International Finance and Trade EMBA - GSB

Trade, Growth, Poverty, Trade Policies and Integration in Africa Prepared by

Edson Mbedzi

Outline
The African Problem- Poverty and dimensions in Africa Linkages between Trade, economic growth and poverty reduction Evidences Trade exports and Poverty reduction Trade Policies and Poverty reduction Economic Integration in Africa and its problems

Poverty and Its dimensions

The main challenge - Poverty 12 countries have GNP/capita of less than US$ 500 Most of the people still living on less than US$1 a day are in Sub-Saharan Africa and South Asia (Sala-i-Martin, 2002; Collier and Dollar, 2002) Multifaceted: income poverty Per capita income ranges from USD 190-460 for Liberia, Zimbabwe, Tanzania, Malawi and, USD 2 100-7900 for Egypt, Namibia and Morocco, Botswana, South Africa, Seychelles and Gabon

Poverty dimensions
The total population of the region is about 1 billion (2011 est.)second largest after Asia - good market for trade Projected to grow at an average of 1.7% per annum between 2005-2015-one of the highest growths.

World total growth is projected at 1.2% for the same period.

Poverty in Africa is predominantly rural. More than 70% of the continents poor people live in rural areas and depend on agriculture for food and livelihood Sub-Saharan Africa-more than 218 million people live in extreme poverty.

Poverty-Global Distribution
Poverty headcount ratio at $1.25 a day (PPP) (% of population) East Asia & Pacific 14.3% 2008 Europe & Central Asia 0.5% 2008 Latin America & Caribbean 6.5% 2008 Middle East & North Africa 2.7% 2008

South Asia 36.0% 2008

Sub-Saharan Africa 47.5% 2008

Poverty Global distribution

Poverty headcount ratio at $2 a day (PPP) (% of population) East Asia & Pacific 33.2% 2008 Europe & Central Asia 2.2% 2008 Latin America & Caribbean 12.4% 2008 Middle East & North Africa 13.9% 2008

South Asia 70.9% 2008

Sub-Saharan Africa 69.2% 2008

Growth Trends in Africa

Economic Grouping Africa North Africa Sub-Saharan Africa Groups 1.8 CEPGL (3) COMESA (20) ECCAS (11) ECOWAS(15) MRU (3) SADC (14) CEMAC(6) UMA (5) UEMOA (8) 1.8 3.8 2.2 2.4 0.3 1.9 1.9 2.2 2.8 -3.5 -3.5 2.8 0.7 3.3 3.1 2.1 2.1 1.8 3.6 -8.1 -8.1 1.4 -3.3 2.4 0.6 0.3 -0.2 -0.1 2.0 -0.3 -0.3 3.7 3.2 3.9 4.9 2.8 3.5 3.2 4.2 4.0 4.0 3.8 5.9 4.2 2.5 3.5 5.4 4.2 3.2 1980-90 2.4 3.0 2.1 1990-2000 2.5 2.4 2.5 1990-95 1.0 0.6 1.2 1995-2000 3.4 3.7 3.2 2000-04 4.0 4.1 4.0

Reducing Poverty through growth

The ECA and the Commission for Africa are quite clear on the fact that addressing Africas poverty requires more rapid growth According to the Commission on Africa report, the mechanism for increased growth are:
More trade and aid need for trade growth An improvement in the investment climate A doubling of expenditure on infrastructure An emphasis on agriculture and on helping small enterprises Thus more guided FDI is needed.

The ECA emphasizes the promotion of trade and regional integration as a core element in fighting poverty.

