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Strengthening Regional Economic Integration for Africa’s Dev

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					 Strengthening Regional
 Economic Integration for
 Africa’s Development
 - Part I
           Ms Bineswaree Aruna Bolaky
                    Africa Section
Division for Africa, LDCs and Special Programmes
                    24 June 2011



                                                   1
Structure of presentation
Part 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?

                                                       2
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.

                                                        3
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)


                                                                    4
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.
                                                                            5
    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.
                                                                              6
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
                                                   7
8
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.




                                                      9
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.



                                                                    10
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;


                                                                          11
Brief History of Regional Integration
in Africa (ARIA IV chapter 2)




                                        12
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
                                                13
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.

                                                        14
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
                                                       15
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.
                                                              16
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.
                                                17
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.

                                                       18
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.

                                                  19
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?

                                               20
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.

                                                        21
22
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.

                                                         23
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




                                               24
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).
                                                          25
Status of regional economic
integration in Africa:Intra-african trade




                                        26
27
BUT Aggregate figures hide
important country variations




                          28
Southern African countries
are more integrated




                         29
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
                              30
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

                                      31
Status of regional economic
integration in Africa:Intra-african trade
Obstacles 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
                                                           32
33
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
                                                                  34
Status of regional economic integration
in Africa:Intra-African investment




                                          35
36
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
                            37
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-African
investment 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
                                      38
intra-African trade and investment.
39
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).                     40
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.

                                              41
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.


                                                  42
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.
                                                      43

				
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