Assessing Regional Integration in Africa VII: Calls for greater focus on human capital and science and technology

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Assessing Regional Integration in Africa VII: Calls for greater focus on human capital and science and technology

Assessing Regional Integration in Africa VII: Calls for greater focus on human capital and science and technology
Photo credit: Green Growth Knowledge

Most African countries agree that regional integration is a goal which they should all aspire to, in order to foster inclusive and sustainable economic growth and development.

The report Assessing Regional Integration in Africa VII: Innovation, Competitiveness and Regional Integration (ARIA VII) launched on 2nd April during the African Development Week states that integration can foster innovation and competition in African countries through investment in human capital.

Africa has spent much of the past decade investing in physical infrastructure, but it must not forget the development of human capital, the report urges. Investing in education, particularly in science and technology, will bring about great gains for the citizens of the continent.

Developed jointly by the Economic Commission for Africa, the African Union Commission and the African Development Bank, this seventh edition posits that regional integration can enable innovation to generate greater competitiveness and trade, boosting integration, growth and development.

“As countries grow in innovation capacities, they are likely to integrate even more with each other through investment, supply chains, trade, knowledge and mobility,” said Mr. David Luke, Coordinator of the African Trade Policy Centre at ECA.

As the Acting Chief Economist of the AfDB, Mr. Charles Lufumpa, pointed out “Africa’s regional integration has changed and improved over the past five years,” culminating in the formation of a tripartite free trade area, and negotiations on the establishment of a continental free trade area.

Mr. Lufumpa thinks Africa can do better. “A lot of progress has been made but we still have problems with energy shortages which pose serious constraints on businesses; lack of integrated infrastructure, and slow implementation of policy.”

Mr. Sidi Ould Tah, the Director General of the Arab Bank for the Economic Development of Africa reminded the audience that the private sector was not given a role in the past, as an engine of economic growth. “To foster innovation, the role of the private sector needs to be expanded,” he argued.

Africa can learn from other countries which have invested much in building talent for innovation. “Africa values regional integration a lot and it can take India’s example of the massive investments made in tertiary education,” suggested Mr. S Kuppuswamy, Representative of the Confederation of Indian Industry and Director of the Shapoorji & Pallonji Group.

The Head of Programmes at Third World Network-Africa’s Secretariat, Mr. Teteh Hormeku, concurs that “it’s not enough to create markets, we must focus on developing capacity and talent.”

He counselled African states to look at the “interface between policies and the commitments we take outside the continent. We must seize this to ensure policy coherence and a pro-development Pan-African intellectual property framework.”


Summary

Assessing Regional Integration in Africa VII (ARIA VII) reviews the relationship between regional integration, innovation and competitiveness. These three elements may not at first seem linked, and competitiveness seems more usually related to efforts to integrate national economies into regional arrangements. But closer review reveals several ways the three interact dynamically. By knitting together networks of institutions, people and markets – the essentials setting innovation in motion – even a loose connection between two or more nations is bound to facilitate innovation and related creative activities. The cross-pollination of ideas and experiences greatly benefits innovators, who can use their enhanced knowledge to adapt ideas and apply them to push beyond the current frontiers of innovation – contributing to competitiveness within the bloc.

Regional integration changes national incentive frameworks as well. In the hope of incentivizing innovation, modern free trade agreements aim to strengthen laws and regulations on the ownership of intellectual property rights. At the same time, anti-competitive and efficiency-reducing regulations and practices are targeted for reform, given the inherent tension between intellectual property rights and access to innovations. It is no surprise that the scope of the negotiations for Africa’s Continental Free Trade Area, launched in June 2015, include intellectual property (IP) and competition policy with a view towards establishing common rules and approaches among African countries.

The wider consumer base provided by the regional economy translates into more demand and ultimately greater returns on any investment in innovation. In addition to facilitating access to new markets and tying them together, regional integration can also have more profound effects on consumer preferences and behaviour. Larger consumer group sizes particularly benefit niche innovators. Deep regional integration between states also enables innovators to cluster more effectively, as seen from the tremendous growth of the electronics industry in the countries of the Association of Southeast Asian Nations (ASEAN). Such clusters are boosted by joint production networks and supply chains, which allow innovators to benefit from scale economies.

