Why African economies must diversify: UNCTAD

aFRICa is among the least diversified regions in the world with regard to exports. Commodities account for more than 60% of total merchandise exports in 45 of the 55 countries in africa, leaving them highly vulnerable to global commodity price shocks and undermining the continent’s inclusive growth and development prospects, a recent report by the united Nations Congress on trade and Development (unctad) has revealed.

The latest unctad “Economic Development in africa Report 2022” has highlighted the need for economic diversification by african economies. It shows that neglecting the potentially transformative role of high knowledge-intensive services, such as information and communications technology services and financial services, is among the key reasons why export diversification remains a challenge in africa.

Between 2005 and 2019 services accounted for only 17% of total exports in africa, of which travel and transport accounted for about two-thirds, representing a high concentration of traditional services sectors in its total trade in services.

The african Continental Free trade area (afCFta) ratified and set in motion in January 2021 could potentially unlock ginormous economic value for the continent. The pact creates a continentwide market; embracing 55 countries with 1,43 billion people and a combined gDP of us$3,4 trillion.

Themed “Rethinking the Foundations of Export Diversification in africa – The Catalytic Role of Business and Financial services,” the unctad report pinned hopes of economic diversity on the afCFta:

“Effectively addressing barriers to services trade under the african Continental Free trade area will be key to unleashing the transformative role of services in enhancing the diversity and complexity of products from africa”

unctad recommends that for export diversification strategies to be impactful in africa, policies need to be in place that enhance inclusive access to innovative financing technologies, including for small-and-medium-sized enterprises. Leveraging high knowledge-intensive services to increase productivity and improve competitiveness in the private sector will be key to achieving higher value-added diversification and growth under the afCFta.

While some countries have added new product lines to their export basket, insufficient progress has been made in steering the industrial sector into high-value-added manufactured goods that are key to successful sector growth and effective integration into the high-value segments of regional and global value chains. In addition, such trade is comprised mainly of traditional services, such as transport, suggesting limited access to a variety of fundamental competitive services inputs from within the continent

Currently, there are about 50 million formal microenterprises and small-and-medium-sized enterprises in africa, with an unmet financing need of us$416 billion every year. Exporting firms, particularly new entrants and small-scale ones, need to secure external financing to cover the high costs of entering export markets.

Crucial to the matrix are the advances in africa’s digital economy as well as in the provision of financial services which have over the past three years witnessed quantum leaps thanks to fintech.

“Investments by african financial technology companies soared to a record of over $2 billion in 2021 (a 200% increase from 2020), and about 60% of the $5,2 billion of venture capital transactions in 2021 were injected into the financial technology sector alone. Venture capital growth in africa in 2021 stood at 215%, higher than in any other region. africa has over 500 active financial technology companies, including a handful of unicorns, start-ups with a market value of over $1 billion” added the report.

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. to maximise its benefits, the first step will be to conclude planned negotiations on investment, e-commerce and intellectual property.

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