Information about Sub-Saharan Africa África subsahariana
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13 Beyond Trade: Regional Arrangements as a Window on Globalization

Editor(s):
Zubair Iqbal, and Mohsin Khan
Published Date:
December 1998
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Information about Sub-Saharan Africa África subsahariana
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Author(s)
Christian A. François and Arvind Subramanian 

This chapter argues that regional arrangements can be an important strategic and practical vehicle to help African countries to integrate themselves into the world economy and to take advantage of globalization of trade and financial markets. However, to achieve these ultimate goals, African governments should implement the right kind of regional integration strategies. These strategies should encompass not only broad trade liberalization but also regional mechanisms for ensuring convergence of macroeconomic stability, structural reforms, common management of resources, and policy credibility. Because chapters above have focused on the trade aspects of regional arrangements, this chapter will limit itself to the other factors contributing to the integration of African economies into the world economy.

It is generally recognized that, in recent years, many countries in sub-Saharan Africa have made considerable progress toward achieving macroeconomic stability and restructuring their economies. However, despite bold reform efforts and clear improvements in performance, the challenges that remain in participating fully in the expansion of world trade and in attracting FDI are daunting. To meet these challenges, Africa needs a reinforced growth-oriented strategy that puts in place the conditions for an appreciable increase in private savings and investment and that has a regional dimension.

To give a measure of the policy challenges facing Africa today, it is worth recalling Professor Tybout’s observation about the dramatic fall in Africa’s share of world exports during the past 30 years.1 IMF data show that the share of sub-Saharan Africa, excluding South Africa and Nigeria, went from 3 percent of global exports in the early 1960s to only 0.8 percent in 1990. Since then, fortunately, it has gradually recovered to a little more than 1 percent in 1995–96. If Africa had merely managed to grow at the same rate as the rest of the world, and hence maintained the same share of world exports it had achieved in the 1960s, sub-Saharan Africa’s exports in 1996 would have not been $44 billion but $152 billion, a level more than $100 billion higher. For Africa to recover its past market share, its exports would need to grow by 10 percent in real terms during the next 20 years.

It is not the purpose of this chapter to analyze the causes of this substantial erosion in the region’s ability to compete in and access international markets, although this analysis has major implications for the kind of strategy and policies that Africa should implement to recover the lost ground.

It is clear that the prime responsibility for pursuing the right growth policies rests with the national authorities. However, regional initiatives can also significantly contribute to the establishment of a secure economic and political environment and the removal of uncertainty about commitment of African government to macroeconomic stability, trade liberalization, and private sector development.

Backdrop to Today’s Regionalism

Regional initiatives are not new to Africa. Since independence, African countries have formed more than a dozen regional arrangements among themselves, encouraged by the creation of the European Community in 1958. A number of these arrangements have failed and have ceased to exist, others have been revitalized, and new ones have been recently launched. It is important to draw lessons from the various experiences.

The primary motive behind the first wave of regional arrangements was industrialization through regional import substitution. It was thought that high regional tariffs and strong government intervention would promote local industries and prepare them for world competition. In the event, however, it led to the creation of a large number of public enterprises with underutilized production capacities and inadequate competitiveness. The new regional approach developed in the late 1980s is based on outward-oriented policies and private sector initiative. It combines preferential regional tariff with multilateral trade liberalization. It also emphasizes deeper integration involving goods, services, and capital, as well as a range of domestic policies.

As in the rest of the world, the new regionalism in Africa developed from the late 1980s is taking place against the background of a more open world economy. And although there is considerable room for further improvement, substantial progress has been made in achieving greater macroeconomic stability, making trade and exchange policies more open, and progressively disengaging the government from economic activity in which the private sector has a comparative advantage. This progress augurs well for regional efforts at integration, as it creates the conditions under which the recent attempts can succeed and potentially yield greater benefits.

Ironically, while regional preferential initiatives are increasing, globalization is clearly posing a threat to the trade preferences enjoyed by the poorer developing countries—many on the African continent. This is happening, of course, indirectly, but through many channels. First, the reduction in MFN tariffs in industrial countries consequent upon the Uruguay Round is eroding preference margins on African exports in these markets. A second channel is through regional integration within industrial countries and between industrial and other developing countries (for example, NAFTA, the EU-East Europe agreement, and the agreement between the EU and the Middle East and North African countries), which is putting African countries on an equal footing with those developing countries that are party to these agreements. The stark illustration of the threat is the recent WTO ruling questioning the Lomé preferences enjoyed by certain banana-exporting countries.