The deeper the integration and the larger the community created, the greater the potential benefits for innovation. For countries in the institution-building and catch-up stage, integration with more developed partners can help to facilitate convergence through enhanced technology diffusion.

The African continent registered an impressive average economic growth exceeding 4 per cent between 2000 and 2014. But over the long term (1975 to 2014) growth was far below the average among Asian developing countries. Africa’s recent growth spurt has hardly changed the underlying orientation towards commodity dependence in national economies. Innovation capacities are therefore crucial for transforming what the continent produces and trades. Industry’s contribution to exports is minimal, however, and the growth of Africa’s merchandise exports is still driven by commodities rather than technological progress and factor efficiencies, which account for perhaps half the economic growth in successful economies.

Evidence in this report for 15 African countries for 1995 to 2010 shows that growth in most of these countries was through factor accumulation and not through major gains in input combinations associated with innovation. Even South Africa – a regional hegemon in the Southern African Development Community (and the continent’s most scientifically and technologically advanced country – has been mired in low total factor productivity growth, achieving just 0.04 per cent growth in 2010. This could suggest that South Africa is caught in a “middle-income trap” where the advantages of “catch-up or late-comer” policies have been exhausted and it must now move to new areas driven by science, technology and innovation (STI), but that also take into account its excess labour and high unemployment.

The report examines how to harness the linkages between regional integration, innovation and competitiveness within the framework of Africa’s normative regional integration development model oriented to structural change. It demonstrates that, in a virtuous circle, innovation is both a driver and beneficiary of competitiveness, endogenous growth, development and transformation.

Key messages

Status of regional integration in Africa

African countries’ commitment to integrating their economies remains unwavering. Progress continues along the dimensions of integration identified in the Abuja Treaty, even if it is uneven across regional economic communities and countries.

The Tripartite Free Trade Area and Continental Free Trade Area are major milestones in Africa’s trade integration

Two key shifts in Africa’s trade integration occurred in 2015. First, the Tripartite Free Trade Area Agreement between the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development Community was signed in June 2015. While much work remains to put it into effect, it nonetheless marks a huge step towards rationalizing Africa’s regional trade arrangements. Second, also in June 2015, the Continental Free Trade Area negotiations were formally launched. They are expected to last until the end of 2017 and will cover trade in goods and services, investment, intellectual property rights and competition policy.

Africa’s regional economic communities continue to adopt formal trade measures

Africa is making progress in establishing legal frameworks to deepen trade integration among regional economic communities. In January 2015, the Economic Community of West African States launched its customs union, which eight of the bloc’s 15 member States began to implement through a common external tariff by April 2015. The Arab Maghreb Union is coming closer to launching its own free trade area. Its member States have already signed three out of the four protocols needed for the FTA, with the protocol on rules of origin remaining.

The share of intra-African trade in gross domestic product is rising but remains low against that in other regions

Intra-African imports as a share of the continent’s GDP rose from around 2.7 per cent in 1995 to around 4.5 per cent in 2013, but this is low compared with regions such as the Americas (6.7 per cent), Asia (17.9 per cent) and Europe (21 per cent). However, among the eight regional economic communities recognized by the African Union, only the Southern African Development Community (from 3.6 per cent of GDP in 1995 to 5.7 per cent in 2014) and the Common Market for Eastern and Southern Africa (from 0.8 per cent in 1995 to 1.8 per cent in 2014) have seen substantial increases in the share of intra-regional trade in GDP. The Southern African Development Community is Africa’s only regional economic community among the highest-performing regional trade agreements worldwide in 2013 (sixth out of 32; Africa’s other regional economic communities fall in the bottom half).

