Tag Archives: European Union

Brexit risks for Africa are overblown

By Rafiq Raji, PhD

For Africa and the United Kingdom, I choose to be optimistic.

Scare-mongering can stop now, the vote is over
I do not share the pessimism expressed by some on the potential negative impact of Brexit – term used to refer to the now almost certain exit of the United Kingdom from the European Union – on African countries. It is important to distinguish between short-term and long-term impacts. Credible risks – if they materialize – are likely short-term. Once market participants get over the shock, things should get back to normal. Market participants were surprised by Brexit. UK pollsters got it wrong. Again. Considering the margin by which the ‘leave’ side won, it is hard to believe that robust polling would have showed a ‘too close to call’ reading. Brexit-induced market volatility may pass sooner than people think, in my view. That is, after market participants get over the angst of being blind-sided. The South African Rand – the worst-hit African currency in the aftermath of the Brexit vote – is typically vulnerable when there are market jitters. And when negative domestic events – bizarrely intermittent – don’t cause some trouble, happenings in distant lands – a la Brexit – almost always come about to disrupt things. But if a long-term view is taken, it is not likely that increased sovereignty for the United Kingdom would be disadvantageous for African countries, the longstanding primary focus of UK foreign policy – or influence. There is ample time for both sides to calmly negotiate, once emotions become subdued and rationality takes over.

Brexit is an opportunity to rebalance the UK economy
Former Rolls Royce – a British carmaker – chief executive, John Rose, wrote once of the unbalanced ‘post-industrial’ UK economy for The Economist. In the article (“Made in Britain”), he recalls how an eminent British industrialist at a conference he was attending was introduced to a German audience as follows: “Our speaker is now going to explain how you run an economy based on real estate.” Sir John Rose made a case then for more British high value-added manufacturing. Brexit is an opportunity for such issues to get the type of attention they deserve. Also, even as Brexit negotiations could potentially get nasty, London’s place as a global financial centre in continental Europe would be hard to replace in a hurry. Still, some global banks have started to make contingency plans, reportedly transferring some jobs to Dublin, Paris, and Frankfurt. They are probably being hasty. It is still possible that the UK would be allowed some form of nuanced access to the single EU market for some services, probably just enough for financial institutions to be able to continue doing their EU-related business from London. So, upcoming Brexit negotiations may still tilt in banks’ favour. The view that a hard EU stance would be a crucial signaling tactic to dissuade other potential ‘Brexiters’ in the EU is short-sighted. I think the EU would be pragmatic.

Domestic factors matter more for African giants
It is the actions of authorities in Nigeria and South Africa – Africa’s largest economies – that matter more for investors. Structural imbalances in both economies have nothing to do with Brexit. And even portfolio inflows into these countries – expected by some to slow due to volatility and uncertainty in global markets owing to Brexit – would depend on the actions of their monetary authorities. Both countries clearly need to remain on a policy tightening path. And in the Nigerian case, if authorities follow through on ongoing structural reforms, the investment case for that country is hard to refute. Morever, capital seeking African assets are now more diversified. Long-term investment plays for asset classes like infrastructure are likely to continue unabated, in my view. The African Development Bank, Africa Finance Corporation and other African infrastucture or development-focused financial institutions are not going to cut back plans just because the UK decided it wanted more sovereignty over its own affairs. Furthermore, fears about a potential reduction in African diaspora remittances may be misplaced. Actually, I think Africans – who now see an increasingly insular West – may begin to build closer ties with their home countries.

Recessions don’t last forever
UK recession fears are the main argument behind negative African Brexit impact fears. Pray tell, do recessions last forever? The key question is whether Brexit would have a long-term negative impact on African economies. It is hardly robust to base an assessment of this on a potential UK recession; which would likely pass – if it happens – within the two years or so that Brexit negotiations and modalities are expected to be completed. Fears that Britons would buy less Kenyan flowers – expressed no less by the Kenya Flower Council – seem defeatist to me. Say that happens during a UK recession that everyone seems to think would occur this year, what about afterwards? I think things would either go back to normal or improve. Morever, there are other markets that could be explored.

