1. Economic Potential for Africa’s Regional Trade Co-operation:
Opportunities and challenges
London – 10 March 2012
Opening Remarks by Edwin Laurent
Madam Moderator Winnie Mutesi, Dr. Githiora, Chairman of the Centre for Africa
Studies 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 it
though as acknowledgement of our work on development and the makeup of our
membership with the African bloc of countries being the largest. Africa’s concerns
and ambitions are inextricably entwined with our own raison d’être. When
working with an intergovernmental organisation it can often be prudent to start
presentations with a disclaimer more so when tackling contentious trade policy
issues in which there are almost as many diverging perspectives and interests
among the 54 Commonwealth Members as exist in the wider WTO. I will
therefore present my own views and perspectives rather than pretending to
share 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 most
attractive feature of today’s event; it’s orientation The conference approaches
the development challenge from the standpoint of what Africa itself can do, not
what outsiders can do or think is needed. If history has taught us one thing, it is
that Africans’ engagement with the outside world has all too often resulted in
weakening rather than improvement in the well-being of its people. Over the
centuries, the great powers that established in Africa did so, not to promote its
development but to advance their own interests. Ever since the identity of the
foreign players and their methods changed but pure altruism never was and
probably never will be the general motive. The ultimate responsibility for Africa’s
development lies with its governments, its entrepreneurs and its people. Income
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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 economic
opportunities not just for the benefit of foreign entities but in support of the
continent’s own development.
The most lasting and fundamental improvement in a country’s ability to provide
for its people will come from its own internal economic expansion. For that, it
must invest more and invariably if it’s expanded output is to be marketed, it must
export.
The new era of globalisation, following the end of the cold war and the creation
of the World Trade Organisation (WTO) in the first half of the last decade,
ushered in on an unparalleled period of sustained economic growth. The greatest
success stories were of developing countries that experienced new prosperity and
an expansion of the middle classes. The most notable examples were Asian and
Latin Americans. Africa though has not shared in this bonanza but instead has
languished on the periphery of the global economic progress.
Africa is of key interest to us. The Commonwealth is seen by many as essentially a
political grouping. Admittedly the promotion of democratic values is a
fundamental tenet, but the organisation is also founded on the advancing
development. Our work in the area of development aims to help foster an
international regulatory and economic environment that is conducive to the
growth and prosperity of developing countries on the one hand and on the other
that these countries are able to access and implement those policies that can
make the fullest contribution to the attainment of their development objectives.
We have been using advocacy that provides a voice and platform for the interests
and concerns of countries that are on the periphery of international discourse and
are not being heard or taken seriously. We seek to help more directly as well by
researching and presenting policy options to governments and also supporting
them in their efforts to strengthen their institutional capacity.
Is there though hope for Africa? We can be positive looking at cases, such as the
rapid growth of South Africa, the discovery and exploration of the new petroleum
resources in Ghana, Uganda and elsewhere and extrapolate, as others have done,
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3. that Africa will emerge as a significant economic force in the Twenty-First
Century. But pessimists point to problems due to climate change, prevalence of
major diseases like HIV/Aids and Malaria, corruption etc and fear even further
marginalisation with the continent failing to keep up with the rest of the
developing world.
The pursuit of regional integration has been the seen as a key tool in the pursuit
of development. The Western European experience popularised the concept.
After the Second World War its removal of barriers to trade and eventual market
unification and ever closer union enabled a period of unprecedented peace and
economic prosperity. Of course SACU existed long before (1910).
Can regional co-operation do for Africa what it did for Europe? Can it be sufficient
for dealing with the development challenges? The logic of regional trade
integration is straightforward, it enables an extension of the “domestic” market
for supplies of goods and services beyond the borders of the home country. The
value of such an arrangement is most evident in small countries the limited
domestic market constrains the ability of firms and businesses to develop within a
benign home market without necessarily having to break into markets abroad and
face 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 overlapping
membership. Then we have the Tripartite launched on 28th October 2008 that
brings together EAC, COMESA, and SADC with a combined population of 527
million and GDP of $624 billion. Their aim is the reduction tariff and non-tariff
barriers and more general economic collaboration. Paul Collier has said though
that despite the talk of solidarity, practical collaboration weak and the “pooling of
sovereignty among African Governments is negligible relative to that in Europe”.
Nonetheless I firmly believe that the ability of African countries to address their
development challenges can be greatly enhanced via effective collaboration at
the regional level and working together not just with immediate neighbours but
others further afield on the continent.
