Making policies work

GREAT insights Magazine

The Political Economy of Regional Integration

October 2013

Smith, G. 2013. The political economy of regional integration. GREAT Insights, Volume 2, Issue 7. October 2013. Maastricht: ECDPM.

Current discourse in regional integration in the tripartite region, comprising 26 countries who are members of either/or SADC, COMESA and the EAC focuses on four inter-related themes. These are trade policy, trade facilitation, infrastructure development and economic competitiveness.

Trade policy is designed to enhance the prospects for enlarging a single market for the trade in goods and services and the movement of people. This is supported by improved trade facilitation measures and infrastructure development that lowers the costs of trade, transport, energy and ICT services, which in turn enhances the region’s economic competitiveness by inter alia expanding its productive base, notably with respect to the potential to increase intra-Africa trade. In reality, the interplay of these issues results in a range of complex political interactions that provide the context within which regional integration occurs. Whilst there is no single conceptual framework for political economy analysis the OECD-DAC (2005) (1) definition is useful is capturing some of the main elements:

‘Political economy analysis is concerned with the interaction of political and economic processes in a society: the distribution of power and wealth between different groups and individuals, and the processes that create, sustain and transform these relationships over time.’

With respect to the political economy of regional integration Asche (2012) (2) has argued that there is only shallow integration of goods, services and factor markets in Africa. However, many development partners argue for deep integration, that is, near complete liberalisation of goods and factor markets, before African industry can become competitive enough to stand on its own in this liberalised environment. As a result, African producers have been left with few opportunities to move up the value-chain, both globally and regionally. As a result, mutual gains are not obvious while immediate gains for some national interest groups are and mostly in a single country where advantages are already clustered.

The question is how does one move and what is the room to manoeuvre from the fundamental problem described. In this respect two visions arise on how to better advance regional economic integration within Africa (and the tripartite region): 

  • The first is that envisioned by market-liberal trade economists who argue for the pursuit of light integrationwhich focuses on better infrastructure, an improved business environment and the development of ‘light institutions’ to facilitate regional integration; and,
  • The second is that envisioned by structuralists who acknowledge that effective industrial policy needs the larger regional market to work, but assert that without a better spatial distribution of new industries, a protected space with heavy institutions is pointless.

The challenges of bringing these two visions together is captured by Asche who concludes that ‘reconciling… the paradigms of regional economic integration and of industrial policy can help… support the acceleration of industrial development, which otherwise hardly occurs in Sub-Saharan Africa, despite sustained overall economic growth’

The reconciliation of these two approaches in political economy analysis would go some way to improving the incentives for regional integration in Africa (and the tripartite region). By way of illustration this article will draw on some on-going work (3) on how the benefits from a large scale integrated mining project could address the challenges of the 3D’s in regional integration in Africa (and the tripartite region), namely, those of Division, Distance and Density, defined as follows: 

  • Division refers to the 54 countries in Africa, many of whom have small economies that are also land-locked, and therefore isolated;
  • Distance refers to the physical distances of travelling in Africa and the time delays encountered due to inefficient borders and poor infrastructure; and,

Density refers to the narrow economic base of many economies in Africa characterised by overdependence on primary commodity exports with weakly developed economies of scale and agglomeration resulting in poorly developed national economies.

The global mining company Vale is currently constructing a new section and rehabilitating existing sections of railway from their mine at Moatize in Mozambique, to a new terminal at Nacala, a distance of 915 kilometres, routed through Malawi, at an estimated cost of US$4.4 billion. The mine, railway and port is designed with an initial capacity of approximately 22 million tons per annum.

This massive investment has presented an extraordinary opportunity to pursue a cluster of hitherto impossible large-scale industrial projects, which hold the potential to transform the region’s economy. The central idea of this project is to utilize excess coal at the existing colliery and nearby iron ore (in Mozambique) and heavy minerals sands (in Malawi), both currently under exploration, as feedstock for two proposed industrial clusters, one at Moatize in Mozambique and the other at Liwonde in Malawi.

Each cluster would comprise of a serviced industrial park with an inter-modal logistics hub with a Co-Generation Plant producing Power, Fuel, Sulphur and Clinker, a Urea Fertilizer Plant and an Iron Ore (at Moatize) or Titanium (at Liwonde) Smelter as initial ‘anchor’ tenants with the envisaged ‘core’ investment at each cluster estimated at approximately USD 1.8 billion. The primary target markets for the products from the Cogeneration/Urea Plan are local and regional and products from the Smelters, if developed, would be international markets.

