Thematic Paper | Sub-Saharan Africa Policy | International Cooperation
Bytes without Borders
How Tech enables African Free Trade
Publication
english.bdi.eu/publication/news/bytes-without-borders
Just scan the QR code with your smartphone or tablet to open the digital version.
Summary
African free trade has the potential to become the key driver for the continent‘s economic development. However, obstacles on the path to economic integration cannot be limited to trade barriers such as tariffs. Free trade needs proper cross-border infrastructure. New technologies and innovations can help to reduce infrastructural deficits and can unleash the full potential of AfCFTA. In this regard, the question of who builds the infrastructure in Africa also has a profoundly geostrategic dimension.
The potential of pan-African free trade is undisputed
The AfCFTA unites 54 African countries, aiming to boost incomes, reduce poverty, and attract investment across the continent.
The African Continental Free Trade Area (AfCFTA), which formally came into force in 2021, is one of the largest free trade areas in the world, encompassing 54 countries and 1.5 billion people, with the aim of creating a single African market (Statista, 2024). Forecasts predict a considerable increase in prosperity: Production factors such as labor and capital are allocated more efficiently, and consumers can choose from a wider range of products. The AfCFTA is expected to boost incomes by 450 billion US dollars by 2035 and lift 30 million Africans out of extreme poverty (African Union, N/A).
In addition, larger markets and the free movement of capital increase attractiveness for local and foreign investors. The AfCFTA is therefore of great importance for German industry, as the free trade area will open new sales markets, leading to a greater independence from single sales markets.
The AfCFTA
is expected
to
boost incomes
by 450 billion US dollars by 2035.
54 Countries 1.5 billion people
Insufficient infrastructure hinders trade
Inadequate infrastructure, particularly in sub-Saharan Africa, poses significant non-tariff barriers to trade within the continent, making goods more expensive and hindering intraAfrican trade, which only accounts for 18% of total African trade.
Duty-free treatment and the regulation of rules of origin undoubtedly play an important role in market harmonization. However, the major obstacles to free trade are of non-tariff nature. Inadequate cross-border infrastructure makes trade more expensive or simply impossible. Sub-Saharan Africa is the region with the lowest road density in the world, and many African countries have generally poor road quality (International Road Federation, 2020). This must be factored into the price of trade: Nowhere is the import and export of goods as expensive as in sub-Saharan Africa (Kere & Zongo, 2023). A lack of efficient transport networks leads to longer delivery times, increased fuel consumption, and higher wear and tear on vehicles, adding up to a higher price of goods. In fact, African countries are trading more outside the continent than amongst themselves: Only 18 per cent of total African trade is accounted for by intra-African trade (Luke, 2023).
Meanwhile, investment in roads and railways in the region is lower than anywhere else, although these are primarily responsible for the transportation of goods (Africa Finance Cooperation, 2024). To enable free trade, inadequate infrastructure must be overcome
Only 18% of total African trade is accounted for by intra-African trade.
Investment in projects by sectors and by region in million US Dollars (2010-2022)
Investment in infrastructure in Africa is below average. The infrastructure that is particularly important for intra-African trade, such as roads and railways, is underdeveloped. Only in ports, which are primarily used for trade with non-
Source: Africa Finance Cooperation (2024)
Airports Roads
No integration without digitalization
The African Internet Economy is expected to generate 712 billion US dollars by 2050.
Despite its fundamental relevance, intra-African trade does not only rely on physical infrastructure. As the digital transformation of the economy continues, telecommunication channels and digital infrastructure are becoming increasingly important for an integrated market – especially because they surpass traditional infrastructure in many areas. Online services have proven essential: messenger services and social networks are the most popular means of communication over long distances.
Digital communication channels not only facilitate social interaction but are also crucial for business transactions and further market integration: it will be essential that suppliers and buyers can encounter each other on the market and exchange their goods and services. Especially for crossborder transactions, a well-developed digital telecommunication infrastructure is necessary, as it gives easier access to distant markets. It also enables a more efficient cross-border division of labor, as people no longer have to be physically in one place to collaborate.
The African Union recognizes the central role of e-commerce with regards to the Pan-African Free Trade Area and has added a protocol to the AfCFTA agreement. It aims at establishing a common legal framework for digital trade and thus, eliminating legal barriers to digital trade (Trade Law Centre NPC, 2024). E-commerce creates more direct sales channels. Particularly in remote areas, producers can sell their goods directly to the end customer, thereby reducing transaction costs due to the absence of intermediaries.