As mentioned above, regional integration attempts of the 1960s and 1970s were confined to liberalizing trade in goods; however, with globalization proceeding apace, regional agreements themselves have had to catch up and broaden their scope to include liberalization of services and investment, and even the harmonization of regulatory standards, domestic policies, and institutions. The EU is probably the most extreme example of the breadth of the issues that are decided and regulated at the supranational, regional level, but the NAFTA experience suggests that even those regional agreements involving developing countries are likely to be more encompassing in their scope. In sub-Saharan Africa, there are also new and deepened regional initiatives between the West African members of the CFA monetary zone (the WAEMU) and between the Central African States (the CAEMC). In addition, there has been a shift of focus in COMESA, while SADC is adopting a new strategy of market integration.

How Can Regionalism Harness the Forces of Globalization?

When we speak of regionalism, we need to keep in mind the two varieties in which it is coming and will continue to come in Africa. The more natural kind of regional integration—and perhaps the one that we instinctively think of—is horizontal integration, that is, integration between African countries. However, there is another—perhaps more powerful—kind of integration that Africa is likely to witness in the years ahead: vertical integration, between African countries and their industrial country partners. One such—involving South Africa and the EU—is already under way, and the EU has indicated that the future status of the Lomé Convention could well take the form of reciprocal trade liberalization codified in a free trade agreement.

Regional agreements can help African countries foster economic growth and harness globalization in at least nine ways. First, regional arrangement can serve as a vehicle for transmitting good policies through regional demonstration effects and peer pressures. This influence can be powerful. The demonstration effect works by provoking the question, If they can do it, why can’t we? It also leads to an examination of the reasons for the regional neighbors’ success and, over time, to emulation of their policies. In the case of vertical integration agreements, the demonstration effect works more directly by anchoring and locking in the policies of the smaller country to those of its trading partner. This effect was thought to be an important motivation for Mexico’s keenness to work toward adoption of NAFTA. An example closer to home, cited by Dani Rodrik, is that of Botswana, which has benefited from the relative macroeconomic stability conferred by its links with South Africa.2 Demonstration effects can be enhanced and consolidated through mechanisms for regional macroeconomic surveillance, as in the EU. Recent examples in Africa include the WAEMU and CAEMC countries.

Regional agreement can be an effective instrument for ensuring that hard-fought policy reforms—such as trade policy or exchange reform—are not reversed by weaker future governments, as an international treaty or a regional formal agreement is much harder to repudiate than national legislation.

Second, there is the important issue of size and credibility. For reasons that may or may not be justified, African countries suffer from the perception that they are too small to be of interest to international investors. Regional integration offers the prospect of building up a critical mass in terms of size (a regional market) that investors might find credible and attractive. In principle, this integration opens up the opportunity to exploit economies of scale, regional specialization, and learning by doing.

Third, to secure an improvement in enabling economic conditions, there is scope for nurturing domestic and regional institutions and fostering institutional linkages. Insofar as the intensification of regional linkages stems from the perception that the process is homegrown, with full ownership by governments and bolstered by the participation of the private sector, there is greater likelihood that institution building and the reforms that it promotes will be sustainable.

Fourth, the need to integrate regionally might also serve to focus attention on the building or rehabilitation of long-neglected regional infrastructure networks. It is nowhere more true than in Africa that geographical contiguity is not synonymous with economic proximity because of poor regional transportation and communication links. This barrier to the intensification of regional economic links needs to be overcome.

Fifth, in some cases, regional cooperation might serve to enhance the region’s bargaining power in its interactions with the rest of the world. One example could be in the area of international trade negotiations. Other examples also come to mind—aid, debt, labor standards, the environment, and so on. The scope of cooperation, from a dynamic perspective, could be large.

Sixth, regional agreements can become agreements for liberalization that goes beyond trade policies—for the liberalization of investment, services, and capital markets. These liberalizations could induce not only static but also dynamic gains that bring about durable increases in productivity levels and facilitate faster growth. In the case of NAFTA, there was substantial liberalization—and on a nonpreferential basis—by Mexico of its investment, financial services, telecommunication services, and transportation services regimes. These objectives are also essential elements in the regional initiatives in West, Central, East, and Southern Africa.

Seventh, regionalism can further broaden trade liberalization by acting as a trial balloon, a kind of learning-by-doing-slowly phenomenon. Those with vested interests in perpetuating protection may not pose strong objections to this form of limited opening, as the competition unleashed—from other Africa country suppliers—would be limited. Nevertheless, the liberalization that is secured as a result could weaken the power of these interests in the long run, paving the way for further nonpreferential liberalization.

Eighth, in an environment where vertical integration between African countries and the EU or the United States is going to become prominent, the case for horizontal integration will also be strengthened. Vertical integration without horizontal integration creates the risk of what is known in the literature as a hub and spoke phenomenon, whereby the incremental foreign direct investment that services the markets in the spokes (the African countries) is located in the hub (the EU or the United States), rather than in the spokes themselves. With horizontal integration, African countries can seek to apply the “cumulative rule of origin” principle in agreements with industrial country partners to maximize the export opportunities.

