Subject: REGIONAL INTEGRATION AND INTRA-TRADE IN SUB-SAHARAN AFRICA
Outline
1. The variety of regional arrangements
2. Theoretical aspects of regional integration: economic costs and benefits
3. The multiplicity of regional agreements in SSA
4. The low-level of intra-trade and integration in SSA
5. North-South preferential schemes: mixed outcomes
6. SSA regional arrangements: limited effectiveness
7. The level of SSA intratrade: lower vs. expected level, given the existence of other determinants?
8. Constraints on integration: infrastructure and others
9. The issue of 'informal' integration
1. The variety of regional arrangements
· Different types of regional arrangements/RAs
Different types in terms of stance towards non members, depth, width (goods, services, and factor mobility).
A RA at individual members discretion: a free trade area/FTA.
Inclusive types=custom union; also the economic union, e.g. the EU, with gains in economic scale and competition effects – but more loss of sovereignty, more commitment, complex policymaking than in a loose Free Trade Area.
Regional integration agreements/RIAs: trade blocs
See World Bank. 2000. Trade Blocs. Trade blocs as policies of 'open regionalism'.
See the WB Global Economic Prospects /GEP 2005: entirely devoted to regional integration: for the WB, multilateral liberalisation far more beneficial than regional trade agreements or arrangements/RTAs.
Categories of regional arrangements:
1) Arrangements with modest aims: a preferential trading arrangement (PTA), i.e. lower tariffs on imports from the partners than from the rest of the world,
Or a Free Trade Area (FTA), i.e. zero tariffs among partners, and positive tariffs with the rest of the world.
2) Arrangements aiming at deeper integration:
- Customs Union=Common External Tariff (CET) by partner countries,
- Common Market (freedom of labour, firms, services and capital),
- Economic union=goes further than a common market= major economic policies coordinated, e.g. fiscal, monetary, possibly a monetary union (see Lyakurwa et al. 1997)
Method of implementation of trade liberalisation (GEP 2005)
Scope of beneficiaries Reciprocal Unilateral
Preferential: selected countries NAFTA, EU, COMESA, GSP, AGOA,
EPAs, other RTAs EBA, Cotonou
Nondiscriminatory GATT/WTO
(MFN): all countries multilateral agreements Autonomous
liberalisation
From UNCTAD. 2007. Trade and Development Report, 2007: Regional Cooperation for Development:
· Free trade agreement or a customs union?
162 RIAs were notified to the GATT/WTO (August 1998), of which 143 FTAs (zero internal tariffs but no harmonization of external tariffs), and 19 customs unions (common external tariff and internal free trade).
Customs unions are more efficient than FTAs, allow greater market integration, but also require more coordination, place tighter constraints on member policies and sovereignty: see Schiff and Winters 2003 Regional Integration and Development.
By definition, regional integration agreements =discrimination against non-members (preferential liberalisation among partner countries only)àinconsistent with the most-favoured-nation (MFN) rule, fundamental principle of the WTO. Compatible with the WTO rules if not aimed at discrimination against non-members.
· Trade agreements exist for a long time: see Estevadeordal and Suominen. 2008. Sequencing Regional Trade Integration and Cooperation Agreements
Trade integration agreements and other international cooperation agreements have proliferated in recent years: rather than being spurred by exogenous forces alone, the two phenomena are path-dependent and endogenous to one another.
· The recent increase in regional arrangements
The new form of blocs and trading arrangements include rich and poor countries: they are 'North-South', they are an attempt to secure 'deep integration' of economic activities
+ issue of convergence/divergence: see Venables 2003 on winners and losers from RIAs.
Historically: after WWII, global move towards trade multilateralisation. Simultaneously, global move towards regional integration. Between 1947 and 1994, 98 agreements: mostly in the 1970s and the 1990s, customs unions or free trade agreements. Creation of WTO in 1995. Simultaneously, 3rd enlargement of the European Community: see Burfisher, Robinson and Thierfelder 2004 Regionalism: Old and New.
Around 230 RTAs in 2004: the number of RTAs has risen 6 fold in 2 decades (see WB GEP 2005).
In the last decades, rapid growth in the number of regional trade blocs: 1/2 of world trade now takes place within trade blocs: see Hoekman and Schiff 2002 Benefiting from Regional Integration.
The recent growth in regionalism is dominated by the EU's activities: the extension of the Single Market Programme to neighbouring countries: of the 87 notifications of RIAs to the WTO since 1990, only 13 had no EU partner: see Schiff and Winters 2003 Regional Integration and Development.
