Exactly 20 years ago the World Economic Forum (WEF) had its first event in Africa about Africa. The theme then, and still is today, interestingly, looked at political stability and regional integration. Although there have been significant strides in relation to political stability, the latter continues to elude the continent.
The relevance of regional integration in Africa is neither new nor surprising. It was a primary objective of the African Development Bank back in 1964 when it set up shop. However, effective integration – particularly in sub-Saharan Africa – has been constrained by inadequate regional infrastructures and a contradictory collection of legal, institutional and regulatory frameworks.
These factors have led many pessimists to choose to dismiss regional integration as a nice idea that is not likely to happen. On the surface, they may appear correct if you consider the situation.
First, sub-Saharan Africa has a population of, an estimated, 877 million but many states within it have small populations and as such have little or no economic muscle given that in many cases they have a GDP of less than US$5 billion.
Second, 15 countries within sub-Saharan Africa are landlocked. This, coupled with the added burden of inadequate cross-country rail and road transport infrastructures – the hangover of a colonial stratagem to transport primary products only to the nearest port – seriously impacts their competitiveness. It has been said, “the reality on the ground is that transport costs in Africa are still among the world’s highest… [and]… throughout the continent, many road, air, and rail networks remain unconnected”.
As Peter Draper says in his essay, Rethinking the (European) Foundations of Sub-Saharan African Regional Economic Integration; “No wonder then that it is not surprising to find that aggregate levels of intra-regional trade in Africa remain the lowest in the world, at around 10%. This is the familiar story of African trade.”
Third, there are the tariff barriers that contribute to the cost of trade.
Last, and most importantly, is the overlapping membership of those African regional economic communities (RECs) implementing integration programmes. For example, two major regional economic communities, namely, the Southern African Economic Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA) already promote the regional integration agenda and have entered into a alliance with a third common market, the East African Community (EAC). The COMESA-EAC-SADC (CES) Tripartite Arrangement – also referred to as the Tripartite Free Trade Agreement (T-FTA) – launched in 2008, represents a milestone in the regional integration agenda, yet is fraught with problems of overlapping membership.
This was highlighted in the report Assessing Regional Integration in Africa: Towards an African Continental Free Trade Area by the Economic Commission for Africa. The EAC – already a common market – “shares four member states with COMESA and one member state with SADC. Five SADC member states are also members of the Southern African Customs Union. Ten countries in the region are already members of customs unions, but all of them are also in negotiations to establish alternative customs unions from the one they now belong to. COMESA and SADC have seven member states in common that are not part of a customs union, but all are preparing to launch customs unions. So, of the 26 countries in COMESA, EAC and SADC, 17 are either in a customs union and negotiating an alternative customs union to the one they belong, or are negotiating two separate customs unions. Similar overlaps, though to a lesser scale, exists among members of regional economic communities in Western and Northern Africa.”
Despite these factors, the reality is that regional integration is not a choice or a probability: it is a must. The indications are that the realists are winning, for a number of reasons. For starters, the Tripartite Free Trade Agreement brought together 26 countries, with a combined population of 530 million people (60% of sub-Saharan Africa) and a total GDP of $630 billion – slightly less than half of the total output of Africa’s economies. The IMF estimated sub-Saharan Africa’s total GDP in 2012 to be $1.36 trillion.
Deepening Africa’s integration goes beyond harmonising the regional economic communities’ memberships and policies. Indeed, the African countries have agreed on a Minimum Integration Programme (MIP). The MIP comprises of those activities, projects and programmes that the regional economic communities have selected to accelerate and bring to completion, as part of the regional and continental integration process.
Our challenge is far beyond tariffs barriers. The removal of tariff barriers would not bring about gains from regional integration unless they are pursued by policy measures aimed at reducing costs of trade ranging from rent-seeking practices to lengthy border-crossing bureaucracies to the duplication of procedures. Regional efforts towards developing infrastructure and reducing the non-tariff barriers are, therefore, imperative to successful integration.
The African Development Bank report, Southern Africa Regional Integration Strategy Paper: 2011-2015 stated: “To benefit from regional and global trade, a country needs to strengthen its productive capacity, improve value chain and enhance the efficiency and competitiveness of its production systems, since simply dropping tariff barriers will not automatically increase its trade shares.”
Draper states that “pooling markets through regional economic integration in principle affords greater economies of scale and the potential for regional production sharing… [and] if supported by appropriate trade facilitation measures the productivity gains through widening regional markets could be potentially substantial”.
The challenge, therefore, is funding the transition and alignment of the regional economic communities’ practices to the agreed MIP. In this regard, the heads of state and government have endorsed a proposal to establish an “Integration Fund” devoted to financing the MIP. One of the questions asked by the Economic Commission for Africa is, “What are the favourable conditions (or opportunities) and challenges (or constraints) for improved performance?”
In addition the African Union, regional groups and national governments are seeking to improve and strengthen financial markets to facilitate economic integration (such as setting up the African Investment Bank, the African Central Bank and the African Monetary Fund). COMESA, through the Eastern and Southern African Trade and Development Bank, for example, is providing $2 billion of technical assistance “to promote investment and provide trade financing facilities”.
However, intra-regional foreign direct investment (FDI) – investments from one African country to another – account for only 5% of the total FDI in Africa in terms of value, and 12% in terms of the number of projects. The value of greenfield FDI projects on the continent coming from other African countries in 2010-11, was 13.2%.
The McKinsey report, Lions on the Move – the progress and potential of African economies, nevertheless states: “The key dynamics of African trade in 2013 and beyond will most likely centre around intra-regional trade… [and] one of the key elements of future African economic growth and social development is intra-regional trade and inter-continental trade.”
There are a number of African infrastructure funds that invest in projects that, one can argue, will promote intra-regional trade and play a critical role in meeting the capital requirements in financing infrastructure investments to accelerate Africa’s growth.
As one, the Government Employees Pension Fund (GEPF) established the Pan-African Infrastructure Development Fund (PAIDF), the key markets of which are transport, telecommunications, energy and water. At the end of July 2012, its strategic investment exposure in key African markets through PAIDF was R2.5 billion ($254 million). However this is still a long way towards investing the overall targeted 5% – R50 billion ($5.08 billion) based on current total assets – of the fund towards markets within Africa but outside South Africa. There is no doubt that our commitment supported by a positive climate for investment will serve as catalyst in attracting much needed capital to drive overall continental integration.
Let’s hope all these efforts will bring reality to the continental free trade areas.
John Oliphant is the principle executive officer of South Africa’s Government Employees Pension Fund (GEPF).