AfDB at the WEF 2011-Bridging Borders: Fostering Regional Integration
AfDB at the WEF 2011-These are the African Development Bank (AfDB) comments on the session entitled “Bridging Borders: Fostering Regional Integration” at the World Economic Forum on Africa in Cape Town on 6 May 2011.
Session Talking Point:
“Intra-Africa trade remains low at 10%, compared with 40% for North America and 60% for Western Europe. How can political will and investment in cross-border infrastructure help expedite greater regional integration?”
Building political consensus is fundamental for success for intra-Africa trade. The political obstacles, particularly sovereignty, frequently hold sway over the economic arguments. Regional integration requires a high level of trust between countries.
Regional Trade Agreements (RTA) in Africa remain limited, despite many declarations. But proper implementation of RTAs and trade policy, combined with regional regulatory harmonization is crucial for progress, particularly for boosting private sector activity.
Improved regional infrastructure – transport, power and communication – is essential. Africa’s poor infrastructure is a drag on its ability to trade within the continent and the wider world.
To unlock Africa’s potential, partners must tackle difficult trade reform, and boost domestic resources for project preparation and investment, particularly implementation of transformative RI projects
To accompany this process, the AfDB’s African partners need to find win-win solutions to overcome the political and economic challenges. These include sovereignty bottlenecks, competing national and regional interests, high costs for some countries, and compensation for those who might lose out.
The AfDB will continue to press for regional integration and political consensus. It will also pay greater attention to help partners to implement RTAs, to harmonize standards, legal and regulatory frameworks and ensure effective enforcement.
Also, the AfDB must set up financing mechanisms that can facilitate regional investments and compensate any loser, similar to processes in place within the European Union, for instance.
We should use our policy advice, expertise and aid innovatively to help facilitate intra-regional trade. Aid for Trade should be scaled up to close the infrastructure gap and provide trade finance.
The importance of regional integration
African leaders have long recognized the importance of regional integration in boosting Africa’s economic development. They have consistently expressed their desire to deepen regional integration through a common market for goods and services. But finding practical solutions to resolve political economy issues will be essential for success.
Areas needing attention include the conflict between regional and national level priorities, such as energy security, migration, and so on. Also there is the question of the political sensitivity of AU-driven continental priorities versus country sovereignty
In addition, there is the question of regional integration benefits that accrue over long political cycles. Are there ways of breaking up processes that can meet political timetables – e.g. signature of key studies, phased development of corridors, and so on?
The AfDB is pursuing innovative ways to help partners address these political economy issues, such as through brokering political consensus, legal enforcement mechanisms and learning from other regions that advanced their regional integration such as the EU, Latin America and Asia.
Progress on Africa Regional Trade Agreements
Only a small proportion of RECs have achieved their targets for trade among member. Similarly, few have made concerted efforts toward common labor laws, free movement of labor, and rights of residence and establishment.
Many are lagging on almost all critical elements necessary for the success of the next phases of integration such as customs and monetary unions.
The number of RECs and other regional bodies on the continent has grown, with many countries members of multiple arrangements. Even though some RECs (such as ECOWAS and UEMOA) have taken significant steps towards rationalization, the issue remains largely unaddressed. The result is a complex web of regional organizations. Such multiplicity has drawbacks such as fragmented markets and approaches to regional integration; inconsistent objectives and conflicting operational mandates; contradictory obligations and loyalties for member countries; increased financial cost of country membership; duplication of programs, and rivalry for donor funds.
Problems due to poor infrastructure are made worse by policy measures and regulatory environments. Constraints include poorly-developed financial markets; the absence of cross-border financial instruments; complex and lengthy regulatory processes hampering the private sector; high tariffs; complex customs arrangements; and limited regional harmonization of policies, regulations, and procedures. Poor transit systems and numerous informal roadblocks along trade corridors create more obstacles.
Inefficient customs at border posts often result in long delays and high trade costs, including unofficial payments.
Delays at African customs are the longest in the world. Clearing customs at the Victoria Falls border post from Zambia into Zimbabwe along the north-south corridor can take up to 36 hours. Trade is reduced, and the situation is especially hard for Africa’s many land-locked countries.
Crossing a transit territory adds another 4%to trade costs irrespective of the distance. . Multiple roadblocks on major roads cause further delays. The highway between Lagos and Abidjan has 69 official checkpoints, the equivalent of seven checkpoints every 100 kilometres. Another example is found in the EAC where there are 27 police control posts between the Ugandan border and the Kenyan port of Mombasa.
