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Date of publication: July 2020
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Reliant 55 pays, la Zone de libre-échange continentale africaine (ZLECAf) sera la plus grande zone de libre-échange dans le monde en termes de nombre de pays membres. Elle aura l’avantage de créer un vaste marché régional, où les pays africains pourront diversifier leurs exportations, sortir de l’extrême pauvreté et attirer les investissements directs étrangers. Mais, il faut compter sur l’adoption des réformes politiques et des mesures de facilitation des échanges pour voir cette zone offrir son plein potentiel. WATHI a choisi ce document parce qu’il analyse les potentiels effets de la création de la ZLECAf pour les pays africains en 2035. Les auteurs montrent que la mise en œuvre de la ZLECAf favoriserait l’instauration des réformes profondes nécessaires pour stimuler la croissance à long terme des pays concernés. Ce rapport révèle que la région obtiendrait 450 milliards de dollars de gains potentiels si des mesures de facilitation du commerce, dont la suppression des lenteurs bureaucratiques et la simplification des procédures douanières, sont mises en place. Concernant la pauvreté et l’emploi, les auteurs montrent que la ZLECAf pourrait permettre à 30 millions d’habitants de sortir de l’extrême pauvreté, et à 68 millions d’autres habitants d’accroître leur revenu. Why did we choose this document ? Linking 55 countries, the African Continental Free Trade Area (AfCFTA) will be the largest free trade area in the world in terms of the number of member countries. It will have the advantage of providing a large regional market, where African countries will be able to diversify their exports, overcome extreme poverty, and attract foreign direct investment. However, it is necessary to rely on the implementation of policy reforms and trade facilitation measures to see this zone offer its full potential. WATHI selected this paper because it analyzes the potential effects of creating the AfCFTA on African countries in 2035. The authors show that the implementation of the AfCFTA would promote the deep reforms needed to stimulate the long-term growth of the countries concerned. The report reveals that the region would realize $450 billion in potential gains if trade facilitation measures, including the removal of bureaucratic obstacles and the simplification of customs procedures, are put in place. With regard to poverty and employment, the authors show that the AfCFTA could lift 30 million people out of extreme poverty and increase the income of 68 million other people.
Reliant 55 pays, la Zone de libre-échange continentale africaine (ZLECAf) sera la plus grande zone de libre-échange dans le monde en termes de nombre de pays membres. Elle aura l’avantage de créer un vaste marché régional, où les pays africains pourront diversifier leurs exportations, sortir de l’extrême pauvreté et attirer les investissements directs étrangers. Mais, il faut compter sur l’adoption des réformes politiques et des mesures de facilitation des échanges pour voir cette zone offrir son plein potentiel.
WATHI a choisi ce document parce qu’il analyse les potentiels effets de la création de la ZLECAf pour les pays africains en 2035. Les auteurs montrent que la mise en œuvre de la ZLECAf favoriserait l’instauration des réformes profondes nécessaires pour stimuler la croissance à long terme des pays concernés. Ce rapport révèle que la région obtiendrait 450 milliards de dollars de gains potentiels si des mesures de facilitation du commerce, dont la suppression des lenteurs bureaucratiques et la simplification des procédures douanières, sont mises en place. Concernant la pauvreté et l’emploi, les auteurs montrent que la ZLECAf pourrait permettre à 30 millions d’habitants de sortir de l’extrême pauvreté, et à 68 millions d’autres habitants d’accroître leur revenu.
Why did we choose this document ?
Linking 55 countries, the African Continental Free Trade Area (AfCFTA) will be the largest free trade area in the world in terms of the number of member countries. It will have the advantage of providing a large regional market, where African countries will be able to diversify their exports, overcome extreme poverty, and attract foreign direct investment. However, it is necessary to rely on the implementation of policy reforms and trade facilitation measures to see this zone offer its full potential.
WATHI selected this paper because it analyzes the potential effects of creating the AfCFTA on African countries in 2035. The authors show that the implementation of the AfCFTA would promote the deep reforms needed to stimulate the long-term growth of the countries concerned. The report reveals that the region would realize $450 billion in potential gains if trade facilitation measures, including the removal of bureaucratic obstacles and the simplification of customs procedures, are put in place. With regard to poverty and employment, the authors show that the AfCFTA could lift 30 million people out of extreme poverty and increase the income of 68 million other people.
