New Free Trade Area in Africa

There is some potential good news coming out of Africa, although, as usual it isn’t being publicized by the world’s mainstream media. Recently, 3 trading blocs in Africa, namely, the East Africa Community (EAC), The Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA). This passed Wednesday (Oct 22 2008), these 3 trading blocs agreed to form a Free Trade Area (FTA) of 26 countries with a combined estimated Gross Domestic Product (GDP) of $624bn.
I approach this new development with caution and that is why I used the word “potential”. This FTA, which stretches from South Africa to Egypt, is an economic arrangement which Africa needs and, in my view, is a necessary step toward the realization of continental African economic unity. The FTA will allow goods and services to flow between member countries with little or no tariffs, quotas and preferences. However, the potential benefits of the FTA, which is a macro level arrangement, will not be realized if it is based on desultory micro-level economic policies.
By micro level, I am referring to the most basic building block of any economy, namely, the individual and in this particular case, the individual’s ability to set up, operate and expand a business. A complete rehabilitation at the domestic level is needed to create a conducive business environment that will produce jobs and growth simultaneously. The list of things in need of rehabilitation is long but I will focus on 3 items.

First is the issue of Taxation. Many African governments still follow the false notion that raising tax rates translates to increasing tax revenues. This is a wrong policy, especially in Africa. Tax rates in many African countries prevent new companies from emerging and entering the formal sector and cause existing companies to exit the formal sector or to fold up altogether. A study of the Laffer Curve would be advisable. Governments need to understand that businesses in Africa are not only taxed in terms of money but also every time the power goes off, when water doesn’t flow, when it takes days to deal with government agencies over business matters, when phone lines aren’t dependable etc. All these scenarios, which occur frequently, represent a tax on business.

Second is the rule of law. No vibrant economy can exist without a timely, transparent, accountable and effective judicial system. Basic human rights, civil and criminal law must be known by citizens and observed by authorities. Limits to the powers of the police force must be set and violators swiftly punished. Citizens should not have to spend days and bribes to fight a minor traffic violation. The right of the civilian should be paramount and the police and military shouldn’t have the ability to infringe on it with impunity.

Third, get government out of the business of being a business and into infrastructure and institutional development. This would involve many things, including land administration reforms. The process of land acquisition must be streamlined, title and land ownership well documented and accessible to the public, establish regional bodies comprised of traditional rulers, local authorities and general citizens to administer the sale of local lands with generated proceeds allocated based on a predetermined formula.

If these and other micro level improvements were instituted then the FTA would stand on a sound economic foundation and the realization of its potential would be far more certain. Thus, the FTA is a step in the right direction, we, however, have to make sure our shoe laces are well tied.