African integration: Facing up to emerging challenges
Least developed countries (LDCs) and low-income countries, particularly in Africa, have been enjoying a sustained period of economic growth and macroeconomic stability. Nevertheless, most LDCs continue to suffer from a set of structural handicaps which affect their ability to achieve sustained economic growth, diversify their economies, create jobs and reduce poverty on a significant scale. A carefully crafted integration agenda could help foster inclusive and sustainable development in Africa.
The issue of regional integration is particularly prominent in Africa, where it has been estimated that the continent’s current trade intensity barely stands above 12 percent. Africa’s own agenda aims to boost intra-regional trade from the current level to 25 percent or more by 2022. This is an ambition that must be embraced by Africa’s traditional and emerging trading partners considering the potential development benefits that could be derived from such a scenario.
But the integration agenda in Africa is rendered extremely complex due to the multiplication of processes. The African Growth Opportunity Act (AGOA) with the US, the Economic Partnership Agreements (EPAs) with the EU, the regional Tripartite Free Trade Area (TFTA) and the drive for a grand Continental Free Trade Area (CFTA) all have an impact on how each Regional Economic Community (REC) handles its integration agenda and priorities.
However, the TFTA marks a key milestone in the long and arduous economic integration process in Africa and this opportunity can be leveraged. It demonstrates a will to tackle several of the long-standing issues that have marred deeper integration efforts until now, including overlapping memberships, poor implementation of liberalisation commitments and a generally fragmented approach to integration.
This paper examines the key elements bearing upon regional integration in Africa. It argues that regional integration should not be an end in itself but rather a means to respond to the sustainable development aspirations of societies across the continent starting with concerns around poverty alleviation, food security and access to essential services. The paper presents the key motivations for deepened integration in Africa, provides a comprehensive overview of experiences to date at the continental level and proposes forward looking options.
The paper has been designed as the first of an ICTSD research series dedicated to regional integration and trade relationships in Africa. The series aims to look at how carefully crafted regional integration processes can act as a vectors for inclusive and sustainable development. We hope that it will provide a useful contribution to researchers, policymakers and trade experts.
Continental integration has been on the agenda ever since African countries gained political independence. The notion of pan-African integration even predates independence movements and the creation of nation states on the continent. Trade has traditionally been the motor of economic, social and political integration. The launch in June 2015 of the Tripartite Free Trade Agreement, followed by the official start of negotiations with a view to establishing a Continental Free Trade Area (CFTA) by 2017, marks a key milestone in this process.
Pursuing regional integration has, however, been challenging on the continent with many initiatives motivated more by political cooperation than by economic interest and trade, let alone sustainable development concerns. Besides concerns around the adverse impacts of tariff cuts on government revenue and local industries, the process has been affected by high implementation costs, institutional weaknesses and overlapping memberships. The private sector has been mainly absent, and, except for members of the East African Community (EAC), there is no specialised agency within government in a number of African countries to monitor regional integration.
In spite of these challenges, the economic gains from further trade integration are potentially large if integration contributes to economic transformation and inclusive development. Poverty is still a heavy burden in Sub-Saharan Africa, with 35.2 percent of the population living on less than US$1.90 a day in 2015. Undernourishment affects close to 220 million people at a time when Africa is far from exploiting its agricultural potential fully. Most Africans have limited access to essential services, including education and health. The adult literacy rate is hovering around barely 60 percent, with deep ramifications in terms of inequality and economic competitiveness in the long term. Finally, it is estimated that Africa is experiencing a 2 percent loss in total Gross Domestic Product (GDP) each year because of insufficient and poor infrastructure. In all these areas, regional integration can generate significant improvements, either by creating employment opportunities through economic diversification, by creating regional infrastructure including roads and electricity or by boosting agricultural productivity and improving access to essential services.
The lack of trade complementarity among African countries, with most exports focusing on extractive industry or agricultural commodities, means that the natural markets for Africa are often external to the continent. But it also means that intra-regional trade tends to exhibit more diversified trade patterns and a higher concentration in manufactures and processed products. In 2015, more than 40 percent of intra-African exports consisted of consumer or capital goods. In other export destinations such goods generally account for less than 30 percent of total exports. This is not only true for goods but also investment flows and services. A first implication is that enhanced intra-regional trade as a result of regional integration may boost trade in more diversified and processed products. This in turn can be a significant driver of structural transformation of the continent’s economies. Regional markets can also serve to help firms prepare and gain competitiveness before engaging internationally and competing with world-class businesses.
To achieve this, regional integration should focus on the emergence and development of regional value chains. The international fragmentation of production is creating new opportunities for African countries by eliminating the need to gain competency in all aspects of a particular good. Integration in international value chains is also frequently associated with enhanced foreign direct investment (FDI) and knowledge spillovers to the local economy. But taking advantage of those opportunities is not automatic. For countries willing to use the “global value chain (GVC) technology” as an engine of development, an open and predictable import regime for intermediate goods becomes more important, as competitiveness is increasingly defined by both country imports and exports. Minimising trade frictions such as delays in border clearance or low quality distribution facilities is critical. Another key factor is connectivity, including transport, logistics services, and information and communications technology (ICT) networks.
