Economic Integration is for Development in Africa
“I am African” is a slogan the African Union (AU) has adopted to promote ownership of the continental integration programs and institutions among the people, especially children and the youth. At the special summit of the African Union on 26 May 2013, marking 50 years since the establishment of the Organisation for African Unity (OAU), the Heads of State and Government adopted AU 2063, a vision that Africa should be peaceful and prosperous by 2063.
At the continental level, the Heads of State and Government have decided that a Continental Free Trade Agreement (FTA) should be formed by 2017, and the Continental Customs Union by 2019. The COMESA-EAC-SADC Tripartite FTA, expected to be in place in 2015, will be the building bloc for the Continental FTA. While ECOWAS, ECCAS and AMU are expected to emulate the COMESA-EAC-SADC Tripartite FTA initiative, it does not appear that much progress is being made in that direction, except for a brief exploratory meeting organised by the AU Commission in the margins of the AU Conference of Ministers responsible for integration held in Mauritius in 2013. This would suggest that if this matter of forming the Continental FTA and Customs Union is not addressed soon, the timelines will come and pass without much to show.
The Treaty establishing the African Economic Community provides for the gradual establishment of the continental community, through progressive stages. The eight Regional Economic Communities (RECs) recognised by the AU are building blocs for the continental integration program. If the building blocs fail to make progress towards deeper integration into customs unions and common markets, the continental objective will not be achieved. The political and economic implications would therefore be vast. Similarly, if the Tripartite FTA negotiations fail to result in the Tripartite FTA, there will not be a Continental FTA, since the Tripartite FTA, given its economic and geographical size, is the key building bloc or the cornerstone for the Continental FTA.
Economic integration as a development strategy in Africa has reached a crossroads. The time has come to take a stand. This is because implementation of regional integration programs is in quite a crisis. In COMESA for instance, some member states, for different reasons, are yet to join the free-trade area, established way back on 1 November 2000; namely, the Democratic Republic of Congo, Eritrea, Ethiopia, Uganda and Swaziland, being five out of the 19 member states of COMESA.
The Customs Union was launched on 7 June 2009, but the three year transition period within which it was supposed to become functional passed without any member state indicating that it was ready to implement the Customs Union, and a number of reasons were advanced for this state of affairs.
Obstacles to Customs Union implementation
Member States that aim to become duty free zones would find a Customs Union’s common external tariff (CET) with positive duties to constitute policy reversal. For Mauritius and Seychelles, about 85% of their tariff lines are already at a 0% duty rate, and about 50% of their national tariff lines have rates that are different from the CET rates. Egypt and Zimbabwe have a large number of tariff lines with a 5% duty rate, which would need to be adjusted to the CET’s 0%, 10% and 25% duty rates on raw materials and capital goods, intermediate products and final products respectively. These two countries have argued that raising the duties from 5% to 10% or 25% would reduce the competitiveness of their products due to higher duties of inputs and would reduce the welfare of the people due to higher consumer prices especially for essential products such as foods. On the other hand, reducing the 5% duty rate to 0% would cause revenue losses for the governments. Sudan and Zimbabwe have pointed to the currently prevailing bad economic situation as posing difficulties in implementing the Customs Union. Sudan has pointed out that it lost key oil assets to South Sudan at the independence of South Sudan, while Zimbabwe has pointed to the decimation of its economy under the prevailing economic sanctions imposed by some economically significant countries of the world - which have weakened the domestic industry and caused a shortage of government revenue - as difficulties in implementing the Customs Union. Some member states progressed well in implementing the transition period in terms of domesticating the key Customs Union instruments, but with change of government, new policy directions were adopted that slowed down the implementation. Zambia for instance, is now reviewing its trade agreements as a new government policy, and this has been understood to include the Customs Union. Some member states, notably Egypt and Mauritius, have raised the matter of having to renegotiate their tariff schedules at the World Trade Organization (WTO), arguing that the CET will result in raising their tariffs beyond the bound rates at the WTO. They have maintained this fear, though it has been explained that the overall level of tariffs under the CET is lower than the overall level of national tariffs and therefore adoption of the CET would not require renegotiation. These are the arguments that have blocked progress on implementation of the COMESA Customs Union, and are likely to be the arguments against any customs unions involving these countries, especially those with CETs with positive rates and rates that are different from those under the national tariffs of the member states.