Trade and Growth

In addition to other factors, trade can be an important source of economic growth
International trade can expand markets, facilitate competition and disseminate knowledge, creating opportunities for growth, poverty reduction and human development Trade can also raise productivity and increase exposure to new technologies, which often spurs growth

Trade liberalization promotes higher economic growth in the longer term (Sachs-Warner 1995, Dollar and Kray, 2000)

Trade and Growth

Trade and macroeconomic policies are highly linked
Macroeconomic variables such as national income, employment, price level, aggregate investment and consumption (savings) are affected by trade

Trade and Growth

Imports:
May be used as inputs in production-affects the level of output and indirectly employment
Imports of consumer goods reflects choices of consumers and hence decisions to spend or save Imports compete with domestic production and hence affect employment adversely if domestic industries cannot compete

Trade and growth

Exports:

Main component of aggregate demand stimulates growth of domestic output and hence income and employment

By expanding markets for domestic firms , exports create conditions for production costs to fall as firms gain from economies of scale-productivity increases
Hence many countries have relied on exports as an engine of growth

Trade and Growth

The reverse causality from macroeconomic variables to trade is also true. Domestic growth will stimulate demand for imports

Changes in domestic price level will affect competitiveness

Trade is sensitive to macroeconomic policies

Is trade important for macroeconomic performance?

Yes!!!!!
Empirical evidence: Most studies testify to the importance of trade for economic growth; Dollar and Kray, 2001; Burnside and Dollar, 1977; Arteta, Eichengreen and Wyplosz, 2001; show that the degree of trade openness is significant in explaining differences in economic growth of countries Most models included trade elements as part of macroeconomic variables that co-determine the explanation of growth performance and were statistically significant Macroeconomic conditions together with open trade policies are found by most economists as critical for explaining faster economic growth

Is Trade important for macroeconomic performance?

Rodigruez and Rodnik (1999) disagree on causality.-flow of causation is not from trade and trade policy to macroeconomic performance but the reverse. Trade liberalisation may also impact on fiscal revenues in countries which are heavily dependent on tariffs as a source of government revenue (Ebrill et al., 1999). In developing countries, budgetary revenues are still heavily dependent on taxes imposed on international trade.

This could be problematic for countries with a small domestic tax base, low efficiency of tax collection or poor design of the tax regime

Are there other direct impacts of trade on Poverty reduction

So far, we have established that trade by impacting on economic growth could help to reduce poverty directly or indirectly But are there other direct impacts of trade on poverty reduction?

Regional Integration Areas (RIAs) and Poverty Reduction

RIA enables neighboring African countries to link their small economies to create relatively larger markets, thus allowing for benefits from economies of scale-larger markets;

The trade creation and diversion effects resulting from the preferential reduction in tariffs. Member countries of a RIA can present themselves as a united and credible group in international trade negotiations.

RIAs and Poverty Reduction

Enhances the potential for sub-regional specialization and cooperation in a variety of economic and social spheres; The deepening of integration within a sub-region may minimize the potential for hostilities between neighbouring countries-toning down political rivalry. National-level reforms and other economic policies gain more credibility if closely coordinated and harmonized within regions.

Trade Developments in Africa

International trade is a prominent economic activity in Africa
Merchandise trade in SSA as a share of GDP increased from 38% to 58% between 1988-89 and 2010-2011.
Higher commodity prices, combined with increased export volumes resulted in a marked increase in the regions export value in 2010 The growth in export earnings sustained the growth of imports which rose by more than 20% between 20032005. However, merchandise exports exceeded imports for the fourth consecutive year.