Mettre en œuvre la Zone de libre-échange continentale africaine (ZLECAf) représente une réelle opportunité pour les pays africains de développer leurs économies et de réduire la pauvreté. La ZLECAf permettrait : What lessons for the countries of the WATHI zone ? Implementing the Continental African Free Trade Area (AfCFTA) is an opportunity for African countries to develop their economies and reduce poverty. The AfCFTA would allow :
Mettre en œuvre la Zone de libre-échange continentale africaine (ZLECAf) représente une réelle opportunité pour les pays africains de développer leurs économies et de réduire la pauvreté. La ZLECAf permettrait :
What lessons for the countries of the WATHI zone ?
Implementing the Continental African Free Trade Area (AfCFTA) is an opportunity for African countries to develop their economies and reduce poverty. The AfCFTA would allow :
Extracts from the document, pages: 15-18, 41-46, 50-55, 57-67
The Content of AfCFTA and African Subregional Trade Agreements
At its launch, the framework agreement establishing the African Continental Free Trade Area (AfCFTA) was signed by 44 countries at a summit of the African Union (AU) held in Kigali, Rwanda, March 21, 2018. AfCFTA was proposed in 2012, and it was hoped that an agreement would be reached by 2017. The first phase comprised negotiation of three protocols: Trade in Goods, Trade in Services, and Rules and Procedures for Settlement of Disputes. The agreement requires members to progressively remove tariffs on at least 97 percent of tariff lines that account for 90 percent of intra-Africa imports. Average tariffs are 6.1 percent, but with high variation across countries and sectors. Intra-Africa trade is highly concentrated, with 1 percent of tariff lines accounting for 74 percent of imports in the average African country. Thus some of the most onerous and protectionist tariffs may be maintained even if countries liberalize most tariff lines.
Trade in certain sensitive sectors is expected to be liberalized over a longer period, but other goods are likely to remain excluded from liberalization. The AfCFTA annex on rules of origin has not yet been finalized. Rules of origin describe the transformation a product must undergo in the region—such as the share of value added—to enjoy preferential market access. They are used to prevent goods from nonmember countries entering through a low-tariff country and being transshipped duty-free to another member country. Rules of origin that are too restrictive can negate the preferential market access intended by the free trade agreement and prevent global supply chains from functioning.
South Africa and Nigeria have expressed concerns that rules of origin too lenient or mismanaged will provoke a flood of extraregional products with low levels of value added. Negotiations on services began in June 2018, and countries have identified five priority sectors: financial services, transport, telecom/information technology, professional services, and tourism. The benefits of services liberalization extend far beyond the service sectors themselves; they affect all other economic activities in which services are inputs.
A second phase of negotiations will focus on investment, competition, and intellectual property rights, with the potential of deepening AfCFTA. Research finds that deep trade agreements boost trade, foreign investment, and participation in global value chains. And yet these areas also involve complex negotiations.
AfCFTA will be an opportunity to regulate policy areas important for economic integration that are often regulated in trade agreements but that so far have not been covered in most of Africa’s PTAs.
An important question is how AfCFTA will complement Africa’s subregional preferential trade agreements (PTAs). This analysis compares the legal text of AfCFTA (as signed in March 2018) with the policy areas covered in existing PTAs. It indicates that AfCFTA could promote regional economic integration in Africa in two ways. First, in the policy areas already covered by subregional PTAs, AfCFTA will offer a common regulatory framework, thereby reducing market fragmentation created by different sets of rules. Second, Africa’s subregional trade agreements tend to be shallow. AfCFTA will be an opportunity to regulate policy areas important for economic integration that are often regulated in trade agreements but that so far have not been covered in most of Africa’s PTAs.
