Information about Sub-Saharan Africa África subsahariana
Building Integrated Economies in West Africa
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Chapter 27. Integration and Poverty Reduction

Author(s):
Alexei Kireyev
Published Date:
April 2016
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Information about Sub-Saharan Africa África subsahariana
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Author(s)
Samuel Guerineau

West African Economic and Monetary Union (WAEMU) experience shows that economic integration may have a significant impact on poverty reduction, even if the “growth channel” is weak. On the one hand, until now, the capacity of trade, financial, and deep integration to foster growth has been rather disappointing, and this partly due to weak implementation of regional rules. On the other hand, the WAEMU benefits from a good growth-to-poverty-reduction conversion. It seems that such capacity is based on both its performances in terms of macroeconomic and monetary stability and its ability to mitigate negative impacts of political conflicts thanks to regional institutions. In addition to this long-term positive impact of common institutions, WAEMU experience suggests two lessons to improve the poverty reduction impact of economic integration. First, community policies should be targeted in sectors where the comparative advantage of regional policies is the strongest. It should therefore be a political priority to strengthen regional public goods supply, particularly for regional transportation and energy networks, but also for regional financial information networks. Second, particular attention must be given to the distributive effects of economic integration. The effect of integration policies on living and poverty standards within the WAEMU is different across sectors. A number of regional policies spontaneously contribute to gap reduction between member countries: agricultural market integration, epidemic-reduction programs, and financial service access development. Inversely, trade integration, transportation network development, and skilled labor mobility can lead to a concentration of benefits in the countries initially the richest. An increased momentum for intracommunity transfers must accompany strengthened integration in order to compensate its distributive effects. This may also decrease national incentives to delay the implementation of regional rules.

Trade Integration and Poverty

Since the end of the 1990s, the WAEMU has been quite an integrated trading zone in the form of a customs union. This customs union was recently broadened to the Economic Community of West African States (ECOWAS), with the implementation of the ECOWAS common external tariff (CET) in Januray 2015,1 with a view to also establishing a common market. As part of the Economic Partnership Agreement negotiations to set up a free-trade zone with the European Union, it was decided to favor negotiations with the ECOWAS as a customs union rather than with the WAEMU.2 Trade integration within the WAEMU has been associated with tariff dismantling in relation to the rest of the world, and is consistent with developing countries’ best practices (Geourjon and others 2013a). Nevertheless, the ECOWAS CET produces a slight increase in the average tariff rate (from 11.5% to 14.7%) and allows temporary high tariff rates on some products.

Trade integration in the zone is constrained by implementation problems and nontariff factors. Implementation problems in the WAEMU include: (1) divergence between CET tariff rates and actual rates; (2) lack of harmonization of customs value calculation procedures; (3) extensive use of customs exemptions; and (4) use of internal customs transit system rather than a single first entry point customs clearance (free circulation). The intrazone trade still faces nontariff barriers, although limited in range. The effects of explicit trade restrictions (quantitative restrictions, import licenses, forced import channels) are quite low in the WAEMU. However member states use seasonal and temporary measures on some agricultural produce (see this chapter’s section on agricultural products). Sanitary and phytosanitary and safety regulations do not represent a major impediment to regional integration, as they are of limited use and nonsystematic application due to weak administrative management capacity. The most important nontariff barriers are the lengthiness of customs procedures and nonrecognition of certificates of origin at internal borders.

The overarching objective of trade integration is to increase trade volume and diversification within the zone. The achievements seem disappointing on both dimensions. Intraregional trade is limited and declining, with a 12 percent to 10 percent total decrease between 1995 and 2010. However, intraregional trade is much higher (five times larger) than it is in the other African franc zone monetary union, the Central African Economic and Monetary Community (CEMAC). WAEMU countries’ exports diversification is relatively low but tends to increase. In an analysis of the export concentration Theil index and the number of exported products (HS-6), Cadot, Carrère, and Strauss-Khan (2011) showed that concentration is strong in the WAEMU. In order to assess the export diversification of a country, it is useful to compare it to similar per capita income countries, since an increase in per capita income promotes export diversification. Senegal seems diversified (that is, more diversified than the average of similar per-capita revenue countries), whereas Côte d’Ivoire and Togo are average and other countries seem overconcentrated. Over the last decade, a concentration decrease trend has been observed. It is mainly based on intracommunity exports and the number of exported goods increase (extensive margin). New export products seem to be first tested on the more easily accessed regional market before being exported to the rest of the world.

Econometric analyses highlight a positive impact of WAEMU membership on intraregional trade. Observed trends in intraregional and global trade do not allow a reliable assessment of trade integration efficiency, as many other factors have substantially impacted trade, particularly on infrastructure quality, trade partner growth, and exchange rate fluctuations. Econometric analysis allows circumventing of this obstacle. Using a gravity model, Araujo-Bonjean, Brunelin, and Carrère (2013) showed that industrial goods intraregional trade is four times higher between WAEMU countries than if this Union had not existed. This result is consistent with previous studies (Carrère 2006). However, the existence of the Union causes a deflection of trade, as imports from third countries are lower than their expected values. In comparison, intraregional trade stimulation is not identified in the CEMAC. WAEMU is not only a customs union but also a monetary union and this may have an additional impact on intraregional trade. Adding nominal exchange rate volatility to trade contributing factors allows for a distinction of their effects. Monetary stability seems to contribute to intraregional trade increase and trade diversion mitigation. The strengthening of integration identified on industrial goods has been confirmed on agricultural products markets. Trade integration benefits are higher for originally diversified countries. Detailed analysis of trade integration impacts shows that, originally, most diversified countries (Senegal, Côte d’Ivoire, Togo) benefit from intraregional and extraregional trade creation. Inversely, in Sahelian countries and Benin, intraregional imports increase is detrimental to extraregional exports, which is indicative of trade diversion. In the WAEMU context, industrial goods trade remains limited, justifying a specific focus on agricultural products.

