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  • 1. Economic Potential for Africa’s Regional Trade Co-operation: Opportunities and challenges London – 10 March 2012 Opening Remarks by Edwin LaurentMadam Moderator Winnie Mutesi, Dr. Githiora, Chairman of the Centre for AfricaStudies of the University of London, distinguished ladies and gentlemen.It is a signal honour for me to address such an eminent gathering of scholars,business persons, experts, government representatives and students. I take itthough as acknowledgement of our work on development and the makeup of ourmembership with the African bloc of countries being the largest. Africa’s concernsand ambitions are inextricably entwined with our own raison d’être. Whenworking with an intergovernmental organisation it can often be prudent to startpresentations with a disclaimer more so when tackling contentious trade policyissues in which there are almost as many diverging perspectives and interestsamong the 54 Commonwealth Members as exist in the wider WTO. I willtherefore present my own views and perspectives rather than pretending toshare with you an institutional position or those of Member States.Let me begin by giving full credit to the organisers for what I see as a mostattractive feature of today’s event; it’s orientation The conference approachesthe development challenge from the standpoint of what Africa itself can do, notwhat outsiders can do or think is needed. If history has taught us one thing, it isthat Africans’ engagement with the outside world has all too often resulted inweakening rather than improvement in the well-being of its people. Over thecenturies, the great powers that established in Africa did so, not to promote itsdevelopment but to advance their own interests. Ever since the identity of theforeign players and their methods changed but pure altruism never was andprobably never will be the general motive. The ultimate responsibility for Africa’sdevelopment lies with its governments, its entrepreneurs and its people. Income 1
  • 2. from its mines, from farms, its factories is needed but for self sustaining growth,profits must be reinvested in the continent and the most made of economicopportunities not just for the benefit of foreign entities but in support of thecontinent’s own development.The most lasting and fundamental improvement in a country’s ability to providefor its people will come from its own internal economic expansion. For that, itmust invest more and invariably if it’s expanded output is to be marketed, it mustexport.The new era of globalisation, following the end of the cold war and the creationof the World Trade Organisation (WTO) in the first half of the last decade,ushered in on an unparalleled period of sustained economic growth. The greatestsuccess stories were of developing countries that experienced new prosperity andan expansion of the middle classes. The most notable examples were Asian andLatin Americans. Africa though has not shared in this bonanza but instead haslanguished on the periphery of the global economic progress.Africa is of key interest to us. The Commonwealth is seen by many as essentially apolitical grouping. Admittedly the promotion of democratic values is afundamental tenet, but the organisation is also founded on the advancingdevelopment. Our work in the area of development aims to help foster aninternational regulatory and economic environment that is conducive to thegrowth and prosperity of developing countries on the one hand and on the otherthat these countries are able to access and implement those policies that canmake the fullest contribution to the attainment of their development objectives.We have been using advocacy that provides a voice and platform for the interestsand concerns of countries that are on the periphery of international discourse andare not being heard or taken seriously. We seek to help more directly as well byresearching and presenting policy options to governments and also supportingthem in their efforts to strengthen their institutional capacity.Is there though hope for Africa? We can be positive looking at cases, such as therapid growth of South Africa, the discovery and exploration of the new petroleumresources in Ghana, Uganda and elsewhere and extrapolate, as others have done, 2
  • 3. that Africa will emerge as a significant economic force in the Twenty-FirstCentury. But pessimists point to problems due to climate change, prevalence ofmajor diseases like HIV/Aids and Malaria, corruption etc and fear even furthermarginalisation with the continent failing to keep up with the rest of thedeveloping world.The pursuit of regional integration has been the seen as a key tool in the pursuitof development. The Western European experience popularised the concept.After the Second World War its removal of barriers to trade and eventual marketunification and ever closer union enabled a period of unprecedented peace andeconomic prosperity. Of course SACU existed long before (1910).Can regional co-operation do for Africa what it did for Europe? Can it be sufficientfor dealing with the development challenges? The logic of regional tradeintegration is straightforward, it enables an extension of