African regional integration a pre-condition toward multilateral liberalization

ECA - CEA

ECONOMIC COMMISSION FOR AFRICA

COMMISSION ECONOMIQUE POUR L'AFRIQUE

Knowledge Networking for Africa's Development

The Africa Knowledge Networks Forum (AKNF) 2001/African Development Forum (ADF)

2001 Technical Advisory Committee Meeting

AFRICAN REGIONAL INTEGRATION: A PRE-CONDITION TOWARD MULTILATERAL LIBERALIZATION

Addis Ababa Ethiopia October 17- 19,2001

ECAC 339.9(6)

A2585 C.1

AFRICAN REGIONAL INTEGRATION: A PRE-CONDITION TOWARD MULTILATERAL LIBERALIZATION

by

William A. Amponsah

October 11, 2001

William A. Amponsah is associate professor of International Trade and development and director of the North Carolina A&T State University International Trade Center. This paper is prepared for the Africa Knowledge Networks Forum 2001/African Development Forum 2001 Technical Advisory Committee, United Nations Economic Commission for Africa, Addis Ababa, Ethiopia, October 17-18, 2001. Please send comments and correspondence to: North Carolina A&T State University International Trade Center, A-25 C.H. Moore Research Facility, Greensboro, NC 27411, Telephone: 336-334-7056, Facsimile: 336-334-7658, and e-mail: williama@ncat.edu

Introduction

Following the failed meeting of the World Trade Organization (WTO) in

November 1999, global multilateralism has faced an increasing number of vocal and active opposition from around the world. As the push for free trade at the multilateral level has become more and more contentious, governments have been focusing on alternative paths to achieving trade and investment liberalization in the hopes of spurring production and export growth. Africa is faced with just such a challenge in announcing creation of the African Union. The issue of market access for African countries attracted much attention during the Uruguay Round of multilateral negotiations. Currently, virtually all African countries have entered into contractual preference arrangements with the European Union (EU). Because of historical colonial ties, the EU accounts for greater than two-thirds of total African trade. African countries also enjoy preferential treatment for certain export products to major markets, such as the U.S. and Japan, under the General System of Preference (GSP). A major concern for these countries is how to obtain the technical assistance necessary to exploit the "wiggle room" that is embodied in

many WTO agreements.

The option of promoting trade and investment integration on a regional basis was implemented in the 1990s by many regions of the world. They include the North American Free Trade Agreement (NAFTA), the EU, the Southern Cone Common Market of Latin America (MERCOSUR), etc. Perhaps, aside from the EU the only other continent-wide arrangement that is similar in its breadth and scope to the African Union is the proposed Free Trade Area of the Americas (FTAA). In Africa alone, there are at present about thirteen different sub-regional trade agreements. There has been a long debate by trade theorists whether over the long run regional integration promotes broader liberalization or inherently leads to regional protectionism and trade diversion and, therefore, to aggregate economic loss. Nevertheless, current thinking is that regional integration promotes greater trade liberalization and other economic reforms. Yet, having escaped the brunt of the global financial crisis of the late 1990s, the question is often asked, whether in the case of Africa the benefits of globalization would outstrip the potential risks? What potential advantages may be conferred by regional economic integration that cannot be achieved under present multilateral and sub-regional arrangements? What lessons in other regions would be most instructive as Africa

embarks on the process of forming an economic union?

Globalization is the Catalyst for African Economic Reforms and Trade Integration

At the end of the 1980s, researchers began focusing on the concept of conditional

convergence. According to this concept, a country's long-run level of income and its

growth rate are determined by factors such as macroeconomic and structural policies, as

well as by how poor the country is relative to the rest of the world (Amponsah et al.,

1999). The uneven economic performance across countries and uneven rewards within

them are frequently linked to the phenomenon of globalization (International Monetary

Fund, 1997). The critical issue arising from recent lessons learned about economic

growth is that policy regimes make a difference in whether a developing country converges toward high income levels.

In part because of the noted dichotomy in global economic performance, the Interim Committee of the International Monetary Fund (IMF) in its September 1996 Declaration on Partnership for Sustainable Global Growth set out a range of broad policy principles to promote the full participation of all economies in the global economy.

