Africa: Deeper regional integration needed in response to crisis

Original Publication Date: 
26 June, 2009

Geneva, 25 Jun (Kanaga Raja) -- The global economic crisis, which has reached the African continent, requires the re-examination of existing approaches to international development, with one important response being deeper regional integration to address the long-standing structural weaknesses of African economies, the UN Conference on Trade and Development (UNCTAD) said Thursday.


In its "Economic Development in Africa" report for 2009, UNCTAD says that regional integration is essential for sustained development on the continent, especially within the context of the current crisis.


It argues that better links between countries, ranging from paved roads to banking cooperation, are needed to spur mutual economic growth. Weak physical and institutional infrastructure is the key obstacle to increasing intra-African trade and investment.


The report notes that Africa currently has the world's lowest shares of regional trade and investment - 9% of recorded flows of total external trade and 13% of recorded flows of total inward foreign direct investment.


The report on Africa comes just as UNCTAD revealed on Wednesday that global foreign direct investment (FDI) inflows and cross-border mergers and acquisitions (M&As) - the main mode of FDI - drastically declined in the last quarter of 2008, and the fall has continued into 2009. FDI inflows dropped by 54% and M&As by 77% during the first quarter of 2009 as compared to the same period last year.


According to UNCTAD, the data available for the first quarter of 2009 reveal a drastic plummet in FDI flows. The 54% decline was apparent among the 57 countries for which quarterly data on FDI inflows were available as of mid-June 2009 (which account for roughly 60% of global inflows). Forty-three countries, including major host countries such as Brazil, China, and the Russian Federation, recorded declines.


FDI outflows for the same period fell by 57% for 47 countries (accounting also for about 60% of global FDI outflows) for which such data are available. Thus, the majority of these countries (37 out of 47), including major investors such as France, Germany, Japan, and the United States, experienced declines in FDI outflows in the first quarter of 2009, said UNCTAD.


Recent data on cross-border M&As confirm this trend: they decreased by 77% for all countries in value in the first quarter of 2009 as compared to the first quarter of 2008, and by 62% over the last quarter of 2008.


UNCTAD has projected a gloomy outlook in terms of prospects for FDI for the rest of the year. If the first quarter trend continues, projections for the whole of 2009 are for global FDI inflows to drop by close to half.


The annual UNCTAD report on Africa meanwhile says that while recognizing that over the last two decades, Africa has made progress in creating sub-regional institutions dedicated to economic integration, the establishment of sub-regional economic communities has not substantially increased intra-African trade, investment and mobility of people as expected.


As part of a broader, well-designed development strategy, regional integration could enhance productive capacity, intensify economic diversification and improve competitiveness, the report argues, recommending the need for African countries to strengthen their regional physical infrastructure such as roads, railways, telecommunications and regional airlines in order to boost regional integration.


Today, there are more regional organizations in Africa than in any other continent and most African countries are engaged in more than one regional integration initiative. In the period from the 1960s to the 1980s, over 200 intergovernmental multi-sectoral economic cooperation organizations had been established and over 120 single sectoral multi-national and bilateral organizations.


Some regional groupings have made some progress in their attempts to integrate, but the performance is mixed, says the report. It highlighted several promising cases, including CEMAC (Economic and Monetary Community of Central Africa) which has managed to form a monetary and customs union, and has harmonized the competition and business regulatory framework.


Another example is COMESA (Common Market for Eastern and Southern Africa) which has designed single rules of origin and has simplified its customs procedures. It has also achieved the elimination of non-tariff barriers (in particular, import licensing), the removal of foreign exchange restrictions, and the removal of import and export quotas.


Regional initiatives in Africa, however, did not deliver much to uplift the economic conditions of its members nor ensure sustainable growth and liberalization. Among the reasons cited by the report are that some regional groupings in Africa have failed to boost the exports of the areas covered. For example, today, CEMAC displays the lowest intra-regional trade share of all regional integration schemes in Africa (less than 2%).


Also, the benefits from regional integration are not the same for all members of these groupings - in ECOWAS (Economic Community of West African States) region, for example, three countries (Nigeria, Cote d'Ivoire and Senegal) account for almost 90% of all intra-regional exports and almost 50% of all intra-regional imports.


According to the report, there remain economic and institutional challenges to furthering intra-regional trade in Africa. The economic obstacles include the high dependence of most member countries on export of primary commodities, the strict rules of origin emanating from trade liberalization schemes and the poor quality of infrastructure.


Institutional challenges include bureaucratic and physical hindrances, such as road charges, transit fees and administrative delays at borders and ports. Other challenges are related to the lack of coordination and harmonization of policies and regulations at the regional level, non-implementation issues and overlapping membership.