the “domestic” marketfor supplies of goods and services beyond the borders of the home country. Thevalue of such an arrangement is most evident in small countries the limiteddomestic market constrains the ability of firms and businesses to develop within abenign home market without necessarily having to break into markets abroad andface full international competition.Africa has taken enthusiastically to the regional approach. There is the EAC, SADC,ECOWAS, UEMOA, COMESA, IOC, CEMAC and many more often with overlappingmembership. Then we have the Tripartite launched on 28th October 2008 thatbrings together EAC, COMESA, and SADC with a combined population of 527million and GDP of $624 billion. Their aim is the reduction tariff and non-tariffbarriers and more general economic collaboration. Paul Collier has said thoughthat despite the talk of solidarity, practical collaboration weak and the “pooling ofsovereignty among African Governments is negligible relative to that in Europe”.Nonetheless I firmly believe that the ability of African countries to address theirdevelopment challenges can be greatly enhanced via effective collaboration atthe regional level and working together not just with immediate neighbours butothers further afield on the continent. 3
  • 4. Realism about the challenges is essential and I begin with the problem oftransportationThe growth and structural transformation in Africa is most affected by the so-called “natural barrier to trade” of the excessive transport costs. Unfavourablegeographical locations increase the costs of both export and import trade relativeto countries with more favourable geographical characteristics. A 10-percentagepoint increase in transport costs is found to reduce trade volumes by about 20per cent (Limao and Venables, 2001). When export structure is characterised by ahigh share of bulky low-value products (e.g., agricultural commodities), countriesface much higher freight costs than high-value products with low storage factors(e.g., many manufacturing exports). Therefore, transport costs alone perhapshave made many African countries uncompetitive internationally.Transport costs and unfavourable geographical location, as reflected in the longdistance from the global centres of economic growth and export markets, alsohave far reaching policy implications for diversification and structuraltransformation of the economies. For a small price taking country ad valoremtransport costs of 20 per cent on both final output and intermediate goods arefound to reduce the domestic value added (and thus GDP), including wages andprofits, by 60 per cent when intermediate goods account for 50 per cent of costs.The implication is that only because of their geographical location many countriesexperience much lower gains from trade, and foreign firms might be reluctant tomove or relocate their production to these countries even when the wages arelow (Redding and Venables, 2001).Another relevant consequence of high transport costs is that they raise theeffective protection for non-export sector in the domestic economy. There areestimates (Milner et al, 2000) demonstrating that natural protection on domesticsales in Uganda arising from transport costs is 48 per cent. Similarly, on the exportside the implicit tax associated with transport costs was as high as 100 per centfor manufactured foods and almost 25 per cent for coffee, cotton and tea. 1 Thistestifies how difficult it is to achieve diversification of production structuresfavouring the export sector.1 These estimates are based on transport costs alone; transaction costs and the impact of poor infrastructure are notincluded. Had they been included implicit taxes on exports would have risen further as Uganda is a landlockedcountry with poor physical infrastructural facilities and the sea-ports it uses for its shipment of exports are either inKenya or in Tanzania also lacking efficient infrastructure. 4
  • 5. One way of breaking this problem of geographical disadvantages is to trade morewith regional growth centre. South Africa, Nigeria, Kenya, amongst others, haveappeared to be emerging as African growth hubs providing opportunities forincreased intra-regional trade including the North South Corridor.But let us look more closely at the situation.Africa’s transport facilities are poor and badly integrated. True there is anestimated 2.3 million kms of road but of that only 580,666 kms is paved and ofthis 49% are in North Africa and 27% in Southern Africa with 13% in the West 10%in the East and 1% in Central AfricaIn the EAC there are various routes for getting goods from the ports to thehinterland. One is the Northern Corridor, 160 km of single track rail served by theRift Valley Railways (RVR) running from Mombassa to Nairobi to Nakuru andMalaba and then Uganda through Tororo, Kampala and ending in Kasese inwestern Uganda. From there transit to Rwanda, Burundi and DR Congo is only byroad. The rail should have been able to handle 7 million tonnes of cargo perannum but does only a third of that. Wagons are unavailable, locomotives andtracks dilapidated and investment inadequate (Imani). Transit from Mombasa toKampala is 4-5 days (down from 14) is long but the Central