The tenth session of the Committee on Regional Cooperation and Integration was held in Addis Ababa on 1 and 2 November 2017, on the theme, “Implementation of the Continental Free Trade Area and shared gains”.

The main objective of the session was to examine the efforts being made to fast track the implementation of the Action Plan for Boosting Intra-African Trade and an agreement to establish an African Continental Free Trade Area (AfCFTA). Participants also took stock of other developments taking place within the sub-programme on regional cooperation and integration in the following areas: intra-African and international trade, infrastructure, industrialization, food security and agriculture, investment and land policies.

This report is one of the submissions to the 51st session of the Conference of African Ministers of Finance, Planning and Economic Development, taking place on 11-15 May in Addis Ababa on the theme, “African Continental Free Trade Area and fiscal space for jobs and economic diversification”.

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Progress in the implementation of the regional integration and trade programme

Surveying developments in Africa’s regional integration with a view to influencing policy

The presentation highlighted the key results achieved by the Regional Integration and Trade Division (RITD) for the period January 2016 to June 2017.

In the area of food security and agriculture, the Division carried out research that contributed to initiatives designed to help Africa rethink agricultural and rural transformation; agricultural production systems; agribusiness and regional value chains; and developing an agriculture sector with a private sector focus. RITD also provided training on developing regional value chains, which contributed to the continental agribusiness strategy and implementation plan aimed at developing a structure and business plan for a continental apex agribusiness.

In regional and international trade, the Division played a significant role in developing the template agreement for the expected establishment of the continental free trade area. That template agreement was being used as the basis for negotiations. RITD undertook research and produced technical papers for African Ministers of Trade on the continental free trade area, African Growth and Opportunity Act, Economic Partnership Agreements, trade and climate change, investment and regional trade agreements.

A key report, the seventh edition of Assessing Regional Integration in Africa (ARIA VII), was published in line with the theme, “Innovation, competitiveness and regional integration”. ECA also launched a report on the Africa regional integration index, which provided data on the status and progress of regional integration on the continent.

Furthermore, the Division delivered trainings on trade and gender, trade policy modelling, and analysis. It also initiated work to develop a Monitoring and Evaluation Framework for Boosting Intra-African Trade Action Plan. In December 2016 and in collaboration with the African Union Commission, the African Development Bank and the African Export-Import Bank, the Division organized Africa Trade Week, a multi-stakeholder platform to discuss topical trade policy issues in Africa.

On industrial and infrastructure development, RITD provided technical assistance on developing industrial policy for member States and regional economic communities. Research was undertaken on the industrial policy landscape in Africa, developing a methodology for the localization of energy technologies to boost the continent’s manufacturing potential and on promoting infrastructure development for Africa’s industrialization. ECA also provided technical support to the African Union Commission, culminating in the launch of the single African air transport market in June 2017. RITD contributed to a better understanding of the role of bioenergy in the energy plans of African countries through a United Nations Development Account project on implementing a biofuel programme for household and transport sectors.

On investment, RITD carried out studies on investment policies and bilateral investment treaties, and provided policy advice on the development of industrial sectors in Namibia, in order to boost trade and foreign direct investment. The Division also conducted policy advocacy in support of the continental dialogue on investment. Two studies were prepared by the Division on the drivers that may support boosting intra-African investment, and on the linkages between double taxation treaties and bilateral investment treaties in Africa. Those studies will support and inform policy processes on the continent, such as the continental dialogue on investment.

The results outlined above were achieved through leveraging strategic partnerships including with Governments, organizations and agencies with the United Nations system, the African Development Bank and the African Union Commission.

During the discussion, concerns were raised about the ability of certain African countries to apply and implement effectively a possible agreement that would establish a free trade area. Similarly, small and landlocked countries in particular expressed concerns that their gains from the regional integration process in Africa would be limited. It was also observed that some other countries have managed to tune their landlocked status to their own advantage. It was noted that the eighth edition of the report, Assessing Regional Integration in Africa (ARIA VIII), provided important insights into how to alleviate such concerns.

Also during the discussion, participants acknowledged that the infrastructure deficit and non-tariff barriers continued to be major challenges that needed to be dealt with in order for African economies to industriali ze, become more competitive in the international market, and be able to export their products under specific trade agreements and arrangements. In that regard, building and upgrading value chains would be critical. One example cited was to develop the required infrastructure and capacities for roasting and blending raw coffee beans in order to be able to export coffee under the African Growth and Opportunity Act.