This analysis focuses on the following subregional PTAs, which are in force and were notified to the World Trade Organization (WTO) as of September 2019: Common Market for East and South Africa (COMESA), East African Community (EAC), Economic Community of West African States (ECOWAS), South African Development Community (SADC), South African Customs Union (SACU), West African Economic and Monetary Union (WAEMU), and Economic and Monetary Community of Central Africa (CEMAC).
This analysis of the content of AfCFTA and Africa’s subregional PTAs focuses on the 20 policy areas most commonly included in trade agreements in force and notified to the WTO. Two policy areas have largely not been covered in Africa’s subregional PTAs but are included in AfCFTA. Intellectual property rights are covered in only one subregional PTA (EAC), and no subregional PTA covers state trading enterprises (STEs).
Finally, although AfCFTA is deeper than any of the existing subregional PTAs, some policy areas are included in individual subregional PTAs but not in AfCFTA. Examples of these areas are state aid (subsidies), environmental laws, labor market regulations, and public procurement. The exclusion of these policy areas in AfCFTA does not prevent countries from aiming for common regulations at a later stage and does not affect the commitments made by countries in the context of the subregional PTAs. An important issue is how inconsistencies or conflict between different jurisdictions, subregional or regional, will be addressed.
As a general comment, Article 19 of the AfCFTA treaty refers to “conflict and inconsistency with Regional Agreements.” Article 19(1) establishes that, unless otherwise provided, AfCFTA prevails in cases of inconsistencies. At the same time, Article 19(2) refers to “higher levels of regional integration” than those established in AfCFTA, such as in “regional economic communities, regional trading arrangements and custom unions.” In the latter situation, and as a general rule, parties maintain such higher levels among themselves. It remains to be seen how this will be implemented in practice.
Macroeconomic Impacts of AfCFTA
The African Continental Free Trade Area (AfCFTA) benefits member countries by lowering costs for consumers and producers, reducing administrative red tape, and reducing compliance costs. The reduction in tariffs will lower the prices of imported goods for consumers, as well as for producers using intermediate inputs. Nontariff barriers (NTBs) take the form of burdensome administrative procedures and various technical requirements.
Sanitary and phytosanitary standards or technical standards are in place to protect consumer welfare and safety, but differences in regulations and standards across countries lead to compliance costs, and they are sometimes used as barriers to trade. The deep commitments under AfCFTA are expected to reduce these costs. Similar to tariffs, the reductions in NTBs benefit consumers of final (household) and intermediate goods (firms).
Finally, although AfCFTA is deeper than any of the existing subregional PTAs, some policy areas are included in individual subregional PTAs but not in AfCFTA.
Reductions in trade costs brought about by trade facilitation measures are captured as iceberg trade costs. With the implementation of trade facilitation reforms, such as improving border infrastructure and reducing the cost of administrative procedures, the price of exports and imports declines and transporting a unit of exports or imports requires fewer trade and transportation services. Overall, with lower trade costs, the price of a unit of imports is less expensive, thereby increasing the competitiveness of local production (using imported inputs) either sold on the domestic market or exported.
As a result, production shifts to the most competitive sectors, leading to productivity gains and expansion of trade and faster economic growth in the AfCFTA region. The trade cost reductions also apply to trade with non-AfCFTA countries, leading to somewhat faster growth in trade with those countries as well.
Better market access to regional markets allows countries to benefit from faster growth of exports, whereas reduction of a country’s own barriers coupled with a reduction of barriers in regional markets leads to lower prices of imports. The differences in gains across countries are linked to the initial level of tariffs, NTBs, and border costs and their reductions under AfCFTA, as well as to the initial level of intra-Africa trade.
The overall welfare implications are also linked to the sectors of comparative advantage. If sectors benefiting under AfCFTA have higher productivity than those that would be expanding in the baseline scenario, the reallocation of production leads to faster economywide productivity gains and income growth. The results of this study assume full implementation of AfCFTA and should be interpreted with caution.
On the one hand, partial reforms would lead to smaller macroeconomic effects. On the other hand, the framework does not capture the dynamic gains from trade. It is expected that AfCFTA members will enjoy faster productivity gains by taking advantage of the economies of scale in the larger market, as well as attract foreign direct investment.