Preliminary results from a modelling exercise indicate that power can be produced at the same cost as the cheapest alternative and fuel (diesel and naphtha oils), urea (fertilizer), sulphur (for agriculture and mining applications) and clinker (for cement production) can all be produced at considerably lower than import parity prices. The three main downstream products of power, fuel (notably diesel) and urea fertilizer are in high demand in Mozambique, Malawi and the wider region.

Significantly, an entirely new demand centre is being created by the explosion of mining activity in the TETE province of Mozambique coupled with the on-going exploration of Ilmenite, Rutile and Zircon (heavy minerals sands) in Malawi, which could underpin the required ‘off-take’ agreements necessary to ‘bank’ these large-scale cluster of projects. Indeed, the demand for diesel fuel alone from new coal mining operations in the TETE province is conservatively estimated at 400,000 tons per annum, which equates to approximately two-thirds of existing demand in Mozambique.

So what are the political economy complexities associated with originating and advancing large complex industrial clusters, such as those proposed above?

With respect to the challenges posed by division the project developer has negotiated participation in a cross-border concession agreement(s) with the governments of Malawi and Mozambique, which deals with, inter alia, traversing rights through sovereign territories, to create a seamless transport corridor from pit to port. This has unlocked the significant investment in the coal mine, the railway and the port and thereby removed infrastructure as a major supply-side constraint in realising the proposed industrial clusters. New advancements in cogeneration technologies and the participation of multi-national corporations (MNCs) with strong balance sheets, either as off-takers or developers, address other significant supply-side concerns relating to appropriate technologies and affordable financing. Securing ‘off-take’ agreements with MNCs for the power and fuel would go a long way to dealing with concerns about market size and composition but a considerable harmonisation is still required to allow for the seamless intra-regional trade of fertilizer, in particular, fuel, to a lesser extent and power, which will ease once the on-going integration of the regional grid is completed.

Similarly, the agreements referred to above have addressed some of the primary challenges posed by distance for the principal transport corridor from the mine(s) at Moatize, Mozambique through Malawi, to the port of Nacala in Mozambique. However, the opportunity now exists for sub-corridors from the industrial clusters at Moatize north to Zambia and south to Zimbabwe. Similarly, at Liwonde, located south of lake in Malawi, a sub-corridor to the north up to the Great Lakes region via a proposed Lake-to-Lake corridor, stretching as far as Bujumbura in Burundi could be opened up, south down to the port of Beira in Mozambique and east to the rail head at Chipata in Zambia, are currently both being addressed. In spite of these potentials significant investments, notably in transport infrastructure and logistics platforms, are required to develop these sub-corridors as competitive options for the movement of bulk commodities, such as fuel and fertiliser.

Finally, in spite of the key supply-side constraints having been addressed and a line-of-sight framed on some of the key market size and composition concerns, it will take a herculean effort and require strong directed support from the governments of Mozambique and Malawi to address the key challenges posed by the current lack of density in both economies. The need to leverage benefits to ordinary people participating in the real economy, notably agriculture, from large-scale mining projects, possibly remains the most difficult and sensitive political economy issue to deal with. The configuration of the projects so that it makes both national (in Mozambique and Malawi) and regional sense (other countries such as Zambia, Zimbabwe, Tanzania, DRC and Burundi) will require ‘pioneer investors’ (4, who have the support of government behind them, as the risks associated with these kinds of projects are largely unknown as these kinds of projects have not been developed in the past.

Graham Smith is a Programme Manager: Corridors at Trade Mark Southern Africa. He is writing this opinion piece in his personal capacity.

Footnotes

  1. OECD-DAC (2005): Lessons Learnt on the Use of Power and Drivers of Change Analyses in Development Co-Operation. 
  2. Asche, Helmut (2012): ‘Reconciling Two Paradigms in African Economic Integration’ that appeared in GREAT Insights Vol. 1, Issue 9, November 2012.
  3. This example is taken from some early stage research that TMSA is conducting under the Economic Competitiveness work stream on ‘Regional Growth-Poles’, specifically looking at the upstream value-addition and downstream beneficiation prospects of selected minerals (oil, gas, coal, ferrous, non-ferrous and phosphates) in the Tripartite countries.
  4. This is a term borrowed from Professor Paul Collier of Oxford University that was first encountered by the author in his thought provoking article entitled ‘Aid as a catalyst for pioneer investment’, published as a WIDER Working Paper No. 2013/004, 16p.

This article was published in GREAT Insights Volume 2, Issue 7 (October 2013).

 

 

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Economic Transformation and TradeRegional IntegrationCommon Market for Eastern and Southern Africa (COMESA)East African Community (EAC)Southern African Development Community (SADC)TradeAfricaMalawiMozambiqueSouth Africa

External authors

Graham Smith