By Hippolyte Fofack
The international development community is already overly familiar with Africa’s development challenges — conflict and insecurity, the escalating effects of climate change, excessive exposure to global volatility, enduring poverty, and widening income and welfare gaps between Africa and the rest of the world. But the as-yet-underexamined hurdle contributing to that divergence is Africa’s growing gap in competitiveness. Narrowing this divide is critical to Africa’s integration into the world economy and progress towards the Sustainable Development Goals, especially in our current age of globalized value chains and climate crisis.
Only two African nations feature among the 64 global economies ranked in the 2023 IMD World Competitiveness Ranking, published by the World Competitiveness Center, those being Botswana (59th) and South Africa (61st). It is perhaps unsurprising that Africa has consistently underperformed when it comes to business sophistication and innovation — the region faces marked deficits in terms of research & development infrastructure, technological leadership, and business networks. Africa has also lagged other parts of the world on other important criteria, including quality of education, financial market depth, and traditional infrastructure development.
The region’s shortcomings can be at least partly attributed to the fragmentation of African markets, a vestige of centuries of colonial subjugation, and still a major constraint to investment growth and competitiveness. The African Continental Free Trade Area (AfCFTA) — which establishes one of the largest free trade areas in the world by membership, with a market of more than 1.4 billion people and a combined GDP of US$3.1 trillion — is the first major attempt to transfigure the region’s competitiveness landscape. Launched in January 2021, the AfCFTA has been touted as a game-changer owing to its potential to enhance market efficiency and amend the composition of investment flows. The latter, traditionally geared toward natural resources investments, will shift in the direction of labor-intensive manufacturing as corporations take advantage of economies of scale, as well as competitiveness and productivity gains associated with the reduction in the risk of investing in smaller, fragmented markets.
Preliminary estimates show that the gains from the AfCFTA in terms of trade performance and capital formation will be positive and significant. Africa’s exports to the rest of the world would increase by 32% within a decade of the implementation of the continental trade integration reform. This would catalyze foreign direct investment (FDI), which is expected to increase by between 111%-159%, boosted by incentives from the rules of origin, as well as protocols governing investment and intellectual property. Intra-African exports would increase by 109%, led by manufactured goods, especially if the AfCFTA’s implementation is accompanied by robust trade facilitation measures — to date, the consequences of non-tariff barriers in Africa (equivalent to an import tariff of 18%) have been just as costly for trade and growth as market fragmentation.
The AfCFTA also has the potential to propel technology transfers and accelerate the diversification of sources of growth — critical in a region where the sticky colonial development model of resource extraction has exacerbated countries’ exposure to global volatility and deteriorating commodity terms of trade. In addition to bolstering the development of robust regional value chains, the diversification of sources of growth will accelerate Africa’s integration into the global economy, in which trade has been driven largely by intermediate and manufactured goods with increasing technological content. This, in turn, will reverse the long-term decline of Africa’s share of global trade, which has fallen below 3%.
Although a larger domestic market under the AfCFTA will reduce the region’s exposure to global volatility, greater market size is not a sufficient condition to succeed in the international competitiveness race, as the example of Singapore shows. The city-state, home to around six million people, is consistently one of the most competitive countries in the world, securing fourth place in the most recent global ranking. It routinely achieves stellar performances in several categories, including education and training, labor and goods market efficiency, innovation, strong infrastructure, and technological readiness, all of which have transformed Singapore into one of the wealthiest, most diverse, and complex economies in the world.
Today growth is highly technology-led. In that context, complexity and competitiveness have become two faces of the same coin and might also mark the dividing line between developing and advanced economies. Unlike Africa, Singapore’s exports are highly diversified, reflecting the complexity of its economy, which is driven by a host of medium- to high-tech exports including electronics, machinery, integrated circuits, chemicals, financial services, and state-of-the-art logistical systems. In light of the strengthening correlation between trade and investment in the age of global value chains, Singapore’s competitive qualities and business environment have turned it into a magnet for investment. In 2022, Singapore received over three times more FDI (US$141 billion) than Africa’s 54 countries combined (US$45 billion).