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4. Realism about the challenges is essential and I begin with the problem of
transportation
The growth and structural transformation in Africa is most affected by the so-
called “natural barrier to trade” of the excessive transport costs. Unfavourable
geographical locations increase the costs of both export and import trade relative
to countries with more favourable geographical characteristics. A 10-percentage
point increase in transport costs is found to reduce trade volumes by about 20
per cent (Limao and Venables, 2001). When export structure is characterised by a
high share of bulky low-value products (e.g., agricultural commodities), countries
face much higher freight costs than high-value products with low storage factors
(e.g., many manufacturing exports). Therefore, transport costs alone perhaps
have made many African countries uncompetitive internationally.
Transport costs and unfavourable geographical location, as reflected in the long
distance from the global centres of economic growth and export markets, also
have far reaching policy implications for diversification and structural
transformation of the economies. For a small price taking country ad valorem
transport costs of 20 per cent on both final output and intermediate goods are
found to reduce the domestic value added (and thus GDP), including wages and
profits, 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 countries
experience much lower gains from trade, and foreign firms might be reluctant to
move or relocate their production to these countries even when the wages are
low (Redding and Venables, 2001).
Another relevant consequence of high transport costs is that they raise the
effective protection for non-export sector in the domestic economy. There are
estimates (Milner et al, 2000) demonstrating that natural protection on domestic
sales in Uganda arising from transport costs is 48 per cent. Similarly, on the export
side the implicit tax associated with transport costs was as high as 100 per cent
for manufactured foods and almost 25 per cent for coffee, cotton and tea. 1 This
testifies how difficult it is to achieve diversification of production structures
favouring the export sector.
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These estimates are based on transport costs alone; transaction costs and the impact of poor infrastructure are not
included. Had they been included implicit taxes on exports would have risen further as Uganda is a landlocked
country with poor physical infrastructural facilities and the sea-ports it uses for its shipment of exports are either in
Kenya or in Tanzania also lacking efficient infrastructure.
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5. One way of breaking this problem of geographical disadvantages is to trade more
with regional growth centre. South Africa, Nigeria, Kenya, amongst others, have
appeared to be emerging as African growth hubs providing opportunities for
increased 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 an
estimated 2.3 million kms of road but of that only 580,666 kms is paved and of
this 49% are in North Africa and 27% in Southern Africa with 13% in the West 10%
in the East and 1% in Central Africa
In the EAC there are various routes for getting goods from the ports to the
hinterland. One is the Northern Corridor, 160 km of single track rail served by the
Rift Valley Railways (RVR) running from Mombassa to Nairobi to Nakuru and
Malaba and then Uganda through Tororo, Kampala and ending in Kasese in
western Uganda. From there transit to Rwanda, Burundi and DR Congo is only by
road. The rail should have been able to handle 7 million tonnes of cargo per
annum but does only a third of that. Wagons are unavailable, locomotives and
tracks dilapidated and investment inadequate (Imani). Transit from Mombasa to
Kampala is 4-5 days (down from 14) is long but the Central Corridor From Dar es
Salaam to Kampala is 19 days after the 25-35 days on average that the ship would
have to spend in the post. Transporting a cubic metre of oil via Mombassa would
be $50 but Dar $200. Not surprisingly Uganda imports just 1% of its imports via
the central corridor and 90% via the Northern. The costs though are high a
container from Mombassa to Kampala costs $2,700 which is twice what it costs
from Europe to Mombassa. I remember a few years ago, Uganda which is a big
producer of bananas being interested in exploring the European market and
taking advantage of its everything but arms concession for LDCs, but with such
high transport costs such an export just would not be feasible.
What of railways? This is the most cost effective means of transporting bulk items
long distances overland. But Africa has only 89,380 kms of track. The networks
use different gauges are under maintained with poor and dilapidated rolling stock
and poor management. There are a few notable exceptions like Trans Gabon and
Trans Cameroon and the mining railway lines built since the 1970’s. It is of little
surprise that only 2% of overland cargo is transported by rail.
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6. Until the transportation hurdle can be overcome the benefits of intra-regional
liberalisation and market unification will always theoretical not just in the wider
continent but even among neighbours. The challenge is not only with regional
integration but just importing and exporting. 14 countries, that account for 40%
of the continent’s population are landlocked, a factor that considerably increases
their costs of doing business.
The customs posts with over-conscientious and thorough officials, numerous
weighbridges and roadblock increase transit times and can sometimes constitute
opportunities for corruption.
Africa’s telecommunication services are also woeful, they are in general most
expensive and inefficient and Africa has the lowest internet diffusion in the world.