A key issue is whether the short-term revenue losses from elimination or reduction of customs duties on certain tariff lines, can be addressed. Analytical assessments, for IDS (1), clearly demonstrated that revenue losses resulting from elimination or reduction of customs duties can usually be recouped from slight increases on the rates of trade taxes such as VAT or excise. Even without the slight increases on trade taxes, the recent experience of the East African Community (EAC) following the adoption of the CET at the formation of the Customs Union in 2005, has demonstrated that increase in trade, resulting from the formation of the FTA or the Customs Union or the general good economic performance, will more than offset the temporary revenue losses. Moreover, the COMESA Adjustment Facility has already been used by a number of member states to address their temporary revenue shortfalls resulting from entering the COMESA FTA or the EAC Customs Union. In the first round, Burundi and Rwanda got disbursements from the Fund and in the second round, all 14 eligible COMESA member states will get disbursements for adjustment to implementation of COMESA obligations.
On the broader benefits of economic integration, recent work by IDS (2013), for instance, estimates that a Tripartite FTA involving elimination of duties and non-tariff barriers, as well as trade facilitation, will generate additional new trade worth US$7.7 billion annually, constituting an increase of about 20% over the 2014 baseline; whereas mere elimination of duties would generate just US$250 million annually. The analysis has shown further that every member state has industries that will gain from the Tripartite FTA, where growing incomes and jobs will be generated.
On loss of sovereignty, there can be no doubt that this is a concern that is critically dear to the governments of the member states. This has always been the case since the days of decolonisation. However, the matter was addressed by the principle of uti possidetis, under which existing borders, though they were colonial boundaries, were maintained and the sovereign equality of member states recognised. Beyond that, the member states clearly saw their limitations as individual member states in light of the grave political and development challenges they faced, and on this basis agreed to joint efforts which necessarily entailed a degree of limitation of sovereignty through joint decision-making. That was under the OAU. After the 1994 genocide in Rwanda, and other serious divergences from African norms of the good life that resulted in loss of life, the African Union introduced an important modification to the principle of non-interference, in order to allow collective action to address serious breaches of the peace in member states that results in un acceptable loss of human life. The AU, in addition, reinvigorated the economic integration programs, by reorganising the Commission, setting clearer integration priorities for instance under the Minimum Integration Program, strengthening relations with the Regional Economic Communities (RECs), and launching initiatives for the Continental FTA and the Continental Customs Union. All these initiatives, by definition, entail some agreement to joint action in a manner that limits unilateral action, the promise being that together the member states are stronger and can jointly address cross-border challenges whether they be political, social or economic. In terms of challenges to sovereignty, the source is not economic integration. It is not the FTA or the Customs Union that will undermine sovereignty of the member states. The source will be weakened populations and governments, resulting from under-development and disunity, as has always been the case.
The 0-10-25% CET structure reflects the industrial policy adopted by the COMESA region of: promoting the importation and the use of low-priced raw materials and capital goods through a 0% duty rate; attempting a balance between low-priced inputs and promoting the emergence and growth of industries in the region producing intermediate products, which increases trade in inputs and vertically integrated production structures; and protecting industries that produce finished products with a duty rate of 25%. For each tariff line, a number of considerations were then taken into account in determining the rate, such as the need to promote competitiveness in the region, availability of or potential capacity to produce the product, and revenue implications of the tariff rate.
COMESA is due to formally launch its common market by 2015 though already legally being established by Article 1 of the Treaty. In considering the common market, the FTA and the Customs Union will provide the inescapable backdrop. Implementing the common market is much harder than implementing the FTA or the Customs Union, because of the deeper nature of the integration and the policy implications for the powers of governments in jointly implementing rules on free movement of services, persons, labour, capital, and enterprises; all of which can be considered as politically sensitive areas. It is therefore important at this point in the long trajectory of economic integration in Africa, to think clearly and design a way forward in terms of relaunching the integration programs or modifying them, but either way, to take decisions that can be implemented with gusto and with results.
The state of regional integration in COMESA holds out many best practices for the entire continent, but also raises some issues that need urgent attention, and addressing which is destined to shape the entire continental integration process due to the similarity of most integration issues across the continent. It is therefore a unique opportunity to have a closer look and decide what to do, bearing in mind the history and the future of Africa in the world.
1. Dirk Willenbockel, General Equilibrium Analysis of the COMESA-EAC-SADC Tripartite FTA, Institute of Development Studies at the University of Sussex, 2013 (forthcoming, on file with the author).
This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).