· The trend is towards comprehensive regional agreements: including trade-related and investment-related provisions – extending to services, intellectual property rights, and competition
Most regional FTAs are also investment agreements: out of 58 RTAs in force, 66% contain chapters on investment and another 17% provisions on investment =liberalisation of, not only trade, but FDI: see UNCTAD note on RIAs, 2003, TD/B/com.2/54.
See Whalley 2008. Recent Regional Agreements: Why so Many: sharp growth in the number of regional agreements. Examples of the US, EU, Chinese, Indian and other agreements. The form, coverage and content of these agreements vary considerably from case to case.
These agreements are tariff plus agreements, and in many cases the plus component dominates the tariff part in length of text and likely in significance given that in many cases the MFN tariff rates are sufficiently low that the margins of preference involved have limited impacts on trade.
They have greater significance as process rather than simply instrument-based agreements that limit the use of trade-based interventions (tariffs).
See Pomfret. 2007. Is Regionalism an Increasing Feature of the World Economy?: deep integration: it is the specificity of recent RTAs and different patterns of RTAs in different parts of the world.
See UNCTAD Trade and Development Report/TDR 2007
See WB WDI 2006: Regional trade agreements are proliferating
Source: World Bank 2005. Global Economic Prospects
· It has been coined the 'rush to regionalism', which may be explained by a 'domino effect': FTA negotiations react to one another
FTAs disadvantage non-members, every time one is signed there is pressure from non-member exporters to engage in integration+ economic considerations+ strategic considerations: see Cosbey, 2005, The Rush to Regionalism: Sustainable Development and Regional/Bilateral Approaches to Trade and Investment Liberalization
See Baldwin, 1995. A Domino Theory of Regionalism, CEPR/NBER 4465: the triggering events of regionalism - the U.S-Mexico ETA and the EC's 1992 programmes had nothing to do with the GATT but result from a domino effect
I.e. political equilibria internal to countries, which within a given country balance anti- and pro-membership forces, and determine governments' stances on regional liberalisation.
· An important point: the compatibility of regional trade agreements with WTO rules (i.e. multilateral trade liberalisation)
WTO Annual Report 2007. XI. Committee on Regional Trade Agreements
The promotion of preferential trade relations among selective partners through the establishment of regional trade agreements (RTAs) is today a key trade policy objective of many WTO Members. The overall number of RTAs is increasing steadily, a trend likely to be strengthened by the many RTAs under negotiation. In 2006, 27 new agreements were notified to the WTO; of these, 16 were notified under Article XXIV of the GATT 1994, 11 under GATS Article V and none under the Enabling Clause.32 As of 31 December 2006, 215 active RTAs have been notified to the WTO, of which 148 under GATT Art. XXIV, 46 under GATS Art. V and 21 under the Enabling Clause.
RTAs are not only increasing in numbers but also evolving in their regulatory provisions, scope, coverage and partner composition. Most of the RTAs in the making go beyond tariff concessions in trade in goods to include preferential commitments in services and innovative provisions in areas such as investment, competition policy, trade facilitation, government procurement, intellectual property, electronic commerce and, in some cases, labour and environment. Such innovations may lay the ground for future multilateral rules on these issues; however, the different regulatory regimes put in place through RTAs also make international trade more complex and may undermine the principles upon which the WTO stands, namely transparency, predictability and nondiscrimination. As for the nature of the agreements and their partner composition, the evolving preferential trading landscape seems to know no bounds; layers of preferential trading relations are being established at the bilateral, regional, continental and crossregional level and among partners irrespective of their level of economic development.
(……..) Among all world regions, African RTAs come closest to the traditional concept of regional integration based on the geographical proximity of the RTA partners and political cooperation through economic integration. Many of these integration schemes suggest overly ambitious programmes. Extra-regional preferential trade relations have been based, until recently, on non-reciprocal preferences under schemes such as the GSP, the African Growth Opportunity Act (AGOA), and the EU-ACP programs. The shift to reciprocal preferences will soon extend to most Sub-Saharan countries with the EPAs replacing the long-standing unilateral preferences granted by the EU under its ACP policy. The EPA process has taken centre stage in African RTA developments in recent years and it is likely to significantly affect intra-RTA dynamics given the asymmetry in members' configuration among these agreements and existing integration schemes. The EPA process is supposed to build upon and strengthen existing regional integration arrangements; while this may be the case in Western and Central Africa, where negotiations are taking place with the ECOWAS and CEMAC (with the sole inclusion of Mauritania in ECOWAS and Sao Tomé and Principe and DR Congo in CEMAC),55 it may not be so apparent in Eastern and Southern Africa where the EPA negotiations foresee two configurations (East and Southern Africa (ESA) and SADC minus) with members from four distinct regional integration schemes.56 Considering that each of these RTAs is either already a customs union (EAC and SACU), or planning to become one (SADC and COMESA) it is expected that the ESA and SADC EPAs may clash significantly with the integration agendas of the existing RTAs.57
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55 The UEMOA has already been a functioning monetary union since 1994; the ECOWAS, comprising all UEMOA members plus other West African countries, decided to merge with UEMOA. On 1 January 2005, ECOWAS launched the CET to become a customs union, providing for three years of transition period.
