How Can Sub-Saharan African Countries Diversify Their Market Access?

traditional markets such as the EU and the US—suggest that Africa may need to explore new frontiers, including effective African Economic Areas, to diversify its markets as well as its exports to these markets.

How Can Sub-Saharan African Countries Diversify Their Market Access?

Tap into Growing Trade Potential with Asia

The first response comes from research conducted by the World Bank’s Office of the Chief Economist for the Africa Region (Ouattara and Zeufack 2019). With the growing interdependence within the global economy, integration into GVCs can ease the industrialization process in Sub-Saharan African countries. Over the past two decades, trade flows have rapidly increased between Sub-Saharan Africa and Asia. Exporting has been an important channel through which Asian countries have accelerated their pace of growth and emerged as major international competitors. But SubSaharan African countries are still lagging. Chapter 4 investigates the extent to which Sub-Saharan African countries can tap into trade potential with their partners in Asia.

Asia, especially East Asia and South Asia, has been the global growth engine in the past few decades. China’s economy is now larger than the US economy (in purchasing power parity). India is the world’s third-largest economy, and Indonesia is on track to become the world’s seventh-largest economy. In 2017, Asia made the largest contribution to world trade volume growth, accounting for 51 percent of the increase in merchandise exports and 60 percent of the growth in merchandise imports (WTO 2018).

For Africa, this indicates a significant shift from the traditional sources of market opportunities and FDI (the EU and the US) to newer sources—in Asia. The share of Sub-Saharan African countries in Asian trade has increased rapidly, and for some African countries their key trading partners are increasingly becoming China, India, and Indonesia (although the traditional export destinations still account for a significant share). Furthermore, the growing middle class and increasing demand from East Asia (accompanied by rising relative wages there), along with the shifting structure of GVCs, may offer new economic opportunities for Africa. The findings from Ouattara and Zeufack (2019) suggest that there is indeed potential for SubSaharan Africa’s exports, given the rising middle-class consumption patterns in Asia.

Focus on Export Growth, Targeting Asia’s Growing Middle Class

The second response comes from a collaborative study by the World Bank’s Office of the Chief Economist for the Africa Region and the Finance, Competitiveness, and Innovation Global Practice (chapter 5). The study examines the effects of Asia’s economic expansion and the subsequent

upsurge in trading partnerships with Sub-Saharan Africa on investment and trade prospects for the region. It also investigates the composition of the export sector, destinations, factor intensity, and various value chain measures (for example, length of production, upstreamness, and domestic value added) of exports in trading with Asia. Although overall exports from Africa to Asia are still highly concentrated in resource-intensive sectors, a few countries have leveraged export booms to Asia to diversify their export portfolios. For instance, Ethiopia and Tanzania have been diversifying into light manufacturing GVCs. In addition to China, India has emerged as a leading trading partner of many African nations.

Chapter 5 identifies the key export sectors driving the GVC participation of African countries with Asia. It evaluates the effects of participating in Asian value chains on the factor content of exports. The study also sheds some light on the policy implications for African nations of moving up the value chains by participating in Asian GVCs. It shows that Asian economic engagement on the continent is associated with an increase in upstreamness, a measure proposed by Antràs et al. (2012). As a result, proportionally more exports to, but not imports from, Asia would help African nations move up the value chains. The effects are particularly strong among African countries that have access to the sea but are relatively poorer than their African peers. The study also shows that increasing engagement with Asia complements rather than crowds out African countries’ exports to the rest of the world, suggesting no evidence of trade diversion due to participation in Asian GVCs.

To tap this rising potential, policy makers in Sub-Saharan Africa must further strengthen their countries’ trade ties with Asia (chapters 4 and 5) in several ways: • Building on achievements of recent years, countries should take steps to increase their participation in this “hub-and-spoke” pattern of trade with select Asian countries. • A careful assessment of the changing demand patterns of Asia’s growing middle class is required to inform export diversification options for the countries in Sub-Saharan Africa. • Countries that invest in reforming their institutions—including strengthening the rule of law and contract enforcement mechanisms, reducing rent-seeking activities in specific markets, and reducing the risks of political instability—would see increasing trade with Asia and the benefits from such trade.

Overall, a policy of export orientation toward Asia can support faster growth and economic transformation and poverty reduction. The prospects for gains in structural transformation will be enhanced by the ongoing restructuring of economies in East Asia and committed leadership for reform and building up firm and state capabilities in African countries. The heterogeneities in the extent of gains from these changes are evidence that the improving external prospects and dormant comparative advantages