British outwardness was never about the EU
There is a need to distinguish between the increasing insularity of some Britons – mostly the white, less educated and older ones, borne out of fears about immigration, and the likely rational decision-making of UK authorities. Whoever succeeds David Cameron as prime minister is not likely to jeopardize the advantages that the UK currently enjoys in global trade and finance. Now free from its EU obligations, it would likely ramp up its foreign policy reach through The Commonwealth – a multinational association of fifty-three member states formally under British colonization, which it controls. A likely renewed British Commonwealth focus would be an additional positive for African countries’ trade. Thus, I am sceptical of the view that the UK would need to renegotiate each and every trade deal it agreed to under the aegis of the EU, especially those with African countries. Brexiters are not dumb. A simple conversion would do.

Also published in my BusinessDay newspaper back-page column. See link viz. http://businessdayonline.com/2016/06/brexit-risks-for-africa-are-overblown/

Africa should renegotiate EPAs for manufactures’ trade parity (1)

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 09 Feb 2016. See link viz. http://businessdayonline.com/2016/02/africa-should-renegotiate-epas-for-manufactures-trade-parity-1/

African countries should only allow duty-free manufactured goods’ imports for the same amount of manufactured goods that they export. Customs duties should apply to trade in excess of this threshold. Reciprocity by Africa’s trading partners would be just as well. Ultimately, this would incentivize local production as Africa’s more industrialized trading partners realize the exports market for their manufactured goods would be dependent on the destined African country’s industrial progress. In tandem, African authorities would also need to ensure that local alternatives are cheaper and readily available. In my view, this is the simple but necessary change that African, Caribbean and Pacific (ACP) countries must insist be made to the Economic Partnership Agreements (EPAs) between them and the European Union (EU). My focus would be on the EPA between the EU and the West African regional bloc. Nigeria is yet to sign the most recently revised EPA. So, it still has a chance to secure concessions from the EU. In his speech to the EU parliament on 3 February 2016, Nigeria’s President Muhammadu Buhari highlighted concerns of local manufacturers about the agreement. These concerns were initially raised during the administration of President Goodluck Jonathan. On 23 June 2014, I attended an event in London hosted by the Financial Times and the Nigerian Customs Service themed “Business in Nigeria: Trade facilitation for Africa’s business hub.” When asked about the status of the EPA negotiations at the event, the then Nigerian trade and industry minister, Mr Olusegun Aganga, said Nigeria would not sign an EPA that potentially harms its industrial development. More than two weeks after, Heads of State of member countries of the Economic Community of West African States (ECOWAS) endorsed the revised EPA that – in the words of the communiqué issued – “has taken due account of the technical concerns raised.” Although the language of the communiqué was somewhat vague, I assumed that perhaps ECOWAS had succeeded in securing concessions on the concerns of its member countries. Not until the Nigerian legislature brought the matter to fore in January 2016 did I realize Nigeria’s concerns had not been addressed. At this time, a committee of Nigeria’s lower house of parliament is reviewing the EPA and should present its findings before the end of February. There is tremendous pressure on Nigerian authorities to sign the EPA. They should not. Not yet.

The Cotonou Agreement reached in February 2000 is actually a marked improvement from the earlier Lome and Yaounde Conventions. The EPA in question is the third revision of the Cotonou Agreement. Earlier revisions were in 2005 and 2010. There is a consensus about the failure of these agreements to achieve their development objectives. The European Commission admitted as much, saying EPAs “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.” During the period of the four Lome Conventions – which subsisted between 1975 and 2000, exports to the EU from ACP countries actually declined. Between 1978-2002, ACP exports to the EU declined from 7 percent to 3 percent. There has not been much improvement since the Cotonou Agreement either, as trade in manufactures remains significantly tilted in favour of the EU. Not that this is entirely surprising. Fifteen years after the Cotonou Agreement, only 15.5 percent of total ACP exports to the EU were manufactured goods. In the same year, 69 percent of total EU exports to ACP countries were manufactures. The manufactures’ trade deficit is much more staggering for the ECOWAS region. In 2014, manufactures accounted for 3.3 percent of total exports to the EU by the ECOWAS region. Goods manufactured in the EU were almost 50% of its total exports to West Africa in the same year. The revised EPAs – that would subsist for at least another 5 years (2015-19) before they can be revised again – are supposedly aimed at reversing this trend. Still, reservations that these new EPAs would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. This is because the revised EPAs still have provisions that are potentially harmful to local industries in ACP countries. A major issue is the very short transitional period – five years in the West African case – before European goods would enjoy free movement in subject countries. It does not require a stroke of genius to know that these arrangements would be detrimental to Africa’s industrialization.

