A Political Economy Readiness Analysis

Was Africa really ready for competitive liberalized trade via the AfCFTA (African Continental Free Trade Agreement), which was launched on 01 Jan 2021?

This study interrogates the functionality of the African Continental Free Trade Agreement (AfCFTA) as an instrument of the so-called trade-led development in three purposively selected East African countries (Uganda, Kenya, Burundi). Launched on 01 January 2021, the AfCFTA has been celebrated by some, and rejected by others. Proponents of AfCFTA uphold the free-trade initiative as a key milestone in the quest for the Africa We Want (AU, 2020). Critics reject this as misplaced optimism. This begs the question: Was Africa really ready for competitive liberalized trade via the AfCFTA? This question is significant for two distinctive reasons – one theoretical, and the other pragmatic. Theoretically, the AfCFTA signifies the globalization of free-market fundamentalism, which is the economic ideology of the high-tech industrial and digital economies of the global North. It signifies the southward spread of Eurocentric ideas of “trade-led” or “private-sector” driven development. These Eurocentric ideas are enshrined in the WTO, which preferentially institutionalizes the political economy preferences of advanced economies vis-à-vis those of the global South.

Pragmatically, we will examine evidence on the preparedness (or unpreparedness) of selected African countries for WTO-style free trade (unfettered by strategic state regulation). The AfCFTA, we contend, was largely driven by neoliberal dogma, not science. We test this argument via critical document review, use of official data, and key informant interviews. The aim is to test the national preparedness (or unpreparedness) of selected African countries for competitive, neoliberal trade (a la AfCFTA). National preparedness will be proxied by (a) the presence or absence of nationalistic institutions designed to leverage trade for durable country-specific development; (b) the structural of the economy – whether backward/agrarian or high-tech industrialized; (c) the share of high value-added manufactures vis-à-vis the primary (or marginally processed) products in total exports; and (c) the proportion of competitive enterprises vis-à-vis the uncompetitive micro-small-medium enterprises (MSMEs) in the national economy. [Official statistics show that over 83% of business enterprises in East Africa are informal micro-small-to-medium (MSMEs) enterprises. These firms keep no official records, and are, ipso facto, non-bankable. Moreover, 65% of them die before celebrating their 5^th birthday].

Official statistics will be augmented with data on the continent-wide loss of revenue, which is estimated to be close to USD 4.1 billion in the short-run (UNCTAD, 2019). Additionally, the study will document the differential impacts of trade liberalization under AfCFTA, that is, the likelihood of relatively more industrialized African economies (eg Kenya) to benefit more than the primary commodity producers (Uganda and Burundi). The study will also highlight the vulnerability of weak local companies to competitive pressures from foreign companies. Yet foreign firms cajole host countries to interpret WTO-like “rules of origin” to include foreign manufactures even if they merely undergo assembling (not transformative value-addition) in the host country. Foreign firms typically invoke the WTO norms of “national treatment” and non-discrimination (between foreign and local enterprises) to outcompete local firms.

The emerging conclusion is simple. The entrenchment of WTO norms in pre-industrial Africa enhances the capacities of relatively competitive industrial economies (eg Kenya) but may be detrimental to backward agrarian economies (such as Uganda/TanzaniaBurundi) that have embryonic manufacturing firms. This suggests one key thing. (East) African economies are largely unprepared for competitive, neoliberal trade via the AfCFTA.

The primary aim of this study is to (a) review received wisdom on the AfCFTA and (b) conduct a readiness assessment of selected African countries (in the EAC region) to join the competitive marketplace represented by WTO. The WTO comes into the picture because it is subtly entrenching its pro-market agenda through a supposedly “home-grown” AfCFTA. By critiquing received wisdom, this study amplifies the GPN concern over Eurocentric North–South relations. For example, has the alleged shift from parasitic aid to the mutually beneficial trade-not-aid form of development cooperation really happened?

The study will cover three purposively selected countries in the EAC (East African Community) region, namely, Kenya, Uganda and Burundi. [Kenya is classified as a middle income, relatively “industrialised” economy (dominated by last-stage assembling of foreign manufactures); Burundi is an agrarian Least Development Country (LDC), Uganda is also an LDC but better organized than Burundi. The selection of these different cases enables us to avoid “selection bias” and conduct objective political economy analysis.

