% of global trade and the global trade is expected to grow just 2.6% in 2019. This makes AfCFTA less viable option.

• Protectionism: In the present scenario of protectionism, as seen in USA-China trade conflict, BREXIT and the standstill at WTO and UNCTAD, AfCFTA is seen as counter-cyclic.

Hope for the success of AfCFTA:

• Around $86bn loans were issued by China between 2000 and 2014 to finance over 3,000 infrastructure projects in Africa. This has increased Africa’s dependence on China. Greater collective self-reliance through African economic integration will reduce the dependence.
• In December 2018, AU organized first Intra-Africa Trade Fair in Cairo. It was successful as $32 billion of business deals were signed. A stronger political will can give boost to the AfCFTA.
• AfCFTA can use the experience of continents’s regional economic blocks- The Community of Sahel-Saharan States  (CEN-SAD),  Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West African States (ECOWAS), and Southern African Development Community (SADC).

Indian perspective:

• Trade Relations: One tenth (approx $70 billion) of our global trade is with Africa. At the same time, India is Africa’s third largest trading partner. Even in the times of India’s global exports being stagnant, the trade with Africa has surged. For example, exports to Nigeria in 2018-19 grew by over 33%.
• AfCFTA will provide more opportunities for Indian stakeholders in the fast growing consumer goods manufacturing and connectivity projects.
• There is rising demand for Indian commodities like foodstuff, finished products (automobiles, pharmaceuticals, consumer goods) and services such as IT enabled services, health care, education, banking and other financial service. India can help AU prepare holistic policies to strengthen infrastructural needs.
• UNSC reforms: Recently African nations supported India in gaining non-permanent membership at UNSC. Maintaining cordial relations with African Union can help India in future for the UNSC reforms.
• India Africa Forum Summit: The meeting provided a new direction to Africa- India relations based on equality, mutual respect and shared gains in addition to identifying broad areas of cooperation in political, economic and social development. The forum will help in developing strong relationships.
• Line of credit: The Government of India has been providing LOC to African countries since 1964 under Indian Technical and Economic Cooperation (ITEC) and Special Commonwealth Assistance for Africa Programme (SCAAP).  It is important to note that the extension of LOC by India to African countries is different from that of other international financial organisations such as IMF and World Bank. Indian LOC on other hand is demand driven. The projects are identified primarily by African countries. Where the scope for fund theft and misusing are less chance. Over the years, there has been a sharp increase in LOCs committed to African countries. In 2004, LOCs to Africa were valued at $304 million while in 2011 LOCs to Africa were valued at $4.3 billion. In 2012, 17 LOCs were made operational and 12 of these LOCs were directed to African countries. Following the establishment of International Solar Alliance (ISA) on 11 March 2018, the nature of Indian LOCs to Africa has undergone a visible shift. India’s offer of extending LOCs worth $1 billion to ensure the implementation of 23 solar energy projects spanning across 13 African countries is in line with the MEA’s decision to earmark 15-20% out of the total $10 billion LOC, extended under IAFS-III, for undertaking solar energy projects in Africa. This focus on investing on renewable energy and sustainable development projects is a shift from its earlier focus on traditional areas of cooperation between India and Africa such as IT, science and technology, agriculture, pharmaceuticals, etc.
• Trade Architecture:  New Delhi can help the AU Commission prepare the requisite architecture, such as common external tariffs, competition policy, intellectual property rights, and natural persons’ movement.
• Indian Diaspora in Africa constitutes 12.37 per cent of the total Diaspora of India and they reside in 46 countries of Africa inhabiting all linguistic, cultural or geographical regions of the continent. It would be interesting to note that among Indian Diaspora in Africa more than 93.58 per cent are PIO’s and they constitute 21.37 per cent of the global strength of PIO’s. The influence of Indian communities in their country of adoption varies from one country to another which is largely dependent on their size of population. In case of Mauritius, they have been able to dominate in the political and socio-cultural domain.

Way Forward:

Africa is a continent of the future and India’s long term prospects are closely tied to the success of its Africa strategy. Here it is important that India does not play a game of catch-up with China. Rather it is more important to leverage India’s own unique strengths, such as its contribution to capacity building, promotion of entrepreneurship, small and medium scale industry and digital connectivity. AfCFTA will provide new opportunities, India must work in the direction to strengthen economic integration of Africa. 

Source: https://www.thehindu.com/opinion/op-ed/a-shot-at-economic-logic/article28323314.ece