There is no shortage of ideas within Africa about how to create prosperity for the continent’s peoples, and there is huge potential. But making the most of the opportunities ahead will increasingly require Africa’s economies to work together, and for its institutions to improve their governance and performance. The African Union (AU) has a key role to play in this, but it needs to be more effective. The institution has previously launched several reform initiatives that have eventually foundered because of a lack of implementation.
President Paul Kagame of Rwanda, who led a review of the AU in 2016 to which I was privileged to serve as a member of the Reform Committee, summed up the challenge neatly in a speech in Addis Ababa in January of this year. Noting that the AU has had a history of good intentions that have not translated into change on the ground, he said, “Serious problems were repeatedly identified. Solutions were found. Decisions were made to apply the solutions. And very little happened.”
The latest review produced four key recommendations: (1) enable the AU to finance itself in the long term; (2) focus the organization on key priorities with continental scope; (3) realign AU institutions to deliver against those priorities; and (4) manage the business of the AU effectively in both political and operational terms.
Only through sustainable long-term financing can the AU follow an independent agenda that speaks to common priorities. Today, over 80 percent of the funding of the AU comes from donors, but in July 2016 a breakthrough AU proposal to charge a duty of 0.2 percent on the import of eligible items from outside Africa that would enable the AU to be self-financing was approved. This initiative—which is in the process of being implemented—is proof that AU decisions can be followed through and have real impact. The challenge now is to move on with implementation of the other three priorities.
The AU’s proposed commitment to a smaller number of priorities—namely political affairs, peace and security, Africa’s global representation and voice, and economic integration—represent a significant sharpening of the institution’s focus versus the status quo. On the last of these, research by the McKinsey Global Institute (MGI) finds a huge economic and business opportunity within Africa, but one that can only be fully mined if the continent’s current fragmentation is overcome.
The report found that household spending is expected to grow from $1.4 trillion in 2015 to $2.1 trillion in 2025. Spending by businesses is expected to grow from $2.6 trillion to $3.5 trillion in the same period. The research also found that Africa could nearly double its manufacturing output from $500 billion today to $930 billion in 2025. Three-quarters of that potential would come from manufacturing within Africa of some of the one-third of food, beverages, and similar processed goods that Africa currently imports. Meeting this demand affordably through imports in an environment of low commodity prices and weakening currencies may be challenging; meeting demand from home capacity makes more sense.
However, Africa needs to overcome its current economic and political fragmentation to enable companies to tap these large opportunities. Consider that Africa today has eight different (partly overlapping) regional trade zones, but none of them includes more than half of Africa’s countries. The two best-performing blocs are the East African Community and the Southern African Development Community, but they still only export 16 percent and 13 percent of goods, respectively, to trading partners within those blocs. For comparison, the equivalent figure in Association of Southeast Asian Nations (ASEAN) is around 20 percent.
Regional fragmentation hinders business activity and creates a fragmented, unproductive business landscape. The continent has few manufacturing and services hubs, which require scale to succeed. While Africa has 400 companies with annual revenues of above $1 billion, when one excludes South Africa, this number is only 60 percent of the number one would expect. The average large African company has annual revenue of $2.7 billion compared with $4 billion to $4.5 billion in other emerging economies. No African company is featured in the global Fortune 500; Brazil and India, whose GDPs are similar to that of Africa as a whole, each boast seven companies on that list. Yet large African companies are, on average, growing faster and are more profitable than companies of the same size in the rest of the world—suggesting enormous potential. Increased integration would help Africa build more of these large companies, thereby raising competitiveness and productivity, and creating more of the formal jobs that the continent desperately needs.
A reformed AU can help. Today, Africans need visas to travel to more than half the countries within the continent—it is easier for North Americans to travel within Africa than it is for Africans. We have already seen the institution’s ability to take practical steps that bring down barriers to doing business across the continent with the African Union passport. The new passport will help enormously and now needs to be made available to all eligible citizens as quickly as possible. Many more steps need to be taken, MGI has argued, including reducing the time it takes for goods to cross borders, continuing to lower tariffs between countries, and driving closer integration of capital markets.
The review recommends that the AU identify continent-wide services such as the provision of neutral arbitration and competition services, and a common technical platform for the data and analysis needed to assess progress toward Africa’s development goals.
Africa faces many challenges, but will not meet any of them without capable leaders who have the vision, determination, skill, and commitment to implement reforms. Our own experience working with public-sector institutions across Africa persuades us that practical measures to ensure effective implementation should be the priority. The recommendations on reforms to the AU’s leadership and working methods are therefore critical. First, the review recommended that the AU deputy chairperson and commissioners should be competitively recruited and that there should be a fundamental review of the organization’s structure and staffing needs. Second, the AU’s Heads of State Summits should focus on no more than three critical items, with other appropriate business being delegated to lower levels within the AU.
Three of the reform recommendations also acknowledge the need to overcome past challenges of implementation. These included recommendations to constitute a heads-of-state-level implementation supervision arrangement, to establish a reform implementation unit within the AU Chairperson’s office, and to create a legally binding mechanism that ensures that member states honor their commitments to implement reforms.
Only with effective implementation will the AU play the vital role Africa needs and, as President Kagame put it, “set our people on a path to dignity and prosperity.”
Note: This blog reflects the views of the author only and does not reflect the views of the Africa Growth Initiative. Acha Leke is a Johannesburg-based McKinsey senior partner, a member of the McKinsey Global Institute Council, and a member of President Kagame’s AU Reform Committee.
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