Despite the long history of regional integration on the continent, the level of intra-African trade remains low in comparison with intra-regional trade in other regions, both developed and developing. Over the period 2004-2006, intra-African exports represented 8.7% of the region's total exports. Intra-African imports, on the other hand, represented 9.6% of total imports.


Looking back over the period 1960-2006, it appears that Africa has consistently had a considerably lower proportion of intra-regional trade than other regions. Indeed, it is the only region in which the proportion of intra-regional exports was lower than 10% in 1960.


"This was largely a consequence of the pattern of trade favoured by colonial rulers, which was extractive and outward-oriented, and did not encourage African countries to develop strong trade linkages among themselves."


Analysing more closely the trade patterns of the main exporters and importers from the region, the report finds that altogether, four countries (of which three are oil producers) account for over half of Africa's total exports to the rest of the world and eight countries together account for over three quarters of it.


With respect to top intra-African exporters, the report points to two countries that are particularly important to intra-African trade - South Africa's exports to the region alone represent almost a quarter of the total, while Nigeria's are worth roughly half that proportion.


Looking at the top importers of African products, the report reveals the vibrant trade in Southern Africa and the large proportion that this represents in the continent's total intra-imports. Of the top 10 importers of African products in Africa, 7 are in southern Africa. This is an indication of the opportunities small and large countries can derive from a strongly integrated economy, particularly in the presence of a strong trade engine such as South Africa.


In terms of exports, the composition of intra-African exports is fairly evenly distributed between fuels, non-fuel primary products and manufactured goods. Non-fuel primary exports represent 30% of the total, 11% of which represents exports of ores and minerals. Hence, agricultural product exports account for only 19% of total intra-African exports, despite the fact that agriculture accounts for nearly 30% of the production of goods in Africa. This is in contrast to manufacturing, which accounts for 21% of the production of goods but 40% of exports.


A more detailed look at the products traded with the rest of the world shows a high concentration of trade around a few products. The top seven exports by value make up more than two-thirds of the total. Intra-African trade is less concentrated. Thirty-nine products account for two-thirds of intra-African exports.


Overall, says the report, the more diversified nature of intra-African trade, when compared with its exports to the rest of the world, suggests that expanding intra-African trade could yield significant benefits to African countries in terms of diversifying their production to non-traditional products and especially manufactures.


In explaining the low level of intra-African trade in comparison to trade within other regions, the report finds that transport costs are arguably the most important impediment to intra-African trade. Econometric estimates find that transport costs in Africa are 136% higher than in other regions and that poor infrastructure only accounts for half of these costs. Landlocked countries in Africa were recently found to have freight costs equivalent to between 10% and 25% of the total value of their imports while the global average is of 5.4%.


The report also highlights the inefficiency of border procedures such as breakdowns of the electronic system for document lodging, poor coordination in the inspection of goods between different actors, overly zealous inspection of goods, insufficient opening times at the point of entry, and delays in duty refunds, among others, as imposing a heavy cost on intra-African trade mostly through the delays they cause. It is estimated that crossing a transit territory implies an additional 4% increase in trade costs irrespective of the distance covered.


The report notes that improving physical infrastructure can have an important effect on raising the levels of intra-African trade. Halving transport costs in a typical landlocked country, for example, can increase the country's trade fivefold.


Improving the main intra-African road network could generate trade expansion of around $250 billion over a period of 15 years for an investment of $32 billion, including maintenance. It is estimated that from the above-mentioned investment, Chad would see a trade increase of 507%, Uganda would see an increase of 741%, and Sudan could see an increase of 1027%.


Important as improvements in hard infrastructures are, they represent only a part of the solution to the constraints limiting intra-African trade. Many other issues - together termed "soft" infrastructure - impact on trade costs. These include the policy and regulatory environment, the transparency and predictability of trade and business administration, and the quality of the business environment more generally.


According to some analysts, says the report, soft infrastructure issues such as customs procedures and regulatory environment have been identified as the main obstacles to intra-African trade. In Angola, modernization of customs has cut processing time and customs revenue has increased by 150%.


Services represent, or have the potential to become, significant sources of export earnings for a large number of African economies. This is particularly true of sectors such as tourism, trade logistic services (transport, harbours, etc.) or construction, among others, says the report, pointing to the importance of an efficient services sector on trade efficiency, a favourable trade balance of most African countries, and the competitiveness of African producers, both domestic and international.


The report makes a range of policy recommendations on measures that African countries could consider taking on to unlock the opportunities offered by regional economic integration. These include deepening regional economic integration to aid Africa's participation in the world economy; adopting a regional cooperation strategy centred on infrastructure development; and adopting a clear development strategy to help Africa defend its interests.