56 The COMESA, the SADC, the EAC and the SACU.
57 Examples of such conflicts are numerous. The most blatant is Tanzania, which is in a customs union with Kenya and Uganda, and negotiating with the SADC EPA while Kenya and Uganda have opted for the ESA EPA. Conversely, SADC members Malawi, Mauritius, Zambia and Zimbabwe have chosen to negotiate with ESA while COMESA members Angola and Swaziland (the latter is also a SACU member) have opted for the SADC EPA configuration. A further complicating factor is the standing of South Africa with respect to these negotiations given its membership in SACU and its FTA already in place with the EU.
2. Theoretical aspects of regional integration: Economic costs and benefits
· The first theoretician of regional integration is Jacob Viner (1950):
See Jacob Viner, 1950. The Customs Union Issue, Carnegie Endowment for International Peace, New York: on the welfare economics of regionalism or trading blocs.
Viner introduced the concepts of trade creation and trade diversion. His key finding is that discriminatory tariff liberalisation has ambiguous welfare effects.
From Mayda and Steinberg. 2006. Do South-South Trade Agreements Increase Trade?
The welfare impact of PTAs is ambiguous. As first stated by Viner (1950), preferential trade liberalization can either result in the replacement of inefficient, high-cost domestic production with low-cost imports from member countries (i.e., trade creation) or in the substitution of efficient, low-cost imports from non-member countries with less efficient imports from member countries (i.e., trade diversion). Consider the case of small open economies signing an agreement: If trade creation takes place, PTAs are welfare-improving while, under trade diversion, their effect on welfare through changes in trade patterns is ambiguous. In the case of large open economies, the impact of PTAs is complicated by terms-of-trade changes, which make it harder to sign the net welfare effect.
The difference between trade creation and trade diversion is also relevant from a political economy point of view. Under trade creation, preferential trade agreements are more likely to be building blocks for multilateral trade negotiations, since policymakers can build consensus around the visible gains of partial trade liberalization. Stumbling-blocks effects are instead possible in industries characterized by trade diversion, where new special-interest groups will form and lobby against multilateral free trade. These are sectors where exports by PTA member countries have replaced exports by more efficient non-member countries. In such industries, producers from member countries would lose in direct competition with producers from non-member countries, and thus feel threatened by movements towards global free trade.
The welfare effects taking place through trade creation and trade diversion and other channels imply that South-South PTAs between small countries are the least likely to produce gains for their members, for several reasons. First, developing countries are not usually natural trading partners, as evidenced by the fact that they trade little with each other as a share of total imports. For example, the share of African imports from other African countries in 2001 was approximately 9 percent (IMF DOTS 2002). The reason is that low-income countries tend to have similar relative factors supplies, therefore the incentive to trade with each other is smaller than for dissimilar countries. In other words, developing countries are not low-cost producers of most goods other developing countries import, since they all tend to have a comparative advantage in the same sectors. Therefore, South-South trade agreements are likely to lead to trade diversion as opposed to trade creation, if any increase in imports occurs at all. From a political-economy point of view, trade diversion in turn implies a stumbling-block effect of South-South trade agreements for multilateral trade liberalization.
Second, low-income and small PTA partner countries are also less likely to produce efficiency gains - linked to economies of scale - and to trigger pro-competitive effects for local producers. The reason is that South-South PTAs offer their members access to smaller markets than would be the case in North-South agreements. In addition, firms in PTA partner countries which are developing economies may not be much more efficient than home firms, therefore competitive pressure on domestic producers may not be so strong. Finally, because trade taxes are a large proportion of domestic revenues in developing countries, the loss of tariff revenue may have a more adverse impact on a developing country's fiscal position. This possibility is evidenced by the strong decline in tariff revenue (8 percent of GDP) in Uganda after the inception of COMESA. For these and other reasons, some authors in the literature have expressed their preference, from an economic point of view, for North-South over South-South PTAs (Schiff and Winters 2003).
Paul Krugman model of trading blocs (1991): depending on the number of blocs, there can be trade creation or trade diversion.
· The relationship between RTAs and growth?
Traditionally, in international economicsà preference given to broad liberalisation, said to lead to faster growth than regional trade agreements
See Vamvakidis 1999 Regional Trade Agreements or Broad Liberalization: the impact of RTAs on growth and investment is negative: RTAs are implemented at the expense of broad liberalisation.