Africa’s marginalization in the global distribution of FDI, its shrinking share of global trade, and widening income gap with other regions of the world reflect the increasing importance of competitiveness, particularly as technological advances have evolved into the principal driver of growth and accelerator of vertical integration. Rampant digitalization and, increasingly, the adoption of artificial intelligence (AI) will only accelerate that trend.
AI raises further challenges in Africa, where chronic infrastructure deficits — whether physical or digital — and insufficient human capital have constrained productivity growth and structural transformation. For instance, in the energy sector, where blackouts and load shedding have become routine in both small and large economies, shortcomings in power are estimated to drain between 2%-4% of African countries’ GDP each year.
Limited access to reliable energy is undermining Africa’s productivity growth. Inadequate transportation systems and logistical deficiencies are hindering the efficient movement of goods. The chronic infrastructure deficit is deterring investment, especially the patient, long-term capital required to bolster manufacturing output, diversify Africa’s sources of growth, and broaden the fiscal space needed to generate more revenues to improve infrastructure and sustain stable economic growth.
A silver lining of this infrastructure deficit is that Africa can leapfrog directly into cleaner, greener infrastructure. This will, however, require the region to be mindful of the global commitment to net zero. Installing sustainable, climate-friendly infrastructure promises to be challenging, especially in the era of rapid technological change and evolving global economic context of increasing complexity and resilience and calls for a distinct set of skills — though the latter may prove difficult to source in the immediate short term, given Africa’s aforementioned shortcomings in terms of human capital.
To make the most of the AfCFTA and boost regional competitiveness, Africa must invest in the establishment of world-class academic institutions, especially in the critical areas of science and engineering, where it has been badly trailing other parts of the world. According to the UNESCO Science Report, Sub-Saharan Africa was home to less than 1% of the world’s researchers in 2018, significantly less than the European Union’s share of 23.5%, while China accounted for 21.1%, and the USA for 16.2%.
Leveraging science and technology to improve Africa’s stewardship of its natural resources — and to mitigate its carbon footprint during industrialization — is paramount to narrowing the region’s competitiveness gap and achieving the Sustainable Development Goals. In the short and medium term, the region could leverage partnerships such as tapping into the Global Federation of Competitiveness Councils (GFCC’s) extensive network of corporations, research universities, and laboratories to amplify the African labor force at scale. In this period of rapid technological change and increasing economic complexity, Africa’s education infrastructure will need to be geared toward training workers who are best positioned to oversee industries that produce greener and skill-intensive, high-value-added goods.
The most competitive countries are also those most able to attract, develop, and retain talent; they are also among the wealthiest in the world. Although correlation does not imply causation, the success of Singapore is again instructive. Besides boosting productivity, the city state’s combination of highly-skilled workers and state-of-the-art infrastructure has catalyzed FDI inflows, enabling it to competitively produce higher-value-added goods that, over time, have enhanced its integration into the global economy, alleviating the constraints imposed by its smaller market size.
The AfCFTA which creates a unified trade landscape across Africa will enable corporations to leverage economies of scale and increase market efficiency in one of the few regions of the world that is projected to enjoy long-term growth and not suffer decidedly from demographic headwinds and population ageing. Indeed, the trade integration reform is already engendering change in Africa and could reshape the global development narrative, especially if nourished by robust international collaboration. These partnerships should bring together African governments, international development finance institutions, private corporations, and the world of academia to address barriers such as limited access to affordable long-term capital, as well as human resources and infrastructure deficits.
By focusing on Africa’s competitiveness, the AfCFTA is helping to steer the world economy toward sustainable development and convergence. For its part, the GFCC can accelerate this trend by leveraging its global network to extend the benefits of green technology and competitiveness where they are most needed.
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Hippolyte Fofack, a former chief economist and director of research at the African Export-Import Bank, is a Parker fellow at the SDSN at Columbia University, a Research Associate at the Harvard University CAS, a fellow at the African Academy of Sciences, and a distinguished fellow at the Global Federation of Competitiveness Councils (GFCC).
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