Finally, an important element in the calculus of regional integration is that regional interaction is likely to be motivated by and, in turn, to facilitate identification of, and cooperation on, a range of political, security, and social issues of concern to the region.

The Pitfalls: What to Avoid

That a well-designed regional arrangement can provide a boost to the right domestic policies and foster growth in its own right does not mean that it necessarily will. There are good and bad regional integration initiatives, and countries need to be alert to the pitfalls that can attend the latter type of integration. It is useful to bear in mind that the ultimate goal is nondiscriminatory liberalization and that regional initiatives should be—in Jagdish Bhagwati’s terminology—building blocks, not stumbling blocks, to this ultimate goal. The following touches upon some of these pitfalls, drawing particular attention to some special features in the African context.

First, there is a risk of setting overambitious goals. With limited administrative resources and with competing claims on political capital, the chances of success are very uncertain and of distraction from nondiscriminatory opening are high. There are some advantages to considering a staged approach, whereby the achievement of a minimum degree of integration will be a first step before embarking on deeper integration.

Second, there is the risk that regional agreements may become bureaucratized and spawn top-down institutions that are not necessarily responsive to the needs of the private sector and are determined to protect their turf to the neglect of the larger objective that they are intended to serve. Avoiding this obstacle to regional integration is one of the critical challenges facing Africa.

Third, as regional integration initiatives mushroom in Africa, we detect the clear risk of a multiplicity of initiatives that overlap each other, leading to potentially conflicting policies. This is clearly a case in which more can not only be less, but damagingly so. For example, in Southern Africa, there are SADC, COMESA, SACU, the CBI, and a number of bilateral agreements. These agreements have overlapping memberships, different objectives (the CBI promotes internal and external liberalization, while the SADC is focused on internal liberalization), different schedules for liberalization, and differences in the scope of liberalization, as reflected in their attitudes toward exclusions. All the effort that is being put into regional integration can easily get diffused, jeopardizing the chances of success for any one effort or initiative. There is clearly scope for rationalizing all these initiatives and adopting a more focused approach to maximize the chances of success.

Fourth, the original insight offered by academics (for example by Viner) about the risks of trade diversion and the attendant possibility that regional agreements might be welfare deteriorating may be particularly relevant for Africa. Why is this so? Africa, notwithstanding the considerable progress made in opening its markets, remains among the most protected regions in the world. And when MFN tariffs are high, the risks of trade diversion are particularly great because of the likelihood that inefficient production in partner countries will replace efficient production in third countries. The low levels of intraregional trade in Africa would tend to suggest that, at least for the moment and given the poor infrastructure links, African countries may not be natural trading partners for each other. As a result, regional agreements in Africa are more likely to lead to inefficient trade diversion. To avoid such adverse outcomes, nondiscriminatory liberalization should accompany regional integration, as envisaged in the CBI. A strong dose of MFN tariff cuts by African countries would help maximize the benefits from regional integration.

Fifth, there is the risk—and this applies especially to horizontal agreements—that countries may be locked into inadequate regional anchors, for example, if the dominant country in a regional arrangement is more restrictive, imparting a protectionist bias to the whole arrangement. This is the other side of the coin of positive demonstration effects, a kind of Gresham’s law whereby bad economic and trade policies could easily drive out the good ones. There is the related danger that regional integration builds up vested interests—especially suppliers in partner countries—that oppose multilateral liberalization.

Finally, there is the broader political context that Africa has to contend with or operate within. In light of the various conflicts, political differences, and civil strifes, it is perhaps not surprising that there has not been a broad commitment to regional goals. After all, this commitment necessarily implies a ceding of sovereignty on economic and financial matters that countries may be unwilling or unprepared to accept. Unless this political will exists, nationalist considerations will prevail over regional aspirations.

Conclusions

Regional initiatives can be an effective additional instrument to accelerate economic growth and facilitate the integration of African economies into the world economy. But to play this role, the regional arrangements must emphasize broad liberalization of domestic policies, promote the transmission of good policies through peer pressures, and nurture efficient domestic and regional institutions. In the African context, many dangers lurk on this path: overambitious goals, overbureaucratization, multiplicity of overlapping initiatives, and weak political will and vision. These traps and pitfalls need to be avoided so that regional arrangements can be building blocks for—not stumbling blocks to—better, more open, and more efficient economic policies in general.

1Professor Tybout made this observation during discussion at the seminar on which this volume is based.
2As discussed in Chapter 7 of this volume.

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