Click here to read Part 2 of this discussion paper.

Regional integration has received much support from African governments. Many African countries, since independence, have adopted regional integration as an important component of their development strategies and concluded a very large number of regional integration arrangements (RIAs), several of which have significant membership overlap. There are however few success stories. African RIAs are generally ambitious schemes with unrealistic time frames towards deeper integration and in some cases even political union. More often than not, African RIAs are usually neighbourhood arrangements. The African paradigm is that of linear market integration, following stepwise integration of goods, labour and capital markets, and eventually monetary and fiscal integration. The starting point is usually a free trade area, followed by a customs union, a common market, and then the integration of monetary and fiscal matters to establish an economic union. The achievement of a political union features as the ultimate objective in many African RIAs.

The issue of economic integration in Africa will be explored in two parts. Part 1 discusses the rationale and need for such integration, the history of economic integration in Africa, various initiatives and their current state. It also evaluates the efficacy of economic integration initiatives in Africa. The paper argues that a linear model of economic integration, i.e. from Free Trade Area (FTA) to Economic Union, is inadequate to address Africa’s needs, and an alternate, inclusive and holistic model is required.  Part two of this paper will explore what could such an approach be.

Rationale for economic integration in Africa

Regional economic integration has been at the forefront of economic and political discourses in Africa. African leaders have committed to implementing the regional economic integration agenda, recognising that without it most African countries, many of them land-locked, have small domestic markets that restrict economic growth and limited individual negotiating power. Most African countries have low per capita income levels and small populations which result in limited markets. Small domestic markets and continental fragmentation translates into a lack of scale economies in the production and distribution of goods and services. Access to regional and international markets on more favourable terms allows trade to be an engine of economic growth. Improved efficiency within a country’s economy through reduced tariff and non-tariff barriers (NTBs), fewer barriers to market entry and lower transaction costs, including for transport, stimulates investment. This will contribute to improved agricultural production and economic diversification, and ultimately lead to increased food security and improved welfare, including in the areas of health and education. The need for effective implementation of the regional economic integration agenda, as a path to job creation and poverty reduction, is critical if African countries are to become internationally competitive.

History of economic integration in Africa

Africa’s geo-political configuration has been largely determined by the European colonial powers. The immediate post-independence era was characterised by a strong commitment to economic planning. The lynchpin of this approach was the belief that development would be promoted by industrialisation. The ambition of African leaders to integrate Africa, and to develop the continent through import substitution industrialisation, was a key feature of the immediate post-colonial period, and provided the rationale for the Lagos Plan of Action (LPA).⁽²⁾ The LPA was an initiative of the Organisation of African Unity (OAU), adopted by heads of state in April 1980, and keenly supported by the United Nations Economic Commission for Africa (UNECA). A decade later in 1991, the Abuja Treaty provided strong support for the African integration agenda. The Treaty emphasised African solidarity, self-reliance and an endogenous development strategy, through industrialisation.

The proposed framework for African integration and continental industrialisation was the division of the continent into regional integration areas that would constitute a united African economy, the African Economic Community. In order to achieve this, UNECA supported three regional integration arrangements: the Economic Community of West African States (ECOWAS) for West Africa, which was established in 1975, predating the LPA; the Preferential Trade Area (PTA) covering East and Southern Africa, which was the precursor of the Common Market for Eastern and Southern Africa (COMESA); and the Economic Community of Central African States (ECCAS) for Central Africa. The Arab Maghreb Union (AMU) was established in 1989, completing continental coverage.⁽³⁾

The Southern African Development Co-ordinating Conference (SADCC) was established in 1980, by the so-called front line states with the specific aim of reducing economic dependence on apartheid South Africa, which was still excluded from the African integration plan. However, in anticipation of South Africa’s democratic transition in the early 1990s, SADCC became the Southern African Development Community (SADC) in 1992 and South Africa joined SADC in 1994.⁽⁴⁾ SADCC was not a market integration arrangement; the front line states constituting the arrangement adopted a broad development mandate. Although the SADC Treaty (and subsequently the SADC Trade Protocol) does not articulate a detailed plan for integration, the detail was provided in the Regional Indicative Strategic Development Plan (RISDP) of 2003.⁽⁵⁾

This strategic plan articulates the roadmap for SADC’s integration and provides for the establishment of a free trade area by 2008, a customs union in 2010, a common market in 2015, a monetary union in 2016 and the introduction of a single currency in 2018. There is still a long way to go before this plan materialises as reality. Although the RISDP is not a legally binding instrument, it enjoys significant political legitimacy and is recognised as the strategic plan for SADC’s integration. The linear approach was also adopted by the East African Community (EAC), established in 1997, and by ECOWAS in West Africa. Progress in ECOWAS to establish a free trade area has been very slow and the customs union is still a work in progress.

