Information about Asia and the Pacific Asia y el Pacífico
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6 Promoting Trade: Regional Integration and the Global Economy

Author(s):
Saleh Nsouli
Published Date:
September 2004
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
F. O. Ndukwe

One of the important characteristics of evolving globalization is the marked increase in world output and trade. Rapid global integration has led to significant economic expansion, notably in industrialized countries, but also in developing countries with outward-oriented economic and trade policies. During the l990s world output expanded at an average annual rate of 2.9 percent, while trade grew by 6.0 percent. For developing countries as a group, relative to the world as a whole, the rate of output growth was much higher at 5 percent. Asia, as a region, recorded an even higher average annual growth rate of 9 percent. Africa, on the other hand, lagged far behind other regions with a growth rate of about 2.3 percent. With respect to trade, during the same period, the export and import volumes of developing countries grew at a much higher rate than the global average, with several Asian countries recording double-digit growth rates.

It is well known and empirically documented that the rapid expansion in global trade occurred in response to countries’ increasing acceptance of openness. Other major contributing factors include the decrease in the unit costs of transport and information technology, including telecommunications; and the globalization of production, with industries moving to areas offering opportunities for lower production cost. The liberalization of global trade has taken many forms, including nondiscriminatory unilateral liberalization, multilateral liberalization, and liberalization in the context of trading blocs (free-trade areas, customs unions, and common markets).

A marked feature of the distribution of the benefits from globalization and liberalization is that the lion’s share has gone to those countries and regions that sustained outward-oriented trade and economic policies. In contrast, just a portion of the gain has accrued to countries with weak performance in reform and tenuous links to the global trading system. However, the rising isolation and marginalization of many countries, mostly in the developing world and particularly in Africa, have also been exacerbated by the protectionist policies in industrial countries. These have erected barriers and have constrained market access to the basic commodities produced by developing countries, thus circumscribing the comparative advantage of these countries in global trade.

With specific regard to the continuing marginalization of Africa in the global economic arena, it is important to highlight the structural rigidities of production and the economic environment that have prevented the continent from taking advantage of globalization. First is the significant shift in the composition of global exports away from basic commodities toward manufactures, clearly an area where Africa does not currently enjoy comparative advantage. Second is the rapidly expanding intrafirm and intra-industry trade—an important indicator of the globalization of production. Here also, since Africa’s share in global production has been declining, it has been unable to share in this fast-growing aspect of global trade. Third is the rising share of trade in services, which is expanding even faster than trade in goods. Fourth is the balkanized structure of African markets, notwithstanding the creation and existence of several regional integration arrangements. The establishment of a number of regional economic communities has not led to the creation of large and effective trading blocs with effective, sizeable markets, sufficient to produce scale economies and competition. Last, even though the past decade has witnessed the expansion of worldwide flows of foreign direct investment (FDI), Africa’s share in these flows has been minuscule.

The thesis of this paper is that for Africa to end its global isolation and marginalization and become an important beneficiary of the fast-expanding global trade, the continent must implement appropriate economic and institutional reforms, create large and effective markets with links to the global economy, diversify the agricultural base, and engage in value-added processing of primary products. Successfully implementing the NEPAD agenda and strategy for Africa’s development will go a long way toward enhancing Africa’s global competitiveness and create an environment conducive for growth and poverty reduction.

Regional Integration in Promoting Trade in Africa

By increasing trade and investment, economic cooperation and regional integration create opportunities to reap the gains from globalization. For Africa, a region characterized by small and balkanized states and markets, economic cooperation and regional integration have the potential to create an expanded and unified market, diversify the economic base, and increase competitiveness in the global market. Open regionalism, with expanding regional trading blocs coexisting alongside the global integration of markets, has spurred growth and development in many parts of the world. This is a phenomenon from which Africa stands to gain.

Over the past four decades, Africa, in an attempt to forge political unity and expand markets, has established several regional economic communities. Today the continent’s economic and political blocs range from preferential free trade areas, to customs unions, to monetary unions. The main advantages expected from these organizations fall into two broad categories. First, the political benefits include the following:

  • Fostering continental unity and development
  • Promoting peace and growth with neighbors, thus reducing the prospects of conflicts among members
  • Facilitating and deepening the exchange of information among democratic neighbors
  • Strengthening regional security through its stabilization effect.

Second, economic benefits anticipated from African integration institutions include

  • Mitigating the economic disadvantages of fragmentation and reducing the attendant constraints on growth and development
  • Promoting industrial growth and creating synergy through exploiting the complementarity of the region’s economies
  • Raising income through innovation and growth
  • Promoting growth through increased factor productivity
  • Creating trade and avoiding trade diversion.

Driven by the desire to reap these benefits from integration, African leaders and governments have created several regional economic communities and trading blocs. In West Africa, for example, the integration arrangements include the Economic Community of West African States (ECOWAS), comprising 15 countries in the subregion; the West African Economic and Monetary Union (WAEMU), consisting of 8 francophone West African countries with a common currency, the CFA franc; and the Mano River Union, comprising Liberia, Sierra Leone, and The Gambia.

In eastern and southern Africa, the major integration schemes include the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC), and the Indian Ocean Commission. In Central Africa, there are the Economic Community of Central African States, the Economic and Monetary Community of Central Africa (CEMAC), the Central African Economic Community (CAEMC), and the Economic Community of the Great Lakes Countries. And in North Africa there is the Arab Maghreb Union (AMU).

In addition to these intergovernmental integration arrangements, there are several activity-based organizations, such as the Cross-Border Initiative, the Club du Sahel, and the Committee for Drought Control in the Sahel. Today many African countries belong to more than one regional integration scheme. However, it is worth noting that several of these integration schemes have duplicate and overlapping mandates and are very poorly funded. Appendix I shows the evolution of these trading arrangements, and Appendix II highlights the degree of overlap in membership in these organizations.