These principles stress the need to implement sound macroeconomic policies that (a) consolidate success in bringing inflation down, strengthen fiscal discipline, enhance budgetary transparency, and improve the quality of fiscal adjustment; (b) foster financial and exchange rate stability and avoid currency misalignments; (c) maintain the impetus toward trade liberalization and current account convertibility; (d) tackle labor and product market reforms more boldly; and (e) ensure the soundness of banking systems and promote good governance in all its aspects. The complementary and mutually reinforcing roles of macroeconomic and structural policies were given particular emphasis (IMF, p.3). At the heart of these policy principles is the expectation that if they can adapt to meet the requirements of increasingly integrated and competitive world markets, ail countries should be better able to develop their areas of comparative advantages, enhance their long-run economic growth potentials, and share in a prosperous world economy.

In the 1980s, many African countries successfully embarked on structural adjustment programs with the assistance of the Bretton Woods institutions, the World Bank and International Monetary Fund. However, to date compared to other regions of the world, Africa is generally characterized by low economic growth, caused by low rates of domestic savings, endemic poverty, excessive dependence on a few agricultural commodities, lack of institutional transparency, lack of market openness and

liberalization. Sub-Saharan Africa's average GDP per head is anywhere around $509

($297 if we exclude South Africa) and it has hardly changed over the past three decades.

Additionally, the regie a has experienced declining shares in nearly all sub-sectors of world trade, and there is a tendency for its exports to be concentrated in primary products whose share of world trade has been declining. Although the slow pace of integration shielded Africa from global financial crises, it has also meant that real prosperity eludes many countries in the region. Africa may not continue in its present course if it wishes to exploit the benefits of globalization, namely, increasing its available resources for productive investment, enhancing efficiency of their uses, and facilitating transfer of appropriate technology to enhance its production processes. Therefore, many economic development analysts have proposed that because of the forces of globalization, African countries (just as most developing countries) have little choice but to integrate into global markets, and that the preferred approach is to integrate regionally to facilitate wider integration into the global economy. In other words, whereas it is alright for these countries to be a part of the global network of multilateral arrangements and need to submit to the rules and regulation of the WTO, Africa must first learn to deal with its neighbors as partners in trade and development. This will provide African countries with the necessary building blocks in negotiating at the WTO level.

Advantages of African Regional Integration

A regional trade agreement can be a good thing if it leads the member countries further and faster towards greater openness and integration. Trade system reforms, as well as the completion of regional integration agreements represent processes rather than discrete events. The implementation schedules for most reforms are usually ongoing.

Fortunately, Africa can build on existing sub-regional and bilateral arrangements in order to broaden and deepen its regional economic integration. Creating a single regional market can eventually increase economic efficiency. Regional trade agreements can help countries build on their comparative advantages, sharpen their industrial efficiency, and act as a springboard to integrate into the world economy. It can help strengthen the political commitment to an open economy, improve technical, management and negotiation skills and competence, educate the public and engage the business community.

Clearly, building closer trading links among African countries will strengthen their capacity to fully participate in the global trading system. It will help avoid the usual problems with small domestic markets, since producers and manufacturers will be offered greater economies of scale and regional market infrastructure. Additionally, an integrated African market should provide greater access to regional trade institutions to harness human resources and re-orient policy instruments. For example, common agreements can be reached to harmonize tariff reduction, legal and regulatory reforms, the rationalization of payment systems, reorganization of financial systems, and reforms of labor markets that would enable African countries to assert their interests from a stronger and more confident position in global markets. It is also expected that by engaging in learning by doing, this process would influence the countries to implement politically more difficult trade measures that they would otherwise not have the individual political will to undertake, such as lowering tariffs or embarking on extra-institutional reforms. To that end, therefore, there could exist a framework for greater surveillance anc* dialogue among partner countries to discourage/reduce potential risks of macroeconomic slippage and to create the enabling stable environment for business to flourish.

Just as with most systems, regionally integrated markets have their down sides.

Regional integration could encourage trade diversion. There is always the tendency for member countries to divert some of their trade that would otherwise take place between the participants of the agreement to third countries. As in the EU, regional trade

integration may encourage member countries to become more inward-looking and

protectionist. This phenomenon may pose a serious threat to open multilateral regimes that are based on non-discriminatory trade. Nevertheless, there is a prevailing view that regional arrangements enable participants to move more closely and quickly to trade

liberalization than it is possible at the multilateral level. Also, if it is trade creating, then

regional agreements would complement the overall goal of achieving multilateral

liberalization.

Some Pre-Conditions for African Regional Integration

In the following I list several conditions that ought to be satisfied so as to create the enabling environment for African regional integration. However, this list is not exhaustive. These are the standard fare these days of existing regional groups. First, all signatory nations must view the integration process as an effective vehicle for integrating countries into the global economy. This means that all countries that are willing to be part of the continental union must buy into the notion that regionalism can create a springboard for the process of economic liberalization and progressive insertion into the global economy. In a world where, in addition to goods, human and financial capital are increasingly flowing across national borders, Africa needs to find mechanisms to overcome its difficulties by implementing cooperative solutions (OECD Development Centre and African Development Bank, March 2001). Second, it is imperative that the regional integration process be designed to foster mutual support among member countries in their reform efforts, not necessarily to go to the defense of any established interest groups per se, but rather push for openness to the rest of the world's markets.

