Intra-African Trade for Structural Economic Transformation

21May2013
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By Christian Kingombe

The elusive quest for industrialization and Structural Economic Transformation

During the last 10 years the African continent has been growing far above the average growth rate of the previous two decades, despite the global financial crisis and the great trade collapse. Nevertheless, the relative high growth rates have, as in the 1960s, largely been driven by commodity export volumes to the rest of the world and the associated increasing commodity prices. The increase in commodity prices has in turn mainly been due to the rise of the BRICS and other emerging economies.

In the post-independent era of the 1960s and 1970s, many African countries attempted to diversify their economies and to industrialize through import substitution and industrialization development strategies based on protected regional markets. This strategy did not achieve its intended objectives for a number of reasons that are beyond the scope of this blog post. Suffice it to say that the strategy came to an end with the outbreak of the debt crisis in the mid-1980s, followed by the introduction of the Washington Consensus policy prescriptions, leading to a more outward-oriented outlook. During this period, the attention of African policy-makers shifted from regional integration to the implementation of structural adjustment and economic liberalization programs.

Intra-African Trade: The magic bullet towards achieving industrialization and structural change?

Since the establishment of the Organisation of African Unity in 1963, regional integration has been seen as a major policy tool to achieve the objectives of accelerating industrialization, diversifying economies, and developing regional infrastructure. Since then, a number of regional integration initiatives in Africa have been introduced (see for instance the 24 intra-regional Preferential Trade Agreements in force as of 2010), but it was not until the Abuja Treaty in 1991 that existing regional groupings were revitalized, initiating a process leading towards the eventual realization of an African Economic Community envisioned through six stages of continuously deeper integration. Each of the first three stages has experienced implementation challenges.

Does old wine in a new bottle ever go bad?

Despite the challenges to regional integration, intra-African trade is dominated by industrial products. This is the key finding of a new paper, which was commissioned by the Regional Integration and Trade Division of the African Development Bank (AfDB). It was prepared by a team from the Overseas Development Institute (ODI) comprising Christopher Stevens and Jane Kennan. The paper argues that increasing exports to other African countries could improve diversification (for example in agriculture), provide opportunities for learning, and in particular promote transformation in poor, landlocked countries. This is demonstrated in the paper by the provision of a snapshot of intra-African trade in goods, including aggregate data on exports and imports, commodity composition, and trade within five regional economic communities (AMU, COMESA, ECCAS, ECOWAS and SADC).

Contrary to what has been estimated in most of the literature reporting Africa’s intra-regional merchandise exports share to be around 12 per cent of US $384 billion in 2009, equivalent to US $46 billion (e.g. WTO’s WTR 2011), this paper estimates that African economies’ merchandise exports to each other totalled almost US $57 billion at the end of the last decade, about 16 per cent of their total exports (up from 11 per cent at the beginning of the decade). While the discrepancy between the two aggregate percentages could be explained by different methodological approaches, the key messages of the paper should be found behind this average.

By dissecting what lies behind this overall trend, the authors find that the usual suspects, namely the primary commodities, particularly petroleum and gold, are the largest product categories traded within Africa. However, more importantly the authors note that African economies also trade processed goods with each other, and they remark that other sources show that manufactures were more important in intra-African exports (40 per cent share in 2004-2006) than in total exports (18 per cent). On top of this important finding within the context of Africa’s quests to achieve structural change, intra-African exports do show some diversity: The top ten products (defined at the four-digit level of the HS) account for less than half the total, while the remaining 1,219 four-digit product groups together accounted for 57 per cent of total exports. The paper further finds that in 44 cases (over two-thirds of the total) intra-African exports have grown more rapidly than exports to the rest of the world. Finally, in 22 of these products intra-African exports are in the tens of millions of dollars, and in seven they are in the hundreds of millions.

Although there are obvious regional differences, the paper nonetheless finds that within Africa, intra-REC exports tend to be more diverse than exports to other African countries. Further, intra-REC exports are more likely to consist of processed goods rather than primary commodities, unlike exports to non-REC members. With the exception of SADC, the fastest-growing export products are dominated by processed goods.

How to make bolstering intra-Africa trade and structural economic transformation happen?

The endorsement in 2012 by African Heads of State and Government of an African Union Plan for Boosting Intra-African Trade and fast tracking the Continental Free Trade Area (CFTA) by 2017 may offer great opportunities for value addition and structural transformation according to UNECA and AU.