Share of Africa in World Trade

1980
Region World Developing Economies E 100 29.5

1985
X 100 25.4

1990
P 100 24.3

1995
O 100 27.6

2000
R 100 31.6

2003
T 100 32.1

2004
S 100 33.5

North Africa
SSA Developing Economies: America Developing Economies: Asia

2.1
3.8 5.5 18.0

1.7
2.6 5.6 15.6

1.2
2.0 4.1 16.9

0.7
1.5 4.4 21.0

0.8
1.5 5.5 23.8

0.8
1.6 5.0 24.7

0.9
1.6 5.1 25.8

Developing Economies excluding China

28.6
I

24.1
M 100.0 23.2 3.7 1.6 2.1

22.5
P 100.0 22.5 2.9 1.2 1.6

24.7
O 100.0 28.8 2.5 0.9 1.6

27.8
R 100.0 28.7 2.0 0.7 1.2

26.2
T 100.0 29.0 2.2 0.7 1.5

27.1
S 100.0 30.4 2.2 0.7 1.4

World Developing economies Developing Economies: Africa North Africa SSA

100.0 24.0 4.6 1.4 3.2

Developing economies: America

Developing economies: Asia Developing economies excluding China

6.1
13.1 23.0

4.2
15.1 21.1

3.7
15.8 21.0

4.9
21.4 26.3

5.9
20.8 25.3

4.8
21.9 23.6

4.7
23.5 24.4

Composition of Africas exports

Merchandise exports expanded by 6% in 2011

Mining rose by 24 %, manufactures by 22% and agriculture by 16%

Although the performance of manufactures and agriculture were below mining, the rates exceeded the respective growth rates of world exports. Despite the rapid rate of growth of manufactures, export dependency on primary commodities remain striking

Commercial services was also outstanding in 2010 underlined mainly by expansion of travel receipts

Manufacturing and poverty reduction

High export growth in manufacturing could make it a good sector to support poverty reducing strategies. But, only a handful of African countries will be able to achieve this because Slow pace of diversification Competitiveness hampered by
Low productivity and inappropriate exchange rates in the move towards the exports of processed goods and manufactures

Mineral exports and Poverty reduction

Mining has some potential positive poverty impacts:
Fiscal impact on foreign exchange Income generation Local economic development Improved land-use planning Source of energy

However, it also habours potential negative poverty impacts:

Governance, corruption and macroeconomic issues. Environment Health and human development Socio-cultural impact

Mineral exports and Poverty Reduction Potentials

By far the greatest complain against mining is its inability to generate employment (limited spillovers) Though a net foreign exchange earner, the labour force is often highly skilled and specialized.

The poor do not participate in the economic opportunities of mining but bear the costs and the risks when a mine is situated in the community. Solution: Encourage artisanal and small-scale mining
Has the potential to employ men and women Has the potential to generate resources for training and education Enhancing local government capabilities.

Tourism Trade and poverty reduction

Tourism is an important component of commercial services export: most relevant to poverty reduction in Africa is tourism trade. Tourism accounts for about one-third of the global trade in services Industrialised countries have the largest shares in the market. However, the increasing importance of South Asia and the Pacific as tourist destinations is remarkable. Africa with its vast potentials still lag behind in this area. Tourism is labour-intensive. According to the World Travel and Tourism Council, it is the most important employer in the world200m employees

Agriculture Trade and Poverty reduction

Most African countries do not have good prospects in mining and tourism. Mining and tourism may have weak linkages and high leakages. Poverty is directly linked to agricultural productivity (Irz, Xavierer et al; 2001).

Agriculture Trade and Poverty reduction

If physical productivity increases, poverty will diminish because: Agriculture is central to the livelihoods of the rural poor. Even with rapid urbanization, more than 50% of the poor will be in rural areas by 2005, and depend significantly on agriculture. Agriculture provides two thirds of employment, half of exports, and more than one third of Gross national Income

For each point in growth of agricultural yield, the number of those living on less than 1$ per day reduces by between 0.6 and 1.2 %.
73% of the poor live in rural areas, and most depend on agriculture Agriculture and agro-processing account for 30-40% of GDP in developing countries General economic development requires prior growth and productivity gains in agriculture.

Agriculture and Poverty

Evidence: large body of literature on the impact of agricultural productivity growth: Irz et al, 2003 Hazell and Haddad, 2001 Dorosh and Haggblade, 2003-investment in agriculture generate the highest impacts on the poor .

But agricultural productivity in Africa faces severe problems.

Secular decline in terms of trade since the early 1980s due to declines in export prices and wide fluctuation in real export prices of primary commodities-coffee, cocoa, cotton, copper etc.
Resulted in marginalization of the region in world tradeAfricas share of world agric exports declined substantially Resource losses due to terms of trade declines have been a major factor in the poor economic performance in the region

What role for Trade Reforms?