REAL INCOME IMPLICATIONS
The real income gains from tariff liberalization alone are small at the continental level at 0.22 percent. However, selected countries including Morocco, Namibia, and Senegal, benefit substantially from improved market access in other AfCFTA markets and see their welfare increase more than 1 percent. The relatively small gains associated with tariff liberalization are explained by the high nontariff barriers and trade facilitation bottlenecks that constrain trade in Africa. Removing only one constraint is a necessary but not sufficient condition for real income gains to materialize.
Indeed, the gains from tariff liberalization and reduction in NTBs (with the increase in market access to non-African markets) would lead to a gain of 2.4 percent in 2035 for the continent. However, several countries such as Cote d’Ivoire, Morocco, Namibia, and Senegal would see their real income increase by over 5 percent. Under full implementation of the AfCFTA scenario, the continental welfare increases by an additional 4.6 percentage points, implying that substantial gains are to be had from trade facilitation.
Differences in regulations and standards across countries lead to compliance costs, and they are sometimes used as barriers to trade
Under the AfCFTA scenario, real income would increase by 7 percent by 2035 relative to the baseline for the Africa region—a sizable gain.3 In monetary terms, the gains represent around US$445 billion in 2035 (at 2014 prices and exchange rates). Although the continent is by far the largest gainer in aggregate, the rest of the world sees an increase of US$76 billion by 2035, which translates into a gain of 0.1 percent relative to the baseline scenario.
The gains are unevenly distributed across the Africa region. At the very high end are Cote d’Ivoire with gains of 13 percent, and Zimbabwe with gains of 12 percent, followed by Kenya, Namibia, Democratic Republic of Congo and Tanzania at more than 10 percent. At the lower end are a few countries clustered around a gain of 2 percent, including Madagascar, Malawi, and Mozambique. The gains are very closely related to the initial level of trade barriers and trade costs. Countries that are already relatively open tend to benefit less from their own liberalization, but they tend to benefit more from improved market access in other markets. Countries that are heavily protected may see a larger reallocation of output across sectors because of heightened import competition, but they are also likely to benefit more from lower imported input prices.
Within the continent, trade will grow substantially. The volume of total exports increases by almost 29 percent by 2035 (relative to the baseline). Intracontinental exports increase by over 81 percent, while exports to non-African countries increase by 19 percent. Despite these changes, intracontinental trade would remain around 20 percent of total trade for the continent in 2035. Cameroon, the Arab Republic of Egypt, Ghana, Morocco, and Tunisia are expected to benefit from the fastest growth of intra-AfCFTA exports to AfCFTA partners, with exports doubling or tripling with respect to the baseline.
The smallest export expansions are expected in Democratic Republic of Congo, Mozambique, and Zambia (10–30 percent). In monetary terms, intracontinental trade grows from US$294 billion in 2035 in the baseline scenario to US$532 billion after implementation of AfCFTA in 2035. By 2035 under AfCFTA, the biggest increase in the value of exports to the regional partners is expected to benefit, in descending order of value, Egypt, Morocco, South Africa, Nigeria, Kenya, and Cote d’Ivoire (between US$48 million and US$11 billion). Similarly, for the welfare gains, the smallest export expansions are expected in the economies that are already relatively open such as Madagascar, Malawi, Mauritius, and Rwanda, with export increases of less than US$1 billion.
Under the AfCFTA scenario, manufacturing exports gain the most, 62 percent overall, with intra-Africa trade increasing by 110 percent and exports to the rest of the world by 46 percent. There are smaller gains in agriculture, 49 percent and 10 percent for intra- and extra-Africa trade, respectively. The gains in the services trade are relatively slight—some 4 percent overall and 14 percent within Africa. The base year trade shares and volumes are relatively slight in services. In volume terms, manufacturing exports dominate the export picture for Africa.