· A key debate: what is preferable? Multilateralism at a global scale vs. regionalism?
A question already asked by Jagdish Bhagwati: are FTA's /free trade agreements building blocks or stumbling blocks for free trade?
See Bhagwati, Krishna and Panagariya eds. 1999. Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Agreements).
FTAs violate the MFN principle, and are disincentives for multilateralisation, vs. may be the basis for multilateralisation?
For many studies: regional integration= a step in global integration: For those interested, see Tonia Kandiero, Lynn Salinger, and Andrew Warner, USAID/RCSA Strategy, Global Competitiveness and Regional Market Integration: on the example of SADC
Regional trade integration is an important input into global integration: as a means to the ultimate end of global integration rather than as an end in itself
=cross-border integration of capital and labour markets, infrastructure, institutions and regulatory frameworks, inter-firm collaboration through joint ventures and outsourcing arrangements, and flows of actual goods and services.
Integration allows goods and services to flow into and out of SADC member countries to/from the global market as efficiently as possible. Regional integration may also further the production of goods and services for the world market from within regionally integrated value chains.
Left unfettered, economic activity migrates in a geographic sense over time to cities, coasts, and areas of dynamic clusters. It is also reallocated over time across sectors in the economy. Since workforces in higher income countries are more heavily concentrated in services and industry than in primary sectors, possible shift of SADC employment out of agriculture.
· The tensions between regionalism/multilateralism/bilateralism
Global trends: in the 1990s, move from 'closed regionalism' to a more open model. Trading blocs between developing countries in the 1960s-1970s were based on a model of import-substitutionàregional agreements=high external trade barriers.
The new wave of RIAs is more outward-looking, focused on international commerce. See the WB GEP 2005: 'making regionalism complementary to multilateralism'.
In the 1990s, a renewed reflection on the welfare economics of 'new regionalism': see De Melo, Panagariya and Rodrik 1993 The New Regionalism: a Country Perspective.
See the review by Burfisher, Robinson and Thierfelder 2004 on the 'new regionalism': Viner's theories, trade creation, trade diversion, terms-of-trade effects are adequate for the analysis of the effects of removing commodity trade barriers: this is 'shallow integration'.
But the 'new regionalism' consists in deep integration often between developing and developed countries
àit includes dynamic changes, e.g., trade-productivity links and endogenous growth theory, international factor mobility, imperfect competition, rent seeking behaviour, political-economy considerations (e.g. potential conflicts between regionalism and multilateralism).
For a general overview of the issues, see UNCTAD. 2007. Trade and Development Report, 2007: Regional Cooperation for Development: on the 'new regionalism" and North South Trade Agreements.
The number of trade agreements notified to the GATT/WTO increased from 20 in 1990 to 86 in 2000 and to 159 in 2007. The agreements concluded over the past 20 years have been mainly bilateral, and primarily between developing and developed countries. They have increasingly included provisions aimed at "deep integration", which involves additional elements for harmonizing national policies in line with a reform agenda that favours greater freedom for market forces – thus also promoting the freedom of movement of TNCs – and reduces options for government intervention.
This trend, combined with the increasing number of FTAs and RTAs involving countries from different geographical regions, characterizes what has come to be labelled as "new regionalism". This term is somewhat misleading, since most of the trade agreements are bilateral and involve countries that are not necessarily in the same geographical region.
"New regionalism" denotes a departure from multilateralism, and has grown out of a sense of frustration of some governments at the slow progress in multilateral trade negotiations.
· Position of the IFIs?
For the World Bank: usually defence of multilateralism. For the WB, the political and economic benefits of regional trade blocs are illusory: they imply trade-offs. Effective integration is more than reducing tariffs and quotas.
In the 1980s, the SAPs were not focused on regional integration, they were devised within national frameworks
But WB evolution in favour of RIAs: regional integration locks countries into policy reform, achieve economies of scale, eases international negotiations + depends on institutional capacity, political consensus, infrastructure.
For the IMF: regional integration, more than increasing intra-trade, allows member countries to gain policy credibility for trade reforms and tariff liberalisation: on the example of COMESA and SADC, see Khandelwal (2004), COMESA and SADC: Prospects and Challenges for Regional Trade Integration, IMF.
See Schiff and Winters 2003 Regional Integration and Development: existence of imperfect competition, market power, product differentiation, increasing returns: changes in perspective that have altered economists' views of the returns to regionalism and of how to quantify them.
Benefits of RIAs via economies of scale, often cause of imperfect competition. Many countries are too small for activities subject to large economies of scale to reach efficient size →insufficient quantities of specialised inputs are available or markets are too small to generate the sales necessary to cover costs.