African countries have taken steps to boost trade in goods within the continent, but not enough

Several of Africa’s regional economic communities have reduced tariffs on intra-regional imports to a relatively low level: out of Africa’s regional economic communities with free trade areas, the East African Community has a zero average applied tariff on imports within the bloc, while the Economic Community of Central African States and the Common Market for Eastern and Southern Africa both apply tariffs averaging around 1.9 per cent. The Southern African Development Community’s and Economic Community of West African State’s intra-regional tariffs are higher, at 3.8 and 5.7 per cent. Common Market for Eastern and Southern Africa, East African Community, Economic Community of West African States and Southern African Development Community have all adopted measures to facilitate transport and reduce non-tariff barriers.

Rising intra-regional trade in intermediate and capital goods suggests the development of regional value chains

Africa’s intra-regional trade in intermediate and capital goods grew at more than 11 per cent annually between 1999 and 2013, greatly outstripping the continent’s real economic growth of 4.4 per cent. Southern and West Africa appear to be leaders on this metric.

Intra-African trade in services has untapped potential, especially as services now account for a large share of gross domestic product in some countries

Intra-African trade remains low, however, because of weaknesses in manufacturing. African countries are estimated to import around $98 billion in services from outside the continent. Lower barriers to services trade between African countries could potentially allow African firms to capture much of this business. But African countries have high barriers: 19 of 26 African countries studied fall in the bottom half of the global rankings for ease of trade in services.

Economic partnership agreements with the European Union and mega-regional trade agreements make it crucial for Africa to conclude, quickly, the Continental Free Trade Area

The economic partnership agreements are likely to undermine Africa’s regional integration and cause revenue losses for countries, and mega-regional trade agreements to undermine the continent’s trade performance, including through preference erosion. Implementing the Continental Free Trade Area before these agreements take effect would reverse most of these impacts.

Macroeconomic performance remains mostly sound, though the economic slowdown in China could pose difficulties for some countries

Africa’s macroeconomic performance remains largely solid, but China’s slowdown could be challenging for fiscal policy in some African countries. In particular, reductions in global commodity prices could pose problems for debt repayment in African countries with sovereign bonds.

Intra-African direct investment appears limited, but pan-African banks are emerging

Though data are limited on intra-African foreign direct investment, it appears that such flows represent only a fraction of Africa’s GDP. However, some African banks are opening branches across the continent, suggesting a potential for greater financial integration if barriers to cross-border lending are lowered further.

Africa’s regional economic communities have further liberalized movement of persons, but barriers remain

Some of Africa’s regional economic communities, including the East African Community (particularly Kenya, Rwanda and Uganda) and the Economic Community of West African States have facilitated their nationals’ movements among member countries. Progress in other regional economic communities is less advanced, however, and the average ratification rate for protocols on free movement of persons remains at 60 per cent. The continent’s infrastructure continues to improve Africa is employing innovative methods to raise infrastructure finance and to drive forward strategic infrastructure projects, including cross-border transport, communications and pipeline projects. The continent is also working on energy projects. Multiple African countries have made large strides in improving road density and quality as well as internet bandwidth. The Economic Community of Central African States, Southern African Development Community and some East African countries have created single-area mobile phone networks across several countries, reducing roaming costs.

Some regional economic communities are harmonizing mining policies and standards, but not others

The East African Community, Economic Community of West African States and Southern African Development Community have taken steps in this direction, but more need to follow the Africa Mining Vision, which provides a blueprint for mining standards across the continent.

African countries are demonstrating a strong commitment to peace and security cooperation

Over 45,000 African personnel were committed to United Nations and African Union peacekeeping missions in Africa. African leaders negotiated swift returns to civilian rule after coups d’état in Burkina Faso and Mali. And African forces from multiple countries have made substantial progress in combating the terrorism of Boko Haram in West Africa as well as Al-Shabab in Somalia.

Regional integration, innovation and competitiveness

Regional integration is a driver and beneficiary of innovation

As the countries in the bloc grow in innovation capacities, they are likely to integrate even more with each other through investment, supply chains, trade, knowledge and mobility. Innovation drives and is driven by accompanying changes in production capacities and competitiveness. Innovation generates greater competitiveness and trade, boosting integration, growth and development.