Of the US$2.5 trillion in exports projected in 2035 for Africa, US$823 billion are in manufactures; US$690 billion in natural resources; US$191 billion in agriculture; and the remaining US$256 billion in services. Of the total growth in exports of US$560 billion, the increase in exports of manufactures represents some US$506 billion—an increase of US$220 billion within Africa and US$286 billion with the rest of the world. Overall, the destination of African exports rises from 15 percent in 2035 in the
baseline to over 21 percent in the AfCFTA scenario. For manufactures, the relevant increase is from 24 percent to almost 32 percent. Exports to AfCFTA members expand with very little trade diversion because the decline in exports to non-AfCFTA regions is negligible and concentrated in a few services sectors and minerals. As compared with the baseline, by 2035, exports of minerals to the European Union and China are smaller under AfCFTA. The biggest expansion of exports to regional partners is recorded in manufactures, not elsewhere specified, followed by energy-intensive manufacturing; chemical, rubber, and plastic products; and processed food products.
Among services, the biggest expansion to regional partners is expected in health and education services; air, road, and rail transport services; and other business services. However, the volume of export growth is much smaller than in agriculture and manufacturing. The same sectors would also be expected to expand their exports to non-AfCFTA partners, with significant gains in the exports of several manufacturing sectors and agricultural products.
The volume of total imports is also very substantial, increasing by 41 percent relative to the baseline for 2035. For intracontinental trade, imports from inside the region expand by 102 percent, and imports from outside the region increase by 25 percent. In value terms, there is an increase in imports of US$310 billion in the baseline scenario, compared with the AfCFTA scenario in which that increase reaches US$627 billion in imports. In terms of share of intracontinental trade, it rises from 18 percent in the baseline to 25 percent with AfCFTA because the share from the rest of the world has a small reduction from 82 percent in the baseline to 75 percent with AfCFTA, which is still very substantial.
For the baseline scenario, intracontinental imports increase from 12 percent in 2020 to 18 percent in 2035. In the scenario in which AfCFTA is implemented, the increase is to 25 percent in 2035, or 7 percent more than in the baseline scenario. By 2035, and under AfCFTA, the countries that benefit the most from the higher increases of imports are Cote d’Ivoire, the Democratic Republic of Congo, Egypt, Ghana, Kenya, Nigeria, South Africa, and Tanzania, where imports increase within a range of between between US$10 billion and US$32 billion. The smaller expansions in imports are expected in economies such as Malawi, Mauritius, and Rwanda, with import increases of less than US$1 billion. Under AfCFTA, there is also an expansion of total imports from non-AfCFTA members, with no trade diversion.
The sector showing the highest expansion of imports is manufactures, not elsewhere specified. Among AfCFTA regions, North Africa experiences the highest growth, whereas for non-AfCFTA members, the imports increase mainly from China and the European Union. Three sectors—chemical, rubber, and plastic products; processed foods; and textiles—also see their imports expanding, with North and West Africa having an important role in that expansion. Among services sectors, imports increase fastest in other business services, with the highest increase in imports from the European Union. The expansion of trade in services is muted because of the initial low levels of trade in services.
AfCFTA is expected to boost regional output by US$211 billion by 2035. The impacts on output are highly varied across sectors. In broad terms, output rises most in natural resources and services (1.7 percent) and manufacturing (1.2 percent), whereas agriculture declines (0.5 percent) relative to the baseline in 2035. In terms of volume of output, most of the gains will be realized by the services sector (US$147 billion), with smaller gains in manufacturing (US$56 billion) and natural resources (US$17 billion) and a small decline in agriculture (US$8 billion) compared with the baseline in 2035.
AfCFTA is expected to boost regional output by US$211 billion by 2035
Relative to the baseline in 2035, agriculture is growing faster in all parts of Africa except in North Africa, which under AfCFTA is shifting toward manufacturing, not elsewhere specified; chemical, rubber, and plastic products; as well as trade services, transport services, and recreation services. East African economies as an aggregate seem to specialize more in agricultural products and services, with productive factors shifting away from the selected manufacturing sectors to take advantage of more profitable opportunities in the growing sectors. Trade in natural resources will grow in Central and West Africa under AfCFTA, whereas it will decline in other regions as compared to the baseline. Services will expand across all regions driven by increasing demand as incomes in Africa rise.