· A key author: Richard Baldwin
See for a review of all theories of regionalism, Baldwin 2008. Big-Think Regionalism:
What Baldwin coins as 'small think regionalism' focused on Viner's question: "Would a nation gain from joining a trade bloc?"
'Big Think Regionalism' considers regionalism's systemic impact on the world trading system, focusing on 2 questions: 'Does spreading regionalism harm world welfare?'
And "Does regionalism help or hinder multilateralism?"
See Baldwin. 2006. Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade: 1) Regionalism will stay; 2) regional trade agreements are not the best way to organise world trade. Moving to global duty-free trade will require a multilateralisation of regionalism.
Trade liberalisation pattern will be marked by fractals – fuzzy, leaky trade blocs made up of fuzzy, leaky sub-blocs (fuzzy since the proliferation of FTAs makes it impossible to draw sharp lines around the 3 big blocs, and leaky since some FTAs create free trade 'canals' linking the blocs).
Political economy mechanism: 'spaghetti bowls as building blocs', whereby offshoring creates a force that encourages the multilateralisation of regionalism.
World network of trade, 2004. from Baldwin 2006
Europe | NAFTA | Asia | MiddleEast | Africa | S&CAmerica | World | |
Europe | 33% | 7% | 8% | 2% | 45% | ||
NAFTA | 8% | 9% | 15% | ||||
Asia | 13% | 3% | 27% | ||||
MiddleEast | 4% | ||||||
Africa | 3% | ||||||
S&CAmerica | 3% | ||||||
World | 44% | 21% | 23% | 3% | 2% | 3% | 100% |
Note: The inter-regional flows are summed over both directions, so there are no entries in the lower triangle of the matrix. All flows are taken as a % of world trade and numbers less than 2% are zeroed out for clarity's sake. CIS-Europe's bi-lateral trade is omitted; it accounts for 2.4% of world merchandise exports in 2004 (my thanks to Michael Finger for this). Source is WTO (2005), Table A1.
See The Economist, In the twilight of Doha, Jul 27th 2006
|
Failure of an alternative to Doha: a greater focus on regionalism. Regional and bilateral trade deals have mushroomed (see chart). All but one WTO member, Mongolia, is now involved in some sort of preferential trade deal.
Within Asia, the number of trade deals is exploding. The 10 ASEAN countries have bilateral deals with each other; all have individual bilateral deals with China. Others are being negotiated with India, South Korea and Japan. East Asia alone will have around 70 free-trade deals by the end of 2006.
'Noodle bowl of Asian regionalism. For Richard Baldwin, Asian-style regionalism may prove more pernicious than other regional deals. The sheer number of agreements, all of which cover slightly different products and contain different rules, will dramatically complicate logistics in a region that epitomises the global trend towards decentralised production.
· A key debate: are preferential trading arrangements (PTAs) superior to multilateral liberalisation, or at least an alternative when multilateral liberalisation proceeds slowly?
If so, what form should the PTAs take?
Should developing countries seek PTAs with industrial countries or among themselves: see Puga and Venables 1997 Trading Arrangements and Industrial Development Policy.
· Regional arrangements' economic effects
àAmbiguous economic effects of FTAs: see De Melo, Panagariya, Rodrik 1993 The New Regionalism..
In RIAs, discrimination between sources of supply is shifted, not eliminated. If partner country production displaces higher cost domestic production→gains/trade creation.
But if the partner country production displaces lower-cost imports from the rest of the world→ trade diversion.
Welfare effect of RIAs on the bloc members as a group depends on the balance between trade creation and diversion: see Schiff and Winters 2003 Regional Integration and Development.
- Static issues= trade creation/diversion
- Dynamic issues=emphasis on economic geography, increasing returns to scale and imperfect competition: see Lyakurwa, McKay, Ng'eno and Kennes, 1997 Regional Integration in SSA.
1) Scale and competition effects: removal of trade barriers: like market enlargement, as separate national markets move toward integration in a regional market. Firms benefit from greater scale and attracts FDI/investment projects for which market size is important + firms from member countries in closer competition=efficiency improvements.
2) Trade and location effects: the preferential reduction in tariffs induces purchasers to switch demand toward supply from partner countries, at the expense of both domestic production and imports from non-members=trade creation and trade diversion effects.
By definition: regional agreements are preferential: hence discriminatory in favour of their members. Trade diversion=sourcing imports from the partners. Uncertain gains on the export side.
CGE models allow the assessment of effects; on the SADC, showing that trade creation dominates trade diversion for under various FTA arrangements, see Lewis, Robinson, Thierfelder, 2003, Free Trade Agreements and the SADC Economies..