The Southern African Customs Union (SACU), often acknowledged as the oldest functioning customs union in the world, has a very specific history.⁽⁶⁾ It was not established as a result of a decision by sovereign states, but is the outcome of a decision by a colonial power (Britain) to establish a customs union consisting of the Union of South Africa (now the Republic of South Africa), Basutoland (now Lesotho), Swaziland and Bechuanaland (now Botswana). Namibia, as a part of South West Africa under South Africa’s rule, was part of SACU before 1990; however it joined SACU as an independent country in 1990. SACU now consists of these five member states. Despite its history spanning more than a century, SACU is still a customs union in progress. South African agencies still manage the affairs of the customs union related to the implementation of the common external tariff. The SACU Tariff Board and national bodies which would manage this function for SACU are provided for in the 2002 SACU Agreement, but have not yet been established. SACU currently faces many challenges: declining revenues, the need to revamp the revenue sharing model - a major flash point, achieving inclusive growth and addressing high levels of unemployment in the region are some of them.

Africa’s economic integration reflects a strong focus on liberalisation of trade in goods in the establishment of free trade areas and customs unions. Trade in services becomes a feature of the regional integration model when the stage of the common market is reached, yet, to date, services have received very little attention in formal African integration arrangements. This is also true of African countries’ foray into the regional trade agreement (RTA) arena with external partners. The inclusion of services (issues such as investment, competition policy and government procurement) is notable by its absence, and has been contentious to say the least. The neglect of the trade in services agenda is somewhat ironic in Africa where infrastructure services such as transport and telecommunications adversely affect the costs of doing business, and pose obvious challenges to the regional and continental integration.

Regional integration and Africa’s economic and trade performance

Africa’s regional integration record is not impressive. The fact that the large number of Regional Integration Agreements (RIA) have done very little to promote intra-regional trade raises questions about the relevance of linear integration models for addressing the real challenges that inhibit regional trade. What factors, in spite of numerous RIA and integration efforts, have caused Africa’s relatively dismal economic performance over the last few decades?

Contemporary research in the field of economic integration has been focusing on this question for a while. This disappointing economic performance can be attributed, partly, to the disproportionate dependence of African economies on very few export products – primary commodities representing more than 80% of Africa’s total exports in recent years – and one or two sectors.⁽⁷⁾ Such high dependence on commodities creates severe constraints on growth due to commodity price volatility, a factor which is external to these countries and beyond the scope of their domestic policies.⁽⁸⁾ However, many African countries lack the industrial capacity for diversified manufactured goods, and are faced with inadequate infrastructure to support trade.⁽⁹⁾ Although Sub-Saharan Africa is one of the fastest growing regions in the world at present,⁽¹⁰⁾ “[t]his growth appears therefore to be intrinsically fragile and based on distorted factors rather than sound economic fundamentals.”⁽¹¹⁾ Consequently, it has been argued that a change in trade composition, coupled with industrialisation, an improvement in infrastructure, and structural transformation, would be key processes in triggering sustainable growth paths in Sub-Saharan Africa.⁽¹²⁾

The situation of intra-regional trade in Africa is dismal. More than 80% of its exports are destined for markets outside Africa, the European Union and the United States of America being the most important export markets.⁽¹³⁾ Asia, in particular China and India, is also an important market for Africa’s exports. In addition, Africa imports more than 90% of its goods from countries outside the continent, despite resource endowments which provide the potential to supply its own import needs.⁽¹⁴⁾ Integration of very small and poor economies results in a relatively small regional market. Any market integration will facilitate some economies of scale benefits, thereby promoting a more competitive industrial development, however, in practice small regional integration constrains the benefits from economies of scale.⁽¹⁵⁾

