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Strengthening Regional Economic Integration for Africa’s Development- Part I

Ms Bineswaree Aruna BolakyAfrica Section

Division for Africa, LDCs and Special Programmes24 June 2011

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Structure of presentationPart 1 Brief History of Regional Integration in Africa Rationale for Regional Economic Integration –

General Case and Case in Africa Status of economic integration in Africa Challenges for economic integration in Africa

Part II by my colleague-Ms Milasoa Cherel Robson From Regional Cooperation to Regional Integration:

Services, Labour Mobility and Migration in Africa Strengthening Regional Integration in Africa: What

next?

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Recommended Readings UNCTAD 2009. Economic Development in Africa

Report. Strengthening Regional Economic Integration for Africa’s Development. Check the CD prepared by Aruna and Mila.

UN ECA. Assessing Regional Integration in Africa (ARIA) I, II , III. Check the website of UNECA.

These reports constitute the references for today’s presentations, unless otherwise stated.

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What is Regional Economic Integration? The formation of closer economic linkages among countries that

are geographically near each other, especially by forming preferential trade agreements.(Source: Economist Dictionary)

Regional economic integration is not only about trade in goods, covers other issues such as investment, services, labour

It encompasses regional co-operation on a wide range of matters

Different stages: PTA, FTA, Custom Union, Monetary Union, common market, economic union (customs union plus common market)

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Brief History of Regional Integration in Africa (ARIA IV chapter 2) The question of Africa’s regional integration has preoccupied many

African leaders since the early years of independence. Many have viewed it as a tool for promoting economic growth and sustainable development and improving the living standards of the African people. The overall strategic objective of regrouping African countries was to fight the impact of colonialism and build a united Africa.

African leaders’ quest for unity clearly demonstrates their commitment, which gave impetus to the formation of Organization of African Unity (OAU) in 1963. The African Union Commission (AUC), the Economic Commission for Africa (UNECA), the African Development Bank (AfDB), and the Regional Economic Communities (RECs) are among the key players of regional integration.

The formation of the OAU, now the African Union (AU) was the first step towards promoting continental unity. Since its inception, significant new efforts have been put in place. Nevertheless, Africa has comparatively few success stories to tell with respect to regional integration.

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Brief History of Regional Integration in Africa (ARIA IV chapter 2)Recognizing the importance of regional integration to developing a strong,united Africa, the continent’s leaders have established a number of initiatives, the most notable of which include the following:

The formation of the Organization of African Unity (OAU) in 1963; The 1980 Lagos Plan of Action for the Economic Development of Africa; The African Charter on Human and People’s Rights drafted in 1981; Africa’s Priority Programme for Economic Recovery (APPER) in 1985,

to address the emerging crisis of the 1980s; The Treaty Establishing the African Economic Community (AEC), known

as the Abuja Treaty, in 1991; The Sirte Declaration of 1999; The 2000 Solemn Declaration on security, stability, development and

cooperation of the African continent The AU programme, the New Partnership for Africa’s Development

(NEPAD) in 2000; and The AU Constitutive Act of 2001.

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Brief History of Regional Integration in Africa New chapter in the history of African regional

integration commenced in Abuja, Nigeria, on 3 June 1991.

The Abuja treaty commits the continent along the path of economic integration. This treaty calls for the establishment of the AEC by 2027, with a common currency, full mobility of the factors of production, and free movement of goods and services among African countries

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Brief History of Regional Integration in Africa In 2009, the AUC, in collaboration with the RECs,

took steps to elaborate a Minimum Integration Programme (MIP). This followed decisions taken by various AU Conferences of African Ministers in Charge Integration (COMAIs), which identified the urgent need to rationalize and harmonize REC activities and programmes, if the AEC were to become realized as it was conceived in the Abuja Treaty and the AU Constitutive Act.

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Brief History of Regional Integration in Africa The Minimum Integration Programme consists of different

activities on which the RECs and parties involved should agree upon to speed up and bring to a successful conclusion the process of regional and continental integration.

The MIP is built on the virtues of variable geometry approach which permits the RECs to progress at different pace in the process of integration. To this end, the RECs will continue to implement their respective programmes (considered as priority programmes) and at the same time, attempt to carry out the activities contained in the MIP, the contents of which were identified by the RECs themselves in close collaboration with the AUC.

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Brief History of Regional Integration in Africa The priority sectors retained by the RECs for the first phase of MIP

(2009-2012), are as follows: free movement of persons, goods, services and capital; peace and security; energy and infrastructure; agriculture; trade; industry; investment and statistics.

