30 December 2016

Africa will not rise until it trades with itself

By Daniel Knowles

Over the Christmas week, CapX is republishing its favourite pieces from the past year. You can find the full list here

For an idea of how wealthy Africans want to think of their countries, flick through the adverts in one of the glossy pan-African magazines given away in the continent’s airport lounges. Banks are promoted with pictures of young glamorous Africans in smart suits strolling through glossy malls. New apartment blocks and golf courses grace the other pages. Africa, in these magazines, is rising.

If, however, you want to get a real idea of how Africa’s economies are faring, you should go where few of the wealthy people in the lounges do: the land borders. Earlier this year, I spent a day at the border of Burkina Faso and Ivory Coast. Whereas Ivory Coast’s commercial capital, Abidjan, buzzes with new investment, at the country’s border, it is hardly noticeable. The start of no-man’s land is marked by a piece of string stretched across the road, and a small office manned by a pair of sleepy soldiers. It is not a busy place; when I was there, a few dozen lorries at most were waiting to cross.

When African countries feature in Western politics, it’s invariably a debate over aid versus trade. In September, Barack Obama hosted a forum in New York designed to promote trade between America and Africa. “From Senegal to South Africa, Africans insist they do not just want aid, they want trade,” declared the outgoing President. In October, Britain’s new DFID secretary, Priti Patel, hinted at using Britain’s hefty aid budget to promote post-Brexit trade deals. The idea is that aid creates dependency, whereas trade creates lasting gains. And it is correct.

But what should matter almost as much is what sort of trade. Africa’s problem isn’t just that it trades too little with the world. It is that it trades too little with itself. Africa’s economic geography is still much as it was in the colonial era: wealth is concentrated in port cities such as Lagos or Dar es Salaam. The raw materials gathered inland cluster in these places, before being sent outwards, towards Europe, or, increasingly, Asia. The rural hinterland – and landlocked countries – remains desperately poor.

According to UN figures, only a tenth of African countries’ exports go to the rest of the continent. The equivalent figure for the European Union is 60 per cent. In 2014, Nigeria, the continent’s second-largest economy, imported more from the Netherlands than it did from the rest of Africa. It exported more to Sweden than it did to its neighbour, Cameroon.

The European Single Market provides unified rules which means that firms need only adhere to one set of rules to sell to 500 million wealthy customers. In North America, Nafta creates a similar market for American, Mexican and Canadian firms. Africa however is not one big market. It is 54 tiny ones, divided by border controls, poor infrastructure and worse, different systems of corruption and patronage. For many African countries, selling to Europe or America is easier than selling to their neighbours.

Unfortunately, this sort of trade tends to be in natural resources. Nigeria, for example, mostly exports one thing, and one thing only: oil. The jobs that are created mostly go to expats, while the foreign exchange earned flows heavily to the super-rich, who use it to import luxuries. In the 1970s, before the oil flowed, Nigeria had a growing textiles industry and was a notable agricultural exporter. Now it imports both clothes and food. And bubbles are followed by bust. With the oil price currently at half of what it was in 2014, in Nigeria, dollars cannot be had for all the ready Naira in the world.

And Nigeria is hardly alone. A whole swathe of oil and metal producers in West and central Africa–from huge Angola to tiny Gabon–are in decline. This year, according to the World Bank, thanks to the commodity bust, GDP growth in sub-Saharan Africa has fallen to just 1.6 per cent. That is the lowest rate since the mid-1990s, when much of Africa was mired in war. It is also lower than population growth, which means Africans are now on average getting poorer again.

The parts of the continent that are doing better are those which don’t sell commodities. Kenya, despite rampant corruption, is still growing quickly, thanks in part to the boost from lower oil import costs. So are Tanzania and Rwanda (although both depend heavily on aid). In those countries, on paper much poorer than their oil-cursed counterparts, people are visibly getting richer: buying solar panels, motorbikes and smartphones. According to the CIA World Factbook, though Kenya’s GDP per capita is half of Nigeria’s, its poverty rate is 25 percentage points lower.

It is surely no coincidence that these are also the most integrated economies. Kenya’s biggest exports are cut flowers, coffee and tea, which still go mostly to Europe. But the fastest growth has been in in exports to the rest of Africa, which now make up 45 per cent of the total. This is partly thanks to the work of the East African Community, which since 2010 has moved towards a genuine single market within the borders of its members But Western aid agencies too have helped, by funding groups such as Trademark East Africa, which identifies trade bottlenecks and pushes to end them.

The trouble is that outside of east Africa, a lot of African finance ministers are just hoping for commodity prices to rise again. Nigeria’s government has tried everything over the past year to avoid admitting that oil isn’t worth what it was: import bans; currency controls; bizarre banking rules. What it hasn’t done is anything that would boost its long-term prospects of trading. If the oil prices goes up again, its economy will puff up again, just like a souffle, and the imports will begin flowing in again, as it will in a dozen other countries. But if Africa wants real growth, its economies need to start working together more.

Daniel Knowles is Africa Correspondent for The Economist. This piece was originally published in November 2016.