As Africa seeks economic advancement, collaboration through joint action
and regional integration has been driven by the recognition of the value of the
consolidation of regional supply and demand. Countries sought to create larger
and more efficient internal markets and supply bases. This model has delivered
primarily by enabling production in some countries to be exported throughout
the wider region without having to meet higher import duties paid on competing
imports. But this was only feasible because up till recently the region could
pursue what was essentially an inward looking policy without excessive intrusion
from the outside world. Hence the direction of regional integration was not
unduly defined by external influences. However, with the Uruguay Round accords
of the early 1990s, notably the establishment of the WTO, the pace of
globalisation accelerated, with rules set for all which also constrained domestic
policy flexibility. Now several countries have concluded interim economic
partnership agreements (IEPA) with the EU, and all regions are negotiating full
EPAs which provide for phased-in reciprocal free trade access, the scope for
influence of the EU in the functioning of the common market would be expected
to increase. This means that policy space and the scope for protection of
domestic industry and agriculture are reduced. Africa is therefore facing a
different ballgame. Hence the original premise of integration in which regional
producers could be shielded by a common protective tariff barrier against
cheaper imports has disappeared as the logic of integration. This of course does
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7. not undermine the case for integration but just suggest that it needs to be
founded on different premises.
What then?
What existence of the transport, communication, policy and other challenges
mean that until they can be overcome, conventional trade in goods integration
will not be the answer. But real and meaningful progress is possible via
alternative routes.
There is though scope for liberalising Government procurement via transparency
and access. According to Charles Kendal transparency accounts for 30% saving.
Admittedly neighbours will not be expected suddenly win major shares of
Government contracts but the overall size is so huge that even a small additional
share would be significant. In the EU Gov’t procurement is 16% of GDP and in a
study of Uganda and Tanzania Steven Woolcox put the figure at a massive 70% of
GDP.
Investment
This is another area in which progress can be made without being constrained by
the physical problems of transportation. COMESA has made the most progress in
this area towards setting up a regional zone in which investors can be facilitated.
Provision of national treatment, right of establishment, free circulation and
repatriation of capital will encourage investment within regional groupings
themselves and the development of larger regional rather than purely domestic
firms.
Competition
This is as much precautionary as an opportunity. The enabling of free trade in
goods and services behind a protective barrier of course helps consolidate
domestic markets for the regional suppliers whilst giving them an advantage over
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8. imports. This they expect would help create larger and stronger producers of
goods and services that would eventually be better able to hold their own against
outsiders. Such an arrangement is of course not neutral in terms of competition.
Setting up a protective barrier around the members of the RTA disadvantages
excluded parties but it can open the possibility of insiders dominating the now
expanded but restricted market.
The RTA is therefore a two edged sword from the competition standpoint. Those
fledgling industries that might normally have been shielded from competition
from abroad by domestic regulation or other policies lose their protection from
regional competitors who might be stronger and more advanced. This would
occur in a common market where, because of the removal of restrictions on the
right of establishment, more advanced operators are able to secure access to
hitherto shielded locations within the common market. For Africa, the concerns
regarding competition policy in RTAs are both to ensure fairness and equity in
which there is no market domination and anti-competitive behaviour. But there is
also the other policy aim of ensuring that fledgling industries that do have the
potential to grow and develop, can actually do so without being snuffed out
before they can establish and get to grips with, and hopefully flourish in their new
competitive 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 look
at government actions. Even at fairly mundane level, for instance, the physical
arrangements at border crossings can be significant. Facilitating informal cross
border trade particularly in Africa could have major implications for the
empowerment of women who often are responsible for most of this trade. They,
though, can be disproportionately subject to harassment and violence, so
addressing their security makes a real difference.
External support
Can Aid for Trade help?
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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 compared
to all other developing countries, and such costs are thought to be a major
constraint to trade and growth in the region. Given these types of constraints,
infrastructure assistance and trade facilitation provided by AfT could be especially
beneficial.
Aid for Trade, which can be a valuable instrument for boosting the capacity of
African countries to produce and supply internationally competitive goods and
services. But the facility will not deliver if it is merely a substitute for already
committed development aid that does not specifically address the actual
impediments to investment, production and getting goods to and from markets.
Developing countries need to expand their ability to produce competitive goods
and services, but this often requires financing for infrastructure, product
development, marketing, export promotion that is not available domestically,
hence Aid for Trade. The concept though had initially been debated and perceived
from the standpoint of the Bretton Woods institutions and donors. We got
involved in order to change the outlook. We undertook a number of studies,
released publications and staged consultations and other encounters engaging
leading experts and economists like Joseph Stiglitz and experts from the South
like Havelock Brewster to help secure a reorientation of the concept to focus on
the needs of the recipients rather than the perspectives of donors. Those ideas
have informed much of the subsequent debate on the subject and influenced
many of the recommendations of the WTO Task Force on Aid for Trade.
We have also been undertaking research which suggests that aid to trade
facilitation has helped reduce the cost of trading in SSA. Among the main SSA
regional economic communities, such effects are found to be the strongest in the
Southern African Development Community (SADC). In terms of the broad impact
of AfT on exports, the estimates of the returns to aid to economic infrastructure
on exports are found to be much larger in SSA than in the other developing
countries. While this is quite important, unfortunately the effects of aid given to
productive capacity (such as developing specific sectors other than oils and
minerals) are not prominent. That is SSA benefited significantly from
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10. infrastructure investments, but not from direct support to its productive sectors.