Well functioning trade finance systems are also crucial. They support intra-regional trade by helping African producers obtain inputs and exporters fund their exports within the region. For exporters, trade credit bridges the time between winning the export order and getting paid.
Availability of trade credit is important. Some African countries had their trade credit lines interrupted during the 2008 trade crisis, and access to trade finance was still hard during 2009. More liquidity became available in 2010 but the crisis had reduced demand.
The lack of production facilities in many African countries prevents or limits the establishment of a diversified manufacturing base.
Even so, some countries have made good progress towards an enabling environment for investment and trade, according to the World Bank’s 2010 Doing Business report.
Rwanda was one of the world’s leading reformers in terms of cross-border trading and easing structural bottlenecks. Still, African companies face greater regulatory and administrative burdens and less investor protection than elsewhere in the world so there is room for much improvement.
In addition, African business suffers from low productivity due to inefficient or outdated technology regarding production, machinery, management systems, agronomic procedures, etc.
The problem is compounded by a lack of working capital, leading to shortages of raw materials, inefficient production runs, and so on.
Trade Landscape and Trade Facts
Intra-African exports represented 8.7% of the region’s total exports while intra-African imports represent 9.6 %, of total imports in 2010, according to the World Trade Organization. This proportion is substantially higher for sub-Saharan Africa (around 12%) than for North Africa (around 3%). North Africa’s intra-regional trade has historically been lower than that of sub-Saharan Africa.
Intra-African exports are more diversified than Africa’s exports to the rest of the world. Non-oil agricultural goods and manufactures account for about 60% of Africa’s exports within the region, but its share of world exports is only 28%, suggesting that Africa should look at value-added and diversified exports.
Intra-African exports more than quadrupled between 2001 and 2008, from USD11.8 billion to USD47.7 billion, with sub-Saharan trade showing the biggest increase in the world.
Intra-African trade volume is underestimated due to informal trade. In West Africa, for example, the informal sector is estimated to account for 20% of national activity in Nigeria to as high as 70% in Benin. The value of East African informal trade is estimated at $206m.
- Energy: Electricity is a considerable cost to producers and supply is unreliable with many exporters citing stoppages as one of their biggest problems. Many have to rely on generators as a back-up, leading to serious cost increases.
Transport costs are the highest in the world, because of poor roads and railways, and are a serious impediment to intra-African trade, and African transport costs are a serious impediment to intra-African trade; Freight costs represent 13% of African import costs, compared to 9% for Asia, 7.5% for Latin America and 5% for western countries.
For instance it takes two to three weeks for copper to reach the port of Durban from the DRC, a distance which could be covered in Europe in two days.
AfDB’s support to the Mombasa-Addis Corridor is expected to increased trade by 500% by 2017. Trade volumes predicted to rise from USD48m to USD200m
- ICT: Poor telecommunications and high costs are constraints on the private sector and export development. For example, in 2007, the average cost of a three minute phone call to the US was $0.14 for Africa compared to the world average of $0.09.
How can we help mitigate the risks of regional infrastructure projects? What kinds of financial instruments could help mitigate these risks?
Processes include: Innovative structuring of projects to address investor’s needs, particularly commercial risks Amending MDB credit policy resources. Use of local and foreign currency bonds Private equity participation. Sovereign wealth funds. Participation by emerging South partners. Mitigation of commercial and political risk. First loss portfolio guarantee
Some AfDB actions supporting Regional Trade Initiatives
The Bank has – directly or indirectly – helped African countries tackle the impediments to intra-African (or international) trade through various programs and policies, including the following:
- Infrastructure development: In line with the Bank’s 2008-2012 Medium Term Strategy, infrastructure has been a priority area of financing, absorbing over half of the Bank’s resources (USD 6 billion in 2009).
- Trade facilitation: The AfDB has played an important role in promoting intra-African trade through its Regional Integration Strategy centered on institutional capacity building and regional physical infrastructure The AfDB’s focus on trade facilitation is a natural complement to its traditional and growing role as a financier of regional transport infrastructure projects.
- Trade finance: The Bank set up a USD 1 billion Trade Finance Initiative in March 2009 to allow African commercial banks and DFIs to support trade finance operations when credit was limited by the global financial crisis. It followed this with a USD500 million investment in the Global Trade Liquidity Program in 2010, serving as a catalyst to mobilize USD15 billion of revolving trade finance operations over a three year period for the benefit of RMCs.
- Private sector development: The AfDB is a fervent supporter of private sector development in Africa. Gross approvals of private sector projects increased 22% in 2010 to USD 6.2 billion.