Innovation drives growth and structural transformation through increased productivity

The increase in output growth that cannot be associated with other measurable changes (such as labour and capital) is taken as innovation, which (technological or not) contributes to growth and structural change. The most obvious manifestation of structural change is the sectoral reallocation of activities, typically with movement towards higher links in the value chain. Innovation, in various forms, raises growth through at least four channels: technological progress, investments in knowledge-based capital, multi-factor productivity growth and creative destruction.

Africa’s recent growth spurt has been generated through factor accumulation and not through gains from input combinations linked to innovation

This finding applies to most of 15 African countries studied, and even South Africa – one of the 15 and the continent’s most scientifically and technologically advanced country – is mired in low total factor productivity growth.

Empirical evidence suggests a positive correlation between innovation and competitiveness

Worldwide, countries at the top of the Global Innovation Index are also at the top of the Competitive Industrial Performance index. African countries have very low rankings on both indices, and on the Global Competitiveness Index. Mauritius was Africa’s best performer on the Global Innovation Index in 2014 (40th out of 143 countries) and on the Global Competitiveness Index (39th out of 144 countries).

Research and development-generated intellectual property is necessary for innovation but not the only condition

Perhaps only 4 per cent of new innovations are based on research and development, and the rest on practice; the vast majority comes from routine learning and economic operations. In short, innovation is a new way of combining factors of production so that the resulting output has practical utility and commercial value, or addresses a consumer’s wants differently – or both.

Innovation is a potential vehicle for technological leap-frogging

Innovation offers unique opportunities to “late-developer” countries to leap-frog: they can seize opportunities not only in emerging but also mature industries. Forerunners maybe locked in current technologies due to large sunk investment costs, but late developers are not, benefiting from entering mature industries without having to bear the research and development costs. Late developers can adopt the most up-to-date products and services, processes, organizational methods and marketing tools as part of catch-up and leap-frogging. Like other world regions, Africa has particularly benefited from innovations enabled by information and communications technology – better take-up and use is imperative.

Innovation and the global intellectual property regime

The TRIPS Agreement constricted developing countries’ policy space

The Trade Related Aspects of Intellectual Property Rights Agreement under the World Trade Organization took away some policy space open to developing countries under World Intellectual Property Organization treaties. Yet it has “flexibilities” that developing countries should use in their intellectual property regimes. Least developed countries in particular have an extendable transition period to apply the agreement. However, all African countries – least developed countries and not least developed – can adopt strategies to maximize policy space in agriculture, manufacturing and public health and more broadly on access to knowledge. Historical conditions have changed but countries still have “freedom to operate.”

The Sustainable Development Goals include technology transfer provisions

The Sustainable Development Goals adopted by the United Nations in September 2015 includes one goal and two targets on technology transfer through a balanced approach to intellectual property rights. While the design and operation of the proposed technology transfer mechanism has not yet been agreed, African countries should keep pushing in this area.

African countries have been active in Geneva in intellectual property rule-making

African countries have been active at the World Trade Organization and World Intellectual Property Organization in Geneva in pursuing initiatives on intellectual property rule-making, and the Doha Declaration on the TRIPS Agreement and Public Health marks a rare example of their success. Conversely, their moves on global intellectual property rules for genetic resources, traditional knowledge and folklore, and geographical indications, which can help to counter bio-piracy, have yet to bear fruit.

At home, African countries need to be more strategic in harnessing intellectual property to enhance innovation and competitiveness for driving structural change and regional integration

Regional cooperation arrangements on intellectual property policy require reform. Ties between Africa’s intellectual property organizations – the African Regional Intellectual Property Organization made up mainly of Anglophone countries, and the Organisation Africaine de la Propriété Intellectuelle incorporating mainly Francophone countries – and science, technology and innovation policy frameworks at national, regional and continental levels are tenuous, and the two organizations’ mandates generally preclude them from helping countries to exercise their patent rights and counter intellectual property “mercantilism,” including the use of flexibilities. Nor do they have links to free trade and bilateral investment agreements with external partners.

Current African Union initiatives through the Continental Free Trade Area negotiations and the effort to establish a Pan-African Intellectual Property Organization provide an opportunity for Africa’s regional cooperation on intellectual property policy.