The question of competitiveness

In the global scenario, trade competitiveness is crucial. A country’s trade performance, export sophistication and diversification are important indicators of its competitiveness. Considering various RIAs in Africa, SADC is the best performing region with three of the top five most competitive countries in Sub-Saharan Africa, namely South Africa, Mauritius and Botswana.⁽¹⁶⁾ These countries have relatively conducive business environments with good institutional frameworks, efficient goods and labour markets, and mature financial markets. However, economic inequality, poverty, health and limited technological capability are a cause of concern. Inefficient government bureaucracy, an inadequately educated workforce, poor infrastructure and the lack of access to finance are important factors which hamper the ease of doing business in this region.

COMESA includes two of the top five best performing countries in Africa (Mauritius and Rwanda),⁽¹⁷⁾ and also performs well in relation to other African regions. COMESA countries, in general, have strong institutions and well-developed financial markets, as well as efficient goods and labour markets. Factors hindering business in the region include access to financing, corruption, high tax rates, and inefficient government bureaucracy. EAC, one of Africa’s most successful regional economic integration initiatives, has efficient financial and labour markets and sound institutions. However, the quality of infrastructure, macroeconomic stability, health and education indicators and technological readiness is poor in the bloc. Countries within ECOWAS perform worst on the Global Competitiveness Index indicators in comparison to other RIAs. They are the strongest on institutions and innovation, and the weakest in the areas of health, education, and infrastructure development. Some of the most problematic factors for doing business in the bloc include access to finance, corruption, burdensome tax regulations, and inadequate supply of infrastructure.⁽¹⁸⁾

An important objective of RIAs is to reduce the transaction costs of trade. African RIAs have focused very much on the import tariff, aiming to achieve duty-free trade in goods among member states. The tariff is undeniably an important barrier but it may not necessarily be the most important one. Multiple border crossings for goods to reach land-locked countries add significantly to the transaction costs of intra-regional trade.⁽¹⁹⁾ Also, inefficient border procedures and corruption are significant hindrances to intra-regional trade. It is encouraging to note that about half of all trade facilitation reforms made in 2009/2010 took place in Sub-Saharan Africa and the Middle East and North Africa, many motivated by regional integration efforts.⁽²⁰⁾ Easing trade regulations is increasingly important for business in a globalised world, as excessive documentation, burdensome customs procedures, inefficient port operations, and inadequate infrastructure all lead to additional costs and delays for exporters and importers, which ultimately hampers trade.⁽²¹⁾

However, it remains more onerous, costly, and time-consuming to export and import goods and services in Africa than in all other regions, with the possible exception of South Asia which requires more documentation to export and import than some African regional economic communities (RECs). Trade facilitation therefore remains important for the promotion of Africa’s intra-regional and global trade performance. Though import tariffs may not be the most important border concern, this measure highlights the specific challenges of most African economies related to a weak and narrow tax base. Trade taxes are important sources of revenues for most African governments.⁽²²⁾ The poor implementation of tariff phase-downs in some RIAs can be traced down to this potential loss of revenue.⁽²³⁾

The second step in the linear model of regional integration is the formation of the customs union. It brings in new challenges, such as setting up supra-national institutions, and managing a common external tariff. Arrangements for the collection and distribution of customs revenue could prove to be contentious, specifically taking into account the complex compromise that is necessary within a diverse group of countries. This challenge is complicated in cases where a regional hegemony may have very specific industrial policy objectives informing its position on the import tariff. In some regional groups, significant divergence in perspectives on the role of the import tariff exists; for some, the import tariff is an important source of government revenue, while for others it is an instrument of industrial policy to be used selectively to protect specific industries.⁽²⁴⁾

In this context, the importance of NTBs cannot be underestimated. The most important NTBs hindering regional trade in the east and southern African region (COMESA, EAC and SADC) include customs procedures and administrative requirements, technical standards and the lack of physical infrastructure. NTBs are of special relevance to agriculture within the region. Cumbersome documentation requirements, stringent standards and inefficient road and rail networks cause time delays and increase the cost of intra-regional trade.⁽²⁵⁾ Though agreement on services is not essential for the conclusion of free trade area or customs union, services are crucial in this context. Services contribute significantly to economic activity and play an important role in facilitating trade in goods. The lack of services infrastructure can restrict competitiveness and increase trade transaction costs.