Overview of Achievements

Measured against the anticipated gains, the results of Africa’s integration efforts can, at best, be described as mixed. It can be claimed that membership in subregional organizations affords member countries opportunities to cooperate and promote good neighborliness. The Organization of African Unity, recently transformed into the African Union, serves as a forum for African leaders to exchange views on matters of common interest to the continent. The existence and achievements of the ECOWAS Monitoring Group, established to prevent, manage, and resolve conflicts, point to the political benefits that can be realized from cooperation among African countries. There has also been some progress in facilitating the regional mobility of labor, particularly in the ECOWAS subregion, where a common travel document permits nationals of one member country to enter the other member countries without visa requirements. COMESA and CAEMC have also introduced regional passports, which allow nationals of each member country entry into the other countries without visas.

The results have also been mixed in realizing the economic benefits from integration. The assessment of monetary integration efforts is generally positive. Studies of the Communauté Francophone d’Afrique (CFA), for example, Medhora (1997) and Guillaumont, cited in the former, find that the growth performance of its members was better than for the non-francophone zone. Symbolizing deeper integration, the WAEMU sub-region’s cooperation has extended beyond traditional trade integration to encompass the integration of fiscal, judicial, and monetary management in addition to establishing a functioning compensation trust fund. The zone has also demonstrated some of the benefits and challenges of an integration arrangement involving industrial countries. Under the association arrangements, the zone has been receiving assistance through France in the form of institutional capacity development, budgetary support for fiscal control, and monetary management.

There has also been some experience in monetary cooperation in southern Africa. The level of trade and financial transactions conducted with the South African rand points to the potential benefits that could be realized from the existence of an effective rand area within the Southern African Customs Union. Some analysts believe that the existence of, and perceived benefits from, these functioning monetary zones are instrumental in the current drive to establish a second monetary zone in the ECOWAS subregion.

Africa’s Share of World Output

Table 6.1 shows that the world economy grew at an average rate of 3.3 percent annually during the 10-year period 1984–93 and is projected to achieve an average growth rate of 3.6 percent during 1993–2003. During these two periods, the industrial economies are projected to grow at about 3 percent, while developing countries will grow at 5 percent. Developing Asia has been the most dynamic of the developing regions; over 1984–93 the region recorded an annual GDP growth rate of 7.6 percent. The region is projected to grow at 6.8 percent a year for the 10-year period 1994–2003. Comparable figures for Africa are 2.0 percent and 3.4 percent, respectively. Africa’s average annual growth rate of about 3.2 percent from 1997 to 2001 made it the third most dynamic region in terms of GDP growth, after Asia and the Middle East.

Table 6.1.GDP Growth Rates by Region(Annual percentage changes)
10-year average
1984-19931994-20031994199519961997199819992000200120022003
World3.33.63.73.64.04.22.83.64.72.52.84.0
industrial economies3.22.83.42.73.03.42.73.33.91.21.73.0
Developing countries5.15.26.76.16.55.83.53.95.74.04.35.5
Regional groups
Africa2.03.42.33.05.63.13.42.63.03.73.44.2
Developing Asia7.66.89.69.08.36.64.06.16.75.65.96.4
Middle East3.43.50.54.24.85.63.91.05.82.13.34.5
W. Hemisphere2.92.75.01.83.65.22.30.24.00.70.73.7
Source: IMF (2002).
Source: IMF (2002).

Even though Africa has recovered from a very severe economic contraction during the 1980s, there is still much unused productive capacity. Moreover, to reduce the currently widespread poverty over the next 10 years, Africa must achieve an annual growth rate of about 7 percent if it is to attain the UN Millennium Development Goal of reducing poverty by 50 percent by 2015.

Africa’s Trade Performance

Africa’s trade performance shows long-term decline in its competitiveness and share in global trade. It is apparent from Table 6.2 that Africa is the only region to have experienced a steady decline in its share of global exports over the period 1985–2000. During this period, the value of the region’s exports declined by about 50 percent. Imports also declined, from 2.8 percent of world imports in 1985 to a low of 1.8 percent in 1996, rising only marginally to 2 percent in the year 2000. These figures contrast sharply with those posted by other regions. For example, Asia and North America each accounted for nearly a fifth of world exports and imports over the period, while Europe accounted for almost half of total world exports and imports. Between 1997 and 2001, Africa’s share in global investment flows also declined by about 44 percent (to $5.3 billion from $9.4 billion). In 1996, Africa’s share of total FDI to developing countries was only 2 percent (UNCTAD, 2001). The loss of market share by Africa for its major commodity exports over the last three decades is estimated to have caused annual revenue losses of about $11 billion in 1996 prices (Ng and Yeats, 1996).1

Table 6.2.Africa’s Share of World Trade(In percent)
Share of World ExportsShare of World Imports
Region19851990199620001985199019962000
World100100100100100100100100
Africa3.22.31.91.62.82.21.82.0
Asia15.816.921.818.015.415.822.022.1
N. America15.814.915.523.621.517.819.316.6
Europe38.745.741.942.238.345.838.443.8
Sources: UNCTAD (1996/97); IMF (2001); see also footnote 1.
Sources: UNCTAD (1996/97); IMF (2001); see also footnote 1.

Intra-African Trade

Tables 6.3 and 6.4 show average intra-African exports and imports as percentages of world total exports and imports for the period 1996–2001. AMU imports from the WAEMU, for example, averaged about 1.36 percent over the period under consideration, while the WAEMU in turn imports mainly from ECOWAS and the franc zone. Intraregional exports of SADC, ECOWAS, and WAEMU do not differ much from intra-exports.

