The African experience

The composition of ECA portfolios and institutional structures, however, differs markedly in different countries. Some maintain ECAs as government departments, but increasingly they are run as government or commercial enterprises that admin-ister an account for the government.

3.4 The African experience

This section examines the performance Africa in global trade. As the first report, Assessing Regional Integration in Africa (ARIA I), pointed out, the structure of trade in many African countries is as follows:

The commodity structure of exports is dominated by primary products

•

in the Standard International Trade Classification (SITC) categories 0-4.⁷ More than 80 per cent of export earnings of most African countries are esti-mated to be derived from exporting primary commodities;

The commodity composition of Africa’s imports is heavily weighted in

• favour of a wide variety of manufactured goods in the SITC product cat-egories 4 through 8; and

7 These are food and live animals (Section 1), beverages and tobacco, crude materials, except fuel (section 2), mineral fuels (Section 3) and animal and vegetable oils and fats (Section 4).

More than 80 per cent of Africa’s total exports, almost invariably primary

• commodities, are destined for Europe, Asia and America, while a compa-rable percentage of the continent’s import needs, usually of manufactured goods, are obtained from the same markets.

Africa’s fundamental role in the global trade market has generally been one of pro-ducing and exporting primary commodities in exchange for manufactured goods.

Given that the relative prices of primary goods have been declining at an average rate of between 0.5 per cent and 1.3 per cent per annum over the past century, Africa’s participation in world trade, in terms of the decline in terms of trade, has been a loss.⁸

Using neoclassical trade models, Frankel and Romer (1995) demonstrate that there is a positive correlation between trade and economic growth and consequently poten-tial improvements in the welfare of producers. However, in Africa we observe that economic growth has not always enhanced the welfare of certain parts of the com-munity. Bhagwati (1955), who coined the expression immiserizing growth, explains that although expanding the production of primary commodities boosts economic growth, it also places a downward pressure on the terms of trade exporting nations face, and that welfare actually falls rather than increases. This explains why recent trade-related growth has been welfare-reducing as we still notice high levels of pov-erty, unemployment and underemployment in the agricultural sector of most Afri-can countries. Many AfriAfri-can countries have adopted modern improvements such as fertilizer, herbicides, insecticides, better seed varieties and irrigation schemes that help expand output and exports. But the resulting oversupply on the world markets, relative to demand, may sufficiently depress primary commodity prices such that farm incomes are lower after growth than before the output expansion. Then, too, unanticipated non-market exogenous shocks such as flood, drought and crop pests often intensify poverty.

Mankiw, Romer and Weil (1992) point out that Africa’s poor macroeconomic per-formance, relative to that of its Asian counterparts, also is responsible for the long-term deficiency in saving and physical capital accumulation on the continent. Other studies also show that rapid productivity growth in Asia and poor cross-country income growth in sub-Saharan Africa, were partly due to differences in the tech-nological innovations to the production structure in the two regions. Africa’s trade potential has also been hampered by restrictive trade orientation, macroeconomic policy failure, the absence of strong institutions, weak economic and political gov-ernance and lack of financial depth, among other factors.

8 See, for example, Spraos (1980), Sapsford (1985), Grilli and Yang (1988), Bleaney and Greenaway (1993) and Thirwall (1983, 1995).

Africa must shift from being an exporter of primary commodities and diversify the structure of its production and trade. This is why regional integration as an inte-grated, subregional, continental market offers Africa the best hope for large-scale manufacturing viability. With the sustained development of physical infrastruc-tures, removing commercial obstacles to the free movement of goods and produc-tive resources, harmonizing sub-regional monetary, fiscal and financial policies, the expanded market is likely to present a vastly improved operating environment for foreign investors relative to individual national markets.