The trade integration process aims at stimulating growth through intraregional trade but also through global trade increase. The expected impact on extracommunity trade is medium-term. Building a regional market larger than the national market should foster regional products competitiveness and attract foreign direct investments in exporting sectors. In the WAEMU context, regional integration was combined with trade liberalization with the rest of the world, and this should have short-term effects. Expected effects of trade integration in the WAEMU have a lot in common with those of trade liberalization. However, given the trade diversion risks, effects related to trade increase can be lessened. Inversely, the trade integration process may mitigate economic instability in creating a broader and more diversified economic space. It is therefore possible to analyze economic integration impacts on poverty, drawing from literature related to the link between trade liberalization and poverty.

The first trade liberalization transmission channel toward poverty is growth. This mechanism rests on a two-way relationship, first, between opening up to trade and growth, and second, between growth and poverty reduction. Economic liberalization can improve company productivity, and therefore growth, through several additional channels. These include access to more efficient technologies, economies of scale, and competitive pressure. In the context of regional integration, trade diversion can lower overall trade increase but this mitigation of static gains can be offset by a combination of dynamic gains and regional integration (broader market size, community policies). Quantitative studies suggest that the positive effect of opening up trade is dependent on other factors: investment, education, and political stability (Winters, McCulloch, and McKay 2004). The poverty incidence reduction allowed by this additional growth is very heterogeneous, since the poverty reduction/growth elasticity is itself heterogeneous (Ravallion and Chen 1997). The effect of liberalization on the poor also depends on its relationship with macroeconomic stability. Indeed, a risk linked to opening up trade is to produce a macro-economic instability increase. Trade integration should mitigate this macroeconomic instability risk by creating a larger size regional market. Direct tests on the trade liberalization/poverty relation usually do not identify significant direct effects of opening up trade (Beck, Demirgüç-Kunt, and Levine 2007). Over a 30-African country panel covering the 1980-2010 period, Le Goff and Singh (2013) found a conditional effect of trade liberalization: it reduces poverty when financial, educational, and governance development levels are high.

Trade liberalization can impact poverty for a given growth level. These direct effects (not linked to growth) can be arranged in three categories, from the individual level to the most aggregated level: price channel, corporate channel, and public finances channel (Winters, McCulloch, and McKay 2004). Figure 27.1 proposes a summary of transmission channels. First, opening up trade directly affects household purchasing power in modifying the sale price of the household’s production and the buying price of their consumption. Border-price transmission depends on internal transportation costs and the margin deducted by distribution channels and by the government as taxes. Porto, Depetris Chauvin, and Olarreaga (2011) showed that the competitive structure of input distribution and product marketing networks significantly impacts farmer income. In the highly concentrated context of cotton in Burkina Faso, the leader split (85 percent market share) into two separate entities would generate (according to Porto’s simulation) a 12 percent increase in the average income of producers. Second, trade liberalization can significantly modify companies’ profitability. Changes in companies’ profitability impacts their labor needs and proposed wages. If this leads to an increase in unskilled labor, it can raise wages and contribute to poverty reduction. However, this transmission channel is limited by the small share of the manufacturing sector in low-income countries. Third, trade liberalization introduces a risk of lower government tax revenue, which can lead to cuts in social expenditure benefiting the poor. The direct effect of trade liberalization is to drastically reduce import tariffs and potential export taxes. This effect can be mitigated, even offset, by collecting value-added taxes on increased imports and the process of tax transition (Chambas 2005). Finally, for any given decrease in public revenue, budget options can, to a certain extent, protect targeted expenditure, which benefits the poor. In the case of an economic union, transfers can be arranged to the countries most affected by lower revenue.

Figure 27.1.Trade Liberalization and Regional Trade Integration Impacts on Poverty

Source: Author, based on Winters, McCulloch, and McKay 2004.

In the African context, trade liberalization can be a driver of poverty reduction through its effect on growth. On the one hand, as on broader samples, studies on the liberalization/growth link on African countries sample have identified a positive impact (Mbabazi, Milner, and Morrissey 2006). On the other hand, the analysis of the growth/poverty reduction link in Western African countries shows an approximately proportional relation (poverty rate/per capita income growth elasticity is close to ‒1). In other words, growth gains from opening up trade contribute to significant poverty reduction. As for most developing countries, tests on the trade liberalization/poverty link in the WAEMU have not identified a direct effect of opening up trade. On a WAEMU countries sample (Kiendrebeogo 2010), the trade liberalization variable did not systematically impact poverty when the growth variable was introduced as a contributing factor. This result suggests that the main effect of opening up trade on poverty reduction is through growth.

