Wednesday, February 21, 2024
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The role of AGOA in accelerating Africa’s digital transformation

The African Growth and Opportunity Act (AGOA) has been a cornerstone of commercial ties between the United States and sub-Saharan African countries for over two decades since its enactment in 2000. The act has significantly improved access to US markets for those African countries that demonstrate eligibility through the continued pursuit of a market-based economy and improvements in rule of law and human rights.

AGOA grants duty-free access along 6,500 product tariff lines and has provided competitive advantages to exporters and manufacturers in 36 countries in the region. To promote utilization of the agreement and further bolster trade, US government programs also facilitate collaboration with African countries through various trade capacity-building programs, including to construct infrastructure, invest in agriculture, and support small and medium-sized enterprises (SMEs). By providing duty-free access to US markets, AGOA has stimulated economic growth and development in the region.

Like the rest of the world, sub-Saharan Africa has witnessed remarkable technological advancements since AGOA’s inception nearly 25 years ago, creating opportunities and challenges. As its current authorization expires in 2025, it is vital to renew and revamp the act by addressing the changes brought about by global digital transformation and leveraging the opportunities presented by the new digital economy.

Since the digital economy is a multiplier of economic growth across many other industries, a revamped AGOA could help unleash the full potential of Africa’s burgeoning market. Moreover, the renewal of AGOA would help reduce market uncertainty, as predictability generates the long-term stability that large and small companies alike need for their investment cycles. This paper explores the potential digital dimensions of AGOA and proposes a modernized framework to better harness the digital economy.

Sub-Saharan Africa’s digital transformation journey

The world has dramatically changed since the enactment of AGOA. Changing demographics, increased urbanization, and digital transformation are sweeping forces affecting all nations. Global internet access has grown from just seven percent in 2000 to over 50 percent in 2020.

The world is becoming more urbanized, with more than half of the global population now living in cities. Much of this trend is driven by Africa and Asia. Africa’s population is expected to double by 2050, reaching 2.5 billion people, making the continent one of the world’s largest potential markets for both US firms and African businesses. This population boom is sourced in an upswelling of Africa’s more digitally conscious youth population.

Digitalization in Africa has played a key role in accelerating the dissemination of information, increasing connectivity, and fostering economic growth while promoting sustainability. There has been a substantial expansion in mobile broadband usage, with the number of internet users in Africa crossing 570 million in 2022—twice as many as in 2015, when AGOA was last renewed.

Mobile technologies and services in sub-Saharan Africa added more than USD 155 billion of economic value in 2019 alone, and Africa boasted almost half of the top 40 fastest-growing mobile markets in 2021 worldwide. Mobile connections are further expected to double between 2017 and 2025. Internet penetration is also increasing rapidly in several countries in the region.

For instance, Cameroon has seen a 123 percent increase in internet penetration since 2010, while Kenya has experienced a 114 percent increase. The COVID-19 pandemic has been a significant driver of increased internet use and e-commerce, as millions of Africans turned to these tools for the first time during lockdowns to access critical information and health supplies, as well as obtain consumer goods. African companies have expanded the number and variety of offerings in this space, and several governments are doubling down on transitioning “emergency” measures into regular government service offerings.

This expansion of customers and services has given a much-needed boost to mobile service providers, allowing them to invest more in expanding access.

Despite these major advancements, there are pressing concerns regarding internet coverage and usage gaps in the region.

Overall internet penetration in Africa was only 40 percent in 2022, compared to the global average of 66 percent. There are also major spatial inequalities in access to digital tools. Only 5 percent of intermediary cities in Central Africa and 20 percent in West Africa are currently within 10 kilometers (seven miles) of fiber-optic cables, and just six percent of rural areas have any digital connectivity.

Bridging this gap will require substantial investments in broadband infrastructure, user skill development, and the establishment of appropriate regulatory frameworks. In order to achieve Africa’s full potential and leverage the skills of the continent’s growing young population, over a billion new users will need to be connected to affordable and high-quality broadband internet access by 2030, necessitating an additional USD 100 billion in new investments over the next 10 years.