Not only the marketplace, but also the movement of goods is optimized by digital technologies. For example, digital customs can speed up the border crossing of goods, when goods are digitally recorded and customs duties are paid automatically, while simultaneously carrying out security checks to detect possible illegal cross border movements (World Customs Organization, 2016 & European Commission, N/A).
According to estimates, the contribution of the Internet Economy to Africa’s GDP is enormous: by 2050, it is expected to generate 712 billion US dollars, 8.5 per cent of the continent’s GDP (International Finance Cooperation, 2020).
offers new ways for division of labor accelerates cross-border movement of goods
is the backbone of future business models
Digital Infrastructure enables long distance communication creates an African E-marketplace
Africa must catch up digitally
60 per cent of Africans do not have access to the Internet.
Average download speed (Mbps)
300 - 200
200 - 100
100 - 50
50 - 20
< 20
In addition, underinvestment in other critical areas of digital infrastructure, such as fiber-optic connections, presents a major challenge. This is a particular disadvantage, as fiber-optic provides a fast, constant and stable Internet connection with a lot of data being transmitted over long distances (The Economist, 2024). Particularly in more remote areas, greater reliance must be placed on the Internet from space, which represents a widespread solution with lower investment costs.
Another structural disadvantage on the African continent is the small number of data centers, the basic framework for cloud computing and e-commerce operations. These provide the necessary infrastructure for storing and processing large amounts of data and can lead to considerable delays in data processing (Data Center Map, 2024). There is even a lack of basic prerequisites for a competitive digital infrastructure: the high energy consumption of digital infrastructure (e.g. data centers) is confronted with a low energy supply on the continent (Malmodin et al., 2024 & International Energy Agency, 2022).
An additional barrier to e-commerce emerges when it comes to cross-border payments. For a long time, traditional banks dominated these transactions, particularly when cross-border goods traffic involved areas with different currencies. This, however, excludes a large proportion of the African population, as 60 per cent of them do not have a bank account (Thiébaut, 2024).
As technical possibilities advance and African technology companies emerge, mobile money has become one of the most common payment methods in Africa. Digital payment methods will be crucial for the cross-border movement of goods, as they are not only more accessible for consumers, but also promise faster payment processing at lower transaction costs. To date, these digital payment providers come with relatively high transaction fees (Safaricom, N/A).
1,43
0,6
1,28 Kenya
Source: Africa Finance Cooperation (2024)
IT capacity in MW per million capita in Q1, 2023
What are the consequences of inaction?
Building digital infrastructure is not optional but critical for Africa’s economic competitiveness in the future.
As outlined, a robust digital infrastructure is essential for the realization of an African single market – for the networking of the African population, for the creation of a digital market that can potentially be accessed by every African, as well as for the smooth processing of financial transactions. Building digital infrastructure is not optional but critical for Africa’s economic competitiveness in the future. Otherwise, the continent risks falling further behind in terms of technological development and missing out on economic potential.
In an increasingly digitalized world, a fast Internet connection is becoming a critical location factor. According to a company survey, the state of the (telecommunications) infrastructure is one of the most important negative location factors in Africa (KPMG, 2023). Without substantial improvements in this area, African countries risk becoming less attractive to foreign investors. At the same time, local businesses that lack sufficient digital infrastructure will find themselves at a competitive disadvantage compared to foreign competitors, who can leverage superior digital tools and resources.
Digital infrastructure and greater computing power will be of the utmost importance for future fields of application and business areas. The usage of artificial intelligence (AI) has not even taken off yet, and Africa’s disadvantages are already apparent. AI is estimated to contribute 16 trillion US dollars to global economic output by 2030 (compared to 2017) (The Economist, 2024). But due to the lack of digital infrastructure, it seems like AI will widen the productivity and income gap between Africa and the richer countries. Since AI naturally reduces the labor factor in a production process, Africa, as a low-wage location, would lose its competitive advantage in the global value creation process. AI is estimated to contribute 16 trillion US dollars to global economic output by 2030
China is building, Germany is watching
China is the dominant player when it comes to the expansion of both digital and physical infrastructure in Africa. 70 per cent of mobile broadband infrastructure is implemented by Chinese-based companies (Arnold, 2023). Huawei in particular is driving digital transformation in Africa (Ehl, 2022). Chinese infrastructure projects typically involve a combination of Chinese loans and contracts awarded to Chinese companies, allowing for rapid implementation. Germany, on the other hand, is only marginally active in infrastructure projects in Africa. In German development policy, investments in economic structures have so far been inconspicuous. Of the total commitments of German bilateral Official Development Assistance (ODA), only seven per cent went to the infrastructure sector (BMZ, 2023).