Without a doubt policy interventions are required to improve African firms’ access to other African markets. The limited implementation of the previously signed regional integration agreements of the RECs, recognized as the building blocks of the African Economic Community, has unfortunately prevented many profitable opportunities for intra-African trade from materializing.

The AfDB is lending support to this process through the design of a multi-year Tripartite Capacity Building Programme (TCBP). The TCBP aims to provide technical assistance and capacity building for the COMESA-EAC-SADC Tripartite Free Trade Area, a core building block for establishing the Continental Free Trade Area (CFTA) and a common market by 2020. Through various activities and processes, the Capacity Building Programme will help boost intra-Tripartite trade from 10 per cent in 2010 to 18 per cent by end of 2020, in line with recent estimates. Activities within the capacity-building pillar of the Bank’s Regional Integration Strategy is complemented by its on-going effort to address Africa’s infrastructure deficit through improved transportation links that also incorporate trade facilitation measures, which are essential to address the very low levels of trade in many landlocked countries.

To seize the opportunity which Intra-regional trade provides in terms of diversification and industrialization, new thinking is required to enhance the continent’s industrial capacity based on the lessons learnt from failures of development strategies/paradigms of previous eras. Perhaps one source of inspiration for the next generation of policy design could be the successful development trajectories of the East Asian Tigers, especially South Korea, which managed to benefit from inclusive growth by making its trade accessible to the global market?

The elusive quest for industrialization and Structural Economic Transformation

During the last 10 years the African continent has been growing far above the average growth rate of the previous two decades, despite the global financial crisis and the great trade collapse. Nevertheless, the relative high growth rates have, as in the 1960s, largely been driven by commodity export volumes to the rest of the world and the associated increasing commodity prices. The increase in commodity prices has in turn mainly been due to the rise of the BRICS and other emerging economies.

In the post-independent era of the 1960s and 1970s, many African countries attempted to diversify their economies and to industrialize through import substitution and industrialization development strategies based on protected regional markets. This strategy did not achieve its intended objectives for a number of reasons that are beyond the scope of this blog post. Suffice it to say that the strategy came to an end with the outbreak of the debt crisis in the mid-1980s, followed by the introduction of the Washington Consensus policy prescriptions, leading to a more outward-oriented outlook. During this period, the attention of African policy-makers shifted from regional integration to the implementation of structural adjustment and economic liberalization programs.

Intra-African Trade: The magic bullet towards achieving industrialization and structural change?

Since the establishment of the Organisation of African Unity in 1963, regional integration has been seen as a major policy tool to achieve the objectives of accelerating industrialization, diversifying economies, and developing regional infrastructure. Since then, a number of regional integration initiatives in Africa have been introduced (see for instance the 24 intra-regional Preferential Trade Agreements in force as of 2010), but it was not until the Abuja Treaty in 1991 that existing regional groupings were revitalized, initiating a process leading towards the eventual realization of an African Economic Community envisioned through six stages of continuously deeper integration. Each of the first three stages has experienced implementation challenges.

Does old wine in a new bottle ever go bad?

Despite the challenges to regional integration, intra-African trade is dominated by industrial products. This is the key finding of a new paper, which was commissioned by the Regional Integration and Trade Division of the African Development Bank (AfDB). It was prepared by a team from the Overseas Development Institute (ODI) comprising Christopher Stevens and Jane Kennan. The paper argues that increasing exports to other African countries could improve diversification (for example in agriculture), provide opportunities for learning, and in particular promote transformation in poor, landlocked countries. This is demonstrated in the paper by the provision of a snapshot of intra-African trade in goods, including aggregate data on exports and imports, commodity composition, and trade within five regional economic communities (AMU, COMESA, ECCAS, ECOWAS and SADC).

Contrary to what has been estimated in most of the literature reporting Africa’s intra-regional merchandise exports share to be around 12 per cent of US $384 billion in 2009, equivalent to US $46 billion (e.g. WTO’s WTR 2011), this paper estimates that African economies’ merchandise exports to each other totalled almost US $57 billion at the end of the last decade, about 16 per cent of their total exports (up from 11 per cent at the beginning of the decade). While the discrepancy between the two aggregate percentages could be explained by different methodological approaches, the key messages of the paper should be found behind this average.