See Venables 2003 Winners and Losers from Regional Integration Agreements: there are winners and losers from RIAs: the benefits and costs of a customs union are divided between member countries. Outcomes depend on the comparative advantage of member countries, relative to each other and relative to the rest of the world. Countries with a comparative advantage between that of their partners and the rest of the world do better than countries with an 'extreme' comparative advantage
à integration between low-income countries lead to divergence of member country incomes. Agreements between high income countries cause convergence
àdeveloping countries better served by 'north-south' than by 'south-south' free trade agreements.
See Venables 2001 Trade, Location and Development: an Overview of Theory: a review of the economic effects of regional integration:
1) costs and benefits of RI depend on the comparative advantage of member countries relative to each other and relative to the rest of the world=basis of the traditional trade creation and trade diversion argument
+ strong argument for North-South rather than South-South agreements (the latter being prone to trade diversion);
2) benefits from economies of scale, combining with pro-competitive effects as firms in member countries are brought into more direct competition with each other;
3) propensity to clusteràboth benefits and costs
Development in just one of the member countries rather than in all=potential for divergence of economic structure and income between member states of RIAs.
The unequal distribution of costs and benefits implied by trade creation and diversion can be amplified by these mechanisms.
· On trade creation/trade diversion: on a case study – the Common Market for Eastern and Southern Africa/COMESA, the Economic Community of Central African States/ECCAS and the Economic Community of West African states/ECOWAS, see Wanjala Musila. 2005. The Intensity of Trade Creation and Trade Diversion in COMESA, ECCAS and ECOWAS
Gravity model: estimate the intensity of trade creation and trade diversion in COMESA, ECCAS and ECOWAS; for the years 1991–8, the intensity of trade creation or diversion varies from region to region and from period to period.
=the intensity of trade creation is higher in the ECOWAS followed by COMESA. The trade creation effect in the ECCAS not confirmed;
Trade diversion effects are weak in the 3 RTAs. Size factors (level of GNP, population) and resistance factors (distance, language) play an important role in the determination of the flow of international trade.
· On change in trade patterns, see Mayda and Steinberg. 2006. Do South-South Trade Agreements Increase Trade? Commodity-Level Evidence from COMESA, on the proliferation of South-South trade agreements
Developing countries signed 70 new agreements between 1990 and 2003.
More than 30 arrangements in SSA (Yang and Gupta, 2005). Countries frequently belong to more than one agreement resulting in competing demands.
Analysis of the static effects of South-South preferential trade agreements that take place through changes in trade patterns.
Impact of the Common Market for Eastern and Southern Africa (COMESA) on Uganda's imports between 1994 and 2003 (import and tariff data at the 6-digit Harmonized System level for over 1,000 commodities.
COMESA's preferential tariff liberalisation has not considerably increased Uganda's trade with member countries, on average across sectors. The effect is heterogeneous across sectors
+ no evidence of trade-diversion effects.
· An important effect of regional agreements: the fiscal effects, the reduction in trade taxes
- Direct effects: tariffs on intra-trade are reduced
- Indirect effects: importers switch from external imports subject to tariffs. Governments may lose tariff revenue
Overall effect on national income may be positive or negative, depending on the costs of alternative sources of supply and on trade policy toward non-member countries. Revenue losses may be substantial.
E.g. at the foundation of ECOWAS, taxes on external trade: from 34% to 66% of budgets.
Example of the simulations for the SADC by the WB. Customs revenue collected as a % of total government revenue in 1996. Implications of a Free Trade Area for SADC members (Trade Blocs, 2000; Schiff and Winters 2003).
Member country | Customs duty as % of total tax revenue | Estimated change in % custom duty | customs duty % total revenue |
Malawi | 14.3 | –36.7 | –5.3 |
Mauritius | 29.8 | –18.2 | –5.4 |
SouthAfrica | 3.6 | 4.9 | 0.2 |
Tanzania | 24.0 | –8.3 | –2.0 |
Zambia | 12.3 | –45.3 | –5.6 |
Zimbabwe | 18.4 | –53.3 | –9.8 |
In SSA, little trade within the regional agreements: e.g. after launching of UDEAC, members partners trade as a share of GDP increased from 0.24% to 0.79%.
See Geda and Kebret. 2008. Regional Economic Integration in Africa: reducing trade barriers in economies where tariff revenue is one of the most significant sources of government revenue complicates the inter-temporal tradeoff between the apparent short-term loss of revenue and the expected long-term benefits emanating from regional integration.