Table 6.3.Average Annual Intra-African Exports, 1996–2001(In percent of world total exports)
ImporterAMUCAEMCCOMESAECCASECOWASFranc

Zone
SADCWAEMU
AMU2.730.090.570.110.560.40.050.30
CAEMC0.541.690.442.100.571.980.540.29
COMESA0.660.125.760.760.200.196.360.04
ECCAS0.311.010.471.300.341.180.950.17
ECOWAS0.831.330.561.769.636.881.315.55
Franc zone1.031.820.592.248.787.080.905.26
SADC0.230.218.391.390.810.4612.300.22
WAEMU1.701.990.782.4419.8613.963.8211.97
Source: Statistics Department, African Development Bank, 2002.
Source: Statistics Department, African Development Bank, 2002.
Table 6.4.Average Annual Intra-African Imports, 1996–2001(In percent of world total imports)
ExporterAMUCAEMCCOMESAECCASECOWASFranc

Zone
SADCWAEMU
AMU3.070.170.580.170.800.600.270.43
CAEMC0.913.430.553.658.376.221.942.79
COMESA0.620.123.490.220.420.269.770.14
ECCAS0.572.312.192.555.924.187.921.87
ECOWAS0.810.270.200.2810.194.91.314.63
Franc Zone1.191.590.361.6814.817.981.526.39
SADC0.050.133.390.370.900.3611.000.23
WAEMU1.360.570.190.5918.559.051.738.47
Source: Statistics Department, African Development Bank, 2002.
Source: Statistics Department, African Development Bank, 2002.

Constraints on Regional Integration and Intra-African Trade

Several factors limit the size of intra- and inter-African trade. First is a lack of the structural complementarities necessary for trade creation. Second, Africa’s restricted industrial base offers limited scope for economies of scale in production and marketing. Third, the continent’s poor and inadequate infrastructure limits trade and raises the cost of the little merchandise that is eventually traded. This, in part, accounts for the high level of informal trade, which is often confined to the common borders of adjacent countries. Fourth, the absence of compensatory mechanisms discourages trade liberalization reforms because of the fear of losing revenue. Similarly, the multiple and overlapping regional trading arrangements, each with its common external tariff, have hindered rather than enhanced trade. Finally, the small size of the trading blocs severely limits economies of scale. Under such circumstances, imports from outside the bloc, most notably from Europe, are encouraged and preferred.

Recent Measures and Initiatives

Whether one uses the traditional measure of trade creation and trade diversion or the now more conventional approach of dynamic gain, the previous section suggests that regional integration arrangements in Africa have not yielded expected results. Several factors, including those identified in the previous section, have combined to inhibit Africa’s trade and development, notably among these are the poor macroeconomic environment, inadequate infrastructure services, currency inconvertibility, political instability, poor governance, and weak institutions. Realization of the need to remove these constraints has prompted many African countries to embark on unilateral structural reforms since the mid-1980s. The following paragraphs highlight some of the key features of the trade and nontrade stabilization and structural adjustment operations undertaken by African countries up to the late 1990s. An overview of the findings of an independent assessment of these programs is also provided.

Adjustment Programs

Stabilization and structural adjustment programs. The global recession of the late 1970s and early 1980s severely weakened many African economies. In several countries real GDP growth plummeted, inflation rose to double digits, currencies appreciated, and economic distortions became pervasive. Fluctuations in the global price of petroleum had adverse real and financial impacts on many countries. Mounting external debts also strained the development programs of many governments. Against this background of worsening economic conditions and severe debt overhang, many countries embarked reluctantly on adjustment programs with support from the Bretton Woods institutions. These programs generally aimed at the following reforms:

  • Establishing a market-determined exchange rate, mindful of the export competitiveness effects of a misaligned exchange rate mechanism
  • Bringing fiscal deficits under control and rationalizing public investment, while directing expenditure to priority areas in health and education
  • Improving public debt management
  • Improving financial sector policies, which meant restoring positive real interest rates and achieving competitive returns on financial assets, increasing the marginal productivity of capital and boosting the saving rate, and restoring the soundness of the banking sector to improve financial intermediation
  • Improving the efficiency of public enterprises and labor markets to enhance the mobility of goods and labor and to make prices and wages more flexible
  • Improving the coverage and quality of social services.

An assessment of the economic impact of these reform programs shows mixed results. Relative to the initial conditions, the supply response is estimated to be generally positive despite the marked country and regional differences. For example, after introducing reforms, the average annual real GDP growth of sub-Saharan Africa rebounded, although from a low base, from 1.9 percent in 1990 to 5.3 percent in 1996. It then stagnated at about 3.2 percent during 1997 and 1998. Since then it has hovered around 2.9 percent, much too low to reduce poverty.

The investment response to adjustment reforms has been generally slow. It remains so in much of sub-Saharan Africa, with the region accounting for less than 1 percent of global FDI and a much lower share of global portfolio investment. The low level of investment, particularly FDI, is telling evidence of Africa’s continuing isolation and marginalization. This suggests, first, that adjustment needs to be deepened, with particular attention to investment incentives, and second, that Africa’s debt overhang continues to hamstring investment and growth. Evidence points to policy reversals that have created doubts about commitment to reforms. Above all, the continuing political instability in sub-Saharan Africa has increased the perception the region is too risky for investment.

Unilateral trade liberalization. This has been implemented with two central objectives. The first is to eliminate the antiexport bias, including on intra-African trade and to remove physical barriers to trade; and to eliminate economic distortions caused by the trade regime. The second is to reverse the import substitution policies that underpinned the development strategy of sub-Saharan Africa up to the mid-1980s. The measures included removing export barriers, quantitative restrictions, and other non-tariff barriers on imports; reducing tariff dispersion through low and relatively uniform tariffs administered in a transparent and evenhanded manner; and establishing neutral treatment of imports and domestic goods. In addition, institutional reforms were carried out, particularly in the pricing and marketing of produce by state marketing boards.

