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publicationJune 30, 2022

Free Trade Deal Boosts Africa's Economic Development

Dignity factory workers producing shirts for overseas clients, in Accra, Ghana

Dignity factory workers producing shirts for overseas clients, in Accra, Ghana

Photo © Dominic Chavez/World Bank

Highlights

  • A new agreement creating Africa’s first continent-wide free trade area could generate greater economic benefits than previously estimated.
  • The African Continental Free Trade Area (AfCFTA), if fully implemented, could raise incomes by 9 percent by 2035 and lift 50 million people out of extreme poverty.
  • To realize its potential benefits, the agreement must accomplish its most ambitious goals, which include harmonizing policies on e-commerce, investment, and intellectual property.

The African Continental Free Trade Area (AfCFTA) could deliver far greater benefits in terms of jobs, growth, and poverty reduction than previously estimated – making it a potential game changer for Africa’s economic development if its ambitious goals are fully realized.

Download the report ⬇️

The deal creates a continent-wide market embracing 55 countries with 1.3 billion people and a combined GDP of US$3.4 trillion. Its first phase, which took effect in January 2021, would gradually eliminate tariffs on 90 percent of goods and reduce barriers to trade in services. That could raise income by 7 percent, or $450 billion, by 2035, reducing the number of people living in extreme poverty by 40 million, to 277 million, according to a World Bank report published in 2020.

A new World Bank study, released in collaboration with the AfCFTA Secretariat, accounts for the additional benefits that would accrue from an increase in foreign direct investment (FDI) – both from within and outside of Africa – that the deal is expected to generate. FDI is important because it brings the fresh capital, technology, and skills so badly needed to raise living standards and reduce Africa’s dependence on volatile commodity exports. In this scenario, real income would rise further, to about 8 percent in 2035, and the number of people living in extreme poverty would fall by 45 million.

The new report also models what would happen if the agreement is expanded, as planned, to harmonize policies on investment, competition, e-commerce, and intellectual property rights. Deeper integration in these areas would help build fair and efficient markets, improve competitiveness, and attract even more FDI by reducing the risks of shifting regulations and policies. This scenario would bring income gains of 9 percent by 2035 and reduce extreme poverty by 50 million. 

The report, Making the Most of the African Continental Free Trade Area: Leveraging Trade and Foreign Direct Investment to Boost Growth and Poverty Reduction, is intended to be a guide for policy makers charged with carrying out the agreement. To maximize its benefits, the first step will be to conclude planned negotiations on investment, e-commerce, and intellectual property. The report also recommends building grass-roots support for and understanding of the agreement, simplifying red tape to encourage investment, and pairing the deal with a “complementary agenda” that includes training and advice for national trade ministries charged with supervising compliance and administration.

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.
H.E. Wamkele Mene
Secretary General, AfCFTA Secretariat

Key Findings

The AfCFTA promises broader and deeper economic integration and would attract investment, boost trade, provide better jobs, reduce poverty, and increase shared prosperity in Africa.  

  • Africa could see FDI increase by between 111 percent and 159 percent under the AfCFTA.
  • Inflows of FDI attracted by the AfCFTA would bring jobs and expertise, build local capacity, and forge connections that can help African companies join regional and global value chains.
  • The AfCFTA can bring higher-paid, better-quality jobs, with women seeing the biggest wage gains.
  • Wages would rise by 11.2 percent for women and 9.8 percent for men by 2035, albeit with regional variations depending on the industries that expand the most in specific countries.
  • To make the most of the AfCFTA,  African governments should conclude talks as planned and ensure the agreement covers investment and competition policy, intellectual property rights, and e-commerce.
  • African governments should seek to build broad public support for AfCFTA and help businesses benefit from its provisions.
  • Distributional impacts should be carefully monitored, and policies designed to provide social safety nets and programs for worker-retraining and job-switching.
  • If AfCFTA’s goals are fully realized, 50 million people could escape extreme poverty by 2035, and real income could rise by 9 percent.
  • Under deep integration, Africa’s exports to the rest of the world would go up by 32 percent by 2035, and intra-African exports would grow by 109 percent, led by manufactured goods.

About the Authors

Roberto Echandi is a Lead Private Sector Specialist in the Trade and Regional Integration Unit (ETIRI) at the World Bank. He focuses on research and policy advice on issues related to cross-border trade in services, negotiation, implementation, and maximization of potential benefits of deep integration trade agreements and the AfCFTA negotiation and implementation process.

Maryla Maliszewska is a Senior Economist in ETIRI. Her area of expertise covers various aspects of trade policy and regional integration with a special focus on the impact of trade on poverty and income distribution. 

Victor Steenbergen is an economist in the Investment Climate Unit at the World Bank. He works on empirical research and policy advice related to the determinants and development impact of foreign direct investment, with special focus on trade, tax, and climate-change mitigation policy.

Contributors: Valentino Desilvestro, Carmen Estrades, Octavio Fernández-Amador, Joseph Francois, Israel Osorio Rodarte, Maria Filipa Seara e Pereira, Achim Vogt