• Thursday, April 18, 2024
businessday logo


Five ways to boost intra-African trade for growth, prosperity – McKinsey

Five ways to boost intra-African trade for growth, prosperity – McKinsey

Improving manufacturing competitiveness for both local markets and exports, as well as boosting agricultural productivity, are critical tactics to stimulate intra-African trade for future economic advancement, McKinsey & Company says in its latest report.

Other tactics include shifting from mere growth to prioritising productivity, nurturing African multinationals, and enhancing urban infrastructure in major African cities.

In the report titled ‘Reimagining Economic Growth in Africa: Transforming Diversity into Opportunity,’ the global management consulting firm said sluggish intra-African trade was stated as one of the obstacles hindering the continent’s economic potential.

“Africa trades much more with economies beyond the continent than within,” the report said.

It noted that Africa’s trade performance falls short of its potential, primarily due to the concentration of commodities and limited diversification.

The authors reported that only 10 percent of its imports and 17 percent of its exports are intraregional. In comparison, within the Association of Southeast Asian Nations, 21 percent of imports and 22 percent of exports occur intraregional. Similarly, in Latin America, intraregional trade represents 19 percent of imports and 20 percent of exports.

For instance, Nigeria’s trade surplus shrank by 99.7 percent last year as imports surged to the highest in at least 16 years. It recorded a trade deficit of N1.4 trillion in the fourth quarter for the first time since Q1 last year.

Over the past decade, Africa’s economic growth has decelerated, although half of its population resides in nations that have experienced prosperity. A report by the Trade Law Centre (Tralac) showed that over the past 10 years, intra-Africa trade has grown from $98 billion in 2013 to $ 102 billion in 2022.

Despite this performance, intra-Africa trade as a share of Africa’s global trade has remained stagnant if not exhibiting a downward trend. After reaching a peak of 21 percent between 2015 and 2016, current estimates show intra-Africa trade at 15 percent of Africa’s global trade.

McKinsey noted that the other half of the African population lives in countries that grew more slowly over the past decade, including the continent’s three largest economies—Egypt, Nigeria, and South Africa—as well as ten of the smallest countries on the continent.

“Africa entered the 21st century with a promising burst of economic growth that persisted for a decade before returning to the slow pace it experienced in the 1990s,” it said.

However, African nations, including Nigeria, can adopt several strategies to boost trade.

Here are more details on the ways to boost intra-African

Pivot from a focus on growth for growth’s sake to a focus on productivity

The continent has shifted from agriculture and extraction to services, yet its productivity lags behind that of global peers across all sectors. Restoring the levels of productivity growth Africa experienced from 2000 to 2010 would be a good first step, but the continent can go even further, given its talent base.

“Africa also has many ways of reducing its reliance on traditional extraction to grow its economy and establish more transparent governance of trade in commodities that are newly in demand as a result of the world’s transition toward net zero,” the authors of the McKinsey report said.

It added that if African countries were to match the productivity growth that Indian agriculture experienced from 1980 to 1990, they would collectively add $200 billion of value to their economies by 2030 or $40 billion more than expected at current productivity levels.

Reimagine manufacturing for domestic consumption and for export in a competitive way

Producing goods for domestic consumption is critical, with countries and companies targeting promising areas for growth where local and regional demand and the need for self-sufficiency justify investment, such as agro-processing, vaccine manufacturing, and refining of key minerals.

However, for Africa’s industrial sector to thrive and see sustainable growth, it must improve its productivity and become globally competitive. Africa also could focus on growing its share of global manufacturing exports, building on successes like automotive exports from Morocco and South Africa.

Spur agricultural transition by improving farming productivity

Agriculture provides almost half of Africa’s employment and is crucial to the continent’s food security, so improving the sector’s productivity is important to lives and livelihoods.

It added that unlocking agricultural potential emerges as a linchpin for economic resurgence, potentially adding substantial value to African economies.

Leveraging productivity growth akin to India’s agricultural sector could yield significant economic dividends, offering a blueprint for boosting food production and enhancing global agricultural output.

Increase and improve urban infrastructure in Africa’s primary and second cities

The future of Africa lies in its vibrant cities. Although 57 percent of the population lived in rural areas in 2019, the continent is urbanising faster than any other place on the planet.

Since 2000, Africa’s urban population has grown by 3.7 percent, outpacing overall population growth on the continent of 2.5 percent

By 2040, Africa will be home to 12 cities of more than ten million people each as ten more cities join Cairo and Lagos.

McKinsey noted that Africa’s largest cities can close significant gaps in urban infrastructure—transportation, power, water, and sanitation—through more coherent land use planning that incorporates climate adaptation measures and by embracing the use of digital technologies.

“Urbanisation is generally a positive economic force and a crucial driver of economic growth, especially in low-income countries. Cities contribute significantly to the overall country’s GDP and are valuable sites of productive employment opportunities,” the report said.

Grow and cultivate African business champions

Thriving corporations are key to achieving strong economic growth across the continent. Large companies fuel supply chains, attract and develop talent, and otherwise contribute to the economies in which they operate in ways that can further enhance economic growth and productivity.

At least 345 companies in Africa have annual revenues of $1 billion or more, collectively they produce revenues of more than $1 trillion. About 230 of these 345 companies are homegrown, meaning they were started in an African country, often by a local entrepreneur.

The number of companies in the largest of these economies Algeria, Angola, Egypt, and Nigeria—is in line with similarly sized economies around the world such as Brazil, China, and India, but still far lower than South Africa’s 147 large companies.

For example, Egypt’s GDP is four-fifths the size of South Africa’s, but the country is home to only 33 large companies, or one-fifth the number of companies in South Africa. Nigeria’s GDP is larger than South Africa’s, but only 23 large companies are headquartered there—just 16 percent of the number of large companies in South Africa.

“Large private companies have an important role to play in rekindling economic progress in Africa because they contribute disproportionately to growth, innovation, employment, exports, productivity, and taxes,” the report said.