Sustained trade reforms doubled growth in the agricultural sector (Michaely, Choksi, Papageorgiou) Agricultural trade liberalisation gives much higher aggregate growth rate- 5.75 vs. 1.1% (Valdes).
Trade liberalisation- easing tariffs and other import restrictions, reducing or eliminating domestic supports and export subsidies-tends to boost economic growwth in the longer term.

SSA countries with large improvement in macro/trade policies had higher growth rate-3.5% vs. 0.3% for those with deterioration (World Bank)

Trade reforms and poverty reduction

Huge evidence exists to show that global trade reforms under the WTO can have big poverty reduction effects
Developed countries by removing subsidies and improving market access can make it more feasible for Africa to gain from reforms African countries can also undertake reforms that would otherwise expose their economies to unfair competition Welfare results are driven by improvements in the terms of trade (export prices rising more than import prices) and the efficiency effects of the improvements in the allocation of resources between different activities.

Trade reforms and poverty reduction

Trade liberalization can enhance food security by increasing rural growth and reducing rural poverty Keeping food prices affordable Improving access to imported agricultural technology, mostly embedded in inputs Providing cash to buy inputs. (Nash, 2005)

Market access
Developed countries must make it easier for developing countries to export to their markets by improving market access through reducing tariffs and non-tariff barriers, and providing duty-free and quota free access for all products exported from LDCS.
Specifically, developed countries were suppose to end agricultural export subsidies by 2010 and substantially reduce tariffs against developing country agricultural exports.

African countries must develop their own trade reforms in line with clear development plans

Trade Liberalisation and the African perspective

Trade liberalisation means reducing the limitations on trade that countries have erected over a number of years Protectionism is a means of attempting to ensure that domestic industries are protected from competition from foreign producers.

Usually implemented through limiting the number of imports coming into a country.

Trade Protectionism
Tariffs : A tax on a good coming into a country. Increases the price of the good and makes it less competitive. Quotas: Physical restriction on the number of goods coming into a country. Non-Tariff Barriers (NTBs) : anything that is not tariffs or quotas. NTBs such as regulations and legislation make it very hard for foreign competitors to sell goods into another country.

Trade Protectionism
The main method involved in NTBs is not to prevent trade but to make the cost of doing so prohibitive to the potential exporter Examples include setting exacting standards on fuel emissions from cars, the documentation required to be able to sell drugs in different countries, the ingredients in products some of which may be banned in the destination country. Often difficult to prove.

Reasons for Protectionism

Protect domestic industries Protect domestic employment Strategic industries reasons Political pressures Protect culture? Prevent Dumping selling goods in the destination country below cost to break into that market

Potential Benefits of Trade Liberalization

Promotes international specialisation and increases world output. Promotes efficient use and allocation of world resources Allows developing countries access to the heavily protected markets of the developed world thus helping promote development Facilitates the working of the international market system and the working of price signals to ensure efficient allocation of resources, international competition and the associated benefits to all

GATT & WTO: Keys of global trade Liberalization

Debate on trade liberalization has spanned over many years The 1940s post-war period witnessed a boom in world trade and rising globalisation. Several countries joined the world trading system Trading was seen as a means for gaining access to resources which were not available in domestic economies.

Keys of Global trade liberalization

However, resource rich nations soon took advantage of this and imposed very high tariffs on goods These countries took advantage of the absence of trade standards and the non-existence of a governing authority to oversee world trade Initiatives to create a world governing body for trade was vigorously pursued.

ITO, WB and IMF

The International Trade Organisation (ITO) was proposed along with the IMF and the World Bank (Bretton Woods Institutions) in the 1944 post-war negotiations. The institutions were conceived at a United Nations conference convened in Bretton Woods, New Hampshire, United States, in July 1944. The goal of the conference was to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global trade economy.

The ITO was expected to serve as the supervisory and negotiating organ for world trade.

ITO, WB and the IMF

The World Bank (IBRD) is tasked with financing long-term economic development and, The IMFs primary purpose is to ensure the stability of the international monetary systemthe system of exchange rates and international payments that enables countries (and their citizens) to trade with one other.

The ITO did not survive

The Havana Charter US opposition

GATT & WTO

GATT succeeded the failed ITO in 1947 and for 47 years charted the course of World Trade.

