Is 2012 Africa’s Year of the Dragon?

At the 2012 World Economic Forum’s Annual Meeting in Davos last week, a record 2,600 global leaders discussed a frenetic mix of economic and social issues facing the global community. A number of panels (some of which were overlooked with all the talk of the unfolding Eurocrisis) focused on the important transition Africa is making from an underdeveloped continent to one characterized by sustained growth — backed by strong trade and investment flows. 

Leaders discussed the need for greater market integration to increase intra-African trade and better cooperation on infrastructure to facilitate investment and trade. Alpha Condé, President of Guinea, called for the establishment of Pan-African ministries to drive greater integration and coordination on the continent. “At the next African union meeting, we must consider establishing three of four ministers for all of Africa,” he said. “These new posts should at least cover energy, infrastructure, and trade in Africa.”

The Chinese New Year of the dragon has also just begun.  People born in the year of the dragon are said to be innovative, enterprising, and respected. Africa in 2012 holds promise to further unlock these same qualities and boost growth and development in the year ahead.  Let’s look at what can make that happen.

Economic Diversification

In a previous blog post, I discussed the potential for African countries to fill the void that will be left behind as the BRICS (Brazil, Russia, India, China and South Africa) continue to work their way up the manufacturing value chain. I outlined the links between trade and manufacturing: trade can create economies of scale, allows firms to take advantage of new technologies, promotes innovation, and attracts foreign investment. Developing a manufacturing base will go a long way toward insulating economies from the damaging effects of commodity price volatility. At the same time, growing disposable income in the BRICS will create demand for African goods and help offset lower demand from Europe and the U.S.

Christine Lagarde, the IMF’s Managing Director, on a two-stage tour through Africa in December 2011, pointed out in an address to the National Assembly in Niger, “Improving the business environment will help attract more job-creating private investment in a wider range of sectors.”

But with limited resources, what policies and interventions generate the biggest bang-for-the-buck? Njinkeu, Wilson, and Fosso, 2008 found that improvements in port and services infrastructure in Africa promises relatively more expansion in intra-African trade than other measures. Building on recent work (some of which I summarized in a blog post in September, including Ferro, Portugal, Wilson, 2011 and Ferro and Wilson, 2011), the World Bank will continue to seek to answer this key question by evaluating and quantifying the effect of various targeted interventions aimed at reducing trade costs and improving the business environment.

Boosting and sustaining South-South Trade: The Role of Standards

Leaders at Davos consistently expressed the need for more intra-African trade to compensate for weakened global demand for African exports and increased volatility in commodity markets. In fact, over the period 2005-10, non-traditional trade partners—primarily the BRICS—accounted for fully two thirds of the region’s export growth.

This geographic diversification is a good thing, yet all development partners –working with Africa – cannot slip into complacency. A growing body of literature shows that, as countries climb the rungs of the income ladder, they adjust their tastes accordingly and increasingly demand higher quality goods.  As the BRICS get wealthier, standards could become more restrictive. This could act as a drag on South-South trade growth.  Similarly, new research at the Bank reveals that landlocked countries, many of them in Sub-Saharan Africa, restrict trade in services such as telecommunications and transport more than other countries. What other barriers are there that need to be considered? 

The Trade Team in the Research Group is conducting work through the Bank Netherlands Partnership Program on a research agenda aimed at evaluating the role of product standards—such as standards for food and agricultural products—in influencing trade flows and economic development – especially focused on the low income countries. This project complements our recent research focus on assessing impact for trade-related assistance measures in the Research Group. 

Regional Integration

Finally, regional integration is another avenue that could help Sub-Saharan African cope with slowing demand from advanced economies. There are large potential gains to be reaped from further intra-African trade (an issue which is discussed in some detail in the Bank’s Trade Strategy). A World Bank report released this week that suggests that African countries are losing out on billions of dollars in potential trade earnings every year because of high trade barriers with neighboring countries. The report finds that it is easier for Africa to trade with the rest of the world than with itself. On the demand side, the McKinsey Global Institute notes that Africa’s labor force is expanding more rapidly than anywhere in the world. McKinsey expects the number of households with discretionary income to rise by 50 percent over the next 10 years, culminating in 128 million middle class households by 2030.

With this in mind, the Tripartite of the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC) holds promise for change.  This initiative aims to lower cross border trade costs by coordinating and harmonizing trade and infrastructure programs. Portugal-Perez and Wilson, 2008 demonstrates how lowering trade costs have greater effects on trade flows than a substantive cut in tariff barriers. In 2012, the Bank hopes to bring its expertise to bear to work with our partners in the region to evaluate the impact of these measures. 

Conclusion

Policymakers should take stock of the enthusiasm at Davos for sustained economic growth amongst emerging continents such as Africa. Africa’s fate is no longer as closely tied to the advanced world’s fortunes as it once was.  Whether seeking to diversify their economies, tap into new markets, or advance regional integration, African countries are taking important steps to reform and grow.  As they do so, the Bank will continue to support them in this effort by building and disseminating knowledge of what works best.

This post was originally featured on February 10, 2012 on “Let’s Talk Development,” a blog hosted By Justin Yifu Lin, the World Bank’s Chief Economist. http://blogs.worldbank.org/developmenttalk/is-2012-africa-s-year-of-the-dragon