Trade is a powerful engine for economic growth and development. In recent years, countries have increasingly opened their economies to international trade, whether through the multilateral trading system, increased regional cooperation, or as part of domestic reform programmes, which have brought enormous benefits to many countries and citizens (World Trade Organization [WTO], 2007).
The relationship between trade openness and economic growth has been the subject of considerable study and analysis, the majority of which suggest a positive correla-tion between the two. Trade can influence growth through several channels. One is by the transmission of technological innovation. Trade openness leads to more exposure of the domestic economy, in which increased and sustainable international trade allows domestic producers to learn, adopt, or imitate foreign technologies and incorporate them in the production process. Thus, trade can help transmit techno-logical innovations and knowledge among trading partners (Grossman and Help-man, 1991).
Increased exposure to foreign technology emanates from the importation of high-tech commodities or from interaction with the sources of innovation due to better international communication and mobility. Such exposure creates a greater capacity to compete with advanced economies on the international market, which leads to broad transformation of product composition of output and exports from agricul-ture to heavy industry and finally to high-tech goods. Such was the pattern experi-enced by the East Asian countries economic growth miracle (Wacziarg, 2001).
Advanced technology is also transmitted through increased foreign direct invest-ment (FDI), either by importing capital goods or by sharing knowledge and exper-tise. Harrison and Revenge (1995) found that trade openness, as measured by total trade flows, is positively correlated with FDI, which implies that open economies attract FDI more than closed economies do.
Greater trade openness also increases competition in the local market, which increases productive efficiency and economic growth (Vickers and Yarrow, 1991).
Open economies are more likely to have tradable goods at competitive world market prices (or fewer market distortions), because free trade facilitates price convergence across countries or regions. Access to larger markets also can benefit countries eco-nomically by increasing the sizes of the markets, which allows their economies to better capture the potential benefits of increasing returns to scale (Ades and Glaeser, 1999). Furthermore, trade liberalization contributes to economic growth by creat-ing incentives for governments to adopt less distortionary domestic policies and a more disciplined management of the macro economy. Evidence suggests that there
is a significant correlation between trade openness and economic growth (Bassanin et al., 2001).
The world has become wealthier over the past several decades. Global poverty has steadily declined, and the lives of millions of people have substantially improved.
Trade has contributed enormously to the development of industrialized economies and can be expected to make a similar contribution to those of less-developed coun-tries, including African economies.
Trade openness is believed to have been particularly instrumental, for example, in the remarkable economic growth of many East Asian countries and in relieving their regional poverty, and once-insolvent Southeast Asian countries have become some of the world’s economic leaders. Trade may affect the income of the poor, though in varying degrees across countries or regions, through its effects on economic growth, employment, revenue, consumer prices and government spending (WTO, 2007).
The emergence of India and China as economic powers has contributed to a sig-nificant decline in world poverty. But while many countries have benefited from increased trade, Africa has, in general, been left behind. International trade statistics indicate that its share in world trade has declined from around 6 per cent 25 years ago to about 2 per cent; less than 1 per cent, if South Africa is excluded. This trend points to the continent’s increased marginalization in the context of world trade.
The situation is no different, if not worse, with regard to intra-Africa trade, which has consistently remained minimal compared with its intercontinental trade. The pattern of African exports continues to be heavily influenced by historical links with the rest of the world. More than 80 per cent of African countries’ exports are still destined for markets outside the continent, with the EU and the United States accounting for more than 50 per cent of this total. On average, over the past dec-ades, only about 10 to 12 per cent of African trade takes place among other African nations. This is not an encouraging trend, especially when compared with other world regions.
For example, about 40 per cent of North American trade occurs with other North American countries. Similarly, about 63 per cent of Western European trade takes place with other Western European nations.
The implications of low intra-African trade are many and far reaching. Many oppor-tunities are lost for using trade within the continent to enhance the prospects for spe-cialization between African countries and accelerated development and integration.
Intra-African trade can generate development and dynamic integration among Afri-can sub-regions and is a powerful driver of AfriAfri-can growth and economic maturity.
The main question, therefore, is how to reverse the situation so that African countries can benefit from improved intra-regional trade.
The production and export structures of most African economies are geared to pri-mary commodities such as minerals, timber, coffee, cocoa, and other raw materials, for which demand is externally oriented. Most lack the industrial capacity for diver-sified manufactured goods to support trade within regional markets. Yeats argues that Africa’s non-oil exports are concentrated in very few products, none of which are important as regional imports. Sub-Saharan African countries appear to have relatively few goods to trade with each other. An analysis of historical changes in the other countries’ exports indicates that the “non-complementarity” problem in African trade cannot be resolved quickly.
Although regional agreements may vary, all have the objective of reducing trade barriers among member countries. Accordingly, various trade liberalization schemes have been launched in African RECs to stabilize and remove tariff and non-tar-iff barriers to trade, harmonize customs duties and internal taxes, facilitate trade through information and promotional services and abolish restrictions to the move-ment of people, goods, services, and investmove-ments across borders. But some countries continue to demand high tariffs on imports, even from their neighbours. They also persist in applying non-tariff barriers and impose quantitative restrictions. Road-blocks and checkpoints, security agents at border posts, and inconsistent procedures and regulations continue to present serious obstacles to intra-Africa trade. Unless these are addressed millions of Africans will continue to suffer from poverty and underdevelopment.
Inadequate infrastructure remains one of the chief obstacles to intra-African trade, investment, and private-sector development. Programmes to cultivate transport and communications networks, energy resources, and information technology would accelerate trade progress and transform Africa into a haven for investment.
RECs have fostered trade development through programmes aimed at achieving a free-trade area, a customs union, and a common market. However, numerous initiatives and decades of experimentation with integration in Africa have brought no significant improvements to intra-REC and intra-African trade. These countries generally lack a strong industrial capacity for diversified manufactured goods to trade within regional markets. The continent’s multiple national currencies continue to lack convertibility, while efforts towards monetary, financial, and physical integra-tion have not been promising. There remains a high cost of doing business due to infrastructural gaps, duplicative border procedures and cumbersome paper require-ments. Paperless trade is a distant objective. Free movement of people and right of establishment have progressed in some RECs but remains a paper objective in many African subregions.
ARIA IV attempts to address these pressing issues. It undertakes a comprehensive empirical analysis of intra-African trade to determine why it has remained consist-ently low over the past decades. The report proposes concrete recommendations, to be implemented by member States, RECs, members of the private-sector, and other stakeholders in Africa’s development. It also analyses the various policy issues and other factors that have affected intra-African trade, although these issues may have been addressed in different contexts.