Regional Integration and Economic Development in Africa

REGIONAL INTEGRATION AND ECONOMIC DEVELOPMENT IN AFRICA

Abstract: Africa has witnessed a period of sustained and impressive economic growth in the past decade. Yet optimism for the continent’s development coexists with concerns that this surge of growth is less a reflection of structural improvements to the African economic framework, than it is a byproduct of increased demand for the continent’s primary commodities; the latter being the less sustainable path to development. Amidst these fears, it remains evident that Africa’s growth can be consolidated and potentially transformed into sustainable development for her nations through the promotion of deeper economic integration between African economies, and as such African Regional Economic Communities have pursued this agenda. The general approach of these Regional Economic Communities towards economic integration is one that focuses largely on trade liberalization, at the expense of needed attention to behind the border issues, such as supply constraints and the inadequate productive capacities of domestic African economies. This paper examines this approach towards economic integration, the bottle-necks and obstacles that characterize it, and the potential for new and better-informed efforts at regional integration to reap the benefits of a significantly improved economic and political climate abroad the continent in recent years.

TABLE OF CONTENTS

Introduction…………………………………………………………………………… 4
The fragile nature of Africa’s economic boom………………………………………. 6
Regional integration as a means to sustain and consolidate Africa’s economic growth………………………………………………………………………………… 8
The African approach to regional integration……………………………………… 16
Current trends..…………………..…………………………………………………… 19
Obstacles to trade liberalization……………………………………………………… 21
Conclusion:Regional integration and multilateral trade liberization; finding the balance ………………………………………………………………………………… 23

1. INTRODUCTION

It has long been established that regional integration fuels growth and socioeconomic development for the states that engage in this practice. Regional integration schemes, which are generally of an economic and/or political nature, entail practices that typically promote the liberalization of trade, and the creation of a larger regional market, both of which facilitate a more efficient allocation of resources between consumers and producers in the regional economy, and create market opportunities for economies of scale. In addition, regional integration initiatives offer opportunities for countries to tackle shared problems such as security and environmental issues, which lie beyond the capacity of each individual country so concerned, to singly address.

With the goal of sustainable economic development in mind, and in recognition of the potential inherent in deeper economic integration to encourage this development, multiple Regional Economic Communities, comprising neighboring African states, have emerged, as endorsed by the 1980 Lagos Plan of Action for the Development of Africa and the 1991 Abuja Treaty. Eight of these communities are currently recognized by the African Union. These are

CEN-SAD: Community of Sahel-Saharan States

COMESA: Common Market for Eastern and Southern Africa

EAC: East African Community

ECCAS: Economic Community of Central African States

ECOWAS: Economic Community of West African States

IGAD: Inter-Governmental Authority on Development

SADC: Southern Africa Development Community

UMA: Arab Maghreb Union

These bodies, while strengthening economic integration between their member states, are envisaged as the building blocks of an even greater integration project, the creation of an African Economic Union, by 2028.

This commitment to economic integration among African policy makers is especially valuable in light ofthe current details of Africa’s socioeconomic narrative. Africa’s growth in recent years has outpaced those of most other regions around the globe, with six of the ten currently fastest growing economies coming from the continent, and an average Gross Domestic Product growth rate for all the economies within the continent at well beyond four percent between 2000 and 2008 (Mc. Kinsey, 2010). Initiatives that foster greater economic integration between the nations in the continent demonstrate the capacity to sustain these positive developments across the African economic geography.

However more sinister factors necessitate a greater commitment towards regional integration on the continent. Although Africa’s economic surge is representative of certain improvements to the general socioeconomic conditions on the continent such as political stability and greater commitment to democracy among her governments, experts maintain that this growth is a mere reflection of favorable demand for Africa’s primary exports among foreign interests. In addition, Africa’s economies are largely undiversified, depending mostly on the export of one or two key primary commodities for economic growth. Judging by the volatility of these commodity prices in the past, it is clear that growth and development cannot be sustained through primary exports alone, and failure to acknowledge this may result in a relapse for African economies. As a means to tackle this issue, appropriately implemented integration initiatives demonstrate the capacity to diversify African exports and production, as well as to increase the manufacturing capacity of African economies. Yet, besides the fact that they have a history of failing to achieve their targets, African REC’s have largely adopted an approach to integration that fails to look beyond tariff and non-tariff barriers to trade, at the expense of attention towards behind-the-border concernswhich must be considered and addressed if there is to be deeper and more beneficial economic integration on the continent.

This paper contends that in the interest of sustainable development for African nations, regional integration policies will have to address concerns beyond trade liberalization at the borders, and take into account the behind-the-border concerns such as the domestic production capacities, and the market environment of African economies.