Digital transformation initiatives

Several initiatives are underway in Africa to better capture the potential of digitalization. Priority one is closing the USD 100 billion gap to provide universal access, 80 percent of which will be needed for digital infrastructure investments. Partnering with private industry can help narrow this gap. Landlocked areas will also require fiber-optic infrastructure.

The African Union is carrying out 114 digital infrastructure projects under the Program for Infrastructure Development for Africa (PIDA) to increase affordable broadband access and bolster e-commerce. These projects include building new fiber-optic infrastructure and upgrading existing facilities. The AU is also close to completing a Protocol on Digital Trade under the African Continental Free Trade Agreement that will provide a set of harmonized procedures and standards designed to expand the adoption and scope of digital trade across the continent.

Measures will include simplifying customs procedures and standardizing digital payment systems.

The US government has offered support for the design and implementation of this new digital protocol, which will create opportunities for both African and US companies. The US Agency for International Development (USAID) has another applicable initiative, the Digital Connectivity and Cybersecurity Partnership (DCCP), which aims to ensure open and interoperable digital infrastructure and build regulatory frameworks and cybersecurity best practices. The DCCP’s technical capacity-building and efforts to increase digital literacy serve as potential avenues to further support digitalization in Africa.

Multiple African countries, including Kenya, South Africa, Uganda, and Lesotho, have adopted digital strategies to create an enabling environment for digitalization. Under the Smart Africa Alliance, Kenya is leading the development of digital strategies and creating a blueprint to help African countries make their own national strategies, harmonizing the functioning of the information and communications technology (ICT) services across the continent.

Digital solutions are being employed in sectors such as finance, agriculture, healthcare, and education, contributing to economic diversification, innovation, and entrepreneurship. One example is Togo’s development roadmap, Togo Digital 2025, which aims to create a dynamic digital ecosystem with a focus on promoting SMEs and women-owned businesses.

Private sector firms, including US companies such as Amazon, Google, and Microsoft, are investing in African data centers, rapidly expanding Africa’s hosting capacity even as they provide customers with data-related services such as cloud computing and storage—especially in South Africa, Nigeria, Kenya, and Ghana. The African cloud market has doubled since 2019 and continues to grow by 25 to 30 percent per year. Over 70 percent of businesses in the continent are expected to shift to cloud-based services in the next two years.

By 2025, the value of the data-center market is estimated to top USD3 billion. These centers accelerate the delivery of services to customers (reducing latency in establishing and maintaining internet connections) in the region. The advent of faster connections and greater download/upload capacities not only increases the performance capabilities of African organizations but also allows for new service sectors to be created.

The United States has already demonstrated its appreciation for Africa’s technological potential and has launched several projects in the region. These include USD 800 million under the Digital Transformation with Africa (DTA) initiative of the Biden administration and USD 100 million from the US International Development Finance Corporation (DFC) to finance the mobile network operator Africell.

Other initiatives include Prosper Africa, which is supporting trade and investment between African countries and the US in the ICT sector; the Millennium Challenge Corporation (MCC), which is addressing digital transformation priorities, regulations, and private sector investment; and efforts by the US Trade and Development Agency (USTDA) to boost the digital economy and infrastructure.

More recently, the US government also collaborated with local and international companies, including FedEx, Google, and MasterCard, to launch the Prosper Africa Tech for Trade Alliance. This alliance aims to combine the goals of the DTA and Prosper Africa and expand two-way digital trade and e-commerce between the US and African countries by accelerating trade and e-commerce, promoting trade with and productivity of African businesses, strengthening technical skills of the workforce, and addressing legal and regulatory obstacles across the continent.

The DFC also provided a USD 300 million direct loan for the creation of seven data centers in Africa. However, further investment in data centers is still required to increase smartphone, internet, and cloud technology access. The more Africa digitalizes, the more need there will be for these hosting services.

As important as these programs are in supporting the development of Africa’s digital marketplace, they will not reach their full potential impact on their own. Greater access to the US market would help jump-start the development of African firms—and the tens of thousands of jobs they would create—as the broader African market develops.

Several surveys show that e-commerce has already granted African SMEs easier access to US marketplaces, while businesses that were already exporting adopted e-commerce to diversify their export markets. Overall, online sellers are massively outperforming offline sellers, with the former twice as likely to sell than the latter. Thus, e-commerce opens a massive opportunity for African firms to export to the US and better leverage AGOA, even in its current form.