The literature on trade falls under two distinctive categories – the orthodox scholarship (eg IMF, 2014) and the heterodox variant (Chang, 2002; Evans, 2014). The former category seeks to entrench free market fundamentalism (eg Smith, 1776; Bhagwati, 1999; AU, 2020). By contrast, the latter variant seeks to promote strategic trade, which is organically tied to country-specific industrial policy (Hamilton, 1791; Friedrich List, 1885; Eric Reinert, 2001; Ha-Joon Chang, 2002; 2007; Kiiza, 2008; 2012).

Recent studies (UNCTAD, 199; Shinyekwa, 2020) point to the differential impacts of trade liberalization in general, and the AfCFTA in particular. According to UNCTAD (2019), tariff reduction under the AfCFTA is associated with substantial loss of revenue at the continental level. Second, the increase in competition is likely to stifle Africa’s embryonic industrial firms (EPRC, 2019).

In the same tradition, Shinyekawa (2020) details the tariff revenue effect of AfCFTA for each of the EAC economies. Clearly, Kenya incurs the largest tariff revenue loss of US$ 14.2 million, followed by Uganda with US$ 13.5 million, Tanzania US$ 5.3 million, Burundi US$ 4.3 million and finally Rwanda US$ 3.9 million.

Regarding the trade creation effects, Shinyekwa (2020) notes that Kenya will create trade to the tune of US$4.3 million and Burundi up to US$8.3 million. However, Uganda, Tanzania and Rwanda will not create trade. Uganda will experience significant trade diversion of a value of US$4.9 million, which further disadvantages the country via expensive imports. Kenya will experience a minimal trade diversion of about US$0.4 million. By contrast, Rwanda and Tanzania are likely to experience a negative trade diversion. Shinyekwa’s inference is compelling. The differential impact of AfCFTA is likely to create winners and losers. The winners (or net beneficiaries) will push for deeper trade liberalization, while the net losers will resist liberalization. Such contests may risk the existence of AfCFTA. Over the long-term, AfCFTA is likely to stifle development policy-space for relatively backward economies (Burundi, Uganda, more than Kenya), thanks to the predominance of MSMEs and embryonic industries (Kiiza, 2013; UBoS, 2019).

To mitigate the likely costs of the AfCFTA, the literature points to the need for country-specific industrial policies prior to the adoption of orthodox trade liberalization. The German political economist, Friedrich List, advises thus:

... (A)ny nation which owing to misfortunes is behind others in industry, commerce, and navigation, while she nevertheless possesses the mental and material means for developing those acquisitions, must first of all strengthen her own individual powers, in order to fit  herself to enter into free competition with more  advanced nations (Friedrich List, 1885: xxvi; also see Julius Kiiza, 2008).

Chang (2002; 2007) and other industrial policy gurus note that today’s industrialized economies used nationalistic policies to grow. This view upholds Jacob Viner’s (1948) seminal work, which documents the policies that were of ‘nearly universal importance’ in early industrialization. Specifically, trade liberalization was discouraged precisely because it promoted the hemorrhage of national savings. Second, domestic industries were promoted via the aggressive use of protective tariffs, state subsidies, and other forms of strategic state guidance of capitalist development. Third, importation of foreign manufactures was discouraged (via high tariffs or even a total ban). The aim was to babysit domestic firms into competitive adulthood. Fourth, while the importation of capital goods and skilled workers was encouraged, these were regulated by developmentalist states (such as South Korea). The aim was to cause foreign capital to promote, rather than constrain, transformative development in the national economy.

Cameron (1989) notes that the policies of economic nationalism – or what the German historical school calls Merkantilismus – historically took roots in countries that deliberately embarked on a Staatsbildung (state-building) program. For the German nationalists, Merkantilismus was no ordinary economic policy. It was “a policy of state-making (Staatsbildung) carried out by wise and benevolent rulers” (Cameron, 1989: 129). Gustav (von) Schmoller (1896: 69) argues that Merkantilismus “in its innermost kernel is nothing but state-making – not state-making in a narrow sense but state-making and national-economic-making at the same time.” Central to Staatsbildung was the centralization of the state. This involved the transfer of power from small political units to centralized states. [The classic examples are the centralisation of Hohenzollern Prussia; the unification of Germany under Chancellor von Bismarck; the creation of the United State of America; and the unification of Meiji Japan in the 19^th century]. The lesson for today’s Africa is simple. Trade liberalization is unlikely to deliver durable developmental impacts unless it is pursued as part and parcel of an Africanist Staatsbildung agenda. Simply stated, the ACFTA is unlikely to have transformative beneficial impacts without the United States of Afrika (USAfrika). This Staatsbildung initiative has not happened at the EAC level either (Kasaija, 2017). Instead, East African presidents have shifted from the unificationist goal of East African Federation to a minimalist agenda of political confederation (which preserves their provincial powers).

