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GREAT insights Magazine

Regional Integration in Africa

Looking East for Inspiration

November 2012

Sunassee Lam, A. 2012. Regional integration in Africa - looking East for inspiration. GREAT Insights, Volume 1, Issue 9. November 2012. Maastricht: ECDPM

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Regional Integration has gone from being a second best policy, shunned upon by mainstream economics, to a policy, which now features as an integral part of most developing county national development plans and key development partners’ programmes. This article looks at the East Asian experience with regionalism and draws out some implication for integration on the African continent. 

Unlike multilateral liberalization, regionalism tends to be controversial in economic and policy circles for a variety of reasons, most of which being linked to the fact that preferential trading arrangements, such as FTAs and customs unions, are by their very nature discriminatory (1)Despite the naysayers regional integration has become an important building block of developing countries’ economic and trade integration strategies, with some countries going to the extent of adopting national development plans for regional integration. With the uncertain outcome of negotiations at the multilateral negotiations under the Doha Development Agenda, the regionalism movement currently constitutes the most significant trend in international commercial policyFigures supporting this new trend are the 300 Preferential Trade Agreements (PTA) which include RTAs presently enforced as compared to the 70 PTAs in 1990 (2)

Africa is an important player in the regional integration arena counting close to 28 RTAs (seven Customs Union and the rest mainly FTAs) (3)The nexus of African integration stems from the effort to correct the geographical fragmentation of past colonialism, which resulted in a string of small markets and land-locked economies (4)  scrambling to join the global market. The Lagos Plan of Action in 1980 and the 1991 Abuja treaty lay out the foundation for defragmenting the continent through a series of Regional Economic Communities, which are expected to eventually merge towards the formation of the African Economic Community (AEC). However, after close to 40 years of intense integration initiatives, the African market remains highly fragmented. While there has been some success in removing import duties within regional communities, a range of non-tariff and regulatory barriers still raise transaction costs and limit the movement of goods, services people and capital across borders. The end-result is that Africa has integrated with the rest of the world faster than with itself (5)Intra-regional trade in Africa, which has been on the rise, remains nevertheless anemic. The share of intra-regional goods trade in total goods imports is only around 10 percent in COMESA, 10 percent in ECOWAS and 8 percent in UEMOA. This compares with over 20 percent in ASEAN, around 35 percent in NAFTA and more than 60 percent in the EU. 

Heterogeneity facilitates integration 

In Africa, which is increasingly looking east, policy makers grapple with questions such as – Why have regional integration initiatives yielded positive results in East and South-East Asia and are there lessons and best practices, which can be adopted from the Asian model of integration? Whilst this topic is in itself a subject for a seminar paper, there are some policy directions and best practices, which can be inferred from the Asian integration process. Regional integration in East Asia is well advanced and unique in character. The process of trade and financial (mainly FDI) regional integration has developed significantly since the early 1990s, as shown by standard indicators of economic interdependence (6), the levels of which are comparable to those recorded in Europe (7). 

Besides history, geography and culture, which are all key determinants of economic development, one of the factors, which East and Southeast Asian integration have in their favour, is the mix of country profiles and the region’s economic heterogeneity. The region counts two OECD countries as well as a healthy mix of developed, developing and least developing countries. This blend of countries forms the basis of the region’s complementarities and diversified comparative advantages, which supports the East Asia Flying Geese model of development, as well as intra-regional trade and production fragmentation and cross-border production networks, which have been a major catalyst for regional integration across East Asia. East Asia’s economic integration has been led predominantly by intra-industry, rather than inter-industry, cross-border trade flows, reflected by the development of vertical production sharing networks within the region, as large corporations have exploited significant disparities in economic development and comparative advantages across countries in East Asia. 

Rules of origin as a trigger or a bottleneck

The ASEAN Free Trade Area has been relatively successful in enabling low-income members (Cambodia and Laos) to participate in production networks with the middle and high-income members (Indonesia, Philippines, Malaysia, Thailand and Singapore). It is notable that the Rules of Origin (RoOs) in the ASEAN area are relatively straightforward and allow for cumulation across a wide range of member countries (8). The major weaknesses of African regional integration have been the economic homogeneity across the region, the similarities in terms of comparative advantages, the weak productive capacity and lack of a strong industrial base and restrictive rules of origins, which prohibit participation in global and cross-border production processes. Restrictive RoO within Africa means that countries are unable to use preferences to exploit a comparative advantage in a narrowly defined task, instead having to undertake a wide range of tasks domestically to meet RoO requirements. The current debate under the Economic Partnership Agreements (EPAs) in particular with the ongoing discussion of RoO with South Africa is of paramount importance for production fragmentation and the eventual participation of African countries into global and cross-border production networks.