The WAEMU is marked by a decrease of growth in the last decade and a slightly lower growth instability than are the groups to which it belongs (sub-Saharan Africa, non-oil-developing countries, low-income countries) (see Table 27.1). The magnitude of external shocks experienced by WAEMU countries (exports and agricultural production) being also smaller than that of the comparison groups (sub-saharan Africa, non-oil-developing countries, low-income countries) one cannot assert that the Union existence is the explanation for a better stability. Nevertheless, this decrease in instability over a trade liberalization period is a convincing sign of the Union’s capacity (in all of its dimensions: commercial, monetary, and economic) to absorb the new risks related to opening up.

Table 27.1.Macroeconomic Instability Evolution by Geographical Zones (1980–2009)
Number of CountriesExportsAgricultural ProductionGDP Growth
80–8990–9900–0980–8990–9900–0980–8990–9900–09
Developing

countries
12817.517.1136.56.25.85.14.63.6
Non-oil-developing

countries
10817.216.312.36.26.35.64.94.13.3
LIC6317.818.816.25.15.65.24.34.43.6
SSA4818.317.916.66.26.55.74.95.63.8
Non-oil SSA4217.616.915.96.56.96.14.54.53.3
CEMAC82219.317.33.84.63.3711.16.4
WAEMU617.814.2118.55.76.24.452.5
Non-oil FZ917.113.610.77.95.55.94.652.6
Source: FERDI (Fondation pour les études et recherches sur le développement international); Box prepared for the 2012 Banque de France Franc Zone Report. Note: CEMAC = Central African Central and Monetary Community; FZ = franc zone; LIC = Low income countries; SSAF = sub-Saharan Africa.
Source: FERDI (Fondation pour les études et recherches sur le développement international); Box prepared for the 2012 Banque de France Franc Zone Report. Note: CEMAC = Central African Central and Monetary Community; FZ = franc zone; LIC = Low income countries; SSAF = sub-Saharan Africa.

The WAEMU economic integration process was not associated with a government revenue decrease. This risk was anticipated at the WAEMU level because the treaty plans for compensation of customs revenue loss (article 58). To this aim, a community solidarity levy (Prélevement Communautaire de Solidarité, PCS) was established in 1996, corresponding to a 0.5 percent tax, raised to 1 percent in 1999, of the customs value of goods imported from third countries by Union member states. This levy is applied by each member state and paid to the WAEMU commission. The community solidarity levy is the WAEMU main own resource, but the compensation system of customs losses ended in 2005. Furthermore, community policies can be used to support the zone’s poorest countries through project funding. The establishment of real transfers comparable to European structural funds could be considered.

The public levy has increased in all WAEMU countries since the customs union was established in 2000, and in six countries out of eight, if compared with 1994. This result is naturally the product of growth performance over the period, but also of supporting policies accompanying trade reform, particularly the tax transition process. Thus, the share of customs duties in overall tax revenue in Senegal went from 39 percent in 1996 to 14 percent in 2012. Simultaneously, there was a symmetrical increase in goods and services tax revenue, notably value-added taxes. This process is relevant for all WAEMU countries, although its effect was less noticeable in a number of countries. Thanks to this tax revenue progression, social expenditure was not reduced over the period. On the contrary, the debt cancellation process for highly indebted countries (HIPC Initiative) has simultaneously freed up extra budgetary resources and directed expenses toward social sectors through the Poverty Reduction Strategy Paper.

The Role of Agriculture

Agriculture is a sector where regional integration can have significant impacts on poverty. First, agricultural trade exchanges are substantial in western Africa. Second, agricultural products represent a significant part of the income and consumption of the poor. Therefore, it is useful to analyze in detail the extent of integration in this field and its effects. Agricultural market integration has been reinforced in the WAEMU by the establishment of the free-trade zone. However, as in the rest of Africa, integration has been hindered by a series of other obstacles including nontariff measures, rules governing input trade (seeds, fertilizer), high transportation costs, and food product distribution network margins (see World Bank 2012).

Agricultural products move freely within the free-trade zone. Movement is further eased by the fact that community origin certificates that must accompany products are not required for agricultural products. The establishment of the ECOWAS free- trade zone in 2003 further enlarged the single market. WAEMU countries are authorized to implement temporary protection mechanisms whenever global market price volatility is too high or whenever unfair export subsidizing practices threaten national producers. Such mitigation measures are national and cannot exceed six months, although they are renewable. They can be used to manage extracommunity import flows but their national characteristic can introduce intracommunity trade distortions.

Nontariff trade challenges remain despite the customs union. First, transportation costs remain extremely high due to transportation infrastructure weaknesses and traveling risks incurred. Recent conflicts in western Africa have increased these costs, as some routes have been closed off. Second, agricultural products are subject to a number of controls and levies between the place of production and the place of consumption. These include central government, local community, and professional trade association interventions, but they can also come from criminal organizations. The various controls, particularly at borders, remain time consuming and frequently cause the loss of perishable goods.

Despite the free-trade zone, official trade restrictions are sometimes used by national authorities. Indeed public authorities use—without any regional consultation—temporary export prohibition measures whenever there is a case of bad crops or a significant food price increase. These trade restrictions have reappeared in the past few years (during the 2007-08 food price boom) although in total contradiction of the free-trade regional agreement principles. These measures are resorted to by coastal countries more than by landlocked countries, as coastal countries benefit from natural protection with transportation costs. Furthermore, input trade restrictions have been used unpredictably for farmers. In order to better contribute to the food safety objective and improve compliance with regional agreements, mitigation measures should be defined at the regional level.