Corridor From Dar esSalaam to Kampala is 19 days after the 25-35 days on average that the ship wouldhave to spend in the post. Transporting a cubic metre of oil via Mombassa wouldbe $50 but Dar $200. Not surprisingly Uganda imports just 1% of its imports viathe central corridor and 90% via the Northern. The costs though are high acontainer from Mombassa to Kampala costs $2,700 which is twice what it costsfrom Europe to Mombassa. I remember a few years ago, Uganda which is a bigproducer of bananas being interested in exploring the European market andtaking advantage of its everything but arms concession for LDCs, but with suchhigh transport costs such an export just would not be feasible.What of railways? This is the most cost effective means of transporting bulk itemslong distances overland. But Africa has only 89,380 kms of track. The networksuse different gauges are under maintained with poor and dilapidated rolling stockand poor management. There are a few notable exceptions like Trans Gabon andTrans Cameroon and the mining railway lines built since the 1970’s. It is of littlesurprise that only 2% of overland cargo is transported by rail. 5
  • 6. Until the transportation hurdle can be overcome the benefits of intra-regionalliberalisation and market unification will always theoretical not just in the widercontinent but even among neighbours. The challenge is not only with regionalintegration but just importing and exporting. 14 countries, that account for 40%of the continent’s population are landlocked, a factor that considerably increasestheir costs of doing business.The customs posts with over-conscientious and thorough officials, numerousweighbridges and roadblock increase transit times and can sometimes constituteopportunities for corruption.Africa’s telecommunication services are also woeful, they are in general mostexpensive and inefficient and Africa has the lowest internet diffusion in the world. As Africa seeks economic advancement, collaboration through joint actionand regional integration has been driven by the recognition of the value of theconsolidation of regional supply and demand. Countries sought to create largerand more efficient internal markets and supply bases. This model has deliveredprimarily by enabling production in some countries to be exported throughoutthe wider region without having to meet higher import duties paid on competingimports. But this was only feasible because up till recently the region couldpursue what was essentially an inward looking policy without excessive intrusionfrom the outside world. Hence the direction of regional integration was notunduly defined by external influences. However, with the Uruguay Round accordsof the early 1990s, notably the establishment of the WTO, the pace ofglobalisation accelerated, with rules set for all which also constrained domesticpolicy flexibility. Now several countries have concluded interim economicpartnership agreements (IEPA) with the EU, and all regions are negotiating fullEPAs which provide for phased-in reciprocal free trade access, the scope forinfluence of the EU in the functioning of the common market would be expectedto increase. This means that policy space and the scope for protection ofdomestic industry and agriculture are reduced. Africa is therefore facing adifferent ballgame. Hence the original premise of integration in which regionalproducers could be shielded by a common protective tariff barrier againstcheaper imports has disappeared as the logic of integration. This of course does 6
  • 7. not undermine the case for integration but just suggest that it needs to befounded on different premises.What then?What existence of the transport, communication, policy and other challengesmean that until they can be overcome, conventional trade in goods integrationwill not be the answer. But real and meaningful progress is possible viaalternative routes.There is though scope for liberalising Government procurement via transparencyand access. According to Charles Kendal transparency accounts for 30% saving.Admittedly neighbours will not be expected suddenly win major shares ofGovernment contracts but the overall size is so huge that even a small additionalshare would be significant. In the EU Gov’t procurement is 16% of GDP and in astudy of Uganda and Tanzania Steven Woolcox put the figure at a massive 70% ofGDP.InvestmentThis is another area in which progress can be made without being constrained bythe physical problems of transportation. COMESA has made the most progress inthis area towards setting up a regional zone in which investors can be facilitated.Provision of national treatment, right of establishment, free circulation andrepatriation of capital will encourage investment within regional groupingsthemselves and the development of larger regional rather than purely domesticfirms.Competition This is as much precautionary as an opportunity. The enabling of free trade ingoods and services behind a protective barrier of course helps consolidatedomestic markets for the regional suppliers whilst giving them an advantage over 7