Global value chains are essentially driven by investment decisions of multinational corporations (MNCs), through their outsourcing and offshoring activities. Yet, for African countries seeking to maximise benefits from their value chain participation, a major concern has been to capture a higher share of value added domestically to promote productivity gains, the deployment of new technologies, better employment opportunities or economic diversification. In practice, however, it is the lead firm who decides where to locate plants, where to invest and who to source from, based on its strategy to maximise profits. This may or may not offer participatory or upgrading opportunities for particular countries. In the absence of backward linkages with the rest of the economy, critics point to the footloose nature of efficiency-seeking investments or caution against the risk for resource exporting countries of being caught in the “resource trap” when FDI focuses on extractive industries. Others suggest that in the absence of active policies, African countries often lack sufficient absorptive capacity to benefit effectively from technology upgrading as a result of GVC integration.
African integration offers significant opportunities to address these concerns. Regional agreements formed among neighbouring countries seem to play an important role in the development of such regional value chains. Estevadeordal et al. (2013) estimate for example that, on average, countries will source 15 percent more of their foreign value added from members of the same regional trade agreement (RTA) than from non-members. Secondly, as firms unbundle their production processes, logistics costs and efficient border operations become crucial. Regional projects, such as one-stop border posts along the North-South Corridor, often offer the only viable approach to address these bottlenecks and reduce the cost of trade.
Regional integration, however, is not happening in a vacuum. With intra-regional trade still accounting for a relatively small share of Africa’s exports, the continent cannot ignore its traditional and new trading partners in the South. Moving towards deep continental integration would also ultimately require harmonising the different trade commitments made by African countries at the multilateral, regional and bilateral level. China is now Africa’s second most important export destination behind the EU, and India has surpassed the US to become Africa’s third largest export destination. The potential for the emerging economies to boost regional integration in Africa is significant. Empirical evidence suggests that Africa’s imports from the emerging economies, notably China and India, have been mainly in manufactured goods, including motor vehicles, machinery and equipment. To the extent that these products can be sourced at lower cost from the South, African countries can afford to import more of them, leading to greater productive capacity and, ultimately, increased trade. The links between emerging economies’ investment activity in Africa and intra-African trade are also critical in building the continent’s productive capacity – both directly, including through infrastructure projects, and through knowledge spillovers. Moreover, where such investment catalyses regional FDI, there will be a further boost to region al integration.
On the regulatory front, the rise of mega-regional agreements is posing new challenges. These deep integration arrangements tend to go beyond tariff liberalisation to focus on services, non-tariff barriers, regulatory cooperation and investment, with the risk for African countries that such agreements may raise the bar too high for non-members to access their markets, resulting in further marginalisation of the continent. Estimating the impacts of the mega-regionals on third parties remains a guessing game since only the Trans-Pacific Partnership (TPP) has been concluded – and at the time of writing ratification is facing growing uncertainties. The trade diversion effects are likely to be small since tariffs are already low. However, the exceptional treatment of agriculture, fisheries or textiles and clothing where high tariffs remain could be a cause for concern over preference erosion for competitive African exporters. On the other hand, the harmonisation of standards, for example between the US and the EU, could benefit excluded parties as they only need to meet the standards in one market to qualify for export to the other. The mega-regionals may also have a “domino effect”, leading excluded parties to form their own bloc or strengthen existing mega-regionals, and, in the case of Africa, ultimately creating new momentum for the CFTA.
Such an effect may also result ultimately from the conclusion of the Economic Partnership Agreements (EPAs). While these agreements promised to strengthen regional integration in Africa, they arguably had the opposite effect, at least at the very outset, by pushing several countries to split away from their Regional Economic Community (REC) and go for an EPA alone or as part of a smaller configuration. However, an unintended by-product of the EPAs may be the realisation among African RECs that, unless they step up efforts to boost regional integration, they might end up offering more generous market access terms to the Europeans than to their regional partners. The EPAs may also provide for technical and institutional support towards regional integration, including in areas such as infrastructure projects and trade facilitation measures. Regional cumulation can also foster the development of regional value chains, which, in turn, can boost intra-regional trade. There is some evidence, for example, that flexible rules of origin for textiles under the US-led Africa Growth Opportunity Act (AGOA), has spurred the development of regional value chains in Africa with remarkable impact on jobs.
In short, regional integration offers significant potential; particularly if it goes beyond cooperation on trade and promotes economic transformation by expanding regional coordination to other areas, including investment, trade facilitation and infrastructure. Essential drivers for such an approach would include the use of intra-African markets as an engine of economic transformation through diversification, industrialisation and the promotion of regional value chains combining goods, services, investment, trade facilitation and infrastructure development.
This paper was produced under ICTSD’s Programme on Inclusive Economic Transformation as part of a project dedicated to regional integration and trade relationships in Africa. ICTSD would like to thank Vinaye Ancharaz (previously ICTSD Senior Development Economist) who acted as lead author and researcher for this paper as well as Christophe Bellmann (ICTSD Senior Resident Research Associate) who provided substantive inputs. ICTSD also wishes to thank David Luke (UNECA) for comments on earlier drafts of this paper. The views expressed in this publication do not necessarily reflect the views of the funding institutions.