What‘s more, national laws and EU directives can even make it more difficult for German companies to become more involved in the African infrastructure sector, for example through mandatory reporting obligations or disclosure of supply relationships.
Still, some may note, that the expansion of infrastructure in Africa has a positive benefit for German industry, also when it is provided by China. However, China acts strategically on the continent and aligns its infrastructure projects with its own interests, i.e. to improve trade routes between itself and African trading partners. This interest does not necessarily correspond to the interest of African companies or the interest of German companies that are active in Africa.
In some cases, the use of Chinese digital infrastructure may even pose business risks. For example, with Huawei technology, there is a risk that certain web content could be blocked, sensitive company data could be exposed, or even acts of sabotage could occur (Ehl, 2022 & BMI, 2024). These concerns underline the need for Germany, together with its Western partners, to play a more active role in Africa’s (digital) infrastructure development. Components
What needs to be done?
The economic potential of an integrated African market is enormous. Building the supporting infrastructure for this should therefore be a priority for German involvement in Africa. However, in German development policy investments in digital infrastructure have so far been too inconspicuous. This must change. The BDI’s recommendations for action are:
1
Germany and its Western partners must be aware of their interests on the African continent and act accordingly. Digital infrastructure projects are not an objective in themselves but are a fundamental location factor –also for German companies.
2
German development cooperation should rethink the prioritization in its budget and venture into large (digital) infrastructure projects. The Federal Ministry for Economic Cooperation and Development (BMZ) should intensify its measures for building digital infrastructure through Germany’s Development Bank (KfW).
3
Satellite constellations will play a central role in the secure supply of Internet in Africa, especially in remote areas. Germany should thus advocate for the planned EU satellite constellation Iris² to cover African countries as well.
4
Global Gateway must become more comprehensible. Regarding Global Gateway, digitalization is one of the five sub-areas that are to be specifically promoted. Up to 300 billion euros in investments are to be mobilized by 2027. So far, however, the initiative presented in 2021 has hardly been noticed, which is due to the vague definition and lack of coherence of the program. Political leaders in Germany and Europe should call for simplified rules so that the funds and guarantee schemes can be accessed as easily as possible and contribute to strengthening the digital infrastructure in Africa.
5
The energy supply for the digital infrastructure must be strengthened. African countries need massive investment in power generation and power grids. To support German industry in its engagement in the African energy sector, the climate policy sector guidelines for export and investment guarantees. By having a strong focus on the EU taxonomy, the guidelines neglect local conditions and requirements in African countries. If, for example, wind, hydro and solar energy are not sufficiently available yet, the residual demand might be met by gas-fired power plants. By excluding this type of basic infrastructure from German guarantee instruments, Africans are denied the opportunity to obtain innovative and comparatively efficient technologies from Germany at attractive financing conditions. The field is left to competitors.
Sources
• African Development Bank (2023). Public-private partnerships needed to bridge Africa’s infrastructure development gap. https://www.afdb.org/en/news-and-events/public-private-partnerships-needed-bridge-africas-infrastructure-development-gap-65936
• Africa Finance Cooperation (2024). State of Africa’s Infrastructure Report 2024. https://www.africafc.org/news-and-insights/news/energy-to-transport-disparity-heralds-unprecedented-chance-to-unlock-growth-afc-state-of-africas-infrastructure-report
• African Union (N/A). About the AfCFTA. https://au-afcfta.org/about/
• Arnold, S. (2024). Africa’s roads to digital development: paving the way for Chinese structural power in the ICT sector?