In Kenya, for instance, government revenue from its imports from EU constitutes 10% of its total revenue. Given that Kenya is a more liberalised country (and widely trades in the region), the revenue loss for other less liberalised member countries could be large. At present, the potential revenue loss from expanded intra-COMESA trade for members is low owing to the low level of intra-regional trade flows. For instance, Ethiopia's revenue loss due to opening its market to COMESA is 1% of total revenue since its trade with COMESA is negligible (although shifting its direction of trade from EU to COMESA could mean a lot of loss in tax revenue).
Table 3 provides a static estimation of the magnitude of revenue loss if COMESA member countries abolish tariff among themselves. The table needs to be taken cautiously, as it does not consider both the possibility of shifting the pattern of trade to COMESA suppliers and an institutionalisation of a common external tariff which would be lower than the rate currently in use by COMESA member countries on a third country. It is also static and hence fails to pick the potential positive effects on tax collection.
The average revenue loss for countries in COMESA is extremely small (about 3% of government revenue excluding grants).
· The limits on South-South trade: asymmetries, increasing polarisation
See Venables 1999 Regional Integration Agreements: benefits and costs of a Free Trade Area are divided among member countries. Outcomes depend on the member countries' comparative advantage, relative to one another and to the rest of the world.
Free trade agreements between low-income countries tend to lead to divergence in member country incomes, while agreements between high-income countries tend to lead to convergence.
Changes induced by comparative advantage may be amplified by the effects of agglomeration.
Developing countries are better served by 'north-south' than by 'south-south' free trade agreements, because 'north-south' agreements increase their prospects for convergence with high-income members of the free trade area.
· In particular, the relocation of production effects: the issue of income convergence/divergence
Changes in trade flows induce changes in the location of production between member countries of a regional agreement. Relocations are determined by the comparative advantage of member countries.
How does the formation of a free trade area or customs union affect the distribution of activity within the area? Are the gains (or losses) divided between members, or do some gain while others lose? Do the real incomes of member countries tend to converge or diverge?
The standard theory of economic integration (Viner 1950): the effects of membership are ambiguous: see Venables 1999 Regional Integration Agreements: A Force for Convergence or Divergence.
Relocations can be a force for convergence of income levels. Labour-intensive production may move toward lower-wage countries, raising wages there. But relocations can be a force for divergence. Industry may be pulled toward a country with a head start, driving up incomes ahead of other countries. Divergence is more likely in "South-South'" regional agreement schemes between economically small low-income countries: tensions that lead to failure of the agreement. For the WB, 'North-South' regional agreements generate technology transfers for Southern members.
Example of divergence in economic performance: the East African Community (EAC): see WB 2000 Trade Blocs, see Venables 1999. Concentration of manufacturing in the EAC (where the Nairobi region gained at the expense of manufacturing in Uganda and Tanzania)
=Uganda and Tanzania contended that all the gains of the East African Common Market were going to Kenya, which was enhancing its position as the industrial centre of the Common Market, producing 70% of the manufactures and exporting a growing percentage to its 2 less industrial partners.
By 1958, 404 of the 474 companies registered in East Africa were located in Kenya. By 1960 Kenya's manufacturing sector accounted for 10% of its GNP, 4% in Uganda and Tanzania => collapse of the EAC in 1977.
· Another example: concentration of industry, commerce, and services in Abidjan and Dakar in the CEAO (Economic Community of West Africa): formed in 1974. Combined share of Cote d'Ivoire and Senegal in manufacturing value added has risen from 55% in 1972 to 71% in 1997.
See Puga and Venables 1997 Trading Arrangements and Industrial Development Policy: trade creation and trade diversion follow a pattern of comparative advantage.
But the changing comparative advantage of newly industrialised countries => the pattern of comparative advantage is potentially flexible, less developed countries can converge in both income and economic structure to industrial economies.
Role of trade in promoting industrial development. Few fundamental differences between countries, so few immutable patterns of comparative advantage.
Patterns of trade in the world economy are determined mainly by history. Cumulative causation has created concentrations of industrial activity in particular locations (industrial countries) and left other areas more dependent on primary activities. Development is the spread of these concentrations from country to country.
Different trading arrangements may have a major impact on development=change the attractiveness of countries as a base for manufacturing production: it may trigger or postpone industrial development.
Relocations are determined by agglomeration or clustering effects – cumulative causation- and by technology transfers and knowledge flows. E. g. global production chains or production networks.
Regional agreements may lead to agglomeration effects and increase divergence. E.g. Nairobi, Abidjan, and Dakar have attracted manufacturing; business networks + linkages that lock manufacturing in to the location. Process further accelerated by the propensity of FDI to cluster in few locations. Agglomeration accentuates the forces for divergence.