GATT helped establish a strong and prosperous world trading system through rounds of trade negotiations
GATT was not an independent third party global trade governing body but a set of rules. Nevertheless, it was good enough to support the rapidly growing multilateral world trading system from 1949 to 1994

As early as the 1980s, there arose a call for the overhaul of the trading system due to;

An expanded and complex trading network system Time consuming rounds of trade negotiations

WTO
The need to establish the WTO came into existence during the last GATT trade round in Uruguay, 1994 as an institutional body to oversee world trade. Marrakech agreement in Morocco gave birth formally to WTO in January 1,1995 The WTO now has 157 (2012) members representing more than 93 % of World trade

Comparison of GATT & WTO

GATT
A system of rules with no institutional foundation Applied only on a temporary basis even though governments subscribed to its rules for over 40 years Rules applied to trade in merchandise goods only Many agreements are plurilateral or selective Dispute settlement system was rather slow Permanent, independent institution WTO signatory commitments are permanent and binding Apply to 3 specific fields Merchandise goods, Trade in services Trade related aspects of intellectual property Agreements are multilateral-members are obliged to commit to the provisions of the organisation Dispute settlement systems was time specific and faster. Operates automatically and has more detailed rules for the implementation of findings.

WTO

Functions of WTO
Forum for Trade negotiations Administering WTO Trade Agreements (Implementation and monitoring) Handling Trade Disputes Building Trade Capacity Developing Countries Outreach and Organizations and Technical Assistance to

cooperation

with

other

International

Principles of operating the WTO System

Five principles are of particular importance in understanding the WTO:

Non-discrimination. Requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. "Grant someone a special favour and you have to do the same for all other WTO members.
Reciprocity. Binding and enforceable commitments. Transparency. Safety Valves.

African perspective on trade liberalization

The Uruguay round of the General Agreement on Tariffs and Trade (GATT) led to the establishment of the World Trade Organization (WTO), with the membership of the original 123 GATT member-countries. The current WTO membership stands at 157 countries, with 32 Least-developed countries (LDCs). African membership currently stand at 47

The Doha Development Agenda (DDA)

The agenda for the present round of negotiations under WTO were set in Doha in 2001, during the Fourth WTO Ministerial Conference. The Ministerial adopted the 'Doha Development Agenda' (DDA), which for the first time promised to address the interests of developing countries, especially LDCs. The Doha Declaration also states "special and differential treatment for developing countries shall be an integral part of all elements of the negotiations.

DDA/SDT
Unfortunately, the implementation of DDA is very slow, thus the developing countries are feeling that developed countries are not committed to the Doha Round and the development agenda remains to be mere lip service. The WTO Ministerial Meeting held in September 2003 in Cancun (Mexico) collapsed without agreement on the way forward, due to rifts between developed and developing countries.

Doha, Cancun, Hong Kong etc.

The General Council Decision of 1 August 2004 (also called the July Package) and the Sixth Ministerial Conference held in Hong Kong in 2005 sought to bring the DDA back in track. The Hong Kong Ministerial agreed to complete the Doha Work programme and conclude negotiations launched in Doha by 2006. The DDA negotiations continued, albeit with dismal performance. But, on 24 July 2006, the DDA was suspended due to wide gaps that remained between key players.

Doha, Cancun, Hong Kong

It is important to revive WTO negotiations, as developed countries are pushing developing countries for bilateral agreements with WTO plus commitments. These bilateral arrangements reduce the policy space created by the WTO and undermine the multilateral trading system.

It is important for African countries to understand the negotiation issues under the WTO and establish a negotiation position that recognizes Africas LDC status and strengthens her development goals.

Major Negotiation Issues and Africas Interest Major negotiation issues, of Africas interest, under DDA are:
Agriculture (removal of agricultural subsidies),
Non-agriculture Market Access (NAMA), Services

Trade Facilitation
Special & Differential Treatment (S&DT)
Duty Free Market Access to LDCs products.