The continent faces daunting challenges to national production and trade diversi-fication. The challenge African countries face in attempting to diversify and shift production and trade away from sole dependence on primary production, is that the average size of individual national markets on the continent is small, measured either in terms of population or aggregate purchasing power. The other obstacle to diversification is technology. Underlying the concept of the production function for a manufactured good is the technically determined minimum level of output that potentially guarantees attainment of the lowest possible average cost of production, or maximum profitability. Moreover, specialization is limited by the size of the inter-nal market. African countries’ attempts to structurally diversify their economies in the 1970s via the import-substitution approach failed largely because the industrial outfits were designed for small domestic economies. The resulting high-cost ventures made them uncompetitive relative to the manufactured imports they were meant to displace.

A regional integration agenda that would lead to the continent’s deeper market inte-gration is vital if Africa is to play its rightful role in the global marketplace. A stand-alone nation-state backed by a rigid adherence to the sanctity of national sovereignty is too small to compete effectively in global markets. But through comprehensive regional integration these countries can pool their resources to form a single African market with the right comparative advantages and economies of scale to participate in the global market.

For most African countries, accelerated economic growth and development cannot be achieved in a reasonable length of time without first overcoming their demo-graphic and economic limitations. Out of 53 independent African countries, 38 (about 72 per cent) have a population of 15 million people or fewer, while a third have a population of 3 million or fewer. Of the 46 countries in the world classified as least developed (in per capita income terms), 31 are located in Africa. These statistics suggest that regional integration offers a viable means of overcoming the limitations of internal market size.

One of the principal pillars to which virtually all African regional economic com-munities are anchored is the objective of fostering intra-African trade and unifying

each regional marketplace by progressively removing artificial barriers to trade in the continent. That is why the RECs are forming free trade areas (FTAs) or customs unions, to integrate national economies, giving them large enough internal mar-kets to achieve production efficiency levels comparable to those in the industrialized countries. The FTA or customs union generates important spin-off effects associated with the enlarged market. Some on the dynamic effects of regional markets include the following:

Enlarged regional markets provide incentives not only for private

cross-bor-• der investments but also foreign direct investment. Establishing optimum-sized industrial and service projects previously constrained by the limited size of individual country markets could be facilitated by adopting appropri-ate trade and macroeconomic policy regimes. The combination of a stable investment climate, the development of transportation and communication infrastructure and sound and coordinated regional economic policy could provide adequate incentives for large-scale investment in manufacturing and service projects that are subject to economies of scale;

Regional market integration at the REC level is expected to lead to regional

•

growth poles capable of generating sufficient externalities to the RECs’ less-developed member states; and

As production structures are diversified away from primary production

• and trade, African countries’ long-term dependence on developed market economies for manufactured goods is expected to diminish as the markets become integrated.

Cernat (2001) finds empirical evidence to support that African FTAs and customs unions stimulate trade not only within the continent but also with non-African countries. Similarly, Elbadawi (1997) argues that the expanded subregional markets that characteristically accompany the formation of African regional trade blocs could generate sufficient scale economies that could result in the much-desired production complementarities and diversity among member States of such unions.

In a similar analysis, Lewis et al. (1999) and Evans (1998) found that Southern Afri-can regional integration schemes generated signifiAfri-cant, positive net welfare effects.

3.5 Conclusion

Regional economic integration, as a prelude to continental market integration, is an imperative survival strategy for Africa. Through deeper integration, the continent could pool its resources to create a single strong market and therefore halt its mar-ginalization in global production and trade.

Africa’s loss of market power and competitiveness in trade is closely related to its longstanding role as producer and exporter of primary commodities and importer of manufactures and technology. The reality today is that most African countries are too small, in terms of economic and demographic size, to influence global trade.

Trade and market integration of the 53 economies into a single African Economic Community offers perhaps the best chance for African economies to overcome the inherent disadvantages associated with small internal market size.

Promoting intra-African trade remains one of the AU’s, and the RECs’, key objec-tives. However, a number of factors hamper the process. The presence of high levels of tariff and non-tariff barriers hinders intra-REC and intra-African trade. Remov-ing artificial obstacles to intra-African trade may not be enough to expand trade within the continent, because structural deficiencies and other weaknesses remain.

