Pol licies in support of trade integration
B. Seeking regional and South-South cooperation
1. Rationale for integrating bilateral, regional and South-South cooperation into LDC development strategies
Export opportunities for LDCs do not lie only in the global market and in the more advanced countries. They also exist in neighbouring and other developing countries. In many cases these opportunities are likely to be easier to grasp, especially for smaller and domestically-owned firms in LDCs. This is an important reason for governments to engage in regional cooperation. Regional integration among developing countries also widens the scope of private sector activities and their diversification in terms of investment, production and factor mobility. It can also prepare the ground for LDCs to integrate into the wider global economy (EDAR 2009: ch.1). Another reason why LDC governments should seek bilateral or regional cooperation with neighbouring countries is the possibility to enlarge their policy space and pursue a strategy of developmental regionalism (LDCR 2011: ch.3).
Developmental regionalism aims at accelerating internal economic development and integration among the countries participating in regional cooperation agreements, while at the same time pursuing integration into the world economy as a regional trading bloc (LDCR 2011: ch.3; EDAR 2009: ch.1). In the holistic vision of developmental regionalism, LDCs will benefit most from bilateral and regional policy cooperation when they engage not only in trade liberalization, but link trade policy with pro-active investment, technology, finance and employment policies. It implies that governments in neighbouring developing countries coordinate their national policies around common development goals, leverage the potential for joint policy action, and invest in regional public goods (LDCR 2013: ch.5).37 Another reason for LDCs governments to engage in active regional cooperation with neighbouring countries is the possibility of enlarging their policy space, through developmental regionalism, to strengthen their voice and representation in international forums (LDCR 2011: ch. 3 and ch.4).
In addition to stepping up cooperation efforts with neighbouring countries, LDC governments may also actively seek closer cooperation with developing countries in other geographical regions, including countries at similar stages of development. This offers opportunities for policy learning and identifying promising new policy instruments and institutions to develop productive capacities. Policy learning can be institutionalized through the regular organization of seminars and round tables, the sponsoring of internships and visits of LDC officials in key development planning institutions and ministries, and the facilitation of academic exchange on development policies and
strategies between research institutions and universities in LDCs and partners in other developing countries (LDCR 2011: ch.3).
2. Harnessing regional dynamics for structural transformation: Developmental regionalism
In most cases, regional cooperation mainly aims at expanding intraregional trade in goods and services through the conclusion and implementation of preferential trade agreements and the facilitation of customs procedures. In most LDCs, cooperation in these areas certainly merits further strengthening and could also be extended trade in agricultural goods (DTIS Niger). Improved access to the markets of neighbouring countries can be an important complement to industrial and enterprise policies during the early stages of structural transformation. Given the pace of population and income growth in developing countries, demand for basic manufactures tends to rise faster there than in developed countries. In addition, quality demands and standardization requirements tend to be less stringent, consumer preferences more similar to those in the domestic market, and transport costs lower than in global trade.
Moreover, the orientation of development strategies to regional markets enlarges the economic space within which learning and upgrading can take place. Developing value chains across borders and among neighbouring countries widens the possibilities for firms to reap the benefits of greater specialization and scale. This regional market orientation creates opportunities for a greater number of SMEs to expand and upgrading their capabilities into higher value and more diversified industrial and service activities (EDAR 2013: ch.4). Integration with regional neighbours also involves greater competition and may also facilitate entry into GVCs, especially for countries that are landlocked and have limited resources and domestic markets (Huria and Brenton 2015;
DTIS Ethiopia).
However, the relatively low degree of effective regional integration achieved in sub-Saharan Africa despite numerous regional trade agreements suggests that it is essential for LDCs to engage in bilateral and regional policy cooperation that goes far beyond trade liberalization. This may include more ambitious forms of intervention in areas such as industrial, enterprise, energy and infrastructure policy (EDAR 2009: ch.5). For regional cooperation within Africa, the New Partnership for Africa’s Development (NEPAD), launched in 2001, provides a framework for such extended regional cooperation, which identifies possible economic clusters in different regions as well as strategic activities that can support these clusters with specific milestones and outputs.
3. Proactive regional cooperation
3.1 Regional cooperation centred on infrastructure and institutional development In LDCs, regional value chains and cross-border linkages among firms are unlikely to emerge without proactive policy measures. The provision of public goods at the regional level, and appropriate administrative and physical infrastructure offers major opportunities for the achievement of economies of scale (EDAR 2013: ch.4). Coordinated or common planning and, where applicable, financing can be conducive to greater efficiency of major infrastructure projects.