Why did Nigerian authorities wait till after the negotiations to raise their concerns about the revised EPA? Negotiations between the EU and the West African regional bloc were closed on 6 February 2014 and ECOWAS Heads of State endorsed it on 10 July 2014. I have always wondered about the recurring incidence of sub-optimal negotiation outcomes by African countries. At the Financial Times Africa Summit in October 2014, I put these concerns to Dr. Donald Kabureka – who was then the President of the African Development Bank (AfDB) and keynote speaker at the event – wondering if he thought for instance that Ghana’s petroleum fiscal regime was optimal. My question was more pointed. Did it make sense that Ghana was borrowing money abroad at about the same time that it was already producing crude oil? Ghana’s Jubilee oil field started production in late 2010. Unlike most crude oil producers who have Production Sharing Agreements (PSAs) with their partners, Ghana opted for the less lucrative Royalty Tax System (RTS) for its Jubilee oil field. Much more worrying is the fact that the Ghana National Petroleum Corporation has only 13.64 percent equity in the Jubilee oil field – the Nigerian National Petroleum Corporation has a 60 percent ownership in five of its six joint ventures with foreign oil companies. After much criticism, however, Ghanaian authorities sought better terms in subsequent contracts. A paper published in the Ghana Policy Journal in December 2010 – “An evaluation of Ghana’s petroleum fiscal regime” – authored by Joe Amoako-Tuffour and Joyce Owusu-Ayim, shows only 38-50 percent of crude oil revenue accrued to the Ghanaian government, calculated based on $65 per barrel of oil – the average brent crude oil price in 2011-14 was $108. When compared with Nigeria’s 64-70 percent, Angola’s 64 percent and Cameroon’s 74-78 percent, it is sub-optimal. Not surprisingly, Dr. Kabureka tactfully avoided taking on Ghana specifically but highlighted how through the African Legal Support Facility (ALSF), the AfDB assists African governments to secure optimal outcomes from negotiations with partners. I do not know if the ALSF was involved in the Ghanaian oil negotiations. However, trade negotiations do not seem to be a priority area for the ALSF, based on its literature. As most trade-related technical assistance (TRTA) is sponsored by developed countries whose interests it serve that such capacity remain limited in the subject countries, the ALSF should probably prioritize trade-related capacity building (TRCB) and TRTA as well. The concerns raised by the Nigerian government on the EPA – and some ACP countries hitherto – is evidence of limited negotiating capacity. Still, even when a government fails to negotiate properly, it should not sign a document if it later realizes its error. It would be most unfortunate if the Nigerian government signs the EPA in its current form.

Also published on my company’s website on 10 Feb 2016. See link viz. http://macroafricaintelligence.com/2016/02/10/thematic-africa-should-renegotiate-epas-for-manufactures-trade-parity-1/ 

Africa’s trade with the developed world: Reflecting on trade preference schemes (Part I)

By Rafiq Raji

SSA Exports to EU and US

Views on the developed world’s trade preference schemes with African countries are mixed. The European Union (EU) Economic Partnership Agreements (EPAs) have “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.”[1] Between 1978-2002, ACP exports to the EU actually declined from 7% to 3%.[2] Re-negotiated EPAs, which technically come into effect on October 1, 2014, are supposedly aimed at changing this. Reservations that they would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. Also, the United States’ trade preference scheme with African countries, the African Growth and Opportunity Act (AGOA IV), which expires in September 2015 (if it is not renewed by the US Congress), enters its final year on October 1, 2014 as well. The consensus view is that AGOA has been relatively successful. This is principally because of its more flexible Rules of Origin (ROO).