Regionalism in Asia has developed differently than from Africa. Asian integration process has been harnessed by a strong Private Sector and driven more by markets than by governments and institutions, whilst the African integration initiative has been driven by politics and based on strong policy and institutional building processes to facilitate regional cooperation. Cooperation among national authorities in ASEAN is more recent and less intimate. It remains focused on economic issues (with some social components) and light on formal institutions. This distinction is often thought of being one of the contributing factors to the Asia’s pragmatic and flexible approach to regionalism. The evolving approach to integration in Asia is market-friendly, multitrack, and multispeed, allowing for a healthy dose of pragmatism among a collegial group of economies. This approach is workable for a region of such size and diversity, and holds several advantages. First, any group of territories, economies, or subregions can integrate according to its particular levels of development and the specific opportunities that regionalism offers. Second, as partnerships strengthen, smaller groups are more likely to merge into larger ones, leading to wider and deeper relations across an ever-growing swathe of Asia. Third, this approach ensures that Asia’s economic integration remains market-friendly—that its framework continues to be responsive to private sector needs as expanding business and open markets power Asian economies ahead (9) . 

Private sector led deeper integration

The unrealized potential of African regional trade is evidenced by the fact that a significant amount of cross border trade does take place between African countries. Nevertheless, a major limitation to African integration progress has been its adherence to a “linear” integration model based on the Europe experience (i.e. Balassa’s five stages of regional integration). This process is marked by the stepwise integration of goods, labour and capital markets, and eventually monetary and fiscal integration. Border measures are likely to represent a minor constraint to regional trade in Africa compared with structural economic shortcomings, such as a lack of infrastructure, an institutional framework, skills, and its limited productive capacity. Deeper integration, which promotes competitive regionally integrated services markets; the elimination of non-tariff barriers; appropriate regulations that allow cross-border movement of services suppliers; and builds the institutions that are necessary to allow small producers and traders to access open regional markets (10) could improve Africa’s record on regional cooperation. Adopting strategies from the Asian Regional Integration Playbook, which support private sector led integration and balancing this with the institutional and political drive is likely to yield a more market friendly, equitable and pragmatic regional integration experience. 

Amanda Sunassee Lam works in Africa and Asia, specializing in building technical and organizational capacities of Ministry of Industry and Trade for the formulation and implementation trade and private sector development policies.

Footnotes
1. Best Practices in regional Trading Agreements: An Application to Asia, Michael G. Plummer, The World Economy (2007).
2. World Trade Report 2011: The WTO and preferential trade agreements: From co-existence to coherence.
3.http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx 
4. Out of 48 landlocked, 17 are from the African Continent, 13 from Europe and 13 from Asia countries.
5. De-Fragmenting Africa Deepening Regional Trade Integration in Goods and Services – Edited by Edited by Paul Brenton and Gözde Isik, World Bank 2012.
6. The two measures that are commonly used to examine the extent of regional interdependence are the share of intraregional trade over total trade, or intraregional trade share (IT Share), and the intensity with which a region trades with itself compared with its trade with the rest of the world, or intraregional trade intensity (IT Intensity). The IT Share is a more straightforward measure of interdependence, as it shows the relative importance of internal (intraregional) versus external trade dependence. The IT Intensity is a more sophisticated measure showing the region’s bias for trading within itself, that is, among partners located within the region. In both measures, total trade is defined as the US dollar value of exports plus imports.
7. Developing Indicators for Regional Economic Integration and Cooperation Giovanni Capannelli, Jong-Wha Lee, and Peter Petri No. 33 | September 2009, ADB
8. Cadot, O. and J. de Melo (2007), ‘Why OECD Countries Should Reform Rules of Origin’, CEPR Discussion Paper No. 6172.
9. EMERGING ASIAN REGIONALISM A Partnership for Shared Prosperity, ADB 2008
10. De-Fragmenting Africa Deepening Regional Trade Integration in Goods and Services – Edited by Edited by Paul Brenton and Gözde Isik, World Bank 2012 

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

 

Economic Transformation and TradeRegional IntegrationAfrica

External authors

Amanda Sunassee Lam