These persisting obstacles must not overshadow the achievements of the past two decades generated by the establishment of the free-trade zone, followed by the customs union, and which can be assessed by analyzing regional agricultural market integration.

Price spread analyses on agricultural markets show that regional market integration has been strengthened over the past decade. For agricultural goods subject to significant informal trade, the exchange volume evolution cannot be analyzed. The border-effects method enables this difficulty to be overcome. Its principle is to test the integration of regional markets by comparing their price evolution. The less price changes are transmitted between various countries’ markets, the more substantial the “border-effect,” which gives a measure of trade barriers. Araujo-Bonjean and others (2013) identify a border-effect drop on millet, sorghum, and maize markets among Benin, Burkina Faso, Mali, and Niger between 1990 and 2011. Trade barriers seem higher with countries outside the WAEMU (Ghana, Guinea, Mauritania), but the small number of analyzed markets moderates the solidity of the result.

The improvements observed in agricultural market integration may significantly impact poverty evolution. This effect operates through exchange flows and prices. Intracountry and intracommunity trade allows both deficit areas’ populations to access lower food prices and surplus areas’ agricultural producers to sell at a higher price. Within the WAEMU, such imbalances are significant for a number of products. The opportunity to sell one’s products at a remunerative price also encourages the producer to develop his or her products’ volume, which reinforces midterm food supply security. Trade liberalization also contributes to smoothing food prices over time. Trade allows the exploitation of cropping calendar diversity and production conditions. It also allows for supply shock mitigation: an exceptional harvest will be less likely to lower product price as the increase in supply will be absorbed by a broader market. To sum up, market integration mitigates price fluctuation over time, and, therefore, has a key role to play in revenue stabilization and in the building of food supply security (World Bank 2012).

However, opening up trade entails two kinds of distributive risks that must be anticipated. First, as demonstrated by recent experience, food price fluctuation in international markets can be substantial. Yet trade liberalization severely restricts a government’s capacity to protect consumers from these variations. Resorting to price controls is particularly incompatible with community trade freedom. In such a context, the urban poor subjected to food price increases without benefiting from income increases are the most affected. Under these pressures, governments took emergency measures including lowering customs tariffs and value-added taxes in 2007 and 2008 (Benin, Burkina Faso, Côte d’Ivoire, Niger, Senegal, FAO 2009), which had the advantage of being effective quickly. However, such measures have a very high budgetary cost, since they apply to all consumers. Measures specifically targeting the poor seem preferable, especially the setting up of safety nets, but this demands time and a less tense social context. Second, trade liberalization has structural distributive effects that can create internal tensions. Generally, the urban poor are net agricultural produce consumers and therefore benefit from trade liberalization-related lower prices. In rural areas, two production types must be distinguished. Producers of global market export crops (for example, coffee and cotton) and producers of regional crops (for example, local cereal and livestock) producers are privileged. But producers of goods for the national market are disadvantaged, as they struggle to be competitive with imported substitutes. This effect is mitigated if the customs union maintains some kind of protection at the entry point.

However, case studies show that it is difficult to anticipate effects in a country without a specific knowledge of consumption and production structures; it seems all the more unreliable to generalize effects between countries. In the case of Morocco, Ravallion and Lokshin (2008) identified a gain for urban populations and a loss for rural populations. This result seems contradictory with the fact that poor rural households are usually net cereal consumers. However, a part of these households is a net producer, and losses experienced by these households offset net consumer household gains. Studies of this kind would be useful to assess the effect of agricultural market integration in the WAEMU.

The overarching objective of regional agricultural policy is to reduce poverty reduction and build food-supply security. Potential advantages of agricultural market integration for poverty reduction have been noted and regional strategies have been developed to show these priorities. In western Africa, in May 2002, heads of state or government gave the ECOWAS the mandate to coordinate the various components of the New Partnership for Africa’s Development, including an agricultural component, the Comprehensive Africa Agriculture Development Program. A regional agricultural policy was adopted at the ECOWAS level in January 2005, with the aim of modernizing agriculture and reinforcing food sovereignty and food-supply security. The ECOWAS is built around three focus areas, the first one being centered on food-supply security and poverty reduction. This policy includes the components of the Common Agricultural Policy defined in the WAEMU context, but also the action plans of specialized regional organizations such as Permanent Interstates Committee for Drought Control in the Sahel (Comité permanent Inter-Etats de Lutte contre la Sécheresse dans le Sahel, CILSS). The importance of building food-supply security was also reiterated at the G20 summit held in Paris in 2011. Emergency food reserve creation was considered and a pilot project is being implemented under the ECOWAS with the support of the World Food Program.

Monetary Integration and Poverty

The WAEMU common monetary policy combined with CFA franc pegging to the euro contributed to low inflation, of approximately 3 percent, over the past decade (Table 27.2). This inflation level is close to that of the CEMAC but is greatly below the average sub-Saharan African level. It also lower than that of the average fixed exchange rate system countries, the oil-importing countries, and other African economic unions (the Southern African Development Community and the Common Market for Eastern and Southern Africa). The WAEMU has also benefited from lower historical inflation volatility, having had no inflation episode over 8 percent since 2001 (see Part 4, Regional Monetary Policy).