In this regard the following challenges need be addressed:

Measures must be taken to deepen market integration with policies and

• programmes that address production and the continent’s supply-side con-straints. Insufficient production, poor diversification and low competitive-ness is responsible for the paucity of intra-African trade and weak participa-tion in world trade;

Intra-African trade suffers from deficiencies in transportation and

commu-• nication networks. The continent’s remains weak and inadequate;

Multiple checkpoints, border-post delays and ignorance about rights and

• benefits conferred on RECs’ trade-liberalization schemes inhibit intra-regional trade;

Africa’s energy enormous potential is but remains essentially untapped to

• generate enough electricity to buttress manufacturing or high-value-added enterprises; and

Restrictions remain to the free movement of people and means of

produc-•

tion and cross-border investments, and weak banking and financial inter-mediation in trade and productive sectors. These factors contribute to the high marginal cost of production and reduce the competitiveness of the African entrepreneurs.

Consequently, most RECs’ trade expansion and market integration objectives have not been met over the past decade. Some RECs were further affected by a hostile political environment, which made the integration process even more difficult.

These challenges only reemphasize the urgency for promoting intra-continental and external trade through the following measures:

African RECs must fast-track their trade liberalization programmes and

• strengthen transit and trade facilitation programmes. Member States should ratify and implement the trade protocols of the RECs to which they belong.

Inter-REC FTAs should be established. The steps taken by COMESA, EAC and SADC to form a single market are commendable as they contribute to the promotion of trade within all three RECs;

Trade policies should be harmonized, for example by using common

doc-• uments for cross-border clearance of cargo, vehicles and business people;

programmes should not be duplicated; investment codes should be coordi-nated; and subregional markets should be unified;

Effective and affordable physical infrastructures, services information and

•

communications technologies should be developed to support market inte-gration. This would contribute substantially to reducing the cost of doing business in Africa and in turn contribute to expanding trade and market integration among the RECs;

Monetary, fiscal and financial policies in the community should be to

facili-• tate the RECs’ allocative and operational efficiency;

Trade and industrial policies must be harmonized throughout the RECs.

• African countries should develop capacities in production diversification and export substantial amounts of manufactured products to the rest of Africa. Cross-border private investment in industry, agriculture and infra-structure should be encouraged to enhance intra-community trade; and Policies should be implemented to encourage the flow of foreign direct

• investment (FDI) to boost the domestic capacity to support trade. FDI is not just an avenue to expand capacity and growth; it also generates consid-erable technological benefits to host countries in education and training, innovative marketing and management procedures and imports of modern technologies.

Mainstreaming trade must be emphasized if intra-African market integration is to succeed. It depends on having trade policies clearly identified and properly inte-grated in national development plans and strategies. Trade can play a positive role in development if appropriate, coherent, complementary and coordinated import and export policies are adopted.

By mainstreaming trade at the national level, African countries could adopt and implement policies to improve domestic supply capabilities and international com-petitiveness. But African countries would have to liberalize import trade policies as well as those pertaining to exports.

The policies and processes for mainstreaming trade have been tested for years and in many countries. Rodrik (2001) identifies three broad categories of trade-related strategies that have been tried in the past, namely: import-substituting industriali-zation (ISI), outward- orientated industrialiindustriali-zation (OOI) and two-track strategies (2-TS). While the track record of mainstreaming trade into these different strate-gies has been uneven, it is nevertheless evident no “one-size-fits-all” approach to mainstreaming trade exists. Instead, a judicious mix of policies is necessary to reduce institutional and infrastructural constraints and create profitable investment oppor-tunities according to each country’s circumstances.

Some African countries have removed import controls, reduced tariffs and rational-ized the tariff structure to the extent that they have become some of the most open economies in the world in terms of the ratio of imports and exports to their GDP.

However, Africa’s poor trade performance, irrespective of such extensive import liber-alization, indicates that trade policy has to be part of a wider strategy to build supply capacities, improve international competitiveness and access external markets.

African countries may use a range of trade and complementary policies to improve export performance. For example, a country could use trade-promotion mechanisms, such as duty drawback or exemption schemes, bonded manufacturing warehous-ing and export-processwarehous-ing zones. Furthermore, WTO rules allow least developed countries (LDCs) and developing countries with per capita incomes of less than US$1000 to give export subsidies. Such policies would also need to be supported by the removal of policies that discriminate against exports such as high import duties on raw materials and intermediate goods, export taxes and export licensing.

