Fostering an Open Economy in Africa

The future of Africa's development lies in the hands of small and medium-sized enterprises (SMEs) and their ability to expand across the continent. These are the enterprises that will create most of the private sector jobs for a rapidly-growing labor force. In an open economy, these SMEs can internationalize and meet surging demand for products and services in Africa and beyond. 

Business internationalization in Africa, however, comes with its own sets of challenges. There are generally weak legal and policy frameworks regarding trade policies. The poor state of infrastructure makes it very difficult for movement of people and goods, both within and between countries, leading to high cost of doing business. Poor human capital development on the continent leads to shortage of skills and makes the labor force uncompetitive. Oftentimes, there are also tendencies for political paternalism, or blatant interference, which I was able to observe during related research I conducted for almost two months in Angola and Mozambique in 2016.

Compare the above scenario with advanced economies, especially those in the European Union (EU) where labor mobility among member-countries is allowed, along with free movement of goods. There is also the fact that the labor force in various EU countries are highly educated.

The most significant opportunity for promoting the growth of Africa's SMEs is the potential for cross-border trade. But for that to happen, there needs to be a set of inward and outward strategies to help strengthen the continent's trading networks.

Furthermore, incompatible policies in Africa, such as protectionism, have to end. Several African economies are known for their protectionist policy stances. It is part of what makes Sierra Leone and Zimbabwe rank among the least competitive business environments in the world. Protectionist trade policies shackle African economies and limit the ability of enterprises to internationalize.

The proposed Tripartite Free Trade Area (TFTA), linking three of the continent's regional trading alliances, the Common Market for Eastern and Southern Africa ( COMESA), the Southern African Development Community (SADC), and East African Community (EAC) is seen by many as a significant step in the right direction. Launched in June 2015, 22 of the 27 member-states signed the agreement as at June 2018. The TFTA is expected to enter into force once it has been ratified by 14 member-states. Only Egypt and Uganda had ratified the agreement as at June.

The TFTA was seen as precursor to the African Continental Free Trade Area (AfCFTA), which was signed last March by 44 countries. But two of the continent's largest economies, Nigeria and South Africa, along with eight others, decided not to sign it. Without these important economies being part of the trade bloc, regional integration and trade liberalization, which are crucial for Africa's development and expansion of SMEs across borders will be severely hampered. As of 2016, intra-Africa exports made up 18 percent of total global exports, compared to 59 and 69 percent for intra-Asia and intra- Europe exports, respectively, according to the Brookings Institution.

Although many African nations have transitioned from autocratic rule to democracies, a lot of African countries practice the free-market system only in name. For instance, South Africa is often cited as one of the most protectionist countries in the world, when it comes to poultry, and other meat products. The country has been adept with using antidumping laws as a strategy for keeping out foreign products from its market.

In 2016, South Africa got into a trade dispute with the United States for placing restrictions on U.S. poultry imports for 15 years, beef imports for 12 years and pork for the previous three years. At the height of the dispute, the Obama administration suspended South Africa from trade benefits under the African Growth and Opportunities Act (AGOA) – the United States legislation that provides duty-free entry into the U.S. for certain goods from eligible sub-Saharan African countries.

African governments must work together towards a regional imperative if Africa's economies are to be transformed in ways that would drive sustainable and inclusive growth for the continent as a whole. While progress on the TFTA is commendable, regional international trading corridors such as the COMESA-EACSADC Tripartite Free Trade Area must be scalable to improve the openness of African economies, especially with regard to how they trade among themselves and enable business growth.

Africa has a young, rising population and the fastest urbanization rate in the world. Hence, as a target market, the African continent presents excellent opportunities for pan-African internationalization of its enterprises, whose products and services will have a ready market given the growing middle class. According to a 2016 report by McKinsey Global Institute, Africa could nearly double its manufacturing output from $500 billion to $930 billion by 2025, as long as countries take decisive actions to create improved environments for the manufacturing industry.

In another report, McKinsey said Egypt, Morocco, South Africa, and Tunisia – Africa's four most advanced economies – are broadly diversified. These economies can also expand manufacturing and be able to cater for local and regional markets.

The internationalization trend of African enterprises in the last decade or so has been very positive. South African multinational enterprises (MNEs) such as Dimensions Data, Massmart, MTN, Nampak, SABMiller, Shoprite, Standard Bank, and Telkom, each has a presence in at least a dozen countries on the continent. Nigerian MNEs such as Dangote and United Bank for Africa are also expanding their footprints across the continent.

These MNEs are creating jobs, helping to improve income levels and modernize infrastructure. For instance, Mozal, an aluminium smelter in Mozambique, often sponsors training programs for workers, thereby building the skills of the local workforce. SEACOM, a privately owned cable company with headquarters in Mauritius, has presence in Kenya, South Africa, Mozambique, and Tanzania. The company has installed thousands of miles of undersea fiber optic cable across Africa, increasing broadband capacity, and helping to improve internet connectivity.

But despite the vast opportunities for African enterprises to scale up, there is a wide range of factors contributing to the lack of internationalization of many enterprises – quite apart from the macroeconomic factors. These non-macroeconomic factors can be divided into external and internal factors with the majority being related to strategic and leadership issues. Often times, management fails to consider international markets as an integral part of growth strategy. Top business entrepreneurs I have advised in Angola and Mozambique had previously failed to commit enough resources to get their businesses established abroad.

A number of African MNEs, especially smaller ones, also tend to set unrealistic targets and fail to recognize that entering international markets at an early stage is fundamental in establishing networks and developing brands. Some also fail to recognize that pan-African markets are more price-sensitive, often committing the mistake of sticking to their pricing structures instead of adapting to local peculiarities and realities.

One of the most critical hindrances that African enterprises face when expanding with in the continent may be the unwillingness to change long-standing business practices. The businesses that tend to focus too much on the larger African economies such as Nigeria, Egypt, South Africa, Algeria, and Angola, neglect smaller but thriving markets such as Morocco, Libya, Sudan, Kenya, Ethiopia, Rwanda, and Ghana. They end up missing potentially better-suited opportunities in the smaller markets.

These failure factors are all a result of a lack of adequate market entry preparation by African enterprises. Development of an internationalization strategy requires them to not only continuously research the external market but also the socio-political environment. They also need to know how to use internal resources to take advantage of opportunities. By conducting preliminary due diligence, managers must develop business proposals depicting what to do, how to do it, by when, and resources required.

To foster an open economy in Africa, the continent needs to develop a culture of internationalization. This requires African governments and public institutions to play key roles in promoting positive attitudes towards international markets. An open economy necessarily requires providing more information and incentives. By developing specialized agencies, public private partnerships, and other supporting strategies, they can create an enabling environment, which can positively contribute to building and sustaining businesses.

Encouraging African business leaders to invest in developing language skills is also advisable. The ability to interact with the local markets requires having practical knowledge of local cultures. This can sometimes mean knowing how to speak the local languages, thereby having the added advantage to do business across borders.

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Originally published at Financial Nigeria Magazine, Lagos, Nigeria, in November, 2018.