Table 27.2.Average Annual Inflation Rate by Regional Groups (2001–2010)
2001–2010Standard DeviationMax
Sub-Saharan Africa9.6%2.915.7
Franc Zone3.1%1.76.8
UEMOA over2.9%2.27.9
CEMAC3.3%1.75.7
SADC10.1%5.321.5
COMESA15.2%10.140
Fixed exchange rate system countries5.6%5.216.7
Floating exchange rate system countries10.5%2.716.3
Oil-exporting countries12.7%5.122.8
Oil-importing countries8.4%3.113.8
Source: IMF Regional Economic Outlook—Africa, 2005 and 2012.Note: CEMA = Central African Economic and Monetary Community; COMESA = Common Market for Eastern and Southern Africa; SADC = Southern African Development Community; WAEMU = West African Economic and Monetary Union
Source: IMF Regional Economic Outlook—Africa, 2005 and 2012.Note: CEMA = Central African Economic and Monetary Community; COMESA = Common Market for Eastern and Southern Africa; SADC = Southern African Development Community; WAEMU = West African Economic and Monetary Union

Inflation usually has a negative impact on the poor, as they have few means to protect themselves from inflation costs. For an initial low-income level, a minimal real income loss can cause impoverishment dynamics, as no asset can be used to offset the shock. Empirical literature generally shows a negative impact of inflation on the income of the poor, which is logically positive on poverty (Honohan 2003; Beck, üç-Kunt, and Levine 2007; Le Goff and Singh 2013). This effect is not systematically robust to changes in poverty measurement (incidence of poverty, intensity of poverty, bottom quintile revenue in income distribution). On a sample restricted to the WAEMU, Kiendrebeogo (2010) did not identify a negative impact of inflation on poverty. These countries had little inflation for a significant part of the study period and the results provide an indirect test of the nonlinear aspect of inflation impact. In comparison with the average effect observed on all developing countries (significantly negative), these results show the gain WAEMU countries have drawn from weak inflation over the recent period.

Gain generated by monetary stability can be reduced if the choice of extremely low inflation target induces growth costs. This is a recurring issue within the WAEMU, where the targeted inflation rate is linked to that of the European Union. In addition, inflation/growth relation analyses show such relation to be nonlinear. Inflation only undermines growth when it is greater than a ceiling, the said ceiling being dependent on each country’s characteristics. For developing countries, this threshold seems to vary between 7 percent and 15 percent (Espinoza, Leon, and Prasad 2010). The cost associated with the choice of a too-low inflation target depends on the effect—positive or null—of inflation on growth below the threshold. On the basis of the previously mentioned studies, the cost of a 3 percent targeted inflation instead of 8 percent within the WAEMU would be nonexistent, low (0.1 percent of annual growth), or high (0.75 percent of annual growth). Such estimated costs correspond with the direct effect of inflation and can be reduced if inflation negatively impacts other growth-determining drivers (particularly investment). The “optimal” inflation target is then below the estimated threshold. In the WAEMU context, the inflation target level increase is, however, limited by its fixed parity with the euro.

Financial Integration and Poverty

Financial integration is stronger than in the rest of Africa, but disappointing as regards the institutional context. In particular, banking system integration is expected to improve, given the existence of regional rules (a single banking law and common supervision) and the development of regional banks (see Part 5, Financial Development and Stability, and Guérineau and Guillaumont Jeanneney 2013).

Financial integration is likely to bring substantial gains for financial services users by facilitating deposit access and banking credit access. It can translate into lower service prices (particularly for interest rates), mid-term and long-term lending increases, and a broader range of financial services. Indeed, financial services production is marked by the significance of fixed costs such as payment infrastructures and legal services. A bigger-sized market would allow the spread of these fixed costs, thereby lowering prices for such services (economies of scale). Therefore, financial integration fosters financial development. In turn, financial development has an impact on poverty that can be broken down, as for trade liberalization, into an indirect effects via growth, and direct effects. These direct effects occur when financial development brings specific benefits for the poor.

Financial development acts as a stimulus for economic growth through five “classical” functions: (1) exchange facilitation, (2) pooling of savings, (3) and (4) investment project selection and supervision, and (5) risk management (Beck and Honohan 2007)3. Studies on the relationship between financial development and growth systematically identify a positive effect between financial depth (money- or credit-to-GDP ratio) and growth (Beck and others 2011), even if financial development also incurs costs, particularly in terms of instability in the case of a financial crisis. The statistical relation between financial inclusion measures and growth seem more fragile than does the one tested with financial depth measures. Financial development seems to have a positive effect on poverty reduction, but this effect is more actively questioned than the one on growth. On one hand, financial development is likely to impact poverty by extending the poor’s access to credit (“intermediation effect”) (Beck, üç-Kunt, and Levine 2007), and by facilitating savings, which can be used to self-finance small investments (“capital channel effect”). On the other hand, it may increase inequalities.