The aggregate numbers mask a lot of heterogeneity of outcomes across countries. Of the 24 economies represented in the simulations, the relative importance of agriculture increases in 14 countries, natural resources in 12 countries, manufacturing in 6 countries, and services in 13 countries. Even while manufacturing’s share of output falls for the majority of countries, the volume of manufacturing will continue to increase under AfCFTA. In fact, in 15 of the 24 countries, the value of output of manufacturing is higher under AfCFTA in 2035 than under the baseline scenario, and the output of several manufacturing sectors expands, just at a slower pace compared with other sectors.
Similarly, for agriculture, the volume of output under AfCFTA by 2035 is higher than under the baseline in 15 out of 24 countries, while for services, the volume is higher under AfCFTA in 21 countries, partially reflecting the positive income elasticity of services. A number of factors explain the impact on output. In the standard Armington framework, a decline in import prices, which in these simulations vary highly across sectors, leads to higher spending on imports compared with domestic production. In the absence of exports, this leads to an absolute decline in production. Exports nevertheless do increase, driven by real exchange rate depreciation, a reduction in production costs (as a result of the lower cost of imported intermediates), the assumed improvement in trade facilitation for African exporters, and the improvement in market access in Africa and the rest of the world.
The key question is whether the import-driven expenditure switching from domestic consumption is greater than the increase in exports. This will depend on four additional factors:
- The import exposure of the sector—that is, the level of imports relative to domestic absorption. If the import share is relatively low, the impact on domestic markets will be attenuated.
- The ease of substitution between imports and domestic goods
- The export exposure of domestic production
- The ex ante decrease in the price of imports—that is, the sum of the change in import tariffs, the nontariff barrier ad valorem equivalent (AVE), and the import component of the trade facilitation agreement (TFA).
In a two-sector economy, the sector with the highest decline in import tariffs would see a relatively larger impact on domestic production—that is, there would be more expenditure switching. Resources would then flow to the sector that is subject to the smallest decline in import prices. On average, agriculture and manufacturing see an ex ante import price decline of 28 percent and 24 percent, respectively, and services only 16 percent (and even less for natural resources). This finding implies that, all else being equal, one would expect to see a reallocation of production toward services and away from agriculture and manufacturing, which is observed in broad terms.
There are significant variations across sectors. For example, in agriculture, the import exposure overall is relatively low (only 6 percent) and the import price shock is 28 percent. At the same time, the domestic output is mostly oriented toward the domestic market. In this situation, expenditure switching is a more important factor than export expansion and resources flow to other sectors. The energy-intensive sector is an interesting counterexample. The import intensity is high at nearly 40 percent, and the import price shock is also relatively high at 27 percent, and yet output expands substantially—some 9.5 percent.
However, exports in the baseline already account for a high percentage of domestic output, and thus export expansion is a more important factor than domestic expenditure switching. Manufacturing, not elsewhere specified, is another sector in which output declines. It is also highly exposed—some 50 percent—but with a relatively low export base. Among services, other business services are the only services to see a decline in output. But they are one of the most exposed services, with an import share of 22 percent in the baseline, and also one that receives the largest import price shock (some 28 percent). Thus expenditure switching plays a large role inthis service sector.
GOVERNMENT REVENUE IMPLICATIONS
AfCFTA’s short-term impact on tax revenues is small for most countries.Tariff revenues would decline by less than 1.5 percent for most countries except for the Democratic Republic of Congo (3.4 percent), The Gambia (2.7 percent), the Republic of Congo (2.1 percent), and Zambia (1.6 percent). Total tax revenues would seldom decline by more than 0.3 percent, except for Djibouti (0.5 percent), the Republic of Congo (0.6 percent), The Gambia (0.9 percent), and the Democratic Republic of Congo (0.9 percent). Two factors help explain these small revenue impacts.
First, imports from African countries account for a small share of tariff revenues for most countries (less than 10 percent on average). Second, most tariff revenues can be shielded from liberalization with exclusion lists because these revenues are highly concentrated in a few tariff lines (1 percent of tariff lines account for more than three-quarters of intra-Africa tariff revenues in almost all African countries). These results are consistent with other studies that show that, even under full liberalization, the number of countries that will experience significant tariff revenue losses is small, and exclusion lists have the potential to significantly reduce such losses.
