Building capacity to help Africa trade better

World Bank Group increases support for regional integration in sub-Saharan Africa


World Bank Group increases support for regional integration in sub-Saharan Africa

World Bank Group increases support for regional integration in sub-Saharan Africa
Photo credit: World Bank

Titled “Supporting Africa’s Transformation”, the World Bank’s new Africa Regional Integration and Cooperation Assistance Strategy for the period FY18-FY23 will promote economic diversification and strengthening of regional value chains, build sub-regional energy and digital markets, help create productive jobs for youth, and tackle cross-border health and climate change risks.

“The World Bank Group brings a unique combination of financing, policy support, and convening power that can help facilitate collective action to address regional infrastructure gaps and policy and regulatory barriers to integration. We are buoyed by the high level of commitment of African leaders towards promoting the regional integration agenda,” said Makhtar Diop, World Bank Vice President for Africa.

The World Bank Group remains an important financier of regional integration initiatives in Sub-Saharan Africa, with existing commitments of over $10 billion. Over the next three years, financing will increase by over $6 billion to assist the continent in addressing barriers to integration. In addition, the provision of technical assistance and better analytics will help facilitate collective action by countries in priority areas. The strategy has benefited from wide-ranging consultations with policy makers, regional bodies, and the private sector in Africa.

“Regional integration is Africa’s most important task and infrastructure is its backbone. The World Bank Group’s Regional Integration Strategy, developed in consultation with the African Union, comes at a critical time when Africa is making steady progress on its economic integration instruments, namely the African Continental Free Trade Area, the Protocol on Free Movement of People, and the Single African Air Transport Market,” said Moussa Faki Mahamat, Chairperson of the African Union Commission. 

The private sector has a large role to play in the regional integration agenda. “The World Bank and the International Finance Corporation will bring together both public and private sector solutions to tackle integration challenges. Our joint efforts will notably target the expansion of regional markets and the diseconomies of scale which are holding back rapid development of the private sector,” said Sergio Pimenta, Vice President of the International Finance Corporation for the Middle East and Africa.


Context of Regional Integration in Africa

The case for integration in Africa rests on several premises and these have largely remained the same over the years. The political geography of Africa was mostly determined by the colonial powers and in many cases, national borders have little relationship with ethnic and cultural homogeneity. The small size of many countries and fragmentation of domestic markets results in various diseconomies of scale, which pulls down the economic potential of the entire continent. Over 70 percent of Sub-Saharan African countries have a population of less than 20 million, and about half the countries have a gross domestic product (GDP) of less than US$10 billion in 2016 (nominal terms). About one-third of SubSaharan African countries are landlocked and crucially dependent on their neighbors for access to global markets. The fact that the resource base may often be in countries far removed from where the markets are makes it imperative to seek regional solutions to some of the common challenges. There are over 50 transboundary river basins and several regional subsurface aquifers in Africa, which again demonstrates the need for collective action in management of these natural resources. There are also the ‘global public bads’ such as conflicts, natural disasters, and epidemics that do not respect national borders.

The African experience of integration does not demonstrate a clear sequential process but shows a diversity of approaches and attempts. The classical thinking on regional integration sets out a sequence of having common markets and customs unions before moving to common currency and full integration of factor markets, eventually leading to a possible political union. Despite any rhetoric, the experience in Africa bears little resemblance to this classical model. There are long-established monetary unions such as Central African Economic and Monetary Community (CEMAC) that have not become real customs unions. In fact, there have been numerous attempts toward creating common markets which have not borne fruit. However, there is renewed expectation around the recent agreement establishing a Continental Free Trade Area (CFTA), and swift follow-up would be critical in fulfilling the expectations. Then, there is the long-standing issue of overlapping membership and mandates of Regional Economic Communities (RECs) which makes it impossible for them to function like true regional communities in its classical form (some countries are members of multiple RECs). All this shows that a flexible and opportunistic approach toward integration has been the practical reality in Africa. Whether this remains the approach going forward would depend on the resolve of African countries to address deeper issues around the balance between sovereignty and integration, recognizing that there would be short or medium-term winners and losers from integration and addressing these differentiated impacts.