2.THE FRAGILE NATURE OF AFRICA’S ECONOMIC BOOM

Africa’s recent economic progress has been rather impressive. The Gross Domestic Product growth rate averaged over the entire region is expected to hover around five percent[1] for the next few years (African Economic Outlook, 2013) with certain countries like Ethiopia and Rwanda in the Sub-Saharan region in particular achieving figures as high as 8% (World Bank, 2013).[2]More significantly, this growth has resulted in poverty eradication, with the poverty rate in Africa falling from56.5% percentto 48.5% between 1990 and 2010 (World Bank, 2013).[3]

While this recent economic surge, all the more astounding in light of the global economic slowdown, may be attributable in part to structural improvements to Africa’s socioeconomic and political framework, it is also heavily dependent on the price of commodities and primary exports,which have soared in recent years, propped up by demand from a growing middle class in emerging economies like China and India.

Indeed, while Africa’s manufacturing capacity has remained stagnated over the past four decades, and the percentage of manufactured goods as a share of total exports has reduced (World Bank, 2013), primary exports, and fuels in particular have largely made up the bulk of African exports. New discoveries of petroleum in Ghana, Ethiopia, andUganda, among other countries suggest that this trend may continue if not well addressed. Most African countries, besides having primary commodities as their predominant exports, also demonstrate the tendency to depend greatly on the production and export of only one or two key commodities in particular. Petroleum as a share of Nigeria’s total exports, for instance, stood at about 97%between 1980 and 2010 (UNECA, 2013).[4] In addition, Africa’s pronounced infrastructural deficit and lack of an enabling environment to encourage entrepreneurship and businesses, largely constrains even greater prospects for development and economic growth on the continent.

Africa’s growth cannot be termed sustainable if it continues to derive mostly from the prices for its primary exports, which have proven to be rather volatile in the past. The slump of these prices in the 1980’s significantly contributed to Africa’s economic stagnation at about that same period, which has now come to be termed as Africa’s lost decade. The commodity prices that so favor African exports, have faced downward pressures in recent times (Chatterjee, Aroop, 2013)[5], indicating that if African governments are to bring about sustainable economic development, they will need to refocus their growth and developmental policies on initiatives that promote economic diversification and industrialization. This is not to suggest that African economies are to completely desert the production of primary exports, in which they do possess a comparative advantage; after all, they have made significant contributions to African growth of recent, and they possess the potential to continue to do so in the coming years. But, in the interest of sustaining these recent positive trends, African governments should not completely hinge the growth and development of their economies on these commodities.

3.REGIONAL INTEGRATION AS A MEANS TO SUSTAIN AND CONSOLIDATE AFRICA’S ECONOMIC GROWTH

Numerous understandings and perceptions of regional integration exist. According to Hans Van Ginkel, regional integration refers to the process by which states within a particular region increase their level of interaction with regards to economic, security, political, as well as cultural and social issues (Van Ginkel, H., Van Langenhove L., 2003) [6] Philip de Lombaerde and Luk Van Lagenhove posit that regional integration is the worldwide phenomenon of territorial systems that increase their level of interaction between their components and create new forms of organization, co-existing with traditional state-led organizations at the national level (De Lombaerde, Phillip and Van Langenhove L., 2007).[7] Luk Van Lagenhove also contends that regional integration initiatives fulfill the following eight functions[8];

•The strengthening of trade integration in the region

•The creation of an appropriate enabling environment for private sector development

•The development of infrastructure programmes in support of economic growth and regional integration

•The development of strong public sector institutions and good governance;

•The reduction of social exclusion and the development of an inclusive civil society

•Contribution to peace and security in the region

•The building of environment programmes at the regional level

•The strengthening of the region’s interaction with other regions of the world

These definitions acknowledge that regional integration must entail some form of cooperation between multiple states, in recognition of the benefits that this cooperation can provide for the parties involved. The scope of this cooperation is not necessarily limited, but is enhanced by the instances of convergences between the interests and goals of the parties involved, and these interests and goals may derive from sociocultural, political, and/or economic factors.

Regional Integration Agreements vary by virtue of the extent to which they propose to actually integrate the national economies of the member states involved. Generally there are five sequential arrangements of regional integration, each building on those that precede it, in accordance with their level of depth:

Preferential Trade Area: Such an arrangement encourages intra-regional trade by partially, but not entirely, eliminating tariffs and/or quotas on goods traded between the countries in the stipulated region, as compared to the tariffs or quotas imposed on third party goods.

Free Trade Area:In a free trade area, trade liberalization is facilitated by the complete eradication of tariffs and import quotas between the countries within the delineated region. In this arrangement, the governments of the member states are not denied the opportunity to determine their individual trade policies with economies that are external to the free trade area. However, the creation of a free trade area typically requires, on the part of each member state,the establishment of Rules of Origin, a set of legal requirements based on which imported goods can be classified as either goods produced within and/or by states in the region, or goods produced by states external to that region.

