Trade as an engine for inclusive growth in Africa

Talkmore Chidede

IN economic terms, as defined by the Organisation for Economic Co-operation and Development (OECD), inclusive growth means growth that creates opportunity for all segments of populations and distributes the dividends of increased prosperity, in non-and monetary terms, fairly across society. The issue of “inclusive growth” has become economically and politically important in Africa’s continental, regional and national discussions, just as in recent global meetings of the International Monetary Fund (IMF), OECD, the World Bank, the World Trade Organisation (WTO) and the World Economic Forum (WEF), among others.

Key to this is the increasing focus on achieving inclusive growth – which relates to inter alia, poverty alleviation, employment generation, youth and women employment and development as well as even distribution of wealth.

The African Union has consistently accentuated the need to achieve inclusive growth in the continent and, accordingly, included it in policy instruments such as the Agenda 2063 and the Declaration and Plan of Action on Employment, Poverty Eradication and Inclusive Development of 2014, among others.

However, the topic of achieving inclusive growth remains more of an aspiration or discussion than an action agenda in many occasions. The African Economic Outlook (2017) shows that unemployment, income and gender inequality, poor industrial development and poverty continue to remain high in Africa.

Trade has been identified as a key tool for inclusive growth by global leaders. Nonetheless, there are different views on the role of trade in driving inclusive growth. For instance, opponents of free trade doubt trade as an engine for inclusive growth and, in fact, view it as a threat to domestic jobs and firm productive capacity, and income growth.

These sentiments have caused some countries (e.g. Kenya, Nigeria, South Africa, the United States and Zimbabwe) to implement inward-looking or protectionist policies with a view to protecting domestic jobs and firms.

On the other hand, champions of free trade, argue that trade is a key driver to achieve economic growth, prosperity and sustainable development for all – inclusive growth.

A joint publication by the WTO, IMF and the World Bank (2017) provides empirical evidence of how trade has created jobs, growth and development in both developing and developed countries, at the same time leaving out many individuals and communities.

The publication notes some downside effects brought by trade such as dislocation of firms and workers.

Be that as it may, the downside effects of trade should not be overstated to undermine the benefits of trade. According to the WTO, with appropriate supporting policies, the downside effects of trade can be offset, thus lifting those left behind and enabling them to reap fully the benefits of trade. Trade reform and facilitation policies, global and regional integration – plus rules-based trade governance are some of the things that are needed to ensure that trade benefits are inclusive.

It should also be emphasised that protectionist measures are not the solution to offset the human and economic downside effects of trade.

Rather, empirical studies demonstrate that, protectionist measures hurt those they are supposed to protect. For example, the OECD study shows that protectionism makes domestic firms less competitive in the export market and stunts economic growth.

Trade reform and facilitation policies

Trade policies that are pro-poor – to the extent they are consistent with the international trade rules – have the potential to enhance trade-led inclusive growth. Pro-poor trade policies entail policies not only concerned with poverty alleviation but also providing fairer and more access to benefits of economic openness, and preventing the poor (including SMEs and women and young entrepreneurs) from bearing the burden of trade liberalisation.

They also include policies that facilitate the adaptation and movement of workers (including women and youth) and SMEs towards sectors with growing demand and the incorporation of new technologies with the objective of promoting productivity and employment growth of a wide group of workers and firms.

Trade reforms should also focus on gender inclusion. For instance, trade reforms have been associated with reduced gender and racial wage gap in the US and Germany, and has also increased gender balance (particularly women involvement) in the trade activities in Lesotho apparel and textile industry.

Trade facilitation measures are key to achieve inclusive growth. The measures simplify trade procedures, reduce trade costs, and enhance access and efficiency of trade-related services (e.g. financial services and logistics).

The simplification of procedures benefits SMEs through creating a level playing field for them and encouraging their participation in regional and global trade. Other trade facilitation measures such as access to finance and trade-related information benefit SMEs and may encourage or enable women and the youth to actively participate in trade.

SMEs are very important because they account for most jobs (even in Africa), and if they boost export potential, competitiveness and connect to value chains, they generally register particularly high productivity, wage, and employment gains.

Reduction in trade costs facilitates the expansion of regional and global value chains, which are strong drivers of productivity and manufacturing exports. They can also support economic diversification depending on the supply-response, skills and capabilities of the private sector.

However, trade in Africa is met with high transaction, transport, customs and administrative costs – plus delays at ports, border posts and various roadblocks as well as inefficient payment systems. At this juncture, Africa’s trade facilitation performance could be enhanced quickly by implementing the WTO Trade Facilitation Agreement (albeit with challenges,) which is expected to greatly reduce trade costs and facilitate trade. To date only a few African countries have ratified the Agreement.

Moving in to manufacturing value chains is also critical for inclusive growth. Countries (such as China, Malaysia, Bangladesh, Vietnam and Eastern Europe) with greater involvement in manufacturing value chains have realised a rapid increase in manufacturing output and employment.

However, manufacturing employment may be difficult to achieve in countries with unskilled or less skilled workers and some job will be lost to technology change, so skills education and labour management will be important. In the EU, the US and Mexico, for example, smooth adjustment and inclusive growth was promoted via trade adjustment programmes. Capacity building is also key to ensure that SMEs bolster their competitiveness
International and regional integration

Along with domestic policies, international and regional integration is also vital in achieving inclusive growth. Thus, global and regional integration can promote inclusive growth when workers and SMEs are able to adjust to enter into growing economic activities and adopt technologies availed through regional and international trade. In addition, active trade (labour-market) policies are also key to easing workers’ mobility across firms, industries and regions – for instance, that ease movement of professionals. Furthermore, coherence between domestic, regional and international trade policies is also important for ensuring that the benefits of trade are more evenly distributed.

Regional integration can boost intra-regional trade, generate higher scale of production, and develop vibrant value chains relevant to domestic firms (including SMEs). It would also provide Africa the scale of economies that allow it benefit fully from the growing global value chains.

Regional integration can be significant for small actors such as SMEs, women and young entrepreneurs who are not able to operate fully at global level.

Africa’s quest for regional integration is becoming salient with the anticipated Tripartite Free Trade Area (TFTA) and the Continental Free Trade Area (CFTA). In the face of these regional integration arrangements, it is therefore important for African leaders to consider ways in which these arrangements can deliver the frameworks needed for inclusive growth in Africa.

-Talkmore Chidede is a researcher at the Trade Law centre, is a capacity-building organisation developing trade-related capacity in East and Southern Africa.