https://www.tandfonline.com/doi/full/10.1080/09692290.2023.2297363#abstract
• BMI (2024). Stärkung der Sicherheit und technologischen Souveränität der deutschen 5GMobilfunknetze. https://www.bmi.bund.de/SharedDocs/kurzmeldungen/DE/2024/07/5g.html
• BMZ (2023). ODA-Zahlen: Deutsche ODA. https://www.bmz.de/de/ministerium/zahlen-fakten/oda-zahlen/deutsche-oda-leistungen-19220
• Cable.co.uk (2024). Worldwide broadband speed league 2024. https://www.cable.co.uk/broadband/speed/worldwide-speed-league/
• Data Center Map (2024). Data Center Map. https://www.datacentermap.com/
• Ehl, D. (2022). Africa embraces Huawei tech despite security concerns. https://www.dw.com/en/africa-embraces-huawei-technology-despite-security-concerns/a-60665700
• European Commission (N/A). Electronic Customs. https://taxation-customs.ec.europa.eu/customs-4/electronic-customs_en
• GSMA (2023). The Mobile Economy Sub-Saharan Africa. https://www.gsma.com/solutions-and-impact/connectivity-for-good/mobile-economy/wpcontent/uploads/2023/10/20231017-GSMA-Mobile-Economy-Sub-Saharan-Africa-report.pdf
• International Energy Ageny (2022). Energy system of Africa. https://www.iea.org/regions/africa
• International Finance Cooperation (2020). Report e-Conomy Africa 2020 - Africa’s $180 Billion Internet Economy Future. https://www.ifc.org/en/insights-reports/2020/google-e-conomy#:~:text=Analysis%20in%20 the%20report%20finds,8.5%25%20of%20the%20continent%27s%20GDP
• International Road Federation (2020). Europe continues to report the world’s highest Road Network Density, followed by East Asia and Pacific. https://worldroadstatistics.org/europe-central-asia-continue-to-report-the-worlds-highestroad-network-density-followed-by-east-asia-and-pacific/
• Kere, S. & Zongo, A. (2023). Digital technologies and intra-African trade. https://www.sciencedirect.com/science/article/pii/S2110701723000057
• KPMG (2023). Afrika: Ein Kontinent im Aufbruch. https://hub.kpmg.de/hubfs/KPMG_Afrika-Studie_2023.pdf?utm_campaign=IB-Studie%2
• Luke, D. (2023). Understanding African trade is key to helping its development. https://www.lse.ac.uk/research/research-for-the-world/economics/understanding-africantrade-is-key-to-helping-its-development#:~:text=But%20intra%2DAfrican%20trade%20 is,in%20minerals%20and%20fossil%20fuels.%E2%80%9D
• Malmodin, J., Lövehagen, N., Bergmark, P., & Lundén, D. (2024) ICT sector electricity consumption and greenhouse gas emissions – 2020 outcome. https://www.sciencedirect.com/science/article/pii/S0308596123002124
• Safricom (N/A). M-PESA Charges.
https://www.safaricom.co.ke/main-mpesa/m-pesa-for-you/tariffs-limits/consumer-tariffslimits
• Statista (2024). Afrika: Entwicklung der Gesamtbevölkerung von 1950 bis 2023 und Prognosen bis 2050.
https://de.statista.com/statistik/daten/studie/1342786/umfrage/entwicklung-der-einwohnerzahl-in-afrika/
• The Economist (2024). Africa 2.0: How to ensure Africa is not left behind by the AI revolution. https://www.economist.com/leaders/2024/07/25/how-to-ensure-africa-is-not-left-behind-bythe-ai-revolution
• Thiébaut, R. (2024). Advancing regional cooperation within AfCFTA through an integrated cross-border e-commerce system.
https://www.tandfonline.com/doi/abs/10.1080/10220461.2024.2352037
• Trade Law Centre NPC (2024). Overview of the AfCFTA Protocol on Digital Trade (2024). https://www.tralac.org/documents/events/tralac/5392-2024-annual-conference-note-overview-of-the-afcfta-protocol-on-digital-trade/file.html
• World Customs Organization (2016). Digital Customs, the opportunities of the Information Age.
https://mag.wcoomd.org/magazine/wco-news-79/digital-customs-the-opportunities-of-theinformation-age/
Imprint
Editor
Bundesverband der Deutschen Industrie e.V.
Breite Straße 29 10178 Berlin
T.: +49 30 2028-0 www.bdi.eu
Contact Person
Matthias Wachter
Abteilungsleiter Internationale Zusammenarbeit, Sicherheit, Rohstoffe und Raumfahrt
Jonathan Kaupenjohann
Referent Internationale Zusammenarbeit, Sicherheit, Rohstoffe und Raumfahrt
T: +49 30 2028-1464 j.kaupenjohann@bdi.eu
Conception & Implementation
Sarah Schwake
Abteilung Kommunikation
T: +49 30 2028-1426 s.schwake@bdi.eu
Layout & Typesetting
Lana Grochowina lanagrochowina.com
T: +39 176 807 529 63 kontakt@lanagrochowina.com
Status
November 2024
Bildnachweis
Cover | @stevenvanelk | Pexels
S. 4 | 1026830437 | AdobeStock
S. 6 | 258528448 | AdobeStock
S. 10 | 968316144 | AdobeStock
S. 16 | AI generated
Newsletter
Follow our daily posts on social media. We welcome likes, retweets and comments. bdi.eu/media/newsletter-abo
Linkedin linkedin.com
X @Der_BDI
youtube.com/user/bdiberlin
YouTube instagram.com/der_bdi/ Instagram