The various mechanisms can be analyzed in a single framework characterized by conditional effects on the relationship between financial growth and development. Below a first financial development threshold, the poor do not have access to banking services and borrower information is very limited. In this context, standard financial development (lower interest rates and a broader range of financial services) particularly benefits the wealthy population, tends to increase inequalities, and has no effect on poverty. Nevertheless, at this stage, financial development favorable to the poor can aim at extending bank deposit access (capital channel effect) and extending credit access to the poor, thanks to microfinancing institutions. Beyond this first threshold, the poor benefit from financial service access development, which can have strong effects on poverty reduction (Rajan and Zingales 2003). However, financial development induces new risks and must therefore be associated with financial system regulation instruments (notably banking supervision). If such regulation is flawed, there is a strong financial instability risk. In this context, financial development can cause an increase in poverty, as the cost of crisis and general macro-economic instability is extremely high for the poor (Guillaumont Jeanneney and Kpodar 2011). Figure 27.2 summarizes the impacts on poverty of monetary and financial integration and financial development.

Figure 27.2.Monetary and Financial Integration and Financial Development: Impacts on Poverty

Source: Author’s presentation.

The effects on poverty reduction of various financial development dimensions are very heterogeneous. Using a sample of developing countries, Guillaumont Jeanneney and Kpodar (2011) show that growth of the broad-money-to-GDP ratio (and more particularly savings deposits) positively impacts poverty reduction, beyond the effect obtained via financial development on growth. Lending to the economy is only efficient in reducing poverty in countries with a high banking services penetration rate. The positive effect of finance over growth in the WAEMU context has been identified for the 1996-2005 period but not for the previous period (1989-95) in Kpodar and Gbenyo (2010), which suggests that this effect is subject to other factors. Kpodar and Gbenyo (2010) also show that the effect of long-term credits is much higher (approximately double). Microeconomic studies have shown that, in developing countries, credit demand is more sensitive (or elastic) to maturities lengthening than to debit interest rate lowering (Karlan and Zinman 2007).

Existing studies lead to two useful lessons on the relationship between financial development and poverty reduction within the WAEMU. First, in the current context, financial services remain barely accessible to the poor, and poverty reduction is mainly based on active financial-inclusion policies. The aim is to both extend bank deposit services and to develop the supply of microfinance services. Potential gains of such policies in terms of poverty reduction are high, particularly for the poorest and least financially developed countries. Second, the WAEMU financial system is relatively invulnerable to financial crisis risks. This low vulnerability is linked to the banking restructuration carried out in the early 1990s, to the existence of a regional banking supervision body, and to the overall macroeconomic stability of the zone. Therefore, instability-related costs are currently limited, and should remain so if regulation accompanies the regional integration building currently in progress. Overall, the WAEMU is undergoing a phase during which financial development benefits are much higher than costs, but during which the scope of benefits is reduced by low private sector credit and banking inclusion. Such benefits can be further strengthened through improved borrower information sharing, interbanking transaction security building, and more generally legal environment security building, as these are remaining weaknesses in the WAEMU.

Deep Integration and Poverty

The WAEMU objective is not only to constitute a goods and capital free movement zone, but also to promote deep integration therein by setting up a common market and community policies. Deep integration–associated objectives pertain to both economic efficiency and political economy factors (Chauffour and Maur 2010). From an economic perspective, productive efficiency must be strengthened through intraregional specialization and factor mobility (common market), but also through the production of regional public goods (community policies). From a political economy standpoint, deep integration is a means toward reform implementation or previous reform preservation (policy anchoring), as well as a way to mitigate national crisis effects through community institutions. These various mechanisms can significantly impact poverty reduction in the WAEMU as well as gaps between Union member countries.

Deepening of the common market is based on the free movement of individuals, the right of establishment, and the harmonization of business law through the Organization for the Harmonization of Business Law in Africa (Plane and others 2013). Free movement is effective within the WAEMU and has been extended to the ECOWAS perimeter. It is obvious that administrative controls on commercial routes slow down transportation, but they do not question the principle of free movement. Intraregional migration flows are structurally high, particularly from Sahelian countries to coastal countries. The Côte d’Ivoire is the WAEMU’s main migrant recipient. On the basis of the latest data from the Global Migrant Database, updated in 2007, the Côte d’Ivoire hosts 1.6 million WAEMU nationals, among whom 1 million are Burkinabe and 500,000 are Malians (in addition, 300,000 are Ghanaians). Other main regional migration flows are less significant (from Benin to Togo, and from Guinea to Senegal).

The right to establishment under the WAEMU 1994 treaty faces significant challenges. Under the treaty, “member state population has the right to any employment on each state territory, except in public services, has the right to set up a business, provide services and benefit from the same conditions as the national population.” Subsequently, guidelines were introduced to specify the establishment conditions for doctors, physicians, architects, lawyers, and accountants. However, the implementation of such principle faces greater obstacles than the free movement of individuals. The red tape required for the establishment and the practice of various liberal professions constitutes a very high entry cost. For professions governed by a professional order (such as doctors and lawyers), the possibility of establishing in another country is, in fact, extremely limited. For professions not governed by a professional order, rules can be used to limit establishment freedom, including restricting access to a number of positions to nationals or imposing specific constraints on foreigners wishing to establish their business.

