As momentum builds around a continental free trade area in Africa, the next big step will be the creation of an investment protocol. It won’t come without obstacles, say Rajneesh Narula and Jon Foster-Pedley.
Do you hear that? The giant sucking sound? Apparently, it’s the sound of money and opportunity moving from one free trade zone to another. Ross Perot, a 1992 US presidential candidate, coined the term when lambasting the proposed North American Free Trade Agreement (NAFTA). Why would American automakers pay $12 an hour for labor when they could pay $1 an hour just south of the Mexican border?
Perot lost the election and the NAFTA debate, but feelings prevailed. The “giant sucking sound” has since been mentioned by a representative of the European Union, in relation to Eastern Europe, as well as by the economist Milton Friedman, this time speaking about the way things have shot for Mexico, “Mexicans … hear ‘giant sucking sound’ in stereo these days – from China in one ear and India in the other”.
Will African countries, which are now finalizing their own free trade agreement, benefit from increased investment, or will they also see investment diverted elsewhere?
The African Continental Free Trade Area (AfCTA) will be the largest in terms of population and geographic size of any free trade area in the world. With more than 80% of signatories having ratified the agreement, the first phase on goods and services is underway. The next phases focus on investment, intellectual property and competition protocols. All of these will be integral to supporting the overall deal, but rules and regulations around investment in particular – where the money goes and what can be done to facilitate a fairer distribution – will be a defining part of the deal. ‘AcFTA.
Opening Africa for Business
Historically, African states have entered into old-fashioned model investment treaties. These were designed in a post-colonial era aimed at protecting investments rather than promoting and facilitating investment flows, especially between African states. The Inbound Investment Protocol, which “aims to promote sustainable intra-African investment and bring more coherence to the investment governance landscape across the continent”, seeks to change all that.
Wamkele Mene, Secretary General of the AfCFTA Secretariat, said, “The AfCFTA sends a strong signal to the international investment community that Africa is open for business, based on a single rulebook for trade and investment”. And indeed, hopes are high that foreign direct investment (FDI) in Africa will be on the rise. FDI to African countries doubled last year to a record $83 billion.
Even more promising: the new rules have also boosted intra-African investment. For example, Morocco has invested more than $2 billion in the construction of a fertilizer factory in Ethiopia, intended to make the East African country self-sufficient in fertilizer production by 2025. .
Speaking at a recent webinar hosted by the Dunning Africa Center at Henley Business School Africa, Andrew Mold from the East Africa Bureau of the United Nations Economic Commission for Africa highlighted the fact that up to 80% of world trade is linked to multinational companies. Much is facilitated within the group – that is, between companies under the same umbrella. It is this fact, says Mr. Mold, that can define whether the inward investment protocol is a catalyst. Can it support increased collaboration and engagement among 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 paperwork? More rules = more obstacles = more departments and administrators = more delays. This will undoubtedly test investors’ patience and commitment. Time is money, and the more time and effort it takes to see returns, the less likely companies, 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 formulating the protocol should be aware that standardizing rules across different countries will bring clarity and enable more investment across 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 goods and services more freely. The complication comes from the balance between continental and national laws. Naturally, national laws are designed to protect their own interests against potential competition from others. But an element of trust and a clear vision of the future benefits of freer trade through intra-African cooperation will open greater opportunities for growth for all parties involved.
The investment protocol will need to support this balance – opening up the single market, but also providing measures to ensure that investment is not just channeled to one or two of the biggest players on the continent.
It’s a delicate balance that depends as much on enforcement as it does on rulemaking. “If you don’t have an instrument that you can apply, then you don’t have an instrument,” says Francis Mangeni, AfCFTA’s Head of Trade Promotion and Programs. Despite the best-laid plans of regional bodies across Africa, effective implementation and enforcement has always been a weakness. This will not be an easy task as there are substantive issues around the obligations of the proposed investment protocol, including anti-corruption measures, indigenous peoples’ rights, 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 protocol proposals, these commitments may include certain technical cooperation, shared principles or rules for administrative procedures, guides on the exchange of information between investment promotion agencies and standards for the dissemination data and other information to investors that ensure transparency. .
Reasons to be optimistic
As Mangeni points out, Africa has always had opponents. And the AfCFTA proposal – an ambitious initiative to radically transform trade and facilitate growth on the continent – was no different. Yet, despite many saying it would be impossible, the deal was brokered in two and a half years – a record for a deal of this magnitude. We can hope that any other hurdles will be ironed out along the way and that leadership will be key here.
Despite the many challenges associated with creating, refining and approving a robust framework to govern investment across Africa, there is much hope for the transformative capacity of the protocol. ‘investment. Anticipation of upcoming regulations is growing and global investors who may have been reluctant in the past are now eyeing the opportunities, as the single market presents a much more attractive investment option.
For all the negativity about NAFTA (the recently renegotiated and renamed United States-Mexico-Canada Agreement (USMCA)), it has been just as good, if not better, for Mexico than it has been for United States and Canada. The European Single Market has also been extremely beneficial for Eastern and Southern European countries, boosting economic growth and generating greater investment flows. The hiss of moving money was as much in as it was out. Hopefully the same will be true for Africa’s AfCFTA if implemented effectively.
Rajneesh Narula is the Director of the Dunning Africa Center and Jon Foster Pedley is the Dean and Director of Henley Business School, Africa. This article is based on a recent webinar hosted by the Dunning Africa Center with panelists Dr Francis Mangeni, Dr Andrew Mold and Ziad Hamoui. New24 encourages freedom of speech and the expression of diverse opinions. The opinions of columnists published on News24 are therefore their own and do not necessarily represent the opinions of News24.