Updating AGOA to be more digital-friendly and supportive of e-commerce would maximize the gains from this essential legislation. Improved technology and capabilities through digitalization can also positively affect product tracing, further increasing AGOA’s preference utilization. Technology-enabled end-to-end traceability for agricultural products would not only ensure better quality and regulatory compliance, but also increase productivity by supporting supply chain optimization, reducing bureaucracy, regulating fraudulent activities, ensuring fair pricing, and opening new business opportunities for farmers.

These kinds of programs can improve efficiency and competitiveness, offsetting some of the costs of setting up logistics networks, which many firms find necessary to serve US customers.

Even more is required

Further concentrated efforts are needed at both national and international levels to expand digital trade and boost digitalization in Africa. To overcome challenges in digital transformation, African states will need to coinvest with the private sector and de-risk investments. Other challenges include increasing internet access, building digital infrastructure, cultivating digital skills, and promoting digital services.

Supporting infrastructure, such as reliable electricity provision, will be required for effective digitalization. However, sub-Saharan Africa has some of the lowest electrification rates in the world, at only 44 percent of households in 2017, as well as high spatial disparities—with only 23 percent of households in rural areas having access compared to 79 percent in urban areas. To bridge this gap and ensure access to sustainable electricity, significant investments will be needed in both enhancing traditional access (including gas-fired power generation) and creating alternative sources such as off-grid solar systems and mini-grids.

Enhancing internet connectivity will also require reducing the cost of data services and mobile phone charges. While increasing investments in subsea cables will expand the number of potential service providers, allowing for greater competition, governments will need to do more to encourage digital trade.

Creating predictability in the regulatory environment, as well as expanding the rule of law, will be crucial in attracting investment in this area. Digital regulatory practices can help eliminate trade barriers and create open digital markets. These practices could include prohibiting duties on electronic transmissions, prohibiting discriminatory digital practices, and protecting digital trade platforms.

African states could support the expansion of e-commerce and the digital economy by establishing robust and interoperable data-protection laws that would give African and US companies the confidence they need to extend their most advanced processes and intellectual property across the continent.

African countries could also support the expansion of cross-border trade and investment, as well as e-commerce, by putting in place cybersecurity frameworks that promote democratic digital practices and provide safe and secure internet. Promoting free data flows and creating a harmonized regulatory framework across national borders would allow existing businesses to expand while helping new e-commerce companies just entering the digital marketplace become better established.

Countries also need to promote cybersecurity awareness campaigns among African businesses and individuals.

Finally, developing a skilled workforce and nurturing digital entrepreneurship will be crucial to effective digitalization. This will require integrating digital skills into educational curricula, offering training programs in emerging technologies, supporting incubators and innovation hubs, and promoting mentorship programs for aspiring digital entrepreneurs.

Revamping AGOA to address digital transformation

The increasingly enormous market in Africa presents opportunities for US trade that should be fully utilized. With Africa’s changing digital landscape and evolving needs, Congress has an opportunity to make AGOA even more successful by revamping it to specifically include digital goods and services.

These new, specific provisions would ensure African exporters of digital services such as software development, ICT consulting, and digital marketing could enter the US market duty-free for the duration of AGOA. Digitalizing AGOA could support the ICT sector and ensure that it enables economic growth across a host of sectors throughout the continent.

A renewed AGOA could also direct US government agencies to fully leverage the benefits of digital transformation by providing capacity building and skills development—including technical assistance, training, and knowledge exchange in areas such as digital literacy, coding, cybersecurity, and digital entrepreneurship.

USAID is already supporting digital capacity building in various regions around the globe. Projects under USAID’s Innovation, Technology, and Research Hub have showcased the benefits of digital education and capacity building, including the Digital Asia Accelerator under the DCCP, which aims to improve digital capabilities in Southeast Asian states and bolster economic growth, and the Economic Security Program, which provides ICT training and connects businesses to online markets in the country of Georgia.

Similar initiatives in Africa would increase trade capacity and ensure that African countries can efficiently and effectively manage their trade regimes.