The assessment by the World Bank and other institutions of the impact of these reforms on trade and investment shows mixed results. The general trend was toward more-open trading regimes, with many countries removing both quantitative restrictions and nontariff barriers. Some countries, particularly those engaged in value-added processing of products, achieved some gains in trade with the rest of the world. For example, Mauritius expanded its export of textiles. For several other countries, the gains were very short-lived owing to exchange rate and price fluctuations, leading to deterioration in the terms of trade. Furthermore, intra-African trade did not expand because of poor communications links, including inadequate infrastructure, which kept the costs of shipping and other forms of transportation high within Africa. As Mistry (1996) points out, the gains from tariff reductions and the removal of quotas and nontariff barriers went to nonregional trading partners that were better positioned to take advantage of the outward-looking policies of these countries. In addition, many African countries showed greater resistance to reducing tariffs on regional trade because they feared the negative impact on revenue targets.

Privatization and FDI flows. Capital has become increasingly mobile, searching for the best returns globally. However, Africa has not been an important destination for either portfolio investment or FDI, receiving less than 2 percent of the combined global flow of these resources.

As part of their structural adjustment programs, many countries embarked on the privatization of at least some state-owned enterprises. The purpose was to increase private participation in the economy and improve the efficiency of resource allocation in production; to increase government revenues and reduce budget deficits and public debt; and to increase FDI through ownership transfer and, through it, accelerate the inflow of technology and enhance efficiency and productivity in the economy. These in turn were expected to improve export performance and enhance external competitiveness.

It is instructive that many countries viewed their regional integration schemes as vehicles to widen markets and increase opportunities of scale for investors and the FDI inflows they bring with them. In addition, as envisaged by Collier (1991), the effective regional integration schemes could also provide credibility to, and lock in, good economic policies, thus enhancing investor confidence for both beneficiary countries and the pertinent subregion. Thus, the confluence of accelerated privatization and effective economic integration schemes is expected to enhance the inflow of FDI to Africa.

Several factors account for Africa’s poor performance as a destination for FDI. Most notably, the reforms have not been deep. The state continues to dominate productive enterprises in African economies. State enterprises in services and production are still prevalent and absorb large amounts of economic resources, crowding out private investment and stifling competition and efficiency.

Efforts to stimulate FDI through privatization of state-owned enterprises and other private investment-stimulating reforms have produced limited positive results for several reasons. First, only a handful of countries have succeeded in privatizing key state-owned enterprises. Major obstacles to privatization include the lack of political will, policy reversals, pockets of insecurity (if not in the privatizing country then in nearby countries), and the inoperative conditions of some of the firms. In the end, the level of FDI inflows was disappointing. Another source of the poor investor response could be the perception that existing regional integration schemes were not effective in creating distortion-free regional markets since they were too circumscribed by states and did not represent effective policy–lock-in mechanisms. Empirical estimates of the trade and FDI effects of regional integration show a very tenuous prospect for Africa (Elbadawi and Mwega, 1998). Their analysis points to some positive impact as a result of the unilateral reforms of individual countries. The existence of a common currency in the WAEMU region is said to have slightly improved intraregional trade and to have generated a limited FDI inflow.

Debt relief and the HIPC initiative. Recurrent external shocks, particularly those associated with the volatility of prices for primary products, declining terms of trade for developing countries, and the fluctuating price of petroleum during the past two decades fueled the debt crises in poor developing countries. Other factors contributed, including erratic climatic changes, economic mismanagement, and conflicts in various parts of Africa. The fear of moral hazard also created some initial resistance to debt relief among lenders. The rising negative impact of the debt overhang, which has strongly accentuated poverty in these countries, led to the HIPC initiative for debt relief of poor countries on a case-by-case basis. As a framework, the HIPC initiative was guided by the following principles:

  • The need, on a case-by-case basis, to address the totality of a country’s debt with a view to reducing it eventually to a sustainable level
  • The need for the donor community to commit resources only to countries that have demonstrated a track record on reforms
  • Equitable and coordinated burden sharing
  • Continued preservation of the financial integrity of the multilateral development banks as preferred creditors
  • The need for all new loans to the beneficiary countries to be on concessional terms.

The enhanced HIPC initiative also introduced several new features to facilitate quick delivery of resources. Several African countries have either reached their completion points under the HIPC initiative and have received substantial debt relief (for example, Uganda and Mozambique), or are about to do so. It is widely acknowledged that the initiative has provided substantial relief to qualifying countries.

Nevertheless, many African countries—including those that have actually received debt relief under the HIPC initiative—still face unsustainable debt-service problems. The evolution of the initiative into an enhanced framework entailing additional debt relief is a clear recognition that heavily indebted countries, most of which are in sub-Saharan Africa, are still struggling to meet their external debt-service obligations.

The following factors contribute to the need for the enhanced HIPCs, corresponding more appropriately to continuing acute debt overhang of the relevant countries:

  • External shocks, such as a deterioration in the terms of trade and adverse weather conditions
  • Civil strife
  • Lack of sustained adjustment or implementation of structural reforms
  • Lending policies of many creditors, especially the provision of loans at commercial interest rates with short repayment periods
  • Lack of prudent debt management policies in debtor countries, driven in part by excessive optimism by creditors and debtors about the prospect of increasing export earnings to build debt-servicing capacity
  • Lack of careful management of the currency composition of external debt.

The continuing debt crises underlie other root causes of Africa’s marginalization and lack of participation in global trade and investment. Critical among these are impediments to the access of African products to markets in developed countries, the need for more effective regional and multilateral trading arrangements, and the pressing need for regionally coordinated adjustment programs capable of removing constraints on investment and trade.