Aid for Trade (Trade Related Technical Assistance)

Others include:
Democracy and Transparency

Public health

Major Negotiation Issues (I) A. Agriculture: Mainstay of Africas economy (30% of GDP, 70% of employment opportunities and most important sector for poverty alleviation). Under WTO, the Agreement on Agriculture (AoA), provides international rules governing trade in agriculture sector. As agriculture is directly related to food security and livelihood issues, it has been a matter of heated debates. Agriculture negotiations have been at the centre of WTO negotiations, and a major source of discord between developed and developing countries and the suspension of the Doha round of negotiations.

Agriculture

Agriculture negotiations are taking place in two major issues: market access and domestic support.

Market access:
Reduction in tariffs has remained a contentious issue during WTO negotiations. Developed countries have been pushing for tariff reductions, seeking to access developing country markets while protecting their own agriculture industry through tariffs and subsidies.

Agriculture
A majority of developing countries want market access to developed countries. Developing countries are also unwilling to cut tariff rates at the level demanded by the US and other developed countries, as agriculture is closely linked to food and livelihood issues. It would be in Africas interest to first identify market access barriers (both tariff and non-tariff barriers) it faces on its agro-exports in the international market, and then negotiate to reduce or remove these barriers.

Agriculture
Export subsidies: A decision made at Hong Kong for parallel elimination of all forms of export subsidies and disciplines on export measures by the end of 2013. The US, EU and Japan account for over 90 percept of global agriculture domestic subsidies. Developed world channels nearly US$ 1 billion a day on trade distorting agriculture subsidies. A high level of subsidies leads to overproduction and drives down world food prices.

Agriculture
Contrasting views for Removal of Agricultural Subsidies Thus, the presumption is that removal of agriculture subsidies in developed countries will benefit poor countries.

However, it should be noted that a majority of low-income countries, especially LDCs are net food-importers (FAO, 2001).

Thus, the removal of subsidies and the increase in world food prices are expected to have a negative impact on them resulting in increased poverty and weakening food security.

Non-Agricultural Market Access (NAMA)

NAMA refers to all those products that are not covered by the Agreement on Agriculture such as: manufacturing products, fuels and mining products, fish and fish products, and forestry products.

NAMA account for almost 90 per cent of the worlds merchandise exports. The methodology for tariff reduction is at the core of NAMA negotiations. .

NAMA
Previously, tariffs were cut on a selective product-byproduct basis through requests and offers made between member countries However, subsequently WTO members decided to use formulas to cut tariffs across-the-board. Member countries have realized that adopting a formula approach for tariff reductions provides transparency, efficiency, equity and predictability.

Special and Differential Treatment (SDT)

Developing countries, particularly LDCs would be given less onerous recourse in implementing the provisions of various WTO agreements. LDCs should hence be granted better market access, be allowed greater flexibility in implementing trade rules, and be allowed to sign agreements with developed countries that do not require full reciprocity. SDT provisions were not mandatory. They depended on the political will of the rich countries for implementation. The position of African countries is that the nonimplementation be reviewed, made mandatory and binding on developed countries.

Democracy and Transparency

Theoretically, WTO operates by consensus-all countries have the right to negotiate on matters affecting them on trade issues. In practice, key decisions, including formulation of documents presented as consensus positions, take place in smaller, informal meetings that are closed or manoeuvred and engineered by the developed countries Even when meetings are open, African countries are underrepresented-they may not be able to afford delegation at such meetings. The unspoken rule - absence or inability to raise valid objections is considered as consensus

Trade-related aspects of intellectual property rights (TRIPS).

Patent rights resulted temporary monopolies, drug prices and high company profits Hence Pharmaceutical industry maintains higher profits relative to other industrial sectors In 1994, WTO agreement on TRIPS mandated member countries to bring their laws into accord with restrictive standards that maximise the rights of patent holders.

Diversifying exports-Why should Africa Diversify?