Context for this Strategy

Going forward, the nature and pace of integration in Africa would also be defined by wider economic opportunities and challenges. In particular, there are likely to be four key economic drivers of regional integration. First, nature of economic growth and macroeconomic stability could be an important factor for integration. The past decade has seen the continent grow largely on the back of a commodity price boom and largely sustainable debt levels. With the recent retreat of the commodity super-cycle, there is an opportunity to push ahead with greater intra-African trade as a potential driver for increasing productivity and economic diversification. Second, the ongoing demographic boom and rapid urbanization could be another important factor for integration. For instance, how is Africa going to take advantage of its burgeoning youth cohorts to meet the growing food needs and rising purchasing power of its urban population? Third, an accelerated pace of structural reforms, which leads to improvements in competitiveness and consequent opportunities for agglomeration and specialization among countries, could be another driver for integration. Finally, advances in technology and its falling costs are likely to be another driver of integration – for example, falling costs of renewables could benefit all countries equally if diseconomies of scale are addressed or availability of improved Internet connectivity could potentially revolutionize distance education and help address chronic challenges such as poor quality of teachers.

Strategic framework for WBG’s support for regional integration in Africa

Possible Future Scenarios of Integration in Africa

While it is hard to predict the pace of regional integration going forward, it is very likely to remain in positive territory. Three possible scenarios for the status and depth of integration in Africa during the next decade can be identified: (a) the integration agenda gets into high gear, among others, with a strong agreement and effective implementation of the CFTA, and a rapid scale-up of regional infrastructure through leveraging private financing; (b) a more likely scenario of continuation of selective approach to integration where collective and sovereign interests overlap, but with greater engagement of the private sector and deepening in certain sectors such as power trade, financial integration, and removal of some barriers to trade; and (c) an unlikely downturn in the overall climate and support for integration due to rising domestic sovereignty considerations and a growing disbelief among people and policy makers about achieving tangible benefits from integration.

Consultations during preparation of the strategy brought out a shared positive assessment of the benefits to be had from deeper integration, but stakeholder views on the prospects of realizing these benefits ranged from some very optimistic to rather pessimistic assessments. Neither of those extremes is realistic and/or warranted, but most feedback was in line with systematically working through the barriers to integration. This WBG strategy has been drafted on the basis that Scenario (b), that is, continuation of an opportunistic approach with pockets of deepening of integration, is more likely to play out over the coming years. Strong and meaningful results are possible under this scenario. But the WBG will continue to support willing governments and regional organizations to push the boundaries and move into a possible high-gear phase reflected under Scenario (a).

Strategic Priorities: ‘What’ will we do?

Four strategic priorities for the WBG’s RI program are being proposed for FY18-FY23 (also the IDA18 and IDA19 periods). These priorities have been guided by the criteria mentioned in the previous paragraph, continental priorities, and feedback from external consultations. African countries and regional institutions (that is, AU and RECs) will continue to set the overall framework for regional integration and determine its pace and sequencing. The WBG support will be within that overall framework and prioritized based on the following strategic priorities:

Strategic Priority 1: Generate economic dynamism along regional economic corridors

Identify 8-10 economic corridors during FY18-FY20 – either along transport trunk routes or along production centers for major agricultural commodities (for example, livestock, or cash crops). Along these corridors, use a combination of WBG instruments to support countries to address policy issues (including standardization of norms and regulations) that affect productivity and promote trade and private investments, along with financing the remaining infrastructure gaps and promoting skills development to take up the job opportunities. Together, this support is expected to make these corridors more dynamic and deepen regional integration. It would also involve using WBG financing and advisory services for leveraging further private investments for improving regional connectivity and developing sub-regional infrastructure, using appropriate WBG instruments to support policy change to address the ‘soft’ areas and use higher-level convening functions to bring multiple countries to take coordinated actions and attract private investments. Success would be measured by increases in productivity, value addition, intra-regional trade volumes, and job creation.