Duty-free access for Africa’s exports supposedly should make its goods cost competitive relative to say, Asian ones. Tariffs and duties that would have been paid by African exporters had there been no trade preferences also add to capital for incremental investment. With predictable demand for its exports consequently, these schemes are expected to help generate employment and contribute to growth. That has largely not been the case because some of the quality specifications in these agreements are beyond the technological reach of most African countries. Flexible ROO mitigate this by allowing subject countries to import intermediate inputs and yet still enjoy preferential market access. The re-negotiated EPAs address this hitherto rigid ROO requirement that has been argued to be responsible for the failure of the Yaounde and Lome Conventions (1975-2000) to engender increased ACP exports to the EU. For instance, the EU-West Africa EPA will allow subject countries “produce goods for exports to Europe using materials sourced from other countries without losing the benefit of the free access to the EU market.”[3] The devil would be in the fine details of these agreements.

My continuing skepticism about these agreements being in the long-term industrial development interests of African countries pushed me to ask for the views of Dr. Adam Elhiraika of the United Nations Economic Commission for Africa (UNECA) at the launch of UNECA’s 2014 Economic Report on Africa (“Dynamic Industrial Policy in Africa”) on 24 September 2014 at Chatham House in London. It was important to me to hear the views of a respected economist who was also African. He believes the EPAs should be re-negotiated for the same reason. A survey of the literature also points to strong views about the cost-benefit trade-offs of these agreements for Africa’s industrial development. Whether these new ones would finally help the continent grow its industrial base remains to be seen.

Trade preferences spur growth under the following conditions: (1) Easy import of complementary inputs (2) Availability of skills and infrastructure that meet global standards.[4] Africa falls short on both conditions for internal and external reasons. Logistical bottlenecks at its ports and foreign exchange policy constraints constitute major hindrances. Corruption and cronyism are also problems. Imports of complementary inputs need to be tariff- exempt for the final goods to remain cost-competitive. Tariff concessions have instead been used as tools of political patronage by most African countries. So, there is a governance problem that is wholly and entirely African. In regard of a skilled workforce, the continent remains bereft. The continent also continues to run a very large infrastructure deficit. There are other supply-side constraints as well. Some of them are: still relatively lower labour productivity, little or no scale economies, and shallow capital markets. The expected relocation of the more value-adding, employment-generating and growth-driving labour-intensive manufacturing from Asia to Africa has not been forthcoming precisely because of these constraints. This is in spite of a widening wage gap between the two continents. The economic argument is that gains that would be given up when an Asian manufacturer relocates to Africa still remain relatively higher. The reverse has to be the case to induce relocation.

[1] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[2] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[3] http://trade.ec.europa.eu/doclib/docs/2014/july/tradoc_152694.pdf

[4] Venables, T. Collier, P. 2007. “Rethinking Trade Preferences: How African can diversify its Exports” The World Economy 30 (2007): 1326-45

Africa is not yet ready for free trade #EUAfrica Summit

A lot has been written on why the EU’s open regionalism is really another scramble for Africa. It is curious that none of the stated objectives of the Cotonou Agreement mentions explicitly how the EU would provide assistance to help resolve the supply-side constraints that Africa faces. Especially as it helped former Soviet countries in this regard. These constraints (rules of origin, sanitory and phyto-sanitary standards, poor transport, lack of access to telecommunication infrastructure, low labour productivity, lack of economies of scale, absence of functioning capital markets) make it premature for full trade liberalization in Africa. African countries were and still remain largely unable to benefit from free trade and would probably remain so for a while. The EU and Africa are unequal partners. That is a fact. However, what is heartbreaking is how much African leaders underestimate the amount of leverage they have (and in fact, some are complicit in the distorted arrangement). The EU, albeit a superior negotiating party, needs Africa. It needs Africa’s markets for its goods and services. But it seems some African leaders just find EU aid (and market access for some) so irresistible. Of course, there have been suggestions in the literature that some of them were essentially “persuaded” to accede to EPAs. The literature is awash with examples of the devastating consequences of EU and US dumping on numerous African economies. So, there is no point stressing that angle of the argument.

