Why Africa’s trade is under performing

Africa's trade landscape has long been characterized by low levels of development and underperformance in both volume and content. A recent study, How Africa Trades, has shed light on the continent's struggling trade sector, revealing that Africa's exports account for just 2.3 per cent of world trade. David Luke, Strategic Director at the Firoz Lalji Institute for Africa, delved into the complexities surrounding Africa's trade challenges in an interview with CNBC Africa. Despite the meager export numbers, exports remain a vital source of revenue for African countries, overshadowing other sources such as overseas development assistance and foreign aid. The study also points out that Africa's trade continues to lag behind in both volume and content compared to other regions. This underperformance can be attributed to a combination of factors, including the pattern of investment and the concentration of trade within the extractive sector. One of the key reasons behind Africa's underperforming trade is the limited investment in sectors that add value to exports. Currently, the majority of investments in Africa are concentrated in commodities and extractives, which are not the most valuable components of exports. Value addition is crucial for maximizing export revenue, and without substantial investments in sectors that add significant value to products, Africa's trade will continue to be limited to low-value commodities. Additionally, Africa's trade is heavily skewed towards fuels, metals, and ores, which are commodities with volatile prices. This concentration exposes African countries to price fluctuations and economic instability, making their trade vulnerable to external factors beyond their control. The policy-making process in African countries also plays a significant role in shaping trade patterns. There is a tendency among political elites to prioritize extractive industries due to their perceived ease of generating revenue. However, transitioning to value-added industries such as manufacturing requires a more concerted effort, focus, and intentional policy interventions. Developing industries that add value and require more sophisticated processes, technology, and infrastructure necessitates a holistic approach to economic development. This includes building supportive institutions, implementing favorable macroeconomic policies, and fostering an environment conducive to industrial growth. Yet, many African countries face challenges in achieving this level of economic transformation due to a lack of coordination, infrastructure, and strategic partnerships. The complexity involved in diversifying trade and transitioning to value-added industries requires a coordinated effort from both governments and investors. Overcoming these challenges and unlocking the full potential of Africa's trade sector will require concerted efforts to address the structural barriers that hinder progress. By diversifying investments, prioritizing value addition, and fostering strategic partnerships, African countries can position themselves for sustainable trade growth and economic development.