In regard to investment issues, it was noted that data collection on intra-African investments remained a challenge for African countries. There was a need to collect and compile data on intra-African investments, including, in particular, on foreign direct investment originating from and heading to African countries. Also stressed was the need to identify key financial challenges faced by the continent and the importance of investments in infrastructure aimed at unlocking the regional trade potential.

The discussion focused on the critical need to review infrastructure bottlenecks in Africa and how best to tackle them. It was noted that the Programme for Infrastructure Development in Africa (NEPAD) had developed programmes and projects to build infrastructure and promote industrial development. In that regard, a key issue was to ensure that the infrastructure projects of the Programme for Infrastructure Development in Africa (PIDA) would contribute to industrial development. It was also noted that, at the Dakar Financing Summit (held on 14 and 15 June 2014), for example, proposals for pdf 16 projects (7.93 MB) were introduced and that ECA was working with the New Partnership for Africa’s Development (NEPAD) to find alternative ways to fund those projects, such as through pension funds and other financing sources.

It was emphasized that there was a need to set up regional value chains, which could promote industrialization and which would include raw materials from Africa. However, it was pointed out that the cost of transportation of inputs was impeding the competiveness of African economies. Also, the opportunities provided by ongoing trade corridor projects needed to be reviewed, with the objective of making them competitive. The discussion turned to strategic and integrated planning, which was identified as necessary for effectively addressing development issues in Africa.

The following recommendations were made:

1. Member States and regional economic communities are encouraged to adopt sound monitoring and evaluation frameworks to ensure the effective implementation of regional integration commitments;

2. ECA, the African Union Commission and the African Development Bank should increase technical assistance in generating and collecting data on trade and regional integration.

Inclusive infrastructure development: the key to promoting Africa’s industrialization

The point was stressed by the secretariat that industrialization was critical for African economies to achieve structural transformation, where resources were shifting from lower to higher productivity, and to value added activities. It was explained that such an approach would ultimately result in sustained growth, job creation and poverty reduction. It was pointed out that numerous opportunities existed for African economies to scale up industrial activities, including large resource endowments, increasing domestic demand, and expanding regional markets driven by trade agreements. If African economies were to tap into those opportunities while promoting value added activities, an inclusive infrastructure development would remain a necessary enabler. Promoting industrialization and infrastructure development was sine qua non to achieving some of the Sustainable Development Goals of the 2030 Agenda and the aspirations of Agenda 2063.

Furthermore, the secretariat indicated that the industrialization of African economies was required in order to find ways that helped the continent address infrastructure bottlenecks. It was noted that such changes would require effective planning and strong coherence through shared strategic plans and policies, similar to the coordination that existed between national and regional infrastructure development programmes. The establishment of special economic zones, under certain conditions, were effective in circumventing the persistent and significant infrastructure constraints on the continent. Ongoing success stories across the continent existed in Egypt, Ethiopia, Kenya and South Africa.

It was pointed out that there was consensus that infrastructure deficits were limiting the full benefits of industrialization for the continent, though countries were moving very slowly towards addressing such deficits. Energy was cited as the most critical infrastructure asset that was posing a serious impediment to the industrialization trajectory in Africa. Emphasis needed to be placed on clean energy production patterns that would ensure that industrial processes were sustainable.

Industrialization also needed to be looked at in the context of a full value chain approach, starting with the production of inputs (e.g. fertilizers), and including products and services. The successful implementation of a continental free trade area would require massive industrialization at the continental level. Another issue that needed to be addressed was the mismatch between most African education systems and the needs of industry.

It was observed that poor governance impacted negatively on infrastructure development on the continent, as the main focus tended to be on building, with less focus on the maintenance of current infrastructure assets.

The following recommendations were made:

1. Member States are recommended to improve the governance of the infrastructure sector, taking into consideration issues of repair and maintenance of the existing assets;

2. Member States are urged to scale up their efforts in addressing energy deficits and to tap into the vast renewable energy potential of the continent;

3. Member States are encouraged to promote the development of Special Economic Zones and Industrial Zones to scale up value added activities;

4. Member States are encouraged to allocate priority to the development of quality infrastructure to reduce logistical costs and enhance inter-connectivity.

Sharing best practices: boosting intra-African investment

The secretariat presented the main objectives and key findings of a study that had been undertaken by ECA, “Drivers for boosting intra-African investment flows towards Africa’s transformation, which built on and was a follow-up to an earlier ECA study on investment policies and bilateral investment treaties in Africa. The main objectives of the current study were to analyse the drivers of boosting intra-African investment flows and to provide a solid theoretical and empirical framework aimed at strengthened investment policies in order to boost intra-African investment. In addition, the study also explored the progress made in negotiating the continental free trade area and linked the benefits of such a trade area with the promotion of intra-African investments.