Again, this means that it will be important to create a more positive and coherent interaction between domestic reforms, regional systems of trade and investment reforms, and economic structural adjustment policies.

Therefore, the African Union must develop institutions that possess the political will to adhere to any established goals and objectives toward harmonizing continental trade and investment. In my viewpoint, this is the true challenge that faces conveners of regional integration. A major effort must be dispensed to achieve economic policy and institutional convergence by establishing a timetable for each nation to achieve parallel reforms, work toward establishing regional institutions, and make available resources to implement institutional reforms. A major caveat is that strong regional institutions must be authorized to develop appropriate policies independent of national interests but accommodating of each country's peculiar conditions. Strong regional institutions will be necessary to negotii: te arrangements to open up global markets to African countries by seeking to remove trade impediments and subsidies imposed by other countries. A key issue, for example, is how to deal with the WTO's agreement on agriculture and textiles.

Another issue of major concern will be how Africa uses reforms following intra-regional trade liberalization to attract greater investment capital into the region. But a note of caution is in order here, since given the continent's many problems, who is to tell if these rather ambitious processes would not be met with greater conflicts? Therefore, a major challenge for Africa is how to educate trade negotiators on how to negotiate based on trade and investment rules and if there were to emerge failures of institutions, how to manage and resolve potential conflicts.

Suggestions and Lessons From Other Regional Integration Efforts

Africa will definitely be faced with major challenges as it seeks to catch up in achieving rapid economic reforms toward regional trade and investment integration. It is rather obvious that given Africa's unique circumstances, there is no existing regional model upon which to fashion the African regional trade integration system. In both the

NAFTA and EU the pre-conditions for regional integration were greatly different from

Africa's and institutions had already emerged, calling for a top-down model. An even

closer parallel can be drawn from the emerging FTAA. However, the FTAA is still under discussion, it involves all of the Americas which already has many different parchments of different agreements, and it will revolve around the United States of America that

dominates economic activity (about 80% of GDP) on the whole continent.

There are six different types of economic integration agreement models:

economic unions in which the members integrate all of their economic

policies;

common markets in which a customs union is supplemented by removal of all barriers to factor movements between members;

customs unions in which member countries eliminate all tariffs and non-tariff barriers among themselves and establish a common external tariff on goods from third countries;

free trade agreements in which member countries eliminate substantially

all tariff and non-tariff barriers among themselves;

preferential agreements in which access to a larger market is offered without demands for reciprocity; and

sectoral agreements that provide for reduced-tariff or duty-free treatment among their members on a limited range of products.

It is not clear what choice of regional agreement Africa wishes to pursue, although any one of the 6 or even a combination of them will do fine. It appears, however, that discussions are moving toward an African economic and monetary union.

Based on my research of agreements in the western hemisphere, the following are my

suggestions. It is important for the countries to reach agreement in terms of the distinct

type of regional integration that it seeks. Then a continental plan of action with an

appropriate timetable and implementation schedule must be developed. Following that,

the groundwork for negotiations must be established according to stages. For example,

during the first stage, there could be established a framework for continental

liberalization in goods and services. This will encompass agriculture and industrial

tariffs, and restrictions to trade in services. Whereas continental liberalization of trade in

goods could build upon the high degree of liberalization already achieved at the

multilateral as well as sub-regional and bilateral levels, liberalization of trade in services

may require a new approach. Regardless of which approaches are followed,

research-based information will be necessary to develop measures affecting African trade

before a framework for trade liberalization could be agreed by the participating countries.

A major concern about Africa which was also similar to the prevailing situation during the negotiations of the FTAA in the 1990s is that there is a dearth of data to back up negotiations. Let us assume that African countries want to negotiate on the elimination of tariff and non-tariff measures. To reach effective agreement through negotiation would require adequate information to conduct the necessary background research that takes into consideration different assumptions to compare third party tariffs, preferential tariffs and rules of origin for the region. Since adequate information may not be available on measures of support, it is doubtful if negotiations can proceed on a sound basis. Even if some information were available, it is not clear how many.countries have the necessary expertise to conduct comprehensive analysis of the existing information without the benefit of expert technical assistance. Perhaps, institutions such as the United Nations Economic Commission for Africa (UNECA) could play a comparable role as the Organization of American States and the Economic Commission for Latin America and Caribbean in the case of the FTAA, by making available information on trade flows and trade policy related information. Perhaps, a special trade unit could be established to pay special attention to the needs of the participating countries (a majority of them are resource poor), and to work towards a strategy that minimizes their adjustment costs, as well as identifies the implications of integrating economies of different sizes and levels of adjustment. If in doubt, seek technical assistance from African intellectuals abroad and or comparable institutions of other well established regional groups. The Africa Knowledge Networks Forum (AKNF) is a plus.

