eBusiness Weekly
Can you hear that? The giant sucking sound? Apparently, it’s the sound of money and opportunities whooshing from one free trade area to another. Ross Perot, United States presidential candidate in 1992 coined the term when lambasting the proposal for the North American Free Trade Agreement (NAFTA). Why would US carmakers pay US$12 per hour for labour when they could pay US$1 per hour just south of the border in Mexico?
Perot lost the election and the debate around NAFTA, but the sentiments have prevailed. The “giant sucking sound” has since been referenced by a European Union representative, in relation to Eastern Europe, as well as economist Milton Friedman, this time speaking of how the tables have turned for Mexico, “the Mexicans . . . are hearing ‘the giant sucking sound’ in stereo these days — from China in one ear and India in the other”.
Will African countries, right now putting the finishing touches to their own free trade agreement, benefit from increased investment, or will they also see Investments being diverted elsewhere?
The African Continental Free Trade Area (AfCFTA) will be the largest in terms of population and geographic size of any free trade area in the world. With more than 80 percent of signatories having ratified the agreement, the first phase on goods and services is in operation. The next phases are looking at protocols on investment, intellectual property and competition. All of these will be integral to supporting the overall agreement, but rules and regulations around investment in particular — where the money goes and what can be done to facilitate a more even distribution – will be a defining element of the AcFTA.
Opening up Africa for business
Historically, African states have entered into older-style investment treaty models. These were designed in a post-colonial era aimed at investment protection rather than the promotion and facilitation of investment flows, especially between African states. The incoming investment protocol, which “aims to promote sustainable intra-African investments and bring more coherence to the investment governance landscape across the continent”, seeks to change all this.
Wamkele Mene, secretary general, AfCFTA Secretariat has said “The AfCFTA sends a strong signal to the international investor community that Africa is open for business, based on a single rule-book for trade and investment.”
And indeed hopes are riding high that foreign direct investment (FDI) into Africa is on the rise. FDI to African countries doubled last year to hit a record US$83 billion.
More promising yet: the new rules have boosted intra-Africa investments too. For example, Morocco has invested more than US$2 billion into building a fertiliser factory in Ethiopia — set to make the East African country self-sufficient in fertiliser production by 2025.
Speaking at a recent webinar hosted by the Dunning Africa Centre at Henley Business School Africa, Andrew Mold, from the Office for Eastern Africa at the United Nations Economic Commission for Africa, pointed to the fact that up to 80 percent of global trade is linked to multinational corporations. A large proportion of which is facilitated intra-group — meaning among companies under the same corporate umbrella. It’s this fact, Mold says, that may define whether the incoming investment protocol is an enabler. Can it support greater collaboration and engagement between African countries?
What it will take to make it work
The simplicity and efficiency of the protocol will be fundamental in shaping the answer to this question. Will it limit bureaucratic red tape? More rules = more hurdles = more departments and administrators = more delays. This will undoubtedly strain the patience and commitment of investors. Time is money, and the more time and effort it takes to see returns, the less likely firms, people, institutions, and governments will be to invest resources in the single market.
Regional integration advocate Ziad Hamoui stresses that institutions and governments involved in the protocol’s formulation need to be made aware that the standardisation of rules across the different countries will provide clarity and enable more investment throughout the continent.
One of the strengths of the broader AfCFTA agreement is that it provides a shared and transparent framework for African countries to trade in goods and services more freely. The complication comes in balancing continental and national laws.
Naturally, national laws are designed to protect their own interests in the face of potential competition from others. But an element of trust, and clear sight of the future benefits of freer trade through intra-African cooperation will open up greater opportunities for growth for all concerned.
The investment protocol will need to support this balance — open up the single market, but also provide measures to ensure investment isn’t only funnelled into one or two of the continent’s biggest players.
It’s a fine balance that depends as much on enforcement as it does rule-making.
“If you don’t have an instrument you can enforce, then you don’t have an instrument,” says Francis Mangeni, Head of Trade Promotion and Programs with the AfCFTA.
Despite the best laid plans of regional bodies across Africa, effective implementation and enforcement has always been a weakness. This will be no easy task as there are substantive issues around the proposed investment protocol obligations, including anti-corruption measures, rights of indigenous people, corporate social responsibility and taxation.
Specific commitments will need to be legally binding for effective investment promotion and facilitation, and to ensure accountability. Under the current proposals for the protocol, these commitments may include certain technical co-operation, shared principles or rules for administrative procedures, guides on the exchange of information between investment promotion agencies, and standards for the dissemination of data and other information to investors that ensure transparency.
Reasons to be optimistic
As Mangeni points out, Africa has always had naysayers. And the proposal for the AfCFTA — an ambitious initiative seeking to radically transform trade and facilitate growth on the continent — was no different. Yet, despite many saying it would be impossible, the agreement was negotiated in two and a half years — a record for an agreement of that magnitude. We can hope that any further hurdles will be ironed out along the way and leadership will be key here.
Despite the many challenges of creating, refining and agreeing a robust framework to govern investment across Africa, there is a lot of hope for how transformative the investment protocol may prove to be.
Anticipation of the incoming regulations is rising and global investors who may have been reluctant in the past are now eyeing up opportunities as the single market represents a much more attractive investment option.
All the negativity about NAFTA (recently renegotiated and renamed United States-Mexico-Canada Agreement (USMCA)) notwithstanding, it has been just as good, if not better, for Mexico as it has been for the United States and Canada.
The European Single Market too, has been hugely beneficial for countries in Eastern and Southern Europe, spurring economic growth and driving greater flows of investment. The whooshing sound of moving money has been incoming as much as outgoing. Hopefully the same will be true for Africa’s AfCFTA if implemented effectively. — News24