Some continental initiatives that had been undertaken by Governments and some pan-African institutions in promoting investment regulations were also highlighted. The initiatives included: (a) work on establishing the trade area – which was instrumental in creating a single continental market for goods and services; (b) the efforts of regional economic communities in the development of investment regulations; (c) ECA study on bilateral investment treaties and double taxation treaties, which have been an integral part of the work of policymakers to counter the perception of risk and promote foreign direct investment (FDI); and (d) a pan-African investment code aimed at harmonizing existing investment regulations.

Some of the key trends on FDI flows in Africa were also highlighted. A key message on such trends is that the continent remains one of the world’s fastest-growing economic regions. That fact provides incentives for foreign companies to consider Africa as a potential destination for their investment. Factors contributing to the increasing growth in investment include: improved government policies, improved macroeconomic conditions, and reforms on investments. Reference was made to some studies which, among other things, reveal that global investment flows have increased rapidly, from approximately $200 billion at the beginning of the 1990s to $1.75 trillion in 2016.

The results from the study reveal that geographical distribution of FDI in Africa in 2016 remains heterogeneous. A breakdown was provided of investment levels in each of the five regions of the continent. Drivers of intra-African investment were highlighted, focusing on both continental and regional levels. In his summary, the secretariat highlighted key conclusions and policy recommendations, and urged African member States to take crucial steps towards implementation.

It was pointed out that the establishment of a continental free trade area would significantly boost intra-African trade. It was very important to ensure, however, that once the trade area was established, African countries would undertake not to participate in discriminatory practices. In addition, any international agreements and protocols, including trade facilitation and customs agreements, must be localized in order for the continent to reap the greatest benefits from such an area. Deeper regional integration in Africa was also called for, based on the view that it was a critical factor in supporting intraregional trade and investment. The importance of investment for Africa ’s development, as a source of both finance and productive assets, was also stressed.

It was noted that the establishment of a continental free trade area would serve as an effective tool in dealing with the numerous challenges and bottlenecks associated with efforts to boost intra-African investment. One of the highlighted challenges was the high cost of production, a key contributing factor to the low productivity levels. In that regard, it was noted that the establishment of such a trade area would present an opportunity to reduce the cost of factors, underpinned by the free movement of people, goods, services and capital. In addition, it was observed that harnessing internal savings would improve intra-African investment.

Regarding investment challenges, it was pointed out that tapping the potential of intra-African trade and investment depended on the capacity of African countries to do the following: increase the pace of production and industrialization; mobilize domestic resources in order to boost intra-African investment; accommodate trade facilitation; and reduce the costs of doing business. In that regard, the point was made that the promotion of intra-African investment could be done through mobilizing internal savings by strengthening the financial system; Moreover, the it was noted that establishment of a continental free trade area could also be complemented by reforms to the business climate to promote intra-African investment. Another point that was emphasized was the need to consider the risk perception relating to Africa in developing a risk framework.

It was observed that productive capacity in Africa was impeded primarily by high production costs. It was noted that large-scale industrialization could harness the potential benefits from the continental free trade area. It was also noted that it was an opportune time to consider the impact of business tourism on intra-African investment and particularly within the region of Eastern Africa. To do that, reliable data would be required on bilateral investment disaggregated by country and sector and on trade in value added. It was observed that such data would enable ECA to perform more detailed and in-depth analyses of the investment determinants.

In that regard, it was noted that service-driven foreign direct investment had taken precedence because the data, especially the announced greenfield investment, masked its growth. To attain more balanced growth, investments across the economic sectors must be more evenly distributed. In that regard, it was noted that reliable data on investment by sectors could help to ensure that. Furthermore, it was noted that African countries faced difficulties in producing data on investment owing to the lack of required statistical expertise and vocational trainings.

It was observed that many investors were reluctant to invest in Africa because of the perception of elevated risk. In that regard, it was suggested that harmonization of rules and regulatory investment frameworks within and across African regions, and the establishment of the continental free trade area, could help to mitigate that concern. In addition to the suggestion of a negative perception, it was pointed out that a lack of political stability and policy predictability were also factors that affected adversely investment flows to Africa.

