Making policies work

GREAT insights Magazine

Reconciling Two Paradigms in African Economic Integration

November 2012

Asche, H. 2012. Reconciling two paradigms in African economic integration. GREAT Insights, Volume 1, Issue 9. November 2012. Maastricht: ECDOM

Although the situation is gradually improving, Africa still displays the lowest level of intra-regional trade integration in the world (along with Central Asia), and is plagued by a well-known myriad of politico-administrative imperfections and mutual mistrust. Accordingly, the formal status of “free trade area”, “customs union” or “common market” substantially diverges from reality on the ground. At the same time, African countries are on average low-level diversifiers: they somewhat diversify exports and production, but essentially along the same product lines and with a low level of sophistication (1) . Why, then, is formal integration so problematic when informal trade is so prevalent? Why these imperfections? Is it simply a matter of time, as the EU experience would seem to suggest?

While there is still no conclusive analysis, in my view, of the underlying reasons, two arguments stand out. First, regional economic integration in Africa represents a typical case of shallow integration of goods, services and factor markets. On the other hand, mostly Northern powers tend to impose what economists call deep integration: near complete liberalisation of goods and factor markets, before African industry has become competitive enough to stand the liberalized environment. This exercise is underway since structural adjustment times, and extends inter alia into the Economic Partnership Agreements (EPAs) introduced by the European Commission. It leaves African producers with few opportunities to move up the ladder of skill-intensity and sophistication, both globally and regionally. North-South deep integration jeopardizes the achievements of intra-African shallow integration.

A second observation relates to the role of the so-called regional champions in African regional economic communities (REC). In fact, over the last years a complex argument from international trade economics, related to imbalance in South-South economic integration, has been to put to the fore. It comes from British authors (best explained by Venables), and has been largely ignored by the sanguine continental European prejudice on economic integration. In short, it reads as follows: both trade creation and trade diversion in South-South RECs tend to reinforce the trade and investment imbalance in favor of the regional champion (in Africa: South Africa, Kenya, Nigeria).

What is more, the regional champion is often a producer far below global productivity heights of the same goods as every other low-level diversifier in your REC (cement, maize flour, corrugated iron sheets, flip-flops…) or of second-class monopoly goods (cars, agricultural machinery…). A regional community protected by sizeable external tariff barriers, but with a regional champion producing below global standards, generates consumer welfare losses, without creating much producer rents. In North-North integration, the less advanced members at least benefit from first-class machinery or equipment, supplied by the regional leader(s), and can hence raise overall productivity levels.

The absence of such dynamics is probably the basic reason for mistrust and lukewarm intra-REC liberalisation in Africa: mutual gains are not obvious while immediate gains for some national interest groups are, and mostly for those in the one country where advantages already cluster.

From the fundamental problem described, two competing visions arise on how to better advance African economic integration: market-liberal trade economists often conclude to do away with South-South RECs, or to pursue at best light integration (as in the COMESA-EAC-SADC tripartite project), with better infrastructure, better business environment and “light institutions”, rejoining the old Balassa – stream of thinking, but stopping short of achieving the customs union stage. Customs unions hardly travel with light institutional baggage (unless one member does most of the administration for the others, as in SACU), and so they are disliked by this liberal strand. In South Africa, two influential think tanks support the vision of light integration (SAIIA and Tralac).

The ambitious structuralist alternative reads: African RECs need a vision of comprehensive regional industrial and agricultural policies to address regional imbalances and harness opportunities within a protected space. It is generally recognized that meaningful agricultural & industrial policy for most African countries needs the larger regional market to work, but the inverse is true as well: without proactive policyfor a better spatial distribution of new industries, a protected space with heavy institutions remains pointless. The few industries that exist cluster in very few places unless a deliberately designed regional tissue of industrial supplies is worked out, along with the private sector. And defending common external tariff (CET) lines, e.g. in EPA group negotiations, without having a common industrial vision is almost futile. Regions need a joint regional idea of which industries to promote in negotiations.

This is an important extension of a still recent debate. Imaginative new industrial policy concepts, departing from old prescriptive modes of policy-making, are gaining more and more ground in development economics worldwide, and some African economies are important testing grounds for industrial policy; see the experience and lively debate in South Africa. However, the new industrial policy discussion and literature has so far not systematically embraced the regional dimension. Historically, this is acceptable: showcases of successful industrial policy like Taiwan and South Korea individually had access to global markets and did not need the region for their advancement. That developmental industrial policy in the current global setting mostly needs a protected regional space to start, but that southern regional spaces in turn need industrial policy to function is less well researched. Suffice it to mention the South African debate again; a SADC perspective remains marginal herein.

Reconciling, in economic science and political practice, the paradigms of regional economic integration and of industrial policy can help both, and support industrial catching-up which otherwise hardly occurs in Sub-Saharan Africa, despite sustained overall economic growth.

Professor Dr. Helmut Asche is Director of the German Institute for Development Evaluation, Bonn.

Footnote
1. Asche, Helmut, Neuerburg, Philipp and Menegatti, Matteo (2011). Economic diversification strategies: a key driver in Africa’s new industrial revolution. UNIDO General Conference 2011. Vienna, UNIDO. 

This article was published in Great Insights Volume 1, Issue 9 (November 2012)

 

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Helmut Asche