It is an honour to be here today at the second UBS Africa Forum meeting “Connecting Africa”. I would like to begin by thanking UBS for organizing this forum.

My remarks today will focus on Africa and Globalisation: Strengths and Challenges. First, I will highlight Africa’s strengths and will talk about changes that are happening with respect to the business environment, economic reforms and the improved regulatory framework. Second, I will discuss some of the main challenges facing African countries, including the fragmentation of the continent, the slow pace of economic transformation and diversification, and the still too many infrastructure constraints. In conclusion, I will make some suggestions on how Africa can better connect to the global economy and play a more significant role in shaping globalisation.

Africa’s Enormous Potential

Let us first look at the figures projected on the screen.

What are Africa’s strengths? First, Africa has a significant proportion of the world’s natural resources, including vast amounts of minerals, oil and other hydrocarbons, and large reserves of fertile agricultural lands. Second, Africa offers vast human resource potential with its 1 billion plus population. It has potential as both a producer and a consumer, giving it a comparative advantage in international trade. Third, the perception of Africa as a place to do business is changing. According to this year’s Ernst and Young report on Africa which surveyed over 300 companies operating on the continent, 60% of respondents said Africa had improved as a place to do business in the past three years. 73% said they expected the African business climate to improve further in the next three years. 

The growing confidence in Africa is also reflected in FDI flows and an impressive growth story for more than a decade. Stock of FDI grew US$340 billion between 2005 and 2010. Although most FDI in Africa goes into natural resources, such as mining and oil production, in recent years services and manufacturing have been claiming a bigger share, as have telecommunications and agriculture.

Between 2001 and 2010, GDP growth in Africa averaged 5.2 per cent. The improvement in Africa’s growth performance is due to a number of factors both internal and external. The main external factors were the increase in commodity prices and the huge demand of emerging economies. The internal factors are related to the sound macroeconomic management and improvement in the business environment. The adoption and implementation of economic policy reforms and improvement of macroeconomic management, greater fiscal discipline, debt relief and more realistic exchange rates have all contributed to macroeconomic stability.

In addition, there were significant improvements in the continent’s business environment in recent years. Legal and regulatory frameworks, governance and accountability, rule of law, pro-business policy reforms, incentives and support for investors along with an unprecedented increase in consumer spending have contributed to the growth performance of many businesses.

Africa has also performed relatively well in international trade. The last decade has seen Africa’s trade outperform the global average. Between 2000 and 2010, the value of Africa’s exports grew by an annual average of 13.1% compared to the world average of 9%, while imports grew at 13.7% compared to the world average of 8.6%. Except for 2009, exports had exceeded imports throughout the last decade, sometimes by a large margin. Like merchandise trade, Africa’s services trade also experienced strong growth in the last decade, although arguably from a low base. Both exports and imports of commercial services grew faster (10.5% and 13.7%, respectively) than the world average of 9.7% for exports and 9.3% for imports.

However, this impressive growth story has largely failed to deliver an economic transformation. 

What are the main reasons and challenges?

— Africa remains the most fragmented continent:

It is a continent of micro economies excluding Nigeria, South Africa and Egypt.  Africa is home to the majority of landlocked countries and least-developed countries.  Intra-African trade is very low.  At an average of 10 to 20 %, the level of trade among African countries compares unfavourably with other regions of the world.  Intra-trade among the EU-27 is around 70 per cent, 52 per cent for East Asia, 50 per cent for North America and 26 per cent for South America.

A major constraint to regional and international trade is the high transaction costs for trade across borders in Africa due to deficiencies in soft and hard infrastructure.

The problem is even more severe for the landlocked African countries, whose trade-processing costs are much higher.

In addition, hard infrastructure remains a pervasive problem. Africa’s infrastructure networks lag behind that of other regions of developing countries, and are characterized by missing links.  Inadequate connectivity in transport and communications infrastructure as well as unreliable power are severe constraints.

— Growth with little diversification and value addition:

Africa’s trade is overly dependent on a narrow range of primary products. Although exports of agriculture and manufacturing have been growing, fuels and mining products constituted 66 per cent of Africa’s total exports in 2010.

— Access to trade finance.

Another important challenge faced by African countries relates to trade finance.  Many African countries face problems in accessing financing. There are several reasons for this, mainly poorly developed banking sectors and perceived credit risk.  All these constraints severely hinder African’s competitiveness in the global market.

Based on the strengths and challenges identified above, allow me to emphasize a few priorities which I believe policymakers, regulators and businesses need to focus on throughout the remainder of this decade if Africa is to play a more significant role in shaping globalization.

 

First, de-fragmentation of Africa - deeper regional economic integration could reduce tremendously the costs of trade between African countries and contribute to building economies of scale.  In this respect, the recent African Union decision and action plan to boost intra-African trade and fast-track a Continental Free Trade Area in Africa by 2017 is an important step in the right direction. 

Removing non-tariff barriers, in particular those related to inadequate infrastructure and trade facilitation, is crucial. In this regard, the WTO trade facilitation negotiations, by streamlining customs and border procedures, excessive fees and red tape and overlapping legal and regulatory requirements, can make a significant contribution.  According to a recent OECD study, implementation of the trade facilitation measures discussed at the WTO could reduce total trade costs by almost 10 per cent. It also shows that, successfully implemented, facilitation programmes increase customs productivity, improve trade tax collection and attract foreign direct investment. There is also a positive impact on government revenues with several countries having more than doubled their customs proceeds after introducing trade facilitation reforms. 

Second, participation in global and regional value chains is essential. Specialization is no longer based on the overall balance of comparative advantage of countries in producing a final good, but on the comparative advantage of tasks that these countries complete at a specific step along the global value chain.  Increasing geographic fragmentation of value chains has led to an increase of trade flows in intermediate goods, especially in the manufacturing sector. In 2010, trade in intermediate goods was the most dynamic sector of international trade, representing more than 50 per cent of non-fuel world merchandise trade.

To unlock Africa’s potential to participate in regional and global value chains, transaction costs must be lowered, the business environment improved and investment shifted into acquiring the necessary skills and technology.

Third, access to finance, both for trade and investment.  

Fourth, improve multilateral trade rules and give African businesses a fairer playing field and unlock Africa’s potential in areas where she has a natural comparative advantage.  In this regard, the successful conclusion of the WTO Doha Round negotiations could bring significant benefits to African countries in areas such as agriculture. With the elimination of export subsidies on agricultural products as well as a significant reduction of tariffs and trade-distorting domestic support, Africa could significantly increase its exports of agricultural products. The negotiations would also result in a significant reduction in the tariffs on manufactured products, thereby affording African countries the possibility of increasing their exports to developed and developing countries.

To sustain their growth and achieve economic transformation, African countries will need to diversify their production structure and make improvements in competitiveness and productivity.  They will also need to take advantage of international trade through deeper integration.  It is essential for African economies to increase investment in trade-related infrastructure and continue to improve the business environment and regulatory frameworks.  While policymakers and intergovernmental organisations have an important role to play, the active engagement of the private sector is critical in pushing forward needed reforms.

In closing, while Africa’s impressive growth and ambitious reforms of recent years will continue to drive investment and business opportunities in the near future, the momentum will be difficult to sustain in the long term without more inclusive growth and a better connection of African economies into regional and global value chains.

The road to realizing Africa’s full potential and better connections to the world’s market is one that will be built only by continuously removing barriers to trade and investment in Africa.  Only then can we help to reverse the still marginal position of the African continent in globalisation.

I thank you.