Cross national evidence also suggests that effective late industrializers such as Japan, Korea and Taiwan derived great benefits from global market integration without renouncing the strategic role of the state in the domestic economy (Johnson, 1982; 1999; Noland and Pack, 2003: xii). According to Rodrik (2001), the East Asian tigers ‘were free to do their own thing, and did so, combining trade reliance with unorthodox policies – export subsidies, domestic content requirements, import–export linkages, patent and copyrights infringements, restrictions on capital flows (including direct foreign investments), directed credit, and so on …’ (p. 28). The key question today is whether these policies of strategic state guidance are still feasible, given the restrictive WTO-style policies being adopted under the AfCFTA.

A recent study by Chihaka (2019) examines the institutional preconditions for effective intra-regional trade in the COMESA region. Chihaka (2019) estimates export flows between Zimbabwe and Libya; Zimbabwe and Mauritius and Libya and Mauritius using an augmented gravity model estimated from the Random Effects Model. A key finding of this study – in line with the World Bank’s (2018) governance indicators – is that institutional quality is positively correlated to export volumes – hence the need for EAC countries to improve the quality of domestic institutions (eg the rule of law) as a precondition for effective regional trade. Did this happen or not happen prior to the launch of AfCFTA?

Cross-national research suggests that certain political economy relations between the global North and the South are informed by asymmetrical colonial or neocolonial power relations (Baaz 2005; Ndhlovu 2017; Melber 2018). Post-development theorists such as Arturo Escobar, Wolfgang Sachs, James Ferguson, and Gilbert Rist argue, with varying degrees of emphasis, that today’s development discourse is characterized by a hierarchy of developed versus backward nations; of superior versus inferior peoples; of producers of knowledge/innovations versus consumer of imported wisdom. Wolfgang Sachs (2015), a leading member of the post-development school notes, "the idea of development stands like a ruin in the intellectual landscape" and "it is time to dismantle this mental structure" ( in Khaled Al-Kassimi (2018). In line with post-development theory, emphasis will herein be placed on the quality of cross-national partnerships in the AfCFTA ecosystem.The level of ownership, and the co-creation of knowledge, if any, will also be examined (Mauser et al. 2013).

The methodology adopted herein is inspired by Shinyekwa (2020), who adopted the Single Market Partial Equilibrium Simulation Tool (SMART) model following the work of Jammes and Olarreaga (2005). We will use data from the Trade Map database of the International Trade Centre [for EAC trade stats]. Following the WITS-SMART analytical framework, the study will use the Excel-based simulation proposed by Punt and Sandrey (2016) to determine the revenue, trade and welfare effects to the EAC countries participating in the AfCFTA. This will be augmented with a readiness assessment tool based on critical review of literature (Eurocentric/orthodoxy versus alternative forms of knowledge). The aim is to understand whether AfCFTA was imposed top-down through the subtle yet imperialistic trade diplomacy of WTO. The WTO is often used by advanced capitalist countries to force backward pre-industrial countries to join WTO. Yet, WTO’s free-trade norms privilege interests of advanced/high-tech economies over agrarian economies. For example, national treatment of foreign capital signifies the death of country-specific industrial policies; Rules of origin, while attractive in form, substantively privilege FDIs/foreign capital which typically imports into Africa ready-made manufactures for “cosmetic” (or “marginal” last-stage) value-addition within the host countries. In line with ethical guidelines, the voluntary consent of interviewees will be sought prior to the interview process.

This study has the following success criteria:

• Cutting-edge literature reviewed – for example on orthodox trade versus strategic trade (which is organically tied to transformative industrial policy)
• Relevant trade protocols and other official documents critically reviewed.
• The EAC regional trade context outlined.
• Relevant trade data examined
• A free-trade readiness index development to assess EAC’s readiness for AfCFTA
• Consultative meetings held with trade professionals/stakeholders representing Govt officials; technocrats/trade diplomats from ministries of trade and finance; selected state agencies eg Export Promotion Board, academic researchers, civil society organizations, and selected business enterprises.
• Relevant key informant interviews conducted
• A Research Paper written and developed into a Working Paper and a policy brief to guide strategic trade and industrial policy in Africa.