In the medium term, the overall impact on import tariff revenue is expected to be positive in the AfCFTA scenario at the regional level. Although tariffs decline, the increase in the volume of imports leads to higher tariff revenue collection, with an increase of 3 percent at the continental level compared with the baseline in 2035. Faster economic growth leading to a higher level of economic activity is likely to increase the total revenue from other taxes as well. In the scenario in which only tariffs are reduced, the fiscal revenue from import taxes declines by almost 10 percent at the continental level. Again, aggregate results mask large heterogeneity in impacts across countries.
In fact, in the simulations, 10 out of 24 countries may see a decline of tax revenues from imports in the AfCFTA scenario compared with the baseline in 2035, including Burkina Faso, Cameroon, the Democratic Republic of Congo, Ethiopia, Ghana, Madagascar, Malawi, Rwanda, Uganda, and Zambia. Overall government revenues are very difficult to predict, however, because the model used in this study is not best suited to follow other taxes when analyzing scenarios up to 2035, and so these results should be treated with caution, and further research is needed in this area.
Distributional Effects of AfCFTA on Poverty and Employment
EFFECTS ON POVERTY
According to the latest estimate from the World Bank (2018), on the African continent 415 million people live in extreme poverty (57 percent of global total) and 60 percent of people reside in countries with fragile situations. Progress toward reaching development goals, including poverty reduction, is heterogeneous across the continent. On a broad regional level, for example, the level of extreme poverty in North Africa is less than 3 percent, whereas that of Sub-Saharan Africa is 41.1 percent. These regional estimates, however, mask strong discrepancies between countries.
In North Africa, the extreme poverty headcount ratio in Djibouti is 19.3 percent, but the same ratio for Algeria and the Arab Republic of Egypt is below 0.4 percent. In Sub-Saharan Africa, incidences of extreme poverty are the lowest in Mauritius (0.4 percent), the Seychelles (0.9 percent), and Gabon (3.9 percent), and the highest in Burundi (74.8 percent), Madagascar (77.5 percent), and the Central African Republic (77.7 percent).
By 2035 and under baseline conditions, the headcount ratio for extreme poverty in Africa is projected to decline to 10.9 percent. Perhaps seeing a continuation of current demographic and economic trends, and in line with poverty projections from the World Bank (2018), the world remains off-target to eradicate extreme poverty by 2030. In the baseline scenario and throughout Africa, the headcount ratio of extreme poverty is expected to decline from 34.7 percent in 2015 to 15.5 percent by 2030 and 10.9 percent by 2035.Throughout this period, Sub-Saharan Africa would observe a decline in extreme poverty to 13.1 percent from the most recent estimate of 41.1 percent. Most countries in North Africa would be expected to eradicate extreme poverty by 2035.
More than half of Africa’s population is likely to live on more than US$5.50, adjusted for purchasing power parity (PPP), a day by 2035. Under baseline projections, the proportion of people who live above moderate poverty, here defined above an international threshold of PPP US$5.50 a day, is expected to increase in Africa from 21.9 percent in 2015 to more than half of the population by 2035, which is equivalent to a net increase of half a billion people. In this analysis’s baseline projections, this expansion is reflected in a higher demand for basic public services such as education, health, electricity, and water.
Full implementation of the African Continental Free Trade Area (AfCFTA) could by 2035 lift an additional 30 million people, or 1.5 percent of the continent’s population, out of extreme poverty. West Africa would observe a decline of 12 million attributable to AfCFTA, while Central and East Africa would observe declines of 9.3 million and 4.8 million, respectively. At the country level, the largest gains in poverty reduction from implementation of AfCFTA would occur in countries with high initial poverty rates such as Guinea-Bissau (10.2 percentage points), Mali (7.6), Sierra Leone (7.2), Togo (7.2), Liberia (5.7), Niger (5.4), and the Central African Republic (5.1).