The following recommendations were made:

1. Member States are encouraged to give effect to regional and international investment instruments and agreements and to those within the proposed framework for the establishment of the continental free trade area;

2. Member States are encouraged to improve the quality of and access to education through targeting specific training and vocational programmes to improve labour skills and scale up the expertise of their labour force;

3. Member States are encouraged to improve the quality of and access to education, based on the view that a more educated workforce would increase investment potential, boost intraAfrican investment flows and promote associated innovation, technology and knowledge transfers;

4. Member States are called upon to improve the business climate, which is essential to attracting investments;

5. Member States are urged to observe the principle of non-discrimination especially in relation to incentives for investors, given that favouring intra-African investors in a discriminatory manner would have a negative impact on sources of investment from outside Africa.

General discussion on the theme of the tenth session, “Implementation of the continental free trade area and shared gains”

General discussion

It was acknowledged that the establishment of the continental free trade area could be an important tool for addressing the continent’s challenges associated with socioeconomic development, unemployment, food security and poverty. At the same time, member States noted that the continental free trade area in itself, once established, would not be enough to ensure a transformational change and inclusive gains, but it would provide a comprehensive platform to address the issues and challenges at stake. It was pointed out that, in order for the free trade area to bring the intended benefits, there would be necessary to implement supporting policies, strategies and measures aimed at, among other actions, building productive capacities, improving trade facilitation, increasing investment and closing infrastructure gaps. In that respect, member States also highlighted the need for special and differentiated treatment when implementing the continental free trade area modalities.

In addition, it was noted that compensation mechanisms would need to be put in place to ensure that potential losses owing to the reforms relevant to liberalization, such as loss in revenue from tariff reductions, could be offset and benefits from the establishment of the continental free trade area could be better shared among member States. Furthermore, the point was emphasized that there was a need for wide consultation with all stakeholders on the negotiations, implementation, and monitoring and evaluation of the agreement to establish the continental free trade area, including with relevant line ministries, women, young people, the private sector and civil society.

Particular emphasis was placed on the key role of the private sector in the process to establish the continental free trade area. During the deliberations, a communication strategy was discussed, which would play a vital role in advocating a free trade area and enhance understanding of the agreement by the private and public sectors. Moreover, structures were called for to support a more unified voice for the African private sector. It also indicated that the implementation of the agreement to establish the continental free trade area must be accompanied by a solid monitoring and evaluation framework to ensure its effectiveness and accountability to stakeholders at national, regional and continental levels. In that regard, it was stated that ECA and the African Union Commission could play a role in that regard, including at the subregional level. It was also discussed that regional economic communities and ministries in charge of economic integration could assume their roles at the regional and national levels, respectively.

In addition, it was noted that trading relations with external partners must also be considered in the implementation of the agreement to establish the continental free trade area. It was pointed out that, in particular, the implications on a continental free trade area of external commitments, such as the Economic Partnership Agreements, must be understood. Member States should make use of the Aid for Trade to finance reforms relevant to an agreement relating to a free trade area. It was also emphasized that it was important to ensure that the establishment of such a free trade area would strengthen the position of Africa vis-à-vis its external partners and would not create new vulnerabilities.

Any study that looked at the interactions between trade agreements (including the Economic Partnership Agreements) and the continental free trade area should be made widely available. In view of the fact that youth unemployment had remained high, the point was stressed that there was a need for African countries to develop curricula better suited to the priorities of the continent and to the needs of the labour market. Moreover, the point was made that offering decent jobs should be a high priority in implementing the 2030 Agenda and Agenda 2063.

Recommendations

The following recommendations were made:

1. ECA, in collaboration with the African Union Commission, should take a leading role in monitoring the implementation of the various components of the agreement to establish the continental free trade area;

2. Member States are encouraged to enhance the implementation of the Boosting Intra-African Trade Action Plan and African Union Commission and partners should carry out the tracking of progress made in that regard and provide technical assistance for the implementation;

3. Member States are encouraged to involve the private sector in the process to establish the continental free trade area to ensure that the design of the agreement addresses their priorities and concerns;

4. ECA and the African Union Commission should also enhance their support to the private sector in taking advantage of the continental free trade area and other trade agreements and arrangements. Specifically, more work should be focused on standardization;

5. ECA and the African Union Commission are encouraged to collaborate in the organization of annual review meetings for members of the private sector from African Union member States to enable them to take stock of the progress in implementing the agreement to establish the continental free trade area and give recommendations to speed up the process;

6. Member States are urged to put in place policies that recognize and enhance the role of FDI (including intra-African investments) as a vehicle for expanding intra-African trade and strengthening the productive capacity of their economies;

7. Member States are encouraged to raise the awareness of their respective constituencies of the continental free trade area, in order to inform and better prepare them to harness the potential benefits of such a trade area;

8. The chief negotiators are urged to be faithful to the continental free trade area negotiations principles that were originally agreed at the launch of the negotiation process.