UNITED NATIONS
ENGLISH
ECONOMIC AND SOCIAL COUNCIL Original: FRENCH
ECONOMIC COMMISSION FOR AFRICA
Africa Knowledge Networks Forum (AKNF) Preparatory Workshop, 17-18 August 2000
Addis Ababa, Ethiopia
The Feasibility of Economic Integration in Central Africa
Jean-Sylvain Ndo Ndong Secretaire General (LEA) Universite Omar Bongo
Faculte de Droit et des Sciences Economiques ECAC
339.543.622 (6-191.2)
F2885 17-18 August 2000
Addis Ababa, Ethiopia
The Feasibility of Economic Integration in Central Africa
The European Economic Community (EEC) and the European Free Trade
Association have made a great impression on Third World countries. The desire to follow the example of Europe—the question "why not us?"— has considerably influenced the process of regional integration in developing countries. Apart from the desire to emulate Europe, it was not long before a degree of apprehension emerged as to the economic impact
of the European Union.
It was therefore a combination of unconscious imitation and a desire to avoid being sidelined that persuaded Third World countries to form customs unions and free trade areas. Several institutions designed to promote regional integration and cooperation
were created.
However, these experiments have not been entirely successful. Trade expansion has been slow, and intra-group trade has remained low-key. In the case of the Central African Common Market (CEMAC) for example, intra-regional export trade accounted for only 4 per cent of the member States' total export trade in 1998. This unsatisfactory performance raises several questions with regard to the theoretical model that had been in
vogue hitherto.
According to the pioneering research by Viner (1950)' and Meade (1955)2 on customs unions, the key factor is the static impact of tariff movements. This approach may be applied to Central Africa in assessing the efficacy of customs unions in general.
There seems, on the surface, to be a lack of compatibility between the structuring of these economies and such constraints as the absence of veritable markets. In sum, two somewhat distinct models are discernible.
The traditional model of international trade holds that the success of a customs union is linked to the existence of a degree of complementarity among the economies concerned. It is evident, however, that Central African economies are not altogether complementary, in the sense that they have the same relative costs and the same fundamental characteristics. This militates against specific comparative advantage and consequently, against specialization. In the result, intra-group trade is limited in extent.
On the other hand, the latest models maintain that hope lies in the fact that world trade, for the most part, takes place between countries with the same structures in terms
' Jacob Viner (1950). «The Customs Union Issue.» New York :
J. Meade (1955). «The Theory of Customs Union. » The Hague, North Holland
Publishing.
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of fundamental characteristics and relative costs.
The existence of variety in production has indeed engendered some degree of competition within given sectors. The difficulty, however, is that high incomes favour variety in production. In the case of Central African economies, this brings us back to the point of departure, which is that incomes per head are too low to sustain intra-sectoral trade.
The issue that emerges, in our view, is that, owing to low incomes per head of population, Central African economies lack domestic markets strictu sensu. Nigeria, for instance, is a large West African country with a population of over 100 million; yet, in terms of the volume of consumption, real purchasing power is outstripped by total domestic output. This example may, in our view, explain the failure of integration in Africa.
It has always been thought that coming together in a customs union suffices to promote trade among the member States; the problem, on the contrary, is that not only are individual countries often on the verge of terminating their participation, but also that the populations within the union often cannot absorb the total output. Should the idea of integration therefore be abandoned? The answer is, certainly not; because it is difficult to see Africa being left out of the current globalizing movements.
This paper aims to identify a number of approaches that can facilitate Africa's integration into the global trade arena. We will argue that Africa needs to be part and parcel of a new strategy towards North-South cooperation (first part). The new strategy must avoid the pitfalls encountered in the integration processes of the 1960s and 1970s.
Accordingly, we will identify some of the necessary conditions for success in the new strategy (second part).
The New Integration Strategy The arguments in favour of regional integration are based on the premise that such integration can achieve better results in the form of customs union than through unilateral trade liberalization.
1. Customs union versus free trade area
Given the weakness of Central African economies, unilateral trade liberalization will encounter more bottlenecks than regional or multilateral liberalization. Indeed, unilateral trade liberalization is likely to deprive these economies of a particularly important element, namely, market access. In addition, unilateral liberalization may not offer them the requisite negotiating leverage.
a) Market access and negotiating leverage
The first element that may be proffered as an argument in favour of a Central
African customs union is market access and negotiating leverage. To enter the global trade arena, Central African countries need to create a customs union that can negotiate
from strength.
The terms of trade of such a union will depend on prices and tariffs prevailing internationally and imposed on the member States from without. To the extent that the level of those tariffs can be influenced by negotiation, a customs union that provides
negotiating leverage is necessarily beneficial to its members.EEC placed the countries of Western Europe in a stronger negotiating position vis-a-vis tne United States of America, in terms of tariff rates, than if they had had to act individually. The economic unions created in Africa and Latin America appear weak by
comparison, and unable to boost their negotiating leverage to the same extent, thoughthere is room for optimism.