Reduction in transaction costs will result in the expansion of market access but it cannot ensure economic growth and development. Enhanced market access without enhancement of the capacity to produce goods and services to benefit from those opportunities will fail to produce higher economic growth. Most of the constraints to economic growth of African economies are on the supply side. Challenges related to enhancing supply-side capacity include improving the quality of governance, developing institutional capacity, investing in infrastructure and developing the associated regulatory infrastructure, and creating a business environment that will support domestic business to develop, and encourage foreign direct investment.⁽²⁶⁾ It is possible to develop policy regulation and institutional capacity, in areas such as services regulatory reform, investment and competition policy, at a national level. It may be argued that a deeper regional integration agenda can assist in addressing the national-level supply-side constraints by anchoring domestic policy and regulatory reform processes. However, low income economies often have weak policy and institutional infrastructure, and capacity constraints to manage these domestic policy processes. Being unable to develop, manage and implement a comprehensive regional integration agenda themselves, weak states may well be stumbling blocks to the development of robust rules-based RIAs.

Africa and rule-based RIAs

In Africa, there are numerous political commitments to ambitious regional integration agendas, which often conflict or overlap with each other. A crucial question is that whether Africa’s regional integration experience demonstrates commitment to rules-based governance or whether RIAs are perceived as rules-based dispensations by their member states.

African RIAs have not been very successful in achieving successive steps of the linear model of regional integration. Delays in the ratification and domestic incorporation of regional legal instruments by member states, failure to implement specific provisions of the agreements such as negotiated tariff reductions, are common in RIAs. Sanctions for lack of implementation are generally absent in African RIAs. Regional institutions, established in RIAs, are envisaged to contribute to the implementation of these agreements. However, these institutions have not been able to play a robust role as an external agency to ensure national compliance, domestic policy synchronisation and legal and institutional development as may be required by the RIAs. The case of the SADC Tribunal can be considered in this context. Following a decision by the Tribunal that Zimbabwe was in breach of Article 6 of the SADC Treaty, Zimbabwe expressed its dissatisfaction with the decision, and as a result, at the August 2010 Summit, the SADC Tribunal was suspended.⁽²⁷⁾

While considering deeper regional integration within Africa, an important issue is the perceived loss of sovereignty that such an agenda involves. This issue is part of the broader ‘policy space’ debate. It must be acknowledged that sovereignty is a feature of the state and not the government. Governments, acting on behalf of their respective states, conclude RIAs and thus the issue of loss of sovereignty is often more perceived than real. However, legitimate concerns about challenges to national sovereignty may well arise in situations where supra-national bodies act in an ultra vires manner or usurp powers over matters best left to legitimate national agencies.

In the case of Africa, when it comes to regional integration, a major concern is weak institutions and vaguely defined mandates. Even the compliance monitoring mechanisms are generally weak in most RIAs and completely absent in some of them. It is a common understanding that once legal arrangements have been established to pursue a common regional integration agenda, then transparency, certainty, predictability and respect for the rules should follow. Compliance should be monitored and non-compliance should be addressed. In short, this refers to the application of the rule of law at inter-state level. It seems fair to conclude that the rules-based nature of RIAs is not yet accepted by many African governments.⁽²⁸⁾

Rule-based governance is not only significant in relation to the role of governments in regional integration, but also to other stakeholders such as the private sector. Though governments enter into RIAs; it is the private sector that is responsible for the bulk of economic activities involved in regional integration. Transparent rules and a supportive economic environment are important for private sector activities in this context. This is compounded by the limited role of the private sector in the design of African RIAs. The feedback loop of private sector and other stakeholders is weak, and RIAs are mostly fully state-driven. There is no doubt that the private sector can provide important inputs into state matters of trade and technical issues like Rules of Origin.

Conclusion

There is a strong rationale to pursue a regional integration agenda in Africa. Though regional integration has been at the forefront of the policy agenda of many African countries, RIAs have not been able to deliver the gains expected from them; this is attributable, in large part, to inefficient implementation rather than inadequate institutions. The linear model of economic integration, from FTA to Economic Union, is not feasible for African realities. The unique challenges Africa faces calls for an alternate and more inclusive approach to economic integration. What could be such an approach? This is the key question that will be explored in the second part of this paper.