There are instruments for the harmonization of business law, but their application remains limited. All WAEMU states are members of the Organization for the Harmonization of Business Law in Africa, which has a total of 17 members. The objective of the organization is to reinforce the legal and judicial security of transactions between member countries. Its first function is to develop “uniform acts” defining common rules in company and business law, legal status of traders, debt collection, and other areas. Application of these standards is the responsibility of member states. A community body, the Common Court of Justice and Arbitration acts as a court of cassation for the member states. The results from this harmonization on regional exchange stimulation remain disappointing. An explanation lies with the limited effective power granted to the institutions and supranational decisions, as it is particularly difficult to ensure the implementation of a ruling outside of the country where it was made (exequatur procedure).

Regional service trade within the WAEMU is badly documented and appears weak. International service trade mainly focuses on transportation, communication, energy, tourism, education, professional services (those offered by accountants, legal counselors, architects, and engineers), and finance sectors (see Part 2). Service exchange development implies reinforced individual mobility, but also simplified administrative procedures. In a study on Eastern and Southern Africa, Coste, Dihel, and Grover (2013) show that the main challenges to professional service trade are the procedures to establish an activity and the rules governing the participation of nationals in investments. Inversely, electronically delivered services, making it easier to circumvent many border obstacles, have been rapidly developing. Central Bank of West African States (BCEAO) data on service trade are insufficient to identify intracommunity service trade. Overall in the WAEMU, the two main services exchanged are travel (net exports of tourism services) and transportation (net imports of freight services). In both cases, the exchanges mainly occur with countries outside the WAEMU, which suggests that intracommunity service exchanges are limited.

Service trade could significantly contribute to poverty reduction by improving the supply of services and reducing their prices. Indeed, many economic policies’ efficiency and poverty-reduction capacity are dependent on education levels and financial development (for example, economic liberalization, see Le Goff and Singh 2013), which can be stimulated by regional exchanges. The increase in transportation service competition would allow a reduction in transportation costs (Raballand 2013), which weigh heavily on the prices paid to producers.

The WAEMU is leading community policies that can contribute to poverty reduction, particularly in the agricultural production, infrastructure, education, and health sectors. However, the scope remains limited. These policies are particularly justified to produce regional public goods (namely transportation or energy-producing infrastructures) and to fight against negative externalities such as contagious diseases. Community policies are financed by the WAEMU’s own resources (mainly the prélevement communautaire de solidarité, PCS), funding from the West African Development Bank, and external partners. The WAEMU Commission manages the Regional Fund for Agricultural Development and the Regional Integration Aid Fund, whereas the Energy Development Fund, created in 2008, is managed by the West African Development Bank.

Physical infrastructure efficiency (transportation, energy, communication) to stimulate production and trade largely depends on regional dimensions. In transportation, the road corridor quality between coastal countries and landlocked countries is crucial for the growth of the latter. Potential gains from a regional policy on energy infrastructures are equally important. Electricity supply quality is currently extremely weak in WAEMU and disparities are very strong within the WAEMU. The electric connection delays reach 158 days in Benin, compared with only 33 days in Côte d’Ivoire; the cost of electricity represents 150 times the average annual income in Benin and only 40 times the annual income in Côte d’Ivoire. Regional electric infrastructure projects and interconnections can therefore have a significant effect on supply improvement in the most disadvantaged areas. Supply improvement reduces formal sector entry barriers for small businesses, fostering, in turn, their growth, employment development, and consequent poverty reduction. Regarding infrastructures, WAEMU projects are structured within the WAEMU Regional Economic Program and one of the objectives is poverty reduction. It is combined with the Program for Infrastructure Development in Africa, led by the African Union.

Existing health community policies can be reinforced to reduce sanitary risks, as these create poverty traps. Regional policies are particularly justified when they produce positive externalities between countries, for example a fight against epidemics, drug purchasing cost reduction, and health personnel training. The WAEMU has established a number of initiatives to fight against communicable, endemic, and childhood infectious diseases. A first instrument is the subregional epidemic monitoring system, which monitors for cholera, meningitis, and avian flu. A second project deals with the fight against malaria by supplementing national protection programs, such as insecticide-treated mosquito nets and indoor spraying, with antilarvae programs. The WAEMU has also implemented a community pharmaceutical policy based on regulation harmonization and group purchase of medicines. The overarching objective of the policy is to increase access to medication by lowering its cost and limiting drug counterfeiting. A third aspect of the community health policy deals with medical staff mobility in order to ensure better sanitary coverage in the most poorly serviced countries. Under these policies, in 2005 the WAEMU established free movement and the freedom to establishment in any member country for doctors. These community policies play a direct part in poverty reduction, as being in good health is the main asset held by the poor. Becoming ill or injured can cause a vicious circle of impoverishment for the worker and his or her family.

Regional education policies have had limited results thus far, but their potential impact on poverty reduction is significant. Regional policies are particularly able to benefit from economies of scale (extremely specialized training costs, which are too high for national demand levels) and to foster skilled staff mobility. Under the WAEMU treaty, “common actions to rationalize and improve postsecondary education and vocational training performances” should be undertaken. The main activities deal with the establishment of community training centers of excellence, regional recognition of diplomas obtained at these institutions, and equal treatment of students from other member states. To date, these education sectors still contribute too little to development and poverty reduction objectives (UEMOA 2004). Although regional policies focus on postsecondary education and vocational training, their role in poverty reduction is substantial. Postsecondary education and vocational training are responsible for filling the qualified personnel gaps to ensure basic health (see above the paragraph on the freedom to establishment) and primary education, which, in turn, both play major parts in poverty reduction. Furthermore, postsecondary education’s capacity to train qualified personnel is a major determining factor in direct investment attraction, which also contributes to growth dynamics and therefore to poverty reduction.