Some of the objectives of the first phase of the MIP are: Progressive elimination of tariff barriers (TB) in all the RECs; Elimination of non- tariff barriers (NTB) in the RECs; Simplification and harmonization of rules of origin; Signing of partnership agreements between RECs; Facilitation of customs procedures and creation of customs union in

each REC with a common external tariff; Total free movement of persons in the regions and partial free

movement between the regions; Free movement of goods in the regions; Progressive free movement of services and capital in the regions;

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Brief History of Regional Integration in Africa (ARIA IV chapter 2)

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Rationale for Regional Economic Integration: what are the benefits?

Three major theoretical motivations for the formation of trade blocs are the:

A. Allocation effects

B. Accumulation (or Growth) effects of free trade in regional trade blocs

C. Location effects

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Rationale for Regional Economic Integration: what are the benefits?A. Allocation effects With respect to the allocation effect, economic theory

shows that, in a competitive economy, the demand for a good directs productive resources to the production of that good. Hence, demand is an important signal between consumers and producers.

Given that the imposition of tariff and non-tariff barriers between countries interferes with this signal, the removal of such trade barriers in the context of regional integration is thought to increase efficiency in resource allocation.

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Rationale for Regional Economic Integration: what are the benefits? A corollary of the allocation effect is the so-

called “scale and variety effects”(Baldwin, 1997).

A. 1. Scale effects: Rationalization of inefficient industries through

reallocation of resources Creation of large markets allowing small firms

to reach optimal size Economies of scale, reduction in average

costs of production and lower consumer prices

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Rationale for Regional Economic Integration: what are the benefits? A.2. Variety Effects

Integrating a country’s economy into a wider market allows consumers to choose from a varied array of goods, which should increase their welfare.

Increased competition across a wide range of products can also lower consumer prices.

From a firm’s perspective, the opportunity to choose from a wider array of production factors would enable it to use the most appropriate inputs, which could increase its productivity.

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Rationale for Regional Economic Integration: what are the benefits? B. Accumulation effects: Investment and

Trade Greater opportunities to specialize, lower

production costs, greater returns to factors of production, greater returns to physical and non-physical factor accumulation.

Technological spill-overs resulting from regionalism lead to increases in productivity and the reduction of production costs, further attracting more investment, and hence, factor accumulation.

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Rationale for Regional Economic Integration: what are the benefits? C. Location : The formation of a trade bloc can have

an influence on the location decisions of foreign firms.

3 key location variables are (a) market size, (b) the cost of production and the availability of relevant production factors, and (c) market access.

Offering the most segmented market in the world, Africa’s trade costs are much higher than in any other region which has discouraged foreign investment while keeping trade flows at very low levels. Market expansion through regional economic integration can contribute to overcoming this constraint.

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Rationale for Regional Economic Integration: what are the benefits? Regional economic integration : more

efficiency, faster accumulation, larger trade: a positive effect on economic growth.

Considering that higher efficiency and faster accumulation are ingredients of a competitive system, regional integration could be a stepping stone for Africa’s integration in the global economy.

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Are there any costs to regional economic integration? Regionalism v/s multilateralism debate:

building blocks or stumbling blocks?

Trade diversion and trade creation debate

Fiscal impact of regional economic integration

Any other?

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Status of regional economic integration in Africa: There are 14 major regional economic groupings in

Africa with varying degrees of integration

The AU classifies these groupings into two: RECs and other integration blocs.

Of the 53 countries, 27 are members of two regional groupings, 18 belong to three, and one country is a member of four. Only seven countries have maintained membership in one bloc.

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Status of regional economic integration in Africa:Intra-african trade Intraregional trade as a proportion of total trade

remains much lower in African regional integration arrangements compared to those of the Asian and Latin American regions. Some regional groupings in Africa have failed to boost the exports of the areas covered

The benefits from regional integration are not the same for all members of these groupings. In the ECOWAS regions for example, three countries (Nigeria, Côte d’Ivoire and Senegal) account for almost 90 per cent of all intraregional exports and almost 50 per cent of all intraregional imports.

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Status of regional economic integration in Africa:Intra-african trade Have there been trade gains to Africa from

Regional Trade Agreements (RTAs)?

Gains from net trade creation?

Evidence is mixed

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Status of regional economic integration in Africa:Intra-african trade Using a gravity model, a study covering 41 sub-

Saharan African countries in the period 1988–1997 found no evidence of trade creation or trade diversion effects, suggesting that overall, trading blocs in Africa have not been able to positively affect the flows of trade in a significant way (Longo andSekkat, 2004)

Evidence for trade creation was found for the three main African trade blocs, namely COMESA, ECOWAS and SADC (Cernat, 2001). There is also empirical evidence that the overall effect of economic integration on trade creation within CEMAC is positive (Gbetnkom, 2008).