Adapting the language it used in the 2015 renewal, Congress could direct the administration to come up with a strategy for harmonizing regulatory frameworks related to digital trade and e-commerce across participating countries and encouraging African nations to adopt policies that promote a conducive environment for digital trade. These could include data protection laws, support for “data free flow with trust,” fair and nondiscriminatory treatment of US and African digital businesses, cybersecurity measures, and streamlined customs procedures for digital goods.

Lastly, US government agencies should support a new AGOA by fostering stronger public–private partnerships to advance digital transformation. This could involve collaboration between governments and technology firms at the local and international levels.

Such partnerships can facilitate knowledge sharing and investment in digital infrastructure and innovation hubs. In the case of data centers, for example, the US government could help international companies form local partnerships and incorporate local operators to drive job creation and promote growth of regional businesses.

Issues to consider

Some US agreements have already recognized the importance of incorporating a digital dimension to address the challenges and opportunities of the modern era. For instance, the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) in 2018, has supported the gradual elimination of tariffs on trade goods ranging from textiles to automobiles and agricultural products.

In order to modernize NAFTA, initially drafted in 1994, a special emphasis was put on digitalization. A new chapter on digital trade was created to bolster the exchange of digital products and services. This included lowering barriers to trade, such as by prohibiting the application of customs duties to digital products, facilitating cross-border data transfers, and prohibiting data localization.

The chapter also incorporated provisions to facilitate trade, such as by increasing customer protection guarantees to enhance trust, defending against cybercrimes, and expanding privacy protections. Even though the chapter is not a direct part of the trade program, it can act as a benchmark for other digital trade policies. Updating the agreement enhanced its ability to support not only digitally delivered services but also the ever-growing trade of digitally ordered goods.

In many ways, the USMCA set the modern standard for promoting digital trade, and it provides a guiding framework and aspirational goals for the US and Africa to better adapt to modern technological opportunities. The United States could support African countries in achieving these digitalization goals.

Additionally, one of the most significant trade facilitation agreements, the World Trade Organization’s (WTO) Declaration on Global Electronic Commerce, has had a major influence on digital trade globally. Its e-commerce moratorium prohibits levying taxes on digital goods and digital transmissions. This moratorium is set to expire in March 2024, and there has been considerable debate among members on whether to extend it, with countries such as India, South Africa, and Indonesia arguing the moratorium is losing them revenue that could be generated through tariffs.

However, several studies have shown that the imposition of tariffs on e-commerce would be counterproductive. To start, such taxes have a disproportionately negative impact on SMEs. Moreover, the revenue lost from the tariff’s prohibition is minimal compared to the gross domestic product (GDP) growth due to trade gained, especially in developing countries. For example, in India, South Africa, and Indonesia, the tariff revenue lost is less than 0.2 percent of all domestic tax revenue, and ending the moratorium would produce overall negative economic consequences by increasing prices and decreasing consumption.

A long-term moratorium also fosters cross-border data flows, increases export competitiveness, and increases the overall cohesiveness of the global digital economy.

Opposition to the WTO moratorium is worrying, as it highlights the temptation to levy increasingly discriminatory taxes on digital trade. Such policies would result in a net loss for everyone involved. The US should signal clearly that it understands its key role in supporting technological innovation and that it will continue to reduce barriers to digital trade and e-commerce.

Including digital provisions in a renewed AGOA would send a powerful message to African countries and create a much better platform on which to engage African countries considering ending the WTO moratorium.

Conclusion

Digital transformation, an enabler for economic growth across a range of different sectors, brings fresh opportunities to sub-Saharan Africa’s economies. AGOA could be updated and better utilized by incorporating support for digitalization, using digital components of past international agreements as inspirational guides.

Given the long-term horizon of investments in many sectors, businesses are less confident to continue trade in African states without clear signals of commitment from the United States on renewing AGOA. Investor confidence is heavily dependent on the rule of law and predictability in trade; therefore, renewing and updating AGOA to be more digitally conscious would accelerate growth throughout one of the world’s most dynamic regions while also providing increased certainty and opportunities for investors from the US private sector.

(Daniel F. Runde is a senior vice president, director of the Project on Prosperity and Development (PPD), and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Thomas Bryja is a program coordinator with the CSIS Project on Prosperity and Development.)

Contributed by Daniel F. Runde andThomas Bryja

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