UPSC MAINS 2019 : AFCFTA: A shot at economic logic

AFCFTA A shot at economic logic

Topic : AFCFTA: A shot at economic logic

Topic in Syllabus: General Studies Paper 2: International Affairs

 

Context:

AFCFTA A shot at economic logic

The 12th Extra-Ordinary Summit of the African Union (AU) which concluded on July 8 at Niamey, the capital of the Niger Republic, saw 54 of 55 of its member states signing the African Continental Free Trade Agreement (AFCFTA) for goods and services.

 

Background:

What is Free Trade Agreement?

Trade agreements are when two or more nations agree on the terms of trade between them. They determine the tariffs and duties that countries impose on imports and exports. All trade agreements affect international trade. Examples of Free Trade Agreements (FTAs) in the world are: the European Union (EU), the North American Free Trade Agreement (NAFTA).

 

Importance of AfCFTA  for African countries.

  • If taken to its logical conclusion, this audacious project would eventually create an African Common Market of 1.2 billion people and a GDP of over $3.4 billion — the metrics are comparable to India’s.
  • The AFCFTA would be largest FTA in world and with the huge market base for global trade, it will create a huge impact.

 

Challenges to the  Success of AFCFTA

There are three main reasons to be sceptical about the viability of the AFCFTA.

  • Ineffective in dealing with the continent’s myriad 
    • First, the African Union (founded as the Organisation of African Unity in 1963) has been largely ineffective in dealing with the continent’s myriad problems such as decolonisation, underdevelopment, Islamic terrorism and the Arab Spring.
    • The AU’s grand plans, including the Muammar Qadhafi-funded Africa Unity project, have been spectacular flops.
    • It is, therefore, natural to take the AFCFTA, the AU’s most ambitious project so far, with a ladleful of salt.
  • Weaker economy:
    • The national economies in Africa are generally weak with a low manufacturing base.
    • They also lack competitiveness and mutual complementarity.
    • As a matter of fact, only a sixth of Africa’s current total trade is within the continent
  • Protectionism:
    • AFCFTA seems to be countercyclical to the ongoing global protectionist trends as seen in the U.S.-China trade conflict, Brexit and the stalemates at the World Trade Organisation and the United Nations Conference on Trade and Development.

 

 Can AFCFTA defy the contrarian global tendencies?

World trade is likely to grow only by 2.6% in 2019, a quarter of last year’s figure. Commodity prices are stagnant and globalisation is often being reversed. With Africa accounting for only 3% of global trade, still, there are reasons to be cautiously optimistic.

  • Around $86bn loans were issued by China between 2000 and 2014 to finance over 3,000 infrastructure projects in Africa. This has increased Africa’s dependence on China. Greater collective self-reliance through African economic integration will reduce the dependence.
  • In December 2018, AU organized first Intra-Africa Trade Fair in Cairo. It was successful as $32 billion of business deals were signed. A stronger political will can give boost to the AFCFTA.
  • Regional economic blocks –Further, the AFCFTA can build upon the experience of the continent’s five regional economic blocks.
  • Extensive road map– While the AU Commission is not famous for efficient planning, it has prepared an extensive road map towards the AFCFTA with preliminary work on steps such as incremental tariff reduction, elimination of non-tariff barriers, supply chains and dispute settlement.
  • Moreover, vigorous “informal” trade across porous national borders is already a fact of African life.
  • A surge in consumer base– Looking into the future, a recent UN projection showed that nearly half the world’s population growth between now and 2050 would come from sub-Saharan Africa, the population of which would double to nearly two billion. This surge in consumer base would make the proposed AfCFTA even more important.

 

How it is useful for India.

  • Africa is already an important economic partner for India with total annual merchandise trade estimated at $70 billion or nearly a tenth of our global trade.
  • India is Africa’s third largest trading partner.
  • While India’s global exports have been largely stagnant, those to Africa have surged. For instance, exports to Nigeria in 2018-19 grew by over 33% over the previous year.
  • Africa still has unfulfilled demand for Indian commodities, especially foodstuff, finished products (automobiles, pharmaceuticals, consumer goods) and services such as IT/IT-Enabled Service, health care and education, skilling, expertise in management and banking, financial services and insurance.
  • India needs to anticipate the AfCFTA’s likely impact on its interests and try to influence and leverage it to enhance India-African economic ties.
  • UNSC reforms: Recently African nations supported India in gaining non-permanent membership at UNSC. Maintaining cordial relations with African Union can help India in future for the UNSC reforms.
  • If handled in a proactive manner, the AfCFTA is likely to open new opportunities for Indian stakeholders in fast-moving consumer goods manufacturing, connectivity projects and the creation of a financial backbone.
  • It is important to note that India donated $15 million to Niger to fund the Niamey AU Summit. As the next step, New Delhi can help the AU Commission prepare the requisite architecture, such as common external tariffs, competition policy, intellectual property rights, and natural persons’ movement.
  • It can also identify various African transnational corporations which are destined to play a greater role in a future continental common market and engage with them strategically.
  • Line of credit: The Government of India has been providing LOC to African countries since 1964 under Indian Technical and Economic Cooperation (ITEC) and Special Commonwealth Assistance for Africa Programme (SCAAP).  It is important to note that the extension of LOC by India to African countries is different from that of other international financial organisations such as IMF and World Bank. Indian LOC on other hand is demand driven. The projects are identified primarily by African countries. Where the scope for fund theft and misusing are less chance. Over the years, there has been a sharp increase in LOCs committed to African countries. In 2004, LOCs to Africa were valued at $304 million while in 2011 LOCs to Africa were valued at $4.3 billion. In 2012, 17 LOCs were made operational and 12 of these LOCs were directed to African countries. Following the establishment of International Solar Alliance (ISA) on 11 March 2018, the nature of Indian LOCs to Africa has undergone a visible shift. India’s offer of extending LOCs worth $1 billion to ensure the implementation of 23 solar energy projects spanning across 13 African countries is in line with the MEA’s decision to earmark 15-20% out of the total $10 billion LOC, extended under IAFS-III, for undertaking solar energy projects in Africa. This focus on investing on renewable energy and sustainable development projects is a shift from its earlier focus on traditional areas of cooperation between India and Africa such as IT, science and technology, agriculture, pharmaceuticals, etc.
  • Indian Diaspora – The cross-linkages of a three million strong Indian diaspora spread across Africa can also be very valuable.

 

Conclusion:

Africa is a continent of the future and India’s long term prospects are closely tied to the success of its Africa strategy. it is more important to leverage India’s own unique strengths, such as its contribution to capacity building, promotion of entrepreneurship, small and medium scale industry and digital connectivity. AFCFTA will provide new opportunities, India must work in the direction to strengthen economic integration of Africa.

 

Sample Question

Discuss the Scope of African Continental Free Trade Agreement (AfCFTA) for India

 


 

AFCFTA_ A shot at economic logic infograph