  • 8. imports. This they expect would help create larger and stronger producers ofgoods and services that would eventually be better able to hold their own againstoutsiders. Such an arrangement is of course not neutral in terms of competition.Setting up a protective barrier around the members of the RTA disadvantagesexcluded parties but it can open the possibility of insiders dominating the nowexpanded but restricted market.The RTA is therefore a two edged sword from the competition standpoint. Thosefledgling industries that might normally have been shielded from competitionfrom abroad by domestic regulation or other policies lose their protection fromregional competitors who might be stronger and more advanced. This wouldoccur in a common market where, because of the removal of restrictions on theright of establishment, more advanced operators are able to secure access tohitherto shielded locations within the common market. For Africa, the concernsregarding competition policy in RTAs are both to ensure fairness and equity inwhich there is no market domination and anti-competitive behaviour. But there isalso the other policy aim of ensuring that fledgling industries that do have thepotential to grow and develop, can actually do so without being snuffed outbefore they can establish and get to grips with, and hopefully flourish in their newcompetitive environment.Trade and gender issues.Agreements that determine the conditions trade are not always gender neutral.So for instance, facilitating export and production of garments can help women,who constitute the bulk of the labour force in the garment factories. Also we lookat government actions. Even at fairly mundane level, for instance, the physicalarrangements at border crossings can be significant. Facilitating informal crossborder trade particularly in Africa could have major implications for theempowerment of women who often are responsible for most of this trade. They,though, can be disproportionately subject to harassment and violence, soaddressing their security makes a real difference.External supportCan Aid for Trade help? 8
  • 9. The aid for trade initiative has been found to be having some positive impact.Since sub-Saharan Africa, on average, has higher transport costs than comparedto all other developing countries, and such costs are thought to be a majorconstraint to trade and growth in the region. Given these types of constraints,infrastructure assistance and trade facilitation provided by AfT could be especiallybeneficial. Aid for Trade, which can be a valuable instrument for boosting the capacity ofAfrican countries to produce and supply internationally competitive goods andservices. But the facility will not deliver if it is merely a substitute for alreadycommitted development aid that does not specifically address the actualimpediments to investment, production and getting goods to and from markets.Developing countries need to expand their ability to produce competitive goodsand services, but this often requires financing for infrastructure, productdevelopment, marketing, export promotion that is not available domestically,hence Aid for Trade. The concept though had initially been debated and perceivedfrom the standpoint of the Bretton Woods institutions and donors. We gotinvolved in order to change the outlook. We undertook a number of studies,released publications and staged consultations and other encounters engagingleading experts and economists like Joseph Stiglitz and experts from the Southlike Havelock Brewster to help secure a reorientation of the concept to focus onthe needs of the recipients rather than the perspectives of donors. Those ideashave informed much of the subsequent debate on the subject and influencedmany of the recommendations of the WTO Task Force on Aid for Trade.We have also been undertaking research which suggests that aid to tradefacilitation has helped reduce the cost of trading in SSA. Among the main SSAregional economic communities, such effects are found to be the strongest in theSouthern African Development Community (SADC). In terms of the broad impactof AfT on exports, the estimates of the returns to aid to economic infrastructureon exports are found to be much larger in SSA than in the other developingcountries. While this is quite important, unfortunately the effects of aid given toproductive capacity (such as developing specific sectors other than oils andminerals) are not prominent. That is SSA benefited significantly from 9
  • 10. infrastructure investments, but not from direct support to its productive sectors.Our analytical work also points to the importance of soft infrastructureinvestments, particularly in finance and business services, as returns from AfT tothese sectors in SSA have been much greater than those that resulted fromresources provided for transport, storage and energy projects. The results alsosuggest that infrastructure support including transport and energy is important.On the whole, the aid for trade can play an important role but achievingdiversification of production and export structures seems to remain a majorchallenge. Aid for Trade can benefit the Africa. Developing countries need to expandtheir ability to produce competitive goods and services, but this often requiresfinancing for infrastructure, product development, marketing, export