Meanwhile, full implementation of the agreement could lift 67.9 million in the continent out of moderate poverty (at US$5.50, PPP-adjusted, a day) by 2035, and in part because of the influence of the large boost in household consumption expected from trade openness, about half of the people lifted from moderate poverty would be located in six countries: Ethiopia (8.2 million), Nigeria (7 million), Tanzania (6.3 million), the Democratic Republic of Congo (4.8 million), Kenya (4.4 million), and Niger (4.2 million).
EFFECTS ON EMPLOYMENT
This analysis focuses on workers switching jobs or on labor displacement, not job creation. Under baseline conditions and at the continental level, the distribution of employment by activity changes according to expected demographic and urbanization trends. Under baseline conditions, agriculture and wholesale and retail trade would provide half of employment in the continent. Agriculture’s importance as a source of employment is expected to decline in 2035 to 29.7 percent of total employment in Africa, down from 35.9 percent in 2020. This decline is in line with historical trends globally and for the African continent. The wholesale and retail trade sector’s participation in total employment is expected to increase from 16.9 percent in 2020 to 20 percent by 2035.
Full implementation of the African Continental Free Trade Area (AfCFTA) could by 2035 lift an additional 30 million people, or 1.5 percent of the continent’s population, out of extreme poverty.
Agriculture would, under baseline conditions, account for one-quarter of employment in the continent, with marked differences between countries. In North Africa, the percentage of people employed in agriculture would be lower than in other regions, at 10.7 percent. In Egypt, agriculture is expected to employ 12.4 percent of the workforce by 2035, and in Morocco, 11.6 percent, but smaller proportions are projected for Tunisia (7.8 percent) and the rest of North Africa (6.1 percent).
For East Africa, the proportion of employment in agriculture is projected to be 47.8 percent, driven by the large shares in Kenya (60.9 percent), Ethiopia (60.7 percent), and Uganda (52.1 percent), compared with lower shares in the countries that make up the rest of East Africa (with 11.4 percent of employment in agriculture by 2035).
In southern Africa, with an employment projection in agriculture of 29.8 percent, the largest agriculture employment share is projected for Madagascar (53.1 percent) and Tanzania (50.4 percent), and the lowest for Botswana (4.9 percent) and South Africa (1.7 percent). Meanwhile, West Africa’s agricultural employment is projected to be 26.7 percent by 2035, while that of the Central Africa region will be 20.9 percent, with more homogeneous conditions between countries.
AfCFTA would support the structural transformation of employment in Africa. A more careful examination of the results at the country level reveals differentiated impacts across countries. For example, agricultural employment as a percentage of total employment is increasing in 15 countries and declining in 14, which reflects the large sectoral redistribution of agricultural output across the continent.
Sectoral reallocation of labor within countries is driven by the intensity of labor used and the reduction of trade costs under AfCFTA. The effect on segments of the population is driven as well by the propensity of people, particularly women, to be employed in certain industries. Across the African continent, the sector that tends to employ a larger proportion of women is recreational and other services. Although at the continental level, recreational and other services are not affected in terms of total employment, nuanced differences emerge when looking at the regional level.
For example, as a result of AfCFTA, Central Africa would observe combined gains of 287,000 jobs in recreational and other services. Again within Central Africa, Cameroon and the Central African Republic would observe gains, while there would be a decline in Rwanda. Major gains in employment are expected in the agriculture sector (0.3 million), which is overall close to gender neutrality in employment across Africa.
In general terms, wages for unskilled labor would grow at a faster rate than average in West, East, and southern Africa. Effects on relative wages are driven by the changes in the composition of output induced by the policy reforms. In East, West, and southern Africa, AfCFTA is expected to reduce the skill wage premia because remuneration for unskilled labor would grow at a faster rate than for skilled labor.
In East Africa, the wages of unskilled labor would grow 0.16 percentage points more (year-on-year) than the wages of skilled workers; in West Africa, 0.03 percentage points; and in southern Africa, the same number of percentage points. Skill premia are expected to increase in North Africa amid the increase in the demand for skilled workers in manufactures and sophisticated services due to AfCFTA. Wages for skilled workers would grow 0.2 percentage points (year-on-year) higher than those of unskilled workers.
Source photo : World Bank Group