By dissecting what lies behind this overall trend, the authors find that the usual suspects, namely the primary commodities, particularly petroleum and gold, are the largest product categories traded within Africa. However, more importantly the authors note that African economies also trade processed goods with each other, and they remark that other sources show that manufactures were more important in intra-African exports (40 per cent share in 2004-2006) than in total exports (18 per cent). On top of this important finding within the context of Africa’s quests to achieve structural change, intra-African exports do show some diversity: The top ten products (defined at the four-digit level of the HS) account for less than half the total, while the remaining 1,219 four-digit product groups together accounted for 57 per cent of total exports. The paper further finds that in 44 cases (over two-thirds of the total) intra-African exports have grown more rapidly than exports to the rest of the world. Finally, in 22 of these products intra-African exports are in the tens of millions of dollars, and in seven they are in the hundreds of millions.

Although there are obvious regional differences, the paper nonetheless finds that within Africa, intra-REC exports tend to be more diverse than exports to other African countries. Further, intra-REC exports are more likely to consist of processed goods rather than primary commodities, unlike exports to non-REC members. With the exception of SADC, the fastest-growing export products are dominated by processed goods.

How to make bolstering intra-Africa trade and structural economic transformation happen?

The endorsement in 2012 by African Heads of State and Government of an African Union Plan for Boosting Intra-African Trade and fast tracking the Continental Free Trade Area (CFTA) by 2017 may offer great opportunities for value addition and structural transformation according to UNECA and AU.

Without a doubt policy interventions are required to improve African firms’ access to other African markets. The limited implementation of the previously signed regional integration agreements of the RECs, recognized as the building blocks of the African Economic Community, has unfortunately prevented many profitable opportunities for intra-African trade from materializing.

The AfDB is lending support to this process through the design of a multi-year Tripartite Capacity Building Programme (TCBP). The TCBP aims to provide technical assistance and capacity building for the COMESA-EAC-SADC Tripartite Free Trade Area, a core building block for establishing the Continental Free Trade Area (CFTA) and a common market by 2020. Through various activities and processes, the Capacity Building Programme will help boost intra-Tripartite trade from 10 per cent in 2010 to 18 per cent by end of 2020, in line with recent estimates. Activities within the capacity-building pillar of the Bank’s Regional Integration Strategy is complemented by its on-going effort to address Africa’s infrastructure deficit through improved transportation links that also incorporate trade facilitation measures, which are essential to address the very low levels of trade in many landlocked countries.

To seize the opportunity which Intra-regional trade provides in terms of diversification and industrialization, new thinking is required to enhance the continent’s industrial capacity based on the lessons learnt from failures of development strategies/paradigms of previous eras. Perhaps one source of inspiration for the next generation of policy design could be the successful development trajectories of the East Asian Tigers, especially South Korea, which managed to benefit from inclusive growth by making its trade accessible to the global market?


Comments

Cleopas Ndorere - 05/06/2013 15:48
Further,analyisis is required on why intra-REC exports are more likely to consist of processed goods rather than primary commodities, unlike exports to non-REC members. Examine the question of trade deflection.Given that many countries in African RECs have other bilateral trade arrangements with developed countries ,there is a possibility that they import semi finished goods and repack them for duty free export to members with in their RECs. This is possible because of the weak Rules of Origin (RoO) and the difficulties in administering the RoO.
Vanguard one - Burkina Faso 31/05/2013 01:09
this is a brilliant peie, very closely relted to a report i recentlty submitted, i appreciate the link to the various reports and data. keep it up
Charles Scott - Zimbabwe 29/05/2013 16:05
Reply to Lear. These reasons for slow pace of regional integration are well documented. I can some up these are:
fear of losing revenue, limited political will although here and there pronounciation are made but not followed with implementation, limited financial and human resources to implement these integration programs, poor coordination at both national and REC level insufficient stakeholder consultation and the most notable culprit is multiple membership.
However I would like to say there are notable efforts to do resolve some of these challenges such as the last one mentioned above. Here I can refer to the Grant FTA being refered in the text, being negotiated with COMESA, EAC and SADC. The success of this FTA plan will likely provide impetus for other African RECs to follow towards the successful realisation of the Africa Economic Community.
Leah Kasera - Tunisia 22/05/2013 13:23
Great article. It may be useful in future to hold an inter-REC consultations sessions with leaders to review the reason for the stalling or the slow pace of realising the 6 stages of deeper integration for the realization of the AEC. Perhaps the next meeting of CEOs of RECs would be a good place to start. The message should be the 'the cost of non-integration'. Making a business case with examples, and an argument that protectionism can only slow or stall economic growth.
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