According to UNCTAD’s Economic Development in Africa 2009 report, the global economic crisis has reached the African continent and requires the re-examination of existing approaches to international development. UNCTAD posits that a key response for Africa is deeper regional integration that would address the long-standing structural weaknesses of African economies and help foster sustained development on the continent, especially within the context of the current crisis.
Better links between countries, ranging from paved roads to banking cooperation, are needed to spur mutual economic growth as weak physical and institutional infrastructure remain a major obstacle to increasing intra-African trade and investment. Africa currently has the world’s lowest shares of regional trade and investment at 9% of recorded flows of total external trade and 13% of recorded flows of total inward foreign direct investment (FDI).
Subtitled “Strengthening Regional Economic Integration for Africa’s Development,” the report recognizes that over the last two decades Africa has made progress in creating subregional institutions dedicated to economic integration. However, the establishment of subregional economic communities has not substantially increased intra-African trade, investment and mobility of people as expected, and, relative to other regions, Africa has by far the most fragmented market.
As part of a broader, well-designed development strategy, regional integration could enhance productive capacity, intensify economic diversification and improve competitiveness. Pooled resources and economies of scale would allow African countries to participate more effectively in the global economy, the report suggests.
In order to boost regional integration, countries need to strengthen their regional physical infrastructure such as roads, railways, telecommunications and regional airlines. Considering the high cost of infrastructure projects and in view of the limited financial capacities of individual African countries, planning at the supranational level and pooling resources to fund priority regional projects is the most realistic strategy for advancing regional integration, UNCTAD notes.
Physical infrastructure will need to be complemented by improvements in soft infrastructure, including policy harmonization at the regional level, trade facilitation, efficiency in border procedures and the adoption of national policies that help rather than hamper the process of integration.
Intra-African trade in goods is very low, but its potential for growth is high
The creation of several institutions for economic integration in Africa in the last two decades was expected to boost intra-African trade in goods. Such trade increased from 2% in the early 1980s to 9% of total African exports in 2007, but these statistics underestimate the actual flows as they do not include unrecorded trade, which is thought to be very important. Even with this caveat, intra-African trade flows are low in comparison to those in other regions and relative to Africa’s trade potential. Developing America, the region with the second lowest figure of intraregional trade, exports 18.5% of its total exports to countries in the region. Developed Europe, in contrast, exports 71.4% of its total exports to the European market. According to the report, Africa’s poor performance hides the fact that the region could increase its intra-African trade substantially if some key constraints, particularly infrastructure, were addressed. An investment of US$32 billion to improve the main intra-African road network could generate around US$250 billion in trade over a period of 15 years. Regional trade within the West African Economic and Monetary Union (WAEMU) would increase threefold if all intrastate roads linking WAEMU countries were paved. The report also notes that paving the road linking Mali to Senegal would increase bilateral trade flows fourfold, while paving the road linking C�te d’Ivoire and Senegal would double bilateral trade flows.
Analysis of trade destinations reveals that despite the low aggregate level of intra-African trade, such trade is very important for many African countries. At least 25% of exports from 20 countries are absorbed by the regional market. The importance of trading blocs is further highlighted by the fact that over three quarters of intra-African trade takes place within these regional groups. In every region, trade centres around a few influential countries, such as South Africa in the southern part of Africa, suggesting the existence of “trade poles” that could become development poles. Analysing trade composition, the report shows different patterns of trade within Africa and between Africa and the rest of the world. Whereas manufactured products dominate intra-African exports, the rest of the world imports mainly primary commodities from Africa. Also, intra-African trade is much more diversified than Africa’s exports to the rest of the world. In the light of these facts, the report suggests that increasing intra-African trade can be a major method of promoting diversification and developing Africa’s manufacturing base.
Intra-African investment is modest but increasing
Africa has a long tradition of cross-border investments but the lack of reliable data has constrained detailed analysis. The rare data available indicates that intra-African investment represents 13% of total inward FDI. This level is less than half the figure for the Association of Southeast Asian Nations (ASEAN) region, where intraregional FDI is estimated at 30% of total FDI. The low level of intraregional FDI in Africa can be attributed to several factors, including low income, which limits domestic as well as outward foreign investment, the lack of adequate transport and communication infrastructure, limited skilled labour and weak economic links and contacts among investors within the region. The report notes that financial liberalization partly explains a recent surge in cross-border investments, particularly in the form of mergers and acquisitions in the banking and telecommunications sectors. These new investments have been led by the need to avoid overdependence on home markets; the rising costs of production in some home economies; pressure from domestic and global competition; and opportunities in host countries, such as privatization of State-owned enterprises.
Intra-African services trade, labour mobility and migration are emerging issues that need attention
Developing services trade is a key component of successful regional integration in Africa, according to the report. Services represent, or have the potential to become, significant sources of export earnings for a large number of African economies. Tourism, construction, ports and logistics services relating to road and rail transport offer important export potential for many countries. Also, considering that professional and transport services, telecommunications, banking and insurance – the so called “producer” services – are inputs into other economic activities, they either facilitate or hinder trade and production in other economic sectors, depending on the efficiency with which they are made available to users. That is why the efficient production of services and their trade should be considered as important as the production and trade of goods. Currently, most African countries are unable to provide domestically the quantity or quality of producer services demanded by local producers and exporters, thus undermining competitiveness. The report says more attention should be given to creating an efficient services sector in Africa.
Most regional integration agreements in Africa include provisions on the free movement of persons and the right of residence. Although these are among the most poorly implemented provisions, they have led to the easing or abolition of visa requirements for travelers within the integration groups concerned, particularly in Western, Eastern and Southern Africa. Restrictions remain on employment and the right of residence given the political sensitivity of these matters. Many in Africa argue that the restricted movement of labour across national boundaries is a major constraint to regional integration. For significant progress to be made, a more positive approach to intra-African migration is needed, the report says. There is a need for stronger political will to overcome national lobbies opposed to this form of integration. Forging ahead with this agenda may also imply amending and harmonizing national laws and investment codes, particularly their provisions barring “foreigners” from participating in certain categories of economic activity.
Further information is available on UNCTAD’s website.