Efficient cross-border road and railway connections are indispensable for an expansion of regional trade and economic integration. Necessary improvements in transport and logistics infrastructure are closely connected with measures for trade facilitation, such as the simplification of administrative procedures combined with some basic investment in trade facilitation technologies, including measures to increase transparency in border procedures (m ch.VI.A.3).38 Moreover, harmonizing national regulations with those in neighbouring countries would help to increase competition in the transport sector and reduce transport costs. Therefore, LDCs should seek to provide an appropriate and transparent regulatory environment for trade in transport services by pursuing domestic reforms and entering into binding commitments with partner countries to harmonize regulation and remove policies that stifle competition or create inefficiencies in the provision of transport services (DTIS Mozambique). This is of particular importance for landlocked and transit LDCs, where the greater efficiency of transit corridors generates savings in trade costs, and may also stimulate the emergence of regional linkages in manufacturing activities (DTIS Mozambique).
In some cases, depending on geographical and geological circumstances, bilateral or regional cooperation may also extend to the bilateral or regional planning and financing of projects in energy, water, and telecommunications infrastructure. Large projects in these areas often exceed the financing capacity of a single LDC, but may become viable when their cost and financing is shared among several beneficiary countries (EDAR 2009: ch.2).39
Common planning, financing and use of infrastructure investment in the energy sector would facilitate the regional integration of LDC energy markets, thereby allowing for the more intensive exploitation of lower-cost energy sources and increasing the scope for diversification, both geographically and across energy sources. Taking into consideration differences in countries’ natural endowments, importing electricity from neighbouring countries through regional power pools may be preferable for some LDCs, whereas
others may use their potential to develop electricity export capacities (LDCR 2017: ch.6;
DTIS Ethiopia).
It is also important to note that common physical infrastructure requires bilateral or regional cooperation at the planning and construction stages, as well as appropriate institutions and financing arrangement for their maintenance.
3.2 Regional orientation of industrial and enterprise policies
Regional industrial and enterprise policies can support structural transformation by harmonizing and coordinating the industrial and sectoral strategies of countries participating in the regional associations (EDAR 2011: ch.4). Such cooperation requires the identification of mutual interests in building productive capacities and advancing structural transformation. For this purpose, information networks should be established to provide accurate and up-to-date information on each country’s policy priorities for structural transformation. These networks could also be used to share information on national laws and regulations, investment opportunities, technological and market potential, the availability of inputs and, possibly, policy experiences. The development of industrial associations at the regional level can play an important role in creating cross-border sectoral supply chains and knowledge linkages.
Public policies can also support the conclusion of industrial collaboration agreements and licensing agreements. These policies can also foster cooperation in engineering and technical services and research and innovation programmes (EDAR 2009: ch.4).
Governments should consider supporting the creation of technology-sharing consortia at the bilateral, regional or wider South-South cooperation level among countries at similar stages of technological development (LDCR 2010: ch.4). Participation in technology-sharing consortia is more efficient than the generation and use of proprietary knowledge and technology at the firm level and in each country individually. In such a consortium each firm benefits from the combined innovation activities of the entire consortium. Joint adaptive research and the exchange of technology (rather than through pure licensing), would provide firms in the consortia with a degree of protection against free-riding, and could nurture and facilitate the greater use of new technological knowledge by enterprises in LDCs. Policy support for participation in such consortia may take the form of financial support for participating domestically-owned firms and a degree of protection against the risk and uncertainty associated with the financing of any innovation activity.
Financial support should be directly linked to collaborative research and development (R&D). This research should primarily focus on the adaptation of foreign technologies to local conditions, and be conducted at a higher level than could normally be achieved in the context of an individual LDC (LDCR 2010: ch.4).
Regional cooperation can also be beneficial for agricultural upgrading, both by increasing yields towards regional best-practice levels, and by strengthening agricultural R&D, as exemplified by the International Rice Research Institute in South East Asia (LDCR 2014: ch.6). In relation to upgrading and diversification of agriculture, governments may consider measures such as joint adaptive research with neighbouring countries, regional storage facilities, and regionally-coordinated investment programmes (EDAR 2009: ch.3).
While government engagement in regional cooperation can prepare the ground for effective regional integration, the latter only becomes effective through increased cross-border linkages in productive and commercial activities at the firm level. Dialogue between governments and private sector associations in the design and implementation of regional cooperation projects remains essential. Moreover, private sector initiatives for cross-border technical and financial cooperation, including corporate integration through mergers, should be facilitated and actively supported by LDC governments as part of their policies for industrialization and agricultural upgrading.