There are, no doubt, distinct advantages offered by regional liberalization, but a number of recent initiatives in this area seem to suggest that the global trading system may be gravitating towards a division into three blocs centred, respectively, on Western Europe, North America and East Asia. Let us suppose that each of these blocs were to liberalize its internal trade regime while at the same time imposing sizeable tariff or non- tariff barriers on imports. Would any economy or region (Central Africa, for instance)
derive more benefit from regional liberalization or by joining one of these blocs?Practical common sense suggests that the latter benefit would be more advantageous as market access to one of the blocs would then be guaranteed.
Another argument would hold that a customs union is better than free trade
because it frees the member States from the restraints of the rules of origin.b) The restraints of the rules of origin
The rules of origin are more of an obstacle than a boon to the partners in a free trade area (FTA). They constitute a handicap precisely because of the very principles on which they operate. In an FTA, exporters based in a third country tend to target markets in the member State with the lowest import duties. This trade diversion" persuades the trading partners to adopt regulations aimed at determining whether a commodity
originates in the area and so qualifies for exemption.These regulations have the same effect as additional trade barriers in an FTA.
The maintenance in an FTA of the external trade barriers of each country while those
between the partners are removed has three implications.1) Rules of origin are necessitated by the existence of different tariff
rates in the FTA partners vis-a-vis third countries: the commoditiesmoving from one FTA partner to another must originate within the FTA in order to avoid trade diversion;
2) By creating incentives, rules of origin can cause protection to move from one country to another;
3) The difference in tariff rates means that producers within the FTA cannot deal, at the same price, with tradable and non-tradable goods the manufacture of which requires large quantities of intermediate goods at different prices in the FTA partners.
These factors naturally militate against the FTA growing into a common market as long as there is no tariff union (Krueger, 1997). Conversely, it is conceivable that a group of States that are members of a customs union can abolish customs procedures between them; but this is impossible in an FTA, because of the requirement of proof of origin of commodities moving within the FTA.
Furnishing documentation proving the origin of commodities is time-consuming.
Consequently, a customs union is to be preferred, rather than an FTA. However, the customs union would have to be built on the foundation of the existing monetary union which falls under the Central African Development Bank (BEAC)
2. Establishing a customs union on the basis of the monetary union
The underpinning for establishing a customs union on the basis of the monetary union of the franc zone primarily relates to the intensive trade relations between the franc zone countries in Africa and the main European Union countries. For historical reasons, the European Union has been a major trading partner with Central African countries; in
1997, the European Union absorbed 35.65 per cent of total exports from CEMAC countries and provided them with 60.87 per cent of their imports.*
Consequently, the establishment of a free trade area between CEMAC and the European Union should favour application of the principle of reciprocity, particularly for imports. CEMAC s imports appear to be relatively stable; and this is probably because the effect of substitution is stronger than the effect of competitiveness, as these imports seem to be insensitive to variations in domestic demand and/or GDP (Ndo Ndong, 1999).
The establishment of an FTA would, most importantly, encourage a reduction in customs tariffs, resulting in lower prices for imported inputs. In all likelihood, competitiveness of Central African economies will improve as a result; ceteris paribas, this should result in higher profit margins and attract new investment to this market
Additionally, the transfer of technology and the innovation expected to result from the new strategy can play an important role. In the light of past experience in trade
between developing countries and industrialized countries, the new trade relations are likely to benefit both groups, more so if the developed countries maintain innovation in new products (Cogneau and Tapinos, 1995). Both groups can therefore expect advantages, albeit accruing unequally.
However, the potential gains can only effectively materialize if there is a real political will on the part of the CEMAC leadership to restructure their respective economies. Certain conditions will have to be fulfilled to ensure the success of the new regional integration strategy.
Necessary conditions for the success of the new strategy The new strategy should, above all, be directed at boosting the region's role in the global trade arena. Its viability will depend upon the continuance of domestic adjustment at the country level, to optimize the actualization of comparative advantages.
1. Domestic adjustment
The realization of economies of scale (that is, reducing production costs by increasing the size of an enterprise), and rationalization of the use of market resources, are obvious advantages of regionalism and multilateralism. However, the advantages of such cost reduction are more evident in the latter context. In a multilateral trade liberalization system that includes developing countries with a diversified industrial base, the resultant cost reduction is particularly significant.
Source: IMF, DTS-June 1998
With the opening up of markets, enterprises tend to realize economies of scale to a level that is not easy to attain within regional markets. A multiplicity of preferential trade agreements causes a great deal of dislocation, as well as political pressures, and raises a number of practical problems. Third countries often respond to trade diversion, occasioned by regional agreements, by taking retaliatory measures; this can lead to a chain reaction with injurious consequences.