Click here to read Part 2 of this discussion paper.

Written by Sudhanshu Sharma ⁽¹⁾

NOTES:

(1) Contact Sudhanshu Sharma through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Gaylor Montmasson-Clair and was edited by Nicky Berg.
(2) McCarthy, C., 1999. “Regional integration in Sub-Saharan Africa: Past, present and future” in Oyejide, A., Ndulu, B. and Greenaway, D. (eds.). Regional integration and trade liberalization in Sub-Saharan Africa (Volume 4: Synthesis and Review), Palgrave Macmillan: Basingstoke.
(3) Ibid.
(4) Ibid.
(5) Ibid.
(6) Ibid.
(7) Sindzingre, A.N., ‘The conditions for long-term growth in sub-Saharan Africa: China as a model, a constraint and an opportunity’, Cahiers du Centre, Working Papers no. 9, July 2011, http://www.durkheim.sciencespobordeaux.fr.
(8) Ibid.
(9) ‘Assessing regional integration in Africa IV: Enhancing intra-African trade’, United Nations Economic Commission for Africa, 2010, http://new.uneca.org.
(10) ‘Doing Business 2011: Making a difference for entrepreneurs. Southern African Development Community (SADC)’, World Bank, 2011.
(11) Sindzingre, A.N., ‘The conditions for long-term growth in sub-Saharan Africa: China as a model, a constraint and an opportunity’, Cahiers du Centre, Working Papers no. 9, July 2011, http://www.durkheim.sciencespobordeaux.fr..
(12) Ibid.
(13) ‘Assessing regional integration in Africa IV: Enhancing intra-African trade’, United Nations Economic Commission for Africa, 2010, http://new.uneca.org.
(14) Ibid.
(15) Ibid.
(16) ‘The Global Competitiveness Report 2012–2013’, World Economic Forum, 2012, http://reports.weforum.org.
(17) Ibid.
(18) Ibid.
(19) McCarthy, C., 2007. “Is African economic integration in need of a paradigm change? Thinking out of the box on African integration”, in Bösl, A., et al. (eds.). Monitoring regional integration in Southern Africa (Yearbook Vol. 6 – 2007). Trade Law Centre for Southern Africa: Stellenbosch.
(20) ‘Doing Business 2011: Making a difference for entrepreneurs. Southern African Development Community (SADC)’, World Bank, 2011.
(21) Ibid.
(22) South Africa and Mauritius are exceptions in this regard – trade taxes contribute a very small percentage of overall tax revenue.
(23) In the case of SADC, the establishment of a free trade area in 2008 was hampered by a lack of implementation of agreed tariff reductions by several countries, due to revenue constraints – Malawi and Mozambique were amongst the countries that were battling to keep pace with their tariff reduction commitments, as a result of government revenue concerns.
(24) McCarthy, C., 2007. “Is African economic integration in need of a paradigm change? Thinking out of the box on African integration”, in Bösl, A., et al. (eds.). Monitoring regional integration in Southern Africa (Yearbook Vol. 6 – 2007). Trade Law Centre for Southern Africa: Stellenbosch.
(25) Viljoen, W., ‘Non-tariff barriers affecting trade in the COMESA-EAC-SADC Tripartite Free Trade Agreement’, Trade Law Centre for Southern Africa, Working Paper, 2011, http://www.tralac.org.
(26) McCarthy, C., 2007. “Is African economic integration in need of a paradigm change? Thinking out of the box on African integration”, in Bösl, A., et al. (eds.). Monitoring regional integration in Southern Africa (Yearbook Vol. 6 – 2007). Trade Law Centre for Southern Africa: Stellenbosch.
(27) Afadameh-Adeyemi, A. and Kalula E., 2011. “SADC at 30: Re-examining the Legal and Institutional Anatomy of the Southern African Development Community”, in Bösl, A., et al. (eds.). Monitoring regional integration in Southern Africa (Yearbook Vol. 10, 2010). Trade Law Centre for Southern Africa: Stellenbosch.
(28) Erasmus, G., ‘Deeper regional integration in SADC. Do the EPAs undermine the process? Trade Law Centre for Southern Africa, Working Paper, 2011, http://www.tralac.org.