Africa and Open Regionalism

Many of the regional economic communities established in Africa during the 1970s could be described as closed regional arrangements. Several of these were formed on the model of import-substituting development, with high walls of protection ostensibly making room for local industries to grow and mature. Influenced by the spectacular export and growth performance of a number of other countries, particularly those in Asia that have implemented export-oriented policies, newer regional integration arrangements have more recently embraced openness through low external tariffs, while creating open regional blocs. The European Union is perhaps the best example among industrial countries since it encompasses many large economies and holds the door open for increased membership and further market enlargement.

The shift to open regionalism is also driven by the realization on the part of many countries that globalization makes individual economies more open to impulses transmitted from the international economy. Although globalization can create opportunities for national economic development, it also makes national policy environments highly susceptible to these external impulses. These can lead to two opposing forces in the world economy—on the one hand, a desire for economic liberalization, with opportunities to participate in global trade and investment; and on the other, a tendency to adopt protection in the face of perceived negative global forces, such as volatile capital flows, displacement of local entrepreneurs, and market dominance.

In these circumstances, regional bloc arrangements can be viewed as a compromise between these two tendencies. Under certain conditions, regional integration can cushion the impact of economic impulses among regions and thus provide opportunities for regional economic and industrial development. Describing this as a return to “inward or self-reliant regionalism” will be misleading. Some experts have described the phenomenon as “desynchronization of business cycles” (Schwab and Smadja, 1995).

With some caveats, the Asia-Pacific Economic Cooperation and the Cross-Border Initiative in eastern and southern Africa can be described as examples of open regionalism. Across the globe, newer regional integration arrangements are increasingly incorporating openness in their charters. Some existing closed regional blocs are amending their charters to take better advantage of global market opportunities. It is envisaged that more and more African countries will embark on and sustain their unilateral economic adjustments, and their regional blocs will adopt lower external tariffs. The continent will thereby enhance its prospects and participation in the global economic system, particularly in trade.

Africa in the Multilateral Trading System

In addition to unilateral actions, there is a pressing need for the multilateral trading system to become equitable and evenhanded. The following paragraphs highlight the strengths and weaknesses of the current multilateral trading system.

WTO: Multilateralism and Regionalism. The World Trade Organization (WTO) was created in 1995 to oversee the General Agreement on Tariffs and Trade (GATT), which had guided rules of international trade since 1947. The GATT’s role was to codify and record a series of tariff reductions that its members wished to make, and provide a structure to give credibility to those reductions. A key concept of the GATT, which underpins the present global trading system, is nondiscrimination between different sources of the same imported good. This is achieved by requiring members to give each other “most favored nation” treatment, except in specified circumstances. In addition to administering the GATT’s rules, the WTO has far-reaching powers. It requires member countries to subscribe to virtually all its rules rather than allowing them to treat some as optional. To be effective, the WTO must proceed by more or less requiring consensus.

The WTO can enhance the economic well-being of developing countries in four ways. First, if enough members wish, it can organize periodic rounds of tariff negotiations (such as Seattle and Doha). These offer opportunities and incentives to reduce their barriers to trade. Second, it provides support for domestic policy, including providing informational support to members in debates over trading laws. Third, it can protect the rights of members against certain violations of the rules by other members (through court decisions and penalties). And fourth, it provides a forum and mechanism for governments to manage the spillovers from members’ trade policies onto their partners. These four avenues provide the framework for assessing the WTO’s current rules about regional integration arrangements. This framework is spelled out in GATT Article XXIV (for goods). An “enabling clause” introduced in 1979 significantly relaxes the conditions for creating regional integration arrangements that include only developing countries.

Notwithstanding good intentions, the application of GATT–WTO rules has not been evenhanded. While giving notional support to open trade, the industrial countries and their regional trading arrangements maintain restrictive policies that deny access of goods from developing countries. These restrictions prompted Michael Moore, the Director-General of the WTO, to argue at the 2000 United Nations Conference on Trade and Development that richer nations need to bring down trade barriers to exports from developing countries. He said, “It makes no sense to spend extra billions on enhanced debt relief if, at the same time, the ability of poorer countries to achieve debt sustainability is impeded by lack of access for their exports.” Echoing similar sentiments in a recent presentation to the WTO, Wiseman Nkuhlu, Chair of the NEPAD Secretariat, reiterated the need for open access for African goods to the markets of industrialized countries, particularly for those agricultural commodities in which the continent has comparative advantage.

Bilateral Initiatives to Promote African Trade

Arising out of concern for the continued marginalization of Africa since the mid-l990s, several multilateral and bilateral initiatives have emerged. If exploited, these could enhance the economic growth of the region and contribute to reducing its gaping poverty. Among these are the following:

African Growth and Opportunity Act (AGOA). As part of United States general policy to support Africa’s development, AGOA provides duty-free access to U.S. markets for products originating from African countries. A premise of the act is that trade could reduce Africa’s aid dependency.

AGOA-based duty-free eligibility is qualified on several conditions. This includes a determination of progress toward establishing a market-based economy, rule of law, and political pluralism; elimination of barriers to U.S. trade and investment; protection of intellectual property; efforts to combat corruption; policies to reduce poverty; increased availability of health care and educational opportunities; protection of human rights and worker rights; and elimination of certain child labor practices.

As of January 2002, 34 African countries had been certified as meeting the criteria to export to the United States free of quotas and duty for several items.

It is too early to measure the impact of AGOA on Africa’s access to and participation in global trade, particularly regarding effective access to the U.S. market. It is, however, significant that there is an element of policy lock-in in AGOA since qualifying countries have to meet some reform benchmarks.