Vital for two reasons (1) Export receipts are needed to finance imports of consumer, intermediate and capital goods Receipts have been compromised by falling trade shares for traditional products Concentration on a few primary products with low demand elasticity

Why Diversify?
(2) African economies are small- there can be no successful diversification drive based solely on domestic markets. Exports, especially of industrial and non-traditional products, will provide the best avenue for attracting high and productive investment Vicious cycle of investment, high growth, increased savings and high investment is only triggered by broad and growing markets

Therefore there is need to integrate>

Why diversify?
Will African firms enjoy higher productivity gains from exporting than firms from other regions?
Minimum efficient plant size is large relative to the domestic market-exporting will make plants more effective Firms are likely to e exposed to greater competitive pressures than is available in domestic markets Exporters learn from their buyers

Debate on Africas Diversification Potential

The Resource based thesis
Africa is richer in natural resources but poorer in human capital-than any other region
Africa will find it hard to acquire a strong comparative advantage in processed primary exports and harder still to develop manufactured exports

Counterarguments
Resource base of Africa weak Unstable and overvalued currencies

Where is Africa Now?

Africa has made progress, but.
Decade of progress in Africa
Improved regional trade and growth HIV/AIDS State vs Government debate-privatisation Freer political systems Less Conflicts

The Economists Top Growers 2010-2015

Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Country CHINA INDIA ETHIOPIA MOZAMBIQUE TANZANIA VIETNAM CONGO GHANA ZAMBIA NIGERIA GDP Growth (%) 9.5 8.2 8.1 7.7 7.2 7.2 7.0 7.0 6.9 6.8

May 2000

Aug 2002

June 2003

July 2005
Sept. 2009

March 2008

December 2011

Regional Trade and Economic Integration

Every continental region has at least one major integration movement.

Europe has the European Community (EC); Asia has the Association of South East Asian Nations (ASEAN), Central America has the Central American Common Market (CACM).
Africa has three major ones: the Southern African Development Community (SADC); the Economic Community of West African States (ECOWAS); and the Common Market for Eastern and Southern Africa (COMESA) among others.

Performance indicators of Trading Blocs

Based on objectives and principles of the trading bloc, it is apparent that they encompass ultimate ideals of a free trade area; such as :

1) Customs union involves free trade among partners, but also the establishment of a common external tariff with the rest of the world.
2) common market is a customs union with free factor mobility. 3) economic union involves the adoption of both common external trade policies and the free movement of primary factors of production as well as goods within the union. 4) Finally, total economic integration involves the joint pursuit of all macroeconomic functions by all member states.

Impediments to Integration and Achievement of Trading Blocs in Africa

(a)Dependence on a few, primary, exports
More than any other developing region, Africa depends primary commodities to generate the foreign exchange needed to buy imports. on

For historical/colonial reasons, Africa's major export markets are also identical, a fact which causes its own problems. Primary commodities constitute an average of 82.6% of total export earnings for these countries, of which 59.4% are from single commodities. Creates BOP problems if production of the single commodities is disrupted, any slump in world commodity prices erodes the ability of regional economies to maintain investment in infrastructure.

Impediments to Integration and Achievement of Trading Blocs in Africa

(b) Underdevelopment of human capabilities With a combined population of about 1 billion, African economies are potentially rich in human resources. People have been relatively neglected, badly educated and in poor health, with their capacities frequently under-used. The consequence is low labor productivity and lack of competitiveness, despite very low wages.

Impediments to Integration and Achievement of Trading Blocs in Africa

(c) Parochialism Problems in Africa stem from failure, on the part of memberstate governments, to internalize trading blocs agreements in their national administrations and development plans. In many of the member states cooperation does not go far beyond the signing of treaties and protocols. Moreover, some governments do not send to meetings those officials who have the appropriate expertise on the issues to be discussed. Hence no action is taken to implement the decisions or to set aside funds for the implementation of programs adopted.

Impediments to Integration and Achievement of Trading Blocs in Africa

(d) Excessive dependency of African States on the developed West Many African nations generally still depend on the West for imports of raw material-supplies and manufactured products, even in cases where products of comparable quality may be available in member states. This runs counter to the rationale for creating bigger markets to facilitate the growth of viable production ventures. This makes regional economies particularly vulnerable to foreign exchange availability. As aresult, inter-sectoral and intra-sectoral linkages are bound to be weak, because firms buy their requirements from outside the regions, rather than from within.