promotionthat is not available domestically, hence Aid for Trade. The concept though hadinitially been debated and perceived from the standpoint of the Bretton Woodsinstitutions and donors. We got involved in order to change the outlook. Weundertook a number of studies, released publications and staged consultationsand other encounters engaging leading experts and economists like Joseph Stiglitzand experts from the South like Havelock Brewster to help secure a reorientationof the concept to focus on the needs of the recipients rather than theperspectives of donors. Those ideas have informed much of the subsequentdebate on the subject and influenced many of the recommendations of the WTOTask Force on Aid for Trade. It is imperative that the ability of Africa to help itself is enhanced. In thisregard I wish to suggest 3 specific areas for action by the internationalcommunity. 10
  • 11. Encouraging Investment: Greatly increased levels of investment in productiveactivities are essential for bridging the supply capacity gap in Africa. Given theinadequacy of internally generated investment, the region has to rely on foreigninflows which must be available on acceptable terms if it is to actually contributeto sustainable development. The international community might assist withidentifying and supporting practical and implementable measures andinstruments to facilitate such transfers and mitigate the risks of investing invulnerable economies. Efforts need also to be undertaken to make financialmarkets work better for Small and Medium scale Enterprises (SMEs). A vitalcomplement would be the introduction of effective measures to facilitate theacquisition of appropriate technology.Fairtrade At a recent agricultural conference, an Ethiopian coffee farmer lamentedthat he had to sell top quality coffee beans at just 20-25 pence a kilo as it entersthe complex chain from village traders, wholesalers and auctioneers, processorsetc before it can eventually sold in Europe for over £8. A serious problem forpeasant farmers and workers is poor countries is that is that as the weakestparticipants at the bottom of the supply chain, they are often denied a fair shareof even the low returns. This situation is not justifiable and must be effectivelyaddressed. To address this situation the device that has increasingly been adopted isthat of FairTrade certification. It stipulates and monitors adherence to specificcriteria encompassing respect for the rights of workers and small farmers andprotect the environment through the minimisation and responsible use ofchemical inputs that could have negative health and ecological consequences. AFairTrade premium is paid to farmers which they use for a variety of communitydevelopment and support projects that the farmers themselves undertake thatthey themselves consider beneficial and expect to improve the quality of life intheir rural areas. To be meaningful Fairtrade has to be more than sanctimoniousrhetoric; it will only work when there is a willingness to pay its price. Evidently itwill always be possible to sell more cheaply an item where production costs are 11
  • 12. kept to a minimum because of the systematic exploitation of producers, workersand the environment as opposed to the case where they get a fair deal.Provision of Policy Advice: Various multilateral institutions as well as donorGovernments engage in “policy dialogue” and provide economic advice todeveloping countries, whether or not linked to the provision of financial or otherbenefits. If the exchange is to actually help the recipients and contribute todevelopment, it must be timely, forward-looking, of high quality, non-ideologicaland objective and be motivated by a sincere commitment to enhancing thewelfare and sustainable development of the recipient countries. It should notsimply recycle orthodox solutions or the latest fashionable but untested policyprescription.In conclusion, the challenge to African countries is to adapt to the new globalisedworld in which those that are less competitive can no longer rely on effectiveSpecial and Differential Treatment. A world where tariffs and other barriers totrade are falling and the market distortions of subsidies are being reduced.Nowadays integration cannot proceed in isolation from the outside world neithercan it be inward looking. Policy makers have, in a way that they have not had tobefore, to take external factors into account as they chart the course for thefuture. Even in our rapidly changing world there is still a real and valuable prizefor Africa from integration, viz. the opportunity for success of member countriesin their engagement with the rest of the world that is greater from joint ratherthan individual actionI eagerly await the outcome of this conference that will, I expect will look at thepolicy issues holistically exploring how structures can best be designed andfunction for Africa’s development. With such a range of expertise here, I amconfident that valuable new insights will emerge. The greatest long term gainfrom the deliberations will not just be to those participating here today but ratherthe dissemination of your findings and adoption of your recommendations bypolicy-makers. 12