Excessively discriminatory trade policies on the part of CEMAC may meet with retaliatory protectionism by third (industralized) countries which would otherwise offer better terms of trade.
Among the risks inherent in regionalism may be cited: possible non-internalization of the advantages of multilateralism in negotiation at the regional level; a potential for intra-group dislocation to worsen; and the possibility of an adverse impact on countries excluded from the regional arrangement.
The success of a regional grouping of Central African economies depends upon
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the attainment of a higher degree of efficiency in the production systems and resolution of budgetary problems at the country level (Ondo Ossa, 1999).
Production efficiency entails improved productivity and enhanced competitiveness.
This will involve identifying new, profitable ventures and reviewing the entire production structure. In Central Africa, productivity is affected by administrative
constraints; uncertainties surrounding the application of pertinent laws; and low investment.The adoption of sound policies in the domains of industry and infrastructure is a prerequisite for successful regional integration. Additionally, it will require reform in the banking sector, establishment of a regional financial regime, and a steadfast policy of
openness vis-a-vis the rest of the world.
However, there has been no real coordination of economic policy among Central
African countries.
It is probable that, in the context of domestic adjustment, regional economic communities in Africa may, as in Europe, require member States to meet benchmarks of economic performance on an annual basis, in relation to inflation, growth and budget deficits. In consequence, the realization of comparative advantage within the individual
economies would be a necessary objective.2. Realizing comparative advantage
Opportunity cost, that is, the gains to trade deriving from specialization, is a basic
concept of commerce.
The aggregate production and consumption of a group of people, or of a group of economies, can increase if the people or economies concerned specialize in the production of goods and services in respect of which they have a comparative advantage and may
freely trade with other people or economies (Caves and Jones, 1985).International trade embodies for all nations, a sound opportunity to specialize in
production depending on the comparative advantage of each. Through trade liberalization-* key objective of the World Trade Organization (WTO)-they can make better use of their resources, or production capacities.Generalization of liberalization, therefore, has two main implications:
1) It encourages a reallocation of resources towards activities in which a given
economy has a comparative advantage;
2) It enhances the consumption opportunities for a given economy, because an
improvement in production efficiency generates more income and hence
multiplies the means whereby goods and services can be purchased from other
economies.
This implies that a country that wishes to maximize the well-being of its people ought not to remove trade barriers. Central African countries, which have no control over global market prices, are a case in point.
The difficulty is that even where an economy incontrovertibly stands to gain from trade liberalization, it may always be preferable that its partners also liberalize. This is one strong argument for generalized trade liberalization.
Any process of regional integration must have as an objective the realization of comparative advantage. This presupposes a scheme of compensation for the poorer economies within the group, so that the costs and benefits of the measures taken are
evenly distributed.
However, this theory rests on two main premises (Ondo Ossa):
1) Production efficiency increases with domestic demand vis-a-vis the enterprise, which, for its part, produces primarily to meet that demand, also known as 'representative demand";
2) Export orientation comes in at a later stage, when the enterprise has become
competitive internationally
The competitiveness of an enterprise would appear to be dependent upon the prior existence of a strong domestic demand. It therefore has to produce, above all, goods that are in high demand on the domestic scene, and export to countries with a similar economic structure. In this view, Central African economies, which appear to have similar structures, can realize comparative advantages, the basis of international trade
(Ricardo, 1965).
The new strategy involves making judicious choices with a view to securing niche markets (Lafay, 1987). The most promising niche markets, by providing the necessary impetus, should eventually become poles of competitiveness.
However, adequate compensation schemes will have to be put in place, to dispel any legitimate fear, on the part of individual partners, of being sidelined. Indeed, disparities in economic might and level of development frequently create imbalances within a regional grouping. In terms of costs and benefits, such imbalances often spawn conflict (Hugon, 1991) between profit and accumulation; between, on the one hand, traders and foreign-
exchange merchants, and producers in agriculture and industry on the other; and between
landlocked countries and coastal countries.In the case of Africa, compensation schemes may be in the form of financial transfers, location of development projects, purchase transactions, transport networks, services delivery or transactions in exchange for sales in the poorer countries within the group (Ondo Ossa).
Conclusion
African economies face many restraints in the current global context. They need to integrate into the global trade arena. The question is how this is to be done. Regional integration has been hampered by considerable macroeconomic divergence.
None the less, globalization is a distinct imperative, and more effort can be made to maximize the utilization of the potential benefits of trade at the level of the regional economic groupings. The prospect of a North-South integration strategy needs to be explored. To that end, the countries concerned should now take urgent measures to effect macroeconomic adjustment with a view to utilizing the comparative advantages. This is the key to economic development in the region.
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