The Cotonou Partnership Agreement. A successor to the Lomé Partnership Agreement among African, Caribbean, and Pacific (ACP) states and the European Union was signed in Cotonou, Benin, in 2000. The new agreement covers 77 countries, 48 of which are in Africa, and aims to promote the economic, cultural, and social development of the ACP states with a view to enhancing peace and security and to promoting a stable and democratic political environment. In part, a specific objective of the agreement is to integrate the ACP economies into the world economy, leading to the stimulation of growth and reduction of poverty. The new partnership agreement, the ACP–EU Convention, has four main components:

  • Reinforcement of the political dimension of relations between ACP states and the European Union
  • Poverty reduction within the context of the objectives and strategies agreed at the international level
  • An economic and trade cooperation framework
  • Rationalization of financial instruments and a system of “rolling programs.”

The new agreement’s main objective is to promote the progressive integration of the ACP countries into the global economy by enhancing production and the capacity to attract investment and ensuring conformity with WTO rules. The new approach emphasizes trade liberalization, including the adoption of transparent competition policies, the protection of intellectual property rights, and standardization and certification.

The New Partnership for Africa’s Development

NEPAD was formulated by African leaders to meet the mounting challenges facing the continent in an era of globalization, whose trade and growth benefits have so far eluded the continent. It comprises a vision for Africa’s development, measurable development objectives, and a strategy for attaining these objectives.

Importance of Regional Integration

A guiding principle of NEPAD is the need to accelerate and deepen regional and continental economic cooperation and integration. Referring to the challenges of globalization, the official document launching NEPAD recognizes that “an effectively managed integration presents the best prospect for future economic prosperity and poverty reduction.” It asserts: “The integration of national systems of production has made it possible to slice up the value chain in many manufacturing and service-sector production processes. At the same time, the enhanced mobility of capital means that borrowers, whether governments or private entities, must compete with each other for capital in global rather than national markets.” NEPAD leaves no doubt about recognition of the opportunities from globalization and the role that regional integration can play in facilitating Africa’s ability to convert these opportunities into growth, development, and poverty reduction.

As the initiative evolves from a conceptual debate to programs to implementation, joint action will be needed on Africa’s shared problems. Events in one country have implications for its neighbors. Action on the following critical regional imperatives will go a long way in reducing, if not ending, African marginalization:

  • Strengthening the mechanisms for conflict prevention
  • Promoting and protecting democracy and human rights in member countries and within subregions
  • Restoring and maintaining macroeconomic stability, at the country and regional levels
  • Establishing transparent legal and regulatory frameworks
  • Promoting infrastructure development and common approaches to the provision of regional public goods.

NEPAD programs provide many opportunities to deepen regional integration and bring dynamic gains from integration. A successful implementation of NEPAD’s Market Access Program will ensure that Africa’s interests are adequately addressed through the WTO. Furthermore, NEPAD’s designation of the subregional integration organizations as focal points for implementing NEPAD programs has laid a solid foundation for market integration. This not only will strengthen regional integration in Africa, but also could well create the groundswell needed to achieve the aspirations of the African Economic Community—the creation of an Africa-wide customs union.

Africa’s Recent Integration Efforts and the Way Forward

There is an extensive theoretical and empirical literature on the relationship between globalization and the expansion of world trade. A major conclusion is that free trade matters for growth. Several studies find a positive relationship between free trade and growth during the past two decades (Dollar, 1992; Edwards, 1992; Levine and Renelt, 1992; Barro and Sala-i-Martin, 1995; Sachs and Warner, 1997; and Vamvakidis, 1998).

Although most of the empirical findings are based on evidence from countries that liberalized trade unilaterally, ample evidence also shows that the structure of regional integration arrangements and their relationship with the rest of the world influence the distribution of growth. An unequivocal conclusion is that most developing countries in Africa have been bypassed by the benefits of globalization. Africa’s share in global trade and growth has declined since the 1970s, notwithstanding numerous integration schemes. Measured by its share in global output and trade as well as the level of inter-African trade, the continent has made little if any progress.

Several reasons have been put forth to explain Africa’s poor trade and growth performance. These include

  • The lack of a conducive macroeconomic environment, resulting from poor reform performance
  • The structure of Africa’s production and the lack of complementarity among its economies
  • The absence of political stability
  • The small size of regional integration schemes and their inclusion of developing countries only.

This structure of African integration schemes and their concentration on the expected static gains from trade have been identified as a major impediment to the growth of trade and development. This arises from the dominance of primary products in African exports and the inherent and long-standing hub-and-spoke trading arrangements between the continent and its most important trading partner, the European Union. Given the underdevelopment of industry in Africa, the exchange has remained the same—Africa exports primary products and imports finished goods. Consequently, on the basis of the traditional concepts of trade creation and trade diversion, most of Africa’s regional integration arrangements cannot generate welfare benefits because the necessary conditions do not exist.

Some Suggestions for the Way Forward

Deepen Economic Integration and Sustain Reforms

To realize dynamic gains, it is argued that integration schemes in Africa must involve deeper integration that will link countries in a mutually beneficial relationship and create a positive synergy from coordinated reforms. In addition to traditional trade integration, this would entail coordinating several policies that have traditionally been viewed as domestic—that is, competition policy, commercial legislation and regulation, investment and tax codes, monetary policy and the creation of a common currency (as exists in the CFA zone), environmental regulation, infrastructure development, labor mobility, product standards, and standards on training and skills certification.

The benefits from regional coordination of reforms in these areas include greater efficiency of resource allocation and production, enhanced prospects for larger investment inflows, technology transfer, and building trust among countries. Several writers (Fine and Yeo, 1997; and Collier and Gunning, 1995) have argued that these benefits are more likely to be realized in an integration arrangement that includes industrial countries because of the prospects for increased investment flow and technology transfer. Above all, it has been argued with cases cited that the former type of trading arrangement is more likely to provide effective restraint, or a policy lock-in mechanism, than the later. It is less clear that industrial countries will be willing to enter into integration arrangements that will confer these anticipated benefits. For their part, developing countries may very well view such arrangements as a backdoor approach to recolonialization.