Our analytical work also points to the importance of soft infrastructure
investments, particularly in finance and business services, as returns from AfT to
these sectors in SSA have been much greater than those that resulted from
resources provided for transport, storage and energy projects. The results also
suggest that infrastructure support including transport and energy is important.
On the whole, the aid for trade can play an important role but achieving
diversification of production and export structures seems to remain a major
challenge.
Aid for Trade can benefit the Africa. Developing countries need to expand
their ability to produce competitive goods and services, but this often requires
financing for infrastructure, product development, marketing, export promotion
that is not available domestically, hence Aid for Trade. The concept though had
initially been debated and perceived from the standpoint of the Bretton Woods
institutions and donors. We got involved in order to change the outlook. We
undertook a number of studies, released publications and staged consultations
and other encounters engaging leading experts and economists like Joseph Stiglitz
and experts from the South like Havelock Brewster to help secure a reorientation
of the concept to focus on the needs of the recipients rather than the
perspectives of donors. Those ideas have informed much of the subsequent
debate on the subject and influenced many of the recommendations of the WTO
Task Force on Aid for Trade.
It is imperative that the ability of Africa to help itself is enhanced. In this
regard I wish to suggest 3 specific areas for action by the international
community.
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11. Encouraging Investment: Greatly increased levels of investment in productive
activities are essential for bridging the supply capacity gap in Africa. Given the
inadequacy of internally generated investment, the region has to rely on foreign
inflows which must be available on acceptable terms if it is to actually contribute
to sustainable development. The international community might assist with
identifying and supporting practical and implementable measures and
instruments to facilitate such transfers and mitigate the risks of investing in
vulnerable economies. Efforts need also to be undertaken to make financial
markets work better for Small and Medium scale Enterprises (SMEs). A vital
complement would be the introduction of effective measures to facilitate the
acquisition of appropriate technology.
Fairtrade
At a recent agricultural conference, an Ethiopian coffee farmer lamented
that he had to sell top quality coffee beans at just 20-25 pence a kilo as it enters
the complex chain from village traders, wholesalers and auctioneers, processors
etc before it can eventually sold in Europe for over £8. A serious problem for
peasant farmers and workers is poor countries is that is that as the weakest
participants at the bottom of the supply chain, they are often denied a fair share
of even the low returns. This situation is not justifiable and must be effectively
addressed.
To address this situation the device that has increasingly been adopted is
that of FairTrade certification. It stipulates and monitors adherence to specific
criteria encompassing respect for the rights of workers and small farmers and
protect the environment through the minimisation and responsible use of
chemical inputs that could have negative health and ecological consequences. A
FairTrade premium is paid to farmers which they use for a variety of community
development and support projects that the farmers themselves undertake that
they themselves consider beneficial and expect to improve the quality of life in
their rural areas. To be meaningful Fairtrade has to be more than sanctimonious
rhetoric; it will only work when there is a willingness to pay its price. Evidently it
will always be possible to sell more cheaply an item where production costs are
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12. kept to a minimum because of the systematic exploitation of producers, workers
and the environment as opposed to the case where they get a fair deal.
Provision of Policy Advice: Various multilateral institutions as well as donor
Governments engage in “policy dialogue” and provide economic advice to
developing countries, whether or not linked to the provision of financial or other
benefits. If the exchange is to actually help the recipients and contribute to
development, it must be timely, forward-looking, of high quality, non-ideological
and objective and be motivated by a sincere commitment to enhancing the
welfare and sustainable development of the recipient countries. It should not
simply recycle orthodox solutions or the latest fashionable but untested policy
prescription.
In conclusion, the challenge to African countries is to adapt to the new globalised
world in which those that are less competitive can no longer rely on effective
Special and Differential Treatment. A world where tariffs and other barriers to
trade are falling and the market distortions of subsidies are being reduced.
Nowadays integration cannot proceed in isolation from the outside world neither
can it be inward looking. Policy makers have, in a way that they have not had to
before, to take external factors into account as they chart the course for the
future. Even in our rapidly changing world there is still a real and valuable prize
for Africa from integration, viz. the opportunity for success of member countries
in their engagement with the rest of the world that is greater from joint rather
than individual action
I eagerly await the outcome of this conference that will, I expect will look at the
policy issues holistically exploring how structures can best be designed and
function for Africa’s development. With such a range of expertise here, I am
confident that valuable new insights will emerge. The greatest long term gain
from the deliberations will not just be to those participating here today but rather
the dissemination of your findings and adoption of your recommendations by
policy-makers.
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