It must also be noted that the WTO framework provides a comprehensive template for emulation, Indeed, there may not be much need to reinvent the wheel, in that measures to enforce trade actions among African countries could be adapted to existing multilateral agreements, as those are already designed to increase transparency and facilitate international trade. Certainly, it is important to ascertain if in fact all African countries are able to implement WTO agreements. Special attention must be paid to areas of special interest to the region, such as agriculture, services, textiles, etc.

The next point is to idertify those issues that are important to the continent but which are not dealt with well in the WTO, such as investment, etc. In part because of the need for attracting investment into African countries, any trade liberalization talks about the subject could generate so much excitement and potential disputes. To this end, it will be necessary to examine closely instruments already contained in sub-regional and bilateral agreements that deal with policy measures on the subject. When the appropriate foundation for the regional issues have been laid, then at the second stage, for example, the regional trade agreement could take shape and free trade in goods and services, as well as new issues, could be negotiated among countries. Another matter of primary importance is whether to structure the African Union through accession to one of the existing sub-regional agreements, or by negotiating an "umbrella" agreement which may allow for the continued existence of current sub-regional agreements, and for strengthening them. Although it may be premature in this paper to identify specific proposals on how to deal with this issue, certainly it is important to keep this at the back of participants' minds.

Despite the fact that the envisaged African Union seems to cover more countries

most commentaries compare it to MERCOSUR. Yet, MERCOSUR was created on

March 26, 1991 among only four countries; Argentina, Brazil, Paraguay and Uruguay when they signed the treaty of Asuncion. The two main instruments of the Treaty were a four-year Trade Liberalization Program and a commitment to implement a common external tariff (CET) ranging from zero to twenty percent for eighty five percent of the products imported from third countries by January 1, 1995. MERCOSUR'S policy-making body is the Common Market Council. It is composed of the four countries' foreign and economic ministers. The Common Market Group is the executive agency in charge of overseeing and implementing the treaty. MERCOSUR also has a Secretariat based in Montevideo, a Trade Commission and a Dispute Settlement Tribunal

based in Asuncion.

The one major similarity that I see is that MERCOSUR was developed based on a similar paradigm of initiating rapid trade policy liberalization based on deep domestic economic reforms of each member state. Another point is that in the Latin American experience in the 1990s, clear goals and objectives for achieving regional integration were established within existing institutional frameworks. As I stated in the previous paragraph, the United Nations Economic Commission for Africa must serve a similar role as its Latin American counterparts, in articulating the imperatives and doctrinal sense for African trade and investment integration. Hopefully, past meetings and the upcoming Forum will complete that process. Additionally, the private sector in Africa is not well developed to complement the public sector, such as has occurred in other notable regional groups, including MERCOSUR. Whereas most regional bodies require one or two powerful nations to serve as drivers (for example, Brazil and Argentina in MERCOSUR), it is not clear if Africa has a capable nation to assume that role. It is very important to have an anchor of economic stability to dampen instabilities that are often brought by

external shocks.

I am confident that the five thematic clusters identified by the UNECA for the African Development ^orum 2001: Economic Policies for Accelerating Regional Integration; Physical Integration through Infrastructure Development; Regional Approaches to Regional Issue; Institutional Arrangements and Capacity; and the Peace and Security Architecture will benefit from thorough professional discourse. I also pray that Africa's children and her friends will not lose focus of the global imperatives that bring us together to participate in this Forum to chart a course that may transform

Africa's standing with the rest of the world.

References

Amponsah, William, Dale Colyer, and Curtis Jolly. "Global Trade Integration and Economic

Convergence of Developing Countries." American Journal of Agricultural Economics 81 (Number 5, 1999): 1142-1148.

International Monetary Fund (IMF). World Economic Outlook. Globalization Opportunities and

Challenges. Washington, DC: May 1977.

OECD Development Centre and African Development Bank. "Regional Integration in Africa."

Summary of the Second International Forurn on African Perspectives. Paris, 26-27 March, 2001.