Customs Union:In addition to the complete eradication of tariff barriers to trade as provided for in a free trade area, a Customs Union ensures that the countries within the region maintain a Common External Tariff on goods from countries that are external to this region. Thus, governments so involved must cede some measure of sovereignty, particularly in the determination of their trade policies with those interests external to the customs union.

Common Market: Common markets involve a greater measure of integration, by facilitating, in addition to the liberalization of trade, the free mobility of the factors of production within the region. This ensures efficiency in the allocation of market resources within the region, which bodes well for greater welfare within the regional economy. This mode of integration as a result of its depth, and the greater degree of mutual interdependence between the economies of the states involved, necessitates a significant harmonization of fiscal and/or monetary policies, in recognition of the consequences that the policy decisions of one government may duly have on another’s economy. Supposing for instance, that a government lowers its income tax rates as compared to those of the other states, it will witness an influx of labor, an important factor of production, from the countries in the common market, quite obviously to the disfavor of the latter states.

Economic Union: Where the common market necessitates a broad convergence of fiscal and monetary policies,[9] the economic union enforces that these policies are more or less uniform. The economic union is the deepest form of economic integration,[10]and in addition to other attempts at harmonization such as the creation of a single central bank within the region, itmay involve the adoption of a common currency for those states that are members of the union.

Political Union: A political union centralizes political authority in a single governmental framework for the entire region, andprovides shared legislative, political, and constitutional structures for the member stateswithin the union. This comes at the expense of autonomy for these states, since they hand over their sovereignty to the centralized institution. However it provides a greater capacity to streamline and render uniform, the economic policies of the member states involved, thus reducing the probability of conflict based on diverging interests, between the member states within the union.

Table 1: Features of Integration

Type of Arrangement / Free trade among members / Common commercial policy / Free factor mobility / Common Monetary and fiscal policy / One government
Preferential Trade Area / No / No / No / No / No
Free Trade Area / Yes / No / No / No / No
Customs Union / Yes / Yes / No / No / No
Common Market / Yes / Yes / Yes / No / No
Economic Union / Yes / Yes / Yes / Yes / No
Political Union / Yes / Yes / Yes / Yes / Yes

Source: Assessing Regional Integration in Africa V, UNECA 2012

The demonstrated interest by African governments in regional integration, as evidenced in their membership of at least one of the Regional Economic Communities, is in full recognition of the developmental benefits that regional integration provides for their national economies. Effective regional integration benefits national economies, for instance, in the sense that it enables the countries so involved to develop andbenefit from shared infrastructure, which otherwise would be beyond the scope or financial capacities of a single country to create. In addition, trade liberalization policies, which largely accompany economic integration, create the opportunity for the diffusion of business ideas and technological spillovers abroad the regional market, which bodes well for economic growth and development in the long run. Strictly from a firm’s perspective, encouraging trade liberalization also increases the scope for the adoption of economies of scale, which, juxtaposed with competition brought about by the entry of more firms into the market, engenders greater cost-efficiency (both time and monetary), and qualitative improvements to the goods and services provided by the firms for the consumers.

These potential benefits are especially valuable in light of Africa’s specific economic condition. Africa’s national economies are generally characterizedby small market sizes, with eleven countries in the continentharboring populations below three million,[11] and fourteen with a GDP of less than $ 5 billion according to data from the World Bank, which greatly limits the scope for the adoption of economies of scale by firms within the countries. This is also somewhat challenging for African governments in that it complicates attempts to create public infrastructure, which would enhance economic development. In some casesthe small sizes of the domestic markets are incapable of supporting the provision of the necessary infrastructure. According to United Nations Economic Commission for Africa for instance, most African economies are incapable of supporting a viable steel project, one of the demands of any meaningful effort towards industrialization, individually[12]. Electricity shortage in Uganda is similarly attributable to constraints imposed by the size of the domestic economy, denying the country substantial annual economic growth (UK Department For International Development, 2011)[13]. However, a comprehensive approach to these issues, entailing their solution on a regional level, through the creation of shared regional electricity grids in Uganda’s case, for example, will facilitate the expansion of the domestic markets beyond their borders, encouraging economies of scale, and provide scope for cooperation between national governments in tackling Africa’s significant infrastructure deficiencies.

The current imbalance in the commodity structure of Africa’s exports in favor of primary commodities, and fuels in particular can also be addressed and rectified through effective regional economic integration.It is recognized that regional integration is not an end in itself, but an important path that paves the way towards globalization and effective and welfare-procuring integration between economies across various regions around the world. However, despite the significant potential benefits that it may yield in terms of increased trade for the global economy, the trend towards globalization does encourage individual economies to specialize in the production of goods and services in which they possessa comparative advantage. These are primary commodities in the case of most African economies. If African governments were to embrace multilateral trade liberalization, thus advancing globalization, without adequately pursuing regional integration, African economies may well remain undiversified and incapable of achieving more sustainable economic development.