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Status of regional economic integration in Africa:Intra-african trade

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BUT Aggregate figures hide important country variations

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Southern African countries are more integrated

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Agricultural goods much less trade-intensive within the region than are manufactured goods

Potential for increasing intra-African trade in agricultural goods remains largely untapped

Encouraging investment in agro-industries could generate important benefits for African economies

Intra-African trade in exports less concentrated than exports to rest of the world. 39 products account for two-thirds of intra-African trade. 7 products make up two-thirds of Africa’s exports to rest of the world

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Intra-African trade more diversified than trade with rest of the world. This suggests that expanding intra-African trade

could yield significant benefits to African countries in terms of diversifying their production to non-traditional products especially manufactures

Intra-African trade though it is more diversified in terms of products traded than Africa’s trade with the rest of the world, however remains highly concentrated not only in geographical terms but also with respect to a few strategic commodities

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Status of regional economic integration in Africa:Intra-african tradeObstacles to intra-African trade“Weak” attraction forces(a) Small size of most African economies(b) Low per capita income which is a proxy for level of

demand

Strong “opposing” forces(c) High “trade” costs: transport, border and behind the

border costs(d) Institutional factors: corruption, poor economic

policy, political tensions

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Status of regional economic integration in Africa:Intra-African investment Data availability an issue. In the period 2002–2004, intra-African FDI was estimated at only

$2 billion annually on average, which represented about 13 per cent of total inward FDI.

In comparison, intraregional FDI in countries from the Association of South-east Asian Nations (ASEAN) is estimated at 30 per cent of total FDI. In 2007 in Africa, the flow of intra-African investment amounted to $6 billion, raising the accumulated stock to $73 billion.

Intraregional FDI is geographically concentrated among the more developed African countries, mainly in Southern Africa and North Africa.

South Africa is the single most important African source of the continent’s stock of foreign investment

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Status of regional economic integration in Africa:Intra-African investment

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Depending on sectors, the share of Africa in total cross-border M&A sales in Africa ranges between 17 per cent and 58 per cent.

Greenfield investments, in contrast, are rather small. Only the financial sector attracted greenfield investments from Africa representing more than 20 per cent of total greenfield investments in the period 2003–2007

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Intra-African investment is (M&As) is highest in the services sector, where it accounts for 36 per cent of deals carried out in Africa, followed by manufacturing (30 per cent) and then the primary sector (26 per cent).

Low figure of intra-Africaninvestment in agriculture- fear of losing control over land

Intra-African investments come from three main poles. The West African pole, dominated by Nigeria, has developed recently and is very active in mergers and acquisitions in Africa’s banking sector.

The Northern pole comprises the Libyan Arab Jamahiriya, Egypt and Morocco.

Since the end of apartheid, South Africa has been the major player in intra-African trade and investment.

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West Africa is the main source of regional private investment flow into South Africa in 2000 and 2007, whereas South Africa’s private sector investment into West Africa was not as dominant. Instead, East Africa and Southern Africa were the main subregions hosting South African investment during this period.

The inflow of FDI over the years has come exclusively from the private sector, particularly Mauritius (East Africa). Similarly, the outflow of portfolio investment from South Africa has been mainly to West Africa (Ghana most recently).

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Challenges to Regional Economic Integration: Reasons for failures Initial conditions: Lack of complementarities

among regional partners in goods and factors of production, and potentials for product differentiation between regional partners emanating from differences in income levels and consumption patterns.

No strong private sector support. Lack of viable mechanisms for

redistributing benefits from the net gainers to the more disadvantaged regional partners.

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Challenges to Regional Economic Integration: Reasons for failures Almost complete non-implementation of

agreed trade liberalization schedules as well as other obligations by members.

Regional integration initiatives were over-ambitious; they had overlapping memberships and mandates that sometimes conflicted and were often unclear.

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Challenges to Regional Economic Integration: Reasons for failures Economic challenges: high dependence of most

member countries on export of primary commodities, strict rules of origin emanating from trade liberalization schemes and poor quality of infrastructure.

Institutional challenges include bureaucratic and physical hindrances, such as road charges, transit fees and administrative delays at borders and ports. These hindrances raise transport costs and render deliveries unreliable.

Other challenges are related to the lack of coordination and harmonization of policies and regulations at the regional level, non-implementation issues and overlapping membership.