Evaluate the Structure of Integration Schemes

To the extent that a trading arrangement including industrial countries is founded on strong partnership initiatives—such as NEPAD or a supranational customs union like the African Economic Community—there is a chance of mutual benefits to both regions. The current EU approach of entering into multiple bilateral arrangements with countries with varying trading conditions is unlikely to benefit Africa.

Regardless of the polar relationship in an integration arrangement, the literature on regional integration and the need for policy coordination and harmonization has received wide attention. This is because a contradictory policy stance in one member country can negate the expected outcome in another in the absence of effective regional coordination. For instance, as Badiane (1997) observed, in West Africa trade liberalization yielded far poorer outcomes than expected because macro-economic policy reforms and coordination were not uniformly pursued. A case in point was the revaluation of the Nigerian naira during the early 1990s at about the same time the CFA franc was being devalued. Similarly, Ernest Aryeetey, professor at the University of Ghana, observed that the Ghanaian cedi was allowed to appreciate at about the same time as the CFA franc was being devalued. The importance of a deeper and better-coordinated policy stance, including trade liberalization, can hardly be overemphasized.

Consider Monetary Integration

There is a growing interest in monetary integration in Africa, even though the interest is not widespread and the implications are not thoroughly understood. Although not a common feature of integration arrangements, monetary integration has several advantages as well as drawbacks. As Aryeetey (1998) points out, when coupled with trade integration, monetary integration will contribute to maximizing intraregional flows because the common currency removes the transaction costs implied in using different currencies. It will also economize on the use of foreign exchange by eliminating its use in intraregional trade. Furthermore, a single currency is likely to promote efficiency through the removal of capital controls and introducing price stability with exchange rate stability.

There are, however, inherent risks and costs. Monetary integration is not feasible until there has been a convergence in macroeconomic indicators in the integrating countries. Another disadvantage lies in the loss of the exchange rate as a policy instrument since adjustments can only be undertaken using expenditure-reducing measures. This handicap may be more than offset by the budgetary discipline entailed in monetary integration. The other costs of monetary integration are the loss of the inflation tax and seigniorage and the difficulty in having an autonomous monetary policy. However, if the recent introduction of the euro and the experience of the CFA zone are a guide, monetary integration deserves serious consideration.

Emphasize Political Stability

The discussion on integration and trade has thus far focused on economic issues and relationships. A necessary condition for regionalization is peace and security or, more generally speaking, stability. Political stability is imperative for a nation’s ability to attract and keep investment. Regional stability is essential for transborder investment in infrastructure and telecommunications, which hold the key to industrialization in an era of linked borders and markets. For years, if not decades, African countries have faced internal conflicts that have had severe cross-border spillovers. A region with so many conflicts will not attract FDI away from more stable regions. Thus, if Africa is to stimulate trade and growth, stability must return.

In sum, political and economic factors intertwine in regionalization. The challenge is to adapt African integration arrangements in ways that would stimulate dynamic gains, coordinate and sustain deep reforms, and strive toward stability in member countries and the region.

Role of the African Development Bank in Fostering Regional Integration

The regional integration mandate of the African Development Bank (AfDB) is enshrined in its founding articles, which enjoin the AfDB to promote, individually and collectively, economic cooperation and the regional integration of Africa. In pursuit of this mandate, AfDB has financed several multinational operations over the years, including river basin development, infrastructure construction and maintenance, power generation and distribution, and the development of telecommunications and information technology services. The AfDB has also facilitated the establishment of regional institutions such as the African Capacity Building Facility, Africare, and Afreximbank, to name a few.2 Furthermore, AfDB has facilitated trade and rural development through its on-lending operations conducted through member countries’ commercial and regional development banks.

As part of its institutional restructuring and revitalization, AfDB in 1999 adopted a vision statement that established sustainable growth and poverty reduction as its raison d’être. One of the operational pillars in the vision statement is to facilitate regional integration. In 2000, in an effort to give operational meaning to the vision, AfDB adopted a formal policy on economic cooperation and regional integration. Among other objectives, it identified the global integration of Africa as an overarching objective. To this end, AfDB is accelerating its regional integration efforts through several activities. These include adjustment reforms aimed at creating conducive economic environments in member countries and in the region, facilitating infrastructure development, promoting private sector development, ensuring sustainable development through the main-streaming of gender issues in its projects and programs, and ensuring the protection of the environment.

In addition to its direct development assistance to member countries, AfDB earmarked 10 percent of its replenishment resources for multinational projects and regional operations to further acceleration of regional integration (seventh and ninth general replenishments of the African Development Fund). A substantial portion of these earmarked resources is being committed to capacity building for regional integration organizations and other institutions, including those engaged in research and private sector development.

The AfDB encourages its member countries to support and promote regional integration; and to do so, it uses performance-based resource allocations. Furthermore, to ensure consistency and harmony in its interventions, AfDB will begin shortly to prepare regional assistance strategies to guide its country-focused interventions, which are articulated in its Country Strategy Papers.

As indicated above, the HIPC initiative has been an important step in strengthening the development capacity of African countries through debt reduction. The resources freed as a result are being directed toward poverty reduction and stimulating growth. It is instructive that AfDB was and remains an active participant in the initiative. As of February 2002, AfDB had committed $1.41 billion in debt relief to 20 African countries.

Finally, AfDB is an active participant in NEPAD. This derives from the vast expertise and development experience that it has built over the years. Recognizing this accumulated expertise and experience, the African heads of state designated AfDB as the initiative’s focal adviser on infrastructure development and banking standards under NEPAD. Jointly with the Economic Commission for Africa, AfDB also advises NEPAD in the area of corporate governance. A successful implementation of NEPAD programs in these and other areas will deepen the regional and global integration of Africa.