Impediments to Integration and Achievement of Trading Blocs in Africa

(e) Proliferation of regional groupings Almost half of COMESA members are also members of SADC, and some are also members of the Eastern African Community. This may tend to weaken the integration process. It leads to costly competition (even for attention and resources); conflict; inconsistencies in policy formulation and implementation; unnecessary duplication of functions and efforts; fragmentation of markets and restriction in the growth potential of the sub-region. SADC was formed in 1980 to reduce member countries' dependence on the then apartheid South Africa. Since May 1994 South Africa apartheid is officially over, throwing into serious question SADC's legal purpose, talks of merging SADC and COMESA have not yielded any results.

Impediments to Integration and Achievement of Trading Blocs in Africa

(f) Africa's debt burden Africa, generally, has experienced mounting external indebtedness accompanied by very high debt service ratios which have diverted a significant portion of export earnings from development programs to debt servicing. Of the 9 countries in the world whose 1996 debt is unsustainable, 5 are in COMESA: Zambia, Mozambique, Burundi, Zaire and Sudan. These countries do not have the capacity to service existing debt from export earnings, capital and aid flows without undue burden on their people.

Impediments to Integration and Achievement of Trading Blocs in Africa

(g) Transport problems The transport infrastructure for intra-regional trade (including roads, rail systems, air and some shipping) is not only inadequate, but in many cases non-existent. Countries like Burundi, Comoros, Lesotho, Mauritius, Rwanda and Somalia, for instance, have no railway systems. Individual systems may also not always be fully compatible, especially in terms of intermodal transfer of goods. In some cases, parts of the network (especially in war-torn states such as Sudan, Angola, DRC, Somalia and Burundi) need urgent rehabilitation and upgrading.

Impediments to Integration and Achievement of Trading Blocs in Africa

(h) Lack of information Most African nations are traditionally linked to former colonizing nations and, as a consequence, there is an acute lack of awareness of what other African countries can offer to substitute for the products currently being sourced from the developed countries. Lack of information is also a direct result of inadequate economic infrastructure in the regions, especially in telecommunications and transportation facilities, directly hindering interaction among regional countries.

Impediments to Integration and Achievement of Trading Blocs in Africa

(j) War damage, Disease and Drought Africa has the most distressing list of nations (of any African regional grouping) that have effectively ceased to function as modern nation states. Burundi, Rwanda, Mozambique, Sudan, Ethiopia, Somalia, Angola and DRC faced enormous and expensive reconstruction problems from years of civil wars that have left them desperately short of skills and infrastructure that will take a generation to rehabilitate. They cannot, therefore, be expected to be equal and effective participants in a regional economic grouping.

European Union (EU) Comparison

The EU is an economic and political partnership between 27 European countries that together cover much of the continent.

The EU is based on the rule of law. This means that everything that it does is founded on treaties, voluntarily and democratically agreed by all member countries. These agreements set out the EU's goals in its many areas of economic activity mainly:
1) The single market is the EU's main economic engine, enabling most goods, services, money and people to move freely. 2) Develop huge resource base to ensure that Europeans can collectively draw maximum benefit.

EU Institutions
There are 5 main institutions involved in EU legislation: 1. The Council of the European Union, which represents the governments of the individual member countries. The Presidency of the Council is shared by the member states on a rotating basis. 2. The European Parliament, which represents the EUs citizens and is directly elected by them; 3. The European Commission, which represents the interests of the Union as a whole. 4. The Court of Justice upholds the rule of European law. 5. The Court of Auditors checks the financing of the EU's activities.

Impediments to Integration and Achievement of Trading Blocs in Africa

Together, these institutions produce through the "Ordinary Legislative Procedure" the policies and laws that apply throughout the EU. In principle, the Commission proposes new laws, and the Parliament and Council adopt them. The Commission and the member countries then implement them, and the Commission ensures that the laws are properly applied and implemented.

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