Trade mainstreaming to foster African development would be successful if backed by a sound macroeconomic and microeconomic environment and supply side capa-bilities. In addition to obvious infrastructural needs such as improved roads and irrigation schemes, the links between trade and energy, especially electricity, trans-portation and trade facilitation need to be enhanced. Trade financing and access to ICTs are also essential.

In mainstreaming trade into national policies and strategies, a country’s interna-tional commitments and the delicate matter of trade negotiations must also be taken into account. African countries need to accelerate their intra-regional trade, a small percentage of total African trade, with exports having a share of 10 per cent and imports a mere 1 per cent. Furthermore, they should only seek to conclude bilateral, regional and multilateral trade agreements that bring about improved market access and balanced and fairer trade rules. In particular, African states should negotiate results that provide sufficient flexibility and space to adopt beneficial developmental policies.

African countries also must strengthen their human and institutional capacity in the area of trade. Doing so may be difficult in view of their resource constraints, but one option would be to seek trade-related technical assistance for this purpose, especially on a collective basis.

The process of mainstreaming trade has to begin quite naturally with the explicit inclusion of trade-related policies into national development plans and strategies. A key aspect of mainstreaming would be to make institutional arrangements for inter-ministerial coordination to ensure coherence throughout the policies of different ministries and to address such issues as the pacing and sequencing of trade policies.

The mainstreaming process would also require that arrangements be put in place to ensure coherence in trade negotiations to avoid overstressing the already limited number of trade negotiators and risk giving away more in bilateral and regional deals than is required. Such arrangements will ensure a better appreciation of the policy flexibilities of various sectors and avoid reduplicating trade-related technical assistance.

Mainstreaming trade in Africa should move it beyond mere import liberalization to a more integrated approach that increases Africa’s international competitiveness and improves its countries’ supply capabilities. This would also entail adopting a judicious mix of trade and complementary policies taking into account of the insti-tutional strengths and requirements.

Prompt, noticeable action is required to initiate these processes. Better inter-minis-terial coordination of policies should ensure the coherence and consistency of trade-related programmes and activities. Africa could benefit from a study of other devel-oping countries’ best practices and build on current trade-related technical assistance programmes to further mainstream trade into national development strategies.

To sum up, it may not be easy for some African countries to adopt policies that promote and strengthen their trading activities. Existing interest groups that ben-efit from the status quo may oppose reform and attempt to postpone adjustments.

While this is the likely environment in which trade reforms are usually proposed, it is nonetheless extremely important to investigate the impact of reforms on specific groups of the poor and to begin to address them. The timing of trade reform imple-mentation should be closely linked to the establishment of the programmes dealing with their impact on the poor.

It is also important to undertake broad trade reforms in all trade-related areas, such as measures frequently meet with less political resistance than cuts in protections to individual sectors. Broad reforms help beneficiaries of reform recognize their poten-tial gains and tend to reduce costs, even among industries that lose protection on

their output. Countries should not wait for some important infrastructure project to be completed, such as a port facility or a road, before embarking on trade reforms.

Given that change takes time, African countries should begin trade reforms by estab-lishing macroeconomic stability and a competitive exchange-rate mechanism. The best results for the poor can be expected when, as a result of the overall reform proc-ess, growth accelerates in the economy as a whole. That said, the poor are the least able to bear risks, and in the short term some groups will suffer losses. Policymakers should understand reform’s likely effects on the poor, and take measures to mitigate

Given that change takes time, African countries should begin trade reforms by estab-lishing macroeconomic stability and a competitive exchange-rate mechanism. The best results for the poor can be expected when, as a result of the overall reform proc-ess, growth accelerates in the economy as a whole. That said, the poor are the least able to bear risks, and in the short term some groups will suffer losses. Policymakers should understand reform’s likely effects on the poor, and take measures to mitigate