Strategic Priority 2: Develop functioning regional markets in four priority sectors

In the spirit of the MFD approach, during the initial years of the strategy, work will focus on laying the foundations of regional markets in priority sectors – agriculture, energy, digital and telecom markets, financial sector, and technical skilled labor. In these areas, the focus would be on increasing supply and quality of the product or service; addressing regulatory, policy, and institutional barriers toward development of functioning regional markets; enabling business reforms aimed at improving access to finance; facilitating cross-border trade and investment; and harmonizing policies and regulations. For example, improving agricultural productivity requires scaling up regional solutions, especially to address training, equipment, and technical support, as well as access to finance. Regional approaches are particularly critical for the introduction of irrigation and integration of development interventions between permanently located agriculturalists and migratory pastoralists. The WBG would continue to align its ongoing programs such as the Sahel Regional Pastoralism Support Project (PRAPS) and the Sahel Irrigation initiative to mitigate internal and cross-border conflicts. The objective is to develop regional migration corridors of livestock to reduce the risks associated with competition for water and land resources. In addition, in WAPP, completion of all planned cross-border interconnectors is expected by 2021, making it possible to have a ‘seamless flow’ of electricity between the 14 member countries of WAPP.

Going forward, the physical infrastructure investments would be complemented by building trust in power trade through payment securitization and addressing off-taker risks. The power trade should eventually lead to a regional spot market. In the area of regional market for skills, WBG support would involve features such as increasing the supply of trained skilled labor from technical and vocational institutions to meet the requirements of the evolving job market, allowing mutual recognition of degrees and addressing other barriers to labor market movement (where countries are committed to such labor movement). Within the financial sector, it would involve developing trade finance and financial infrastructure as well as long-term financing through capital market development and deepening the market in areas such as SME finance, agriculture finance, and housing finance. In the telecom/ICT sector, there are opportunities for sub-regional harmonization of telecom regulations and roaming policies, cross-border digital payment integration, e-trade, and examining options for regional data centers and ‘cloud platforms’ and for multi-currency, multi-country settlement platforms for cross-border financial transactions. In the real sectors, the WBG will support the integration of supply chains across countries/sub-regions, including through the emergence of regional champions and capacity-building and product-upgrading solutions. Success would be measured by progress made in laying the foundations of these markets, increase in supply, reduction in cost, and improved quality of supply, all of which should ultimately benefit the end users.

Strategic Priority 3: Scale up access to quality public services and entrepreneurship through complementary regional solutions

In areas such as off-grid energy access and small-scale irrigation, there are economies of scale benefits that are possible by harmonizing standards and regulations and providing regional lines of credit to scale up access. Opportunities would be explored for facilitating greater uptake of improved technologies, including through private sector channels. In areas, which have multiplier regional benefits such as through R&D support, technology adoption, provision of identity systems (ID4D), building institutional capacity, or promoting entrepreneurship, complementary regional solutions would be explored. In parallel, the WBG will contribute to the dynamism of regional entrepreneurship with dedicated disruptive technology solutions and investment funds. Prioritize the introduction of ICT and mechanization to modernize agricultural production and increase its competitiveness.

Strategic Priority 4. Promote collective action to address risks of regional economic contagion, fragility, epidemic, and climate ‘hot spots’

There is a large body of existing WBG operational engagement in this area. Many of the regional priorities in the World Bank’s ACBP18 would be pursued further. As mentioned elsewhere, this area of work would require long-term engagement. The focus going forward would be on deepening the cooperation and collective action efforts, making them more sustainable both institutionally and financially. There are also opportunities for innovation and developing the next generation of regional solutions in complex areas of providing public goods.


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