May 19, 2021

Why the extent of intra-African trade is much higher than commonly believed—and what this means for the AfCFTA

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Intra-African trade is widely perceived as low compared to other regions of the world, an argument made ad nauseum in both academic and policymaking circles. Some observers are especially disparaging about its potential. One recent textbook on African economic development (Cramer et al., 2020:65) claims that:

“Despite decades of negotiations and agreements within subregions and RECs in Africa, intra-African trade remains a tiny proportion of the continent’s overall trade. … [While] greater intra-African trade may be rhetorically appealing on grounds of economic nationalism or South–South solidarity, as a blueprint for accelerated development it is a fantasy.”

We beg to differ and argue that intra-African trade has much greater economic significance than is commonly believed. The orthodox narrative is driven by three errors: 1) The comparisons made with other regional blocks are frequently misleading and do not compare like with like; 2) the picture of intra-African trade is distorted by large-scale commodity exports to destinations outside the continent; and 3) there is a systematic failure to recognize the scale of informal cross-border trade.

Comparisons made with other regional blocks are frequently misleading and do not compare like with like

The African continent is often compared in a poor light vis-à-vis other continents in terms of the extent of intraregional trade. On a continental level, this argument, at first sight, seems true given the low percentage of intra-African trade of the region’s total trade (Figure 1). However, if we focus on subgroupings within these continental blocks, their intraregional trade figures are suddenly not so impressive. Compared to the Asian average, for instance, Central and Southern Asia are relatively less prosperous regions with less industrialized and diversified economies. Likewise, the ASEAN (Association of Southeast Asian Nations) grouping straddles countries with highly diverging levels of income and economic diversification—and with different types of economic integration into the global economy. For example, only 9 percent of Vietnam’s trade is currently with other ASEAN member states.

Figure 1. Intraregional trade (imports + exports) as a percentage of total trade

Conversely, in a similar breakdown of African trade figures, we find some subsets of African countries (particularly the landlocked ones) with significantly higher levels of dependence on intraregional trade than the continental average (Figure 2). In fact, what actually drags down the African average of intraregional trade are the continent’s larger economies—Egypt, Nigeria, and South Africa—distorting the picture of the importance of intra-African trade for the rest of the continent. For each of these countries, the reason for the low dependence on the African market varies: As a country with long-standing market access agreements with the European Union, Egypt has in the past prioritized the markets of its northern neighbors; for Nigeria, it reflects the country’s oil wealth; and for South Africa, there are historical reasons, related to its apartheid economy, that make its economy less dependent on its regional neighbors’ markets than would otherwise have been the case. The basic point is that many African countries have a higher dependence on the continental market than average figures denote.

Figure 2. Intra-African trade (imports + exports) as a percentage of total trade

The picture of intra-African trade is distorted by commodity exports to destinations outside the continent

The extreme dependence on commodity exports of a minority of African countries creates a misleading narrative around intra-African trade. This trend is a common characteristic of the patterns of trade in resource-rich regions: For example, after nearly three decades of existence, the share of MERCOSUR’s trade that is intraregional (see again Figure 1) is still lower than the African average. This outcome is largely because the bloc is dominated by one of the world’s largest commodity exporters—Brazil—and the principal demand for its commodities comes from outside the region. Africa finds itself in a similar situation: The region holds a significant proportion of global mineral reserves (e.g., 60 percent of manganese, 75 percent of phosphates, 85 percent of platinum, 80 percent of chrome, 60 percent of cobalt, and 75 percent of diamonds) and is responsible for nearly 10 percent of global oil and gas production. Notably, the bulk of these commodities are destined for markets outside Africa, dragging down the share of intraregional exports.

This structural feature very much distorts our vision of the potential of the continental market. Angola is a case in point: Oil comprises more than 90 percent of its exports—nearly all of which is destined to the United States. But strip out those extraregional commodity exports, and suddenly, according to our calculations (based again on UNCTADStat data), the importance of intra-African exports for Angola jumps to around three-quarters of the country’s total exports. It also needs remembering that while the continent is rightly considered as “resource-rich,” this is not true for the average African country, more than half of which are net commodity  importers, not exporters. As a corollary of this, most African countries tend to have a higher dependence on the continental market than the principal commodity exporters.

There is a systematic failure to recognize the scale of informal cross-border trade

A final reason why our perception of intra-African trade is so distorted is the prevalence of informal trade. A lot of African borders are extremely porous; indeed, simply the length of borders inhibits against tight controls. While informal cross-border trade is a global phenomenon, studies tend to concur that it is more widespread on the African continent vis-à-vis other developing regions (e.g., FAO, 2020, Afreximbank 2020). Almost by definition, all informal trade is intra-African, implying once again that the real extent of intraregional trade is much higher than can be gleaned from official trade statistics alone.

Table 1 provides some estimates of the scale of informal trade relative to formal sector exports. With the exception of Tunisia (which has low formal-sector, intra-African exports), the smaller landlocked countries are usually where informal sector trade is most intensive. Summarizing the available data, Harding (2019) concludes that intra-African trade is systematically underreported by anything between 11 percent and 40 percent.

Table 1. Estimates of informal sector exports, by country (various years)

Conclusions and policy implications

The stylized facts described above have a number of important implications for policy, especially at a time when trading under the African Continental Free Trade Area (AfCFTA) has begun:

  1. Policies should be adopted to address the extensive barriers across the continent to informal cross-border trade (World Bank, 2020). Once fully implemented, the AfCFTA may see a sudden blooming of small-scale, cross-border trade, as the incentives for keeping informal sector trade off the record suddenly disappear.
  2. The impression of sluggish intra-African trade is wrong: It represents a high share of total African trade and is usually the more dynamic—and certainly the more diversified—element of a typical African country’s exports. This disarms the excessively simplistic but widespread myth that African countries have nothing to trade with one another.
  3. National trade strategies need to be consistent with these stylized facts—and prioritize intra-African trade rather than expend political capital in prolonged free trade agreement negotiations with extra-African trading partners.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

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Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

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