Regional integration is a means to mitigate the vulnerability of WAEMU countries’ small economies. WAEMU countries are small in size and vulnerable to exogenous economic shocks (natural or external). Literature on drivers of developing countries’ growth has shown that these features contributed to growth performance reduction. Indeed, a small-sized economy cannot benefit from economies of scale and is a barrier to competitive diversification of internal production. The frequency and scope of exogenous shocks render entrepreneur investment choices and government economic policies more uncertain (and therefore less efficient). Both of these effects result in a combined growth reduction effect.

Existing retrospective analysis based on growth equations does not reveal any growth gain for WAEMU members. In terms of growth, the past advantage of WAEMU membership can be evaluated by introducing—in a growth-explanatory equation—a dummy variable on top of usual growth factors. An estimate by Guillaumont (2013, based on a sample of 75 developing countries over the 1975-2010 period, divided into five-year periods—on average—did not reveal any significant gain linked to the WAEMU.

It is also possible to assess the growth potential associated with regional integration by simulating a perfect integration situation where the WAEMU would make up one single economy (Guillaumont 2013). The first step of this method consists of estimating a growth equation including the usual determining factors and one size indicator (logarithm of the population) and one exogenous shock indicator (export instability). The estimated equation allows, in turn, the evaluation of the expected growth rate for each country and each period. A third step consists of obtaining the potential growth rate of each country by replacing its size indicator by that of the WAEMU and its export instability indicator by that of aggregated exchanges in the Union. This exercise estimates the potential integration gain to 1.7 percent on average over the period, including 1.4 percent for economies of scale and 0.3 percent for shock mitigation. These estimates, which should be interpreted with caution, suggest that the effects of integration on poverty reduction can be strong, both through the growth channel and the macroeco-nomic instability mitigation effect, whose overall effect is smaller, but which strongly impacts the poor.

Benefits from WAEMU membership in terms of poverty reduction depend on both the growth surplus and the capacity to transform this growth in poverty reduction. To assess the combined effects of trade, financial, and economic integration on poverty reduction, it is possible to compare the growth/poverty relationship among country groups. Such a comparison was carried out between African franc zone countries and the rest of sub-Saharan Africa by Guillaumont (2013) (Figure 27.3). The relation between the average annual economic growth rate and average annual poverty reduction over the same period seems stronger in the franc zone, since the slope of the adjustment line for franc zone countries is larger. To the extent that this difference does not seem to be attributed to an impact of original poverty levels, the author suggested it could be due to the lower franc zone inflation.

Figure 27.3.Growth/Poverty Reduction Relation in and Outside the Franc Zone (1994-2010)

Source: Guillaumont (2013).

Note: Three-letter International Organization for Standardization abbreviations used for country names.

Deep regional integration requires delegating part of the national sovereignty to the regional level, which can protect economic policies from national constraints. First, delegating a number of decisions to the regional level allows the implementation of reforms, which may be halted by national private interests (Chauffour and Maur 2010). It can also help to preserve previous reform results in case of changes in the national political context caused by an increase in reform exit costs. In the case of the WAEMU, regional tariff consistency seems to be a benefit from the regional dimension of negotiation. Finally, the presence of community institutions generates a pole of stability in case of national political crisis.

It seems that WAEMU countries were less affected by the consequences of conflicts than were other African countries over the past decades. This also constitutes a protection for poor populations. Up until the 1990s, WAEMU countries (and CEMAC countries) experienced fewer armed conflicts than did the rest of Africa. However, this past decade saw the cancelling of this advantage as the number of conflicts increased in Côte d’Ivoire and Mali, whereas there has been a decreasing trend in the rest of the continent. Yet, strikingly, Côte d’Ivoire and other Franc zone countries (such as Chad) have experienced critical conflict periods without it translating the kind of economic collapse often observed elsewhere in such cases of internal conflict. It is likely that low inflation, currency convertibility, and the continuity brought by regional institutions have had a mitigating effect on the economic and social impact of conflicts. To summarize, conflicts seem to have had a less negative impact on growth in the Franc zone than in the rest of Africa. Given the enhanced impact of economic crises and hyperinflation on the poor, this crisis-mitigating effect makes for a substantial gain of regional integration. Figure 27.4 presents a summary of deep integration impacts on poverty.

Figure 27.4.Deep Integration Impacts on Poverty

Source: Author illustration.

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1A free trade area has existed since 2003 (see The ECOWAS Trade Liberalization Scheme (ETLS), ECOWAS Protocol A/P1/1/03).
2The trade integration diagnosis is taken from Geourjon and others (2013a).
3Beck and Honohan (2007) propose a complementary breakdown of financial services according to the type of financed operation: (1) market financing, including commercial credits and other short-term credits used for exchange purposes; (2) growth financing, which allows investment financing; and (3) finance for the overall population, particularly small and medium-sized enterprises and poor households. This third financial development dimension has a specific impact on poverty reduction.

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