Conclusion

In their efforts to overcome the development constraints imposed by the small size of their national economies, African governments have created regional integration schemes. These vary from free trade arrangements to customs unions to common currency zones. Ideally, these schemes should have facilitated integration by creating larger markets with opportunities for economies of scale in production, competition, enhanced investment inflows, and economic growth. The findings of several studies, including this analysis, have shown that integration schemes in Africa have not achieved the expected results. The African economies remain small and not integrated; and in a fast-globalizing world, Africa remains the most isolated and marginalized region.

This chapter suggests that Africa can achieve better integration results and end its global isolation through several measures. Critical among these is the need for consistent implementation of sound macroeconomic policies and the rationalization and transformation of African integration blocs into effective, open, and large markets that will serve as stepping stones for the global integration of Africa. In addition, Africa needs a stable, conflict-free environment if it is to attract and retain investment, particularly FDI, whose global mobility has spurred economic development and growth in other parts of the world during the past two decades. NEPAD’s objectives and programs for Africa’s development could not have come forward at a better time. The challenge is to transform these programs into actionable development activities and commence their implementation.

Best efforts notwithstanding, Africa will realize little progress toward ending its isolation unless developed countries remove their current trade barriers, which have circumscribed the comparative advantages that African products would have otherwise enjoyed in these markets. There is a pressing need to make the multilateral trading rules, which are currently biased against primary products, more equitable and evenhanded. In this regard, the NEPAD market access program provides a useful agenda with which to promote African trade.

Appendix 1.
Inter-Africa Trade, 1990–2001(In billions of US$)
199019911992199319941995199619971998199920002001
Exports to:AMU
AMU0.961.070.960.790.971.111.120.920.880.921.081.20
Africa1.381.461.371.221.361.661.701.551.171.221.461.65
World33.4832.3429.9825.6725.7629.1832.4734.7326.9336.6248.1045.57
Imports from:
AMU0.800.921.230.991.061.161.161.010.730.961.171.33
Africa1.361.481.761.401.591.821.821.871.281.481.681.92
World29.7726.5528.8927.9629.0834.1232.3632.7532.4236.1635.7637.51
Exports to:COMESA
COMESA0.910.570.630.710.951.041.281.231.181.151.301.33
Africa1.451.221.331.562.062.232.702.632.372.252.612.52
World15.0015.5615.3514.0816.6518.0020.1319.8117.5318.7427.2726.10
Imports from:
COMESA0.990.650.780.701.001.071.261.231.201.201.341.38
Africa2.472.322.872.693.384.274.995.134.424.244.835.30
World24.4521.9523.3021.2523.8729.6232.5432.3635.5234.3740.2042.90
Exports to:ECOWAS
ECOWAS1.561.422.111.781.731.942.292.242.262.382.972.90
Africa2.061.922.502.232.102.503.073.213.213.274.003.83
World19.6314.7520.4318.4919.1021.4626.9626.0922.2421.7630.8129.50
Imports from:
ECOWAS1.911.432.081.901.832.002.382.212.472.553.143.18
Africa2.181.722.422.232.132.532.822.712.983.223.853.95
World17.8318.3926.2322.7120.8223.4023.3523.0027.4124.5628.0429.91
Exports to:Franc Zone
Franc Zone0.890.800.710.610.560.770.951.061.111.051.010.98
Africa1.751.461.541.341.301.481.751.741.991.741.831.77
World10.9310.2410.209.119.2611.0714.2114.1513.3313.7516.2015.40
Imports from:
Franc Zone0.900.860.670.570.500.730.890.971.081.090.961.03
Africa1.901.761.681.511.301.812.102.132.132.312.762.81
World9.639.131.008.507.6010.4811.7611.0612.7412.5212.9614.40
Exports to:SADC
SADC1.731.802.452.613.093.541.424.803.974.354.604.60
Africa1.892.052.752.923.734.411.705.974.985.465.735.90
World26.1326.7828.1726.4530.0036.3213.8842.8838.5237.3739.3644.63
Imports from:
SADC1.721.782.442.603.053.474.354.723.873.844.382.51
Africa2.122.072.862.933.564.135.115.424.554.625.275.65
World23.2423.8825.9624.7028.8137.6239.8138.7242.4239.4541.0142.60
Source: Statistics Department, African Development Bank.Notes: AMU =Arab Maghreb Union. COMESA = Common Market for Eastern and Southern Africa. ECOWAS = Economic Community of West African States. SADC = Southern African Development Community.
Source: Statistics Department, African Development Bank.Notes: AMU =Arab Maghreb Union. COMESA = Common Market for Eastern and Southern Africa. ECOWAS = Economic Community of West African States. SADC = Southern African Development Community.
Appendix II.

African Regional and Subregional Economic Integration Groupings

Regional and Subregional Groupings

CEMAC:Communauté Economique et Monétaire de l’Afrique Centrale
COMESA:Common Market for Eastern and Southern Africa
EAC:East African Cooperation
ECOWAS:Economic Community of West African States
ECCAS:Economic Community of Central African States
IOC:Indian Ocean Commission
SACU:Southern African Customs Union
SADC:Southern African Development Community
UMOA:Union Economique et Monétaire Ouest Africaine
AMU:Arab Maghreb Union
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1The combined 1993 GDP of the 48 sub-Saharan African countries was about $155 billion. Excluding the four major oil-exporting countries—Angola, Congo, Gabon, and Nigeria—total 1993 sub-Saharan African exports of $19.8 billion were approximately one-half those of Thailand and only $4 billion more than those of Israel (Yeats, 1999).
2The multilateral development banks also promote integration. The World Bank, the Asian Development Bank, and the Inter-American Development Bank have established formal structures to promote integration. For example, the World Bank Africa Region has a formal unit on integration. Among other activities, it has prepared regional assistance strategies to guide the World Bank’s regional and country operations in West and Central Africa.

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