Although the Cotonou Agreement is a marked improvement from the Lome and Yaounde Conventions {exports to the EU from African, Carribean and Pacific Countries (ACP) actually declined from c. 7% to c. 3% during the period (1978-2002) of the Lome Conventions (1975-2000)}, it is a sub-optimal deal for Africa. The stated objectives (poverty reduction, institutionalisation of democratic principles, respect for the rule of law and human rights, good governance, peace building, conflict prevention and regional integration) are all very well. They, however, pale in comparison to what Africa really needs: Industrialization. African countries need to move up the value chain of industries where their resources are major inputs. Job creation is what would accelerate poverty reduction in Africa. By one’s reckoning, labour-intensive manufacturing offers the best chance of achieving this; at least for now. Not cash transfers or dividend payments like some very admirable and well-intentioned economists at the World Bank/IMF are considering.

Historically, countries that have succeeded in achieving industrialization have tended not to abide by the stated objectives of the Cotonou Agreement; at least during the early stages of their evolution. These countries had commonalities of either war, strong single-party or monarchical/military rulership during the early stages of their industrial evolution. There are a few exceptions, of course. Also, it turns out the African countries that have made some (albeit very little) effort at pushing for more value addition of their resources before exports turn out to be longstanding rulers. The irony is that although they likely made these policy moves for political gain, they were able to do it (in spite of the potential backlash from developed nations) largely because they were African big men.

Truth be said, it is not the responsibility of the EU, US or other developed countries to watch out for the interests of African countries. Leaders of African countries must be butts of jokes in Paris, Brussels, London, and Washington when they visit these capitals with all the pomp and ceremony walking with puffed up pride just to show how independent they really are. Well, if you are really independent, don’t ask me not to negotiate to maximize my interests. I mean, it’s silly. It must be said, however, that there are lots of people in these capitals who are genuinely eager and desirous to see Africa develop. They wear their frustrations on the grey hair that some have developed through decades of hard work fighting and campaigning on African issues. Progress has been slow.

If the EU really wants to help Africa, it should make tangible commitments towards helping these countries resolve the supply constraints that hold them back from enjoying the benefits of free trade. That is an irrational request, however. It is foolhardy to expect the EU to diminish the advantage it has. Trade with Africa may not be attractive otherwise. The task thus falls on African leaders. The beginning of the solution lies not with boycotts and posturing; but to protect selected industries and insist on minimum value addition to minerals and other natural resources before exports. If a country has crude oil, it should insist that the MNOCs build refineries (Uganda’s policy in this regard is exemplary). If you produce copper; well there are many uses for copper. How about producing some of the finished goods in situ. The list is endless; iron-ore, coffee, diamonds, gold, cocoa, etc. But of course, these policies should be backed by resolving the logistics nightmare (and numerous other issues) on the continent.

Thus, as African and EU leaders start their two-day trade summit today in Brussels, let our big men and women bear at the back of their minds that it is not too late to re-negotiate. The solution does not require any complicated legalese. It is simple. Import liberalisation for African countries (as early as 2015) is premature. African countries should protect selected markets and ensure that trade and FDI revolves around value-addition. The postponement of the signing of EPAs by some African regional blocs (and the outright refusal of some African countries to accede to one) should be used as an opportunity to revisit some of the terms in the Cotonou Agreement. Every and any Agreement, no matter how strong or binding, can be renegotiated. African countries should see this Summit as an opportunity to start the process of reviewing the EPAs and in fact every facet of the EU-Africa economic arrangement. If none of the EPAs are signed and no African (or ACP) country makes any unilateral arrangement, the EU would have no choice but to re-negotiate. African (or ACP) leaders have more leverage than they realise. They should use it!