· On the East African Community/EAC, see McIntyre 2005. Trade Integration in the East African Community: an Assessment for Kenya: the East African Community (EAC) is a preferential trading area/PTA consisting of Kenya, Tanzania, and Uganda.
The present or "new" EAC is a revival of the original EAC, a customs union that was established in 1967, at the end of the colonial era and that collapsed in 1977. The "new" EAC is aiming to achieve deeper regional integration with the establishment of a customs union, then a common market, a monetary union, and ultimately a political federation.
The treaty establishing the EAC was launched in 2001, the EAC treaty established a customs union on January 1, 2005: i.e. the three countries would have to remove all internal tariffs and establish a Common External tariff/CET, introduce rules of origin, and a variety of administrative arrangements, including a harmonised customs administration, a customs valuation system, and customs procedures and documentation.
Trade linkages between the EAC member states are not strong, except between Kenya and Uganda. The EAC CET will reduce Kenya's external tariffs and therefore, lower the price of imports. The EAC customs union will have a positive impact on Kenya's trade.
· For the WB: the static welfare effects: the basis for the economic analysis of regional integration agreements.
However, there are other economic effects: reduction of policy uncertainty for investors; increased FDI; creation of larger markets; increased competition; economies of scale; liberalisation of service industries; integration through regulatory cooperation and harmonisation +non economic objectives=improved governance, reducing foreign policy tensions. North-South regional integration arrangements may be superior to South-South RIAs: see Hoekman and Schiff 2002 Benefiting from Regional Integration.
· There are conditions for regional agreements to succeed: e.g., some convergence of economies, shocks that are not too asymmetric across member countries
On the example of COMESA (Common Market for Eastern and Southern Africa), see Carmignani, 2006. The Road to Regional Integration in Africa: Macroeconomic Convergence and Performance in COMESA: COMESA wants a currency union by 2025: hence, a policy harmonisation programme and a set of convergence criteria. There are different dimensions of the integration process: macroeconomic policy convergence, shocks symmetry, per-capita income catching-up.
Findings: the monetary policy stance mildly converges across countries; fiscal stabilisation is problematic in several member states; trade integration is low, but for some countries, shocks are somewhat symmetric; little evidence that per-capita incomes across countries are converging: except some convergence to the bottom among the poorest members.
Another example of the importance of symmetric response to external shocks: a monetary area such as the CMA. See IMF Survey magazine: Southern Africa: Adapting to Shocks, Jian-Ye Wang and Iyabo Masha, IMF African Department. February 21, 2008. The Common Monetary Area/CMA, launched in 1986 and comprising Lesotho, Namibia, South Africa, and Swaziland, has benefited its members. It has facilitated the development of a regional market for goods and services. The CMA countries, anchored by price developments in South Africa, have had lower inflation than their neighbors in the region.
Still, growth and fiscal performance in the four countries varies widely (see Chart 1). Recent changes in the global environment: new challenges to the members.
Withstanding shocks: The net gains of a monetary union to its members hinge on how well the members adjust to external shocks, such as changes in the value of export commodities. Two variables that affect the adjustment process are whether the shocks affect the member countries equally or differently and whether the policy and institutional framework of the union facilitates adjustment.
The available data show that shocks to the terms of trade in the CMA countries are asymmetric (see Chart 2), largely because the countries have different exports whose world prices do not move together. For example, the world market prices of gold, platinum, and iron ore—which accounted for over half of South Africa's exports in 2005-06—have surged since the late 1990s.
During the same period, declining prices of textile products (75% of Lesotho's exports in 2005-06) have weakened its terms of trade. Namibia's ToT are influenced by changes in the prices of diamonds and other minerals; sugar prices are important for Swaziland.
· A complex issue: is there a relationship between trade blocs and currency blocs? An example: the WAEMU in West Africa: it started as a currency union, but has difficulty to become a trade bloc: problem of weak complementarities between countries.
For some studies, there are complementarities: see Goretti and Weisfeld. 2008. Trade in the WAEMU: on trade reform in the West African Economic and Monetary Union (WAEMU) since 1996.
Evidence of significant trade complementarities within WAEMU, particularly between coastal and landlocked countries.
But the implementation of the trade regime still suffers from persistent non-tariff barriers and administrative weaknesses.
3. The multiplicity of regional agreements in SSA
· A multiplicity of formal regional organisations in SSA.
See IMF, REO/Regional Economic Outlook: SSA, October 2008
See World Bank World Development Indicators 2005, 2006: list of regional trade blocs
· The Economic and Monetary Community of Central Africa (CEMAC): Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon, São Tomé and Principe (1994): formerly Union Douanière et Economique de l'Afrique Centrale, created in 1966. One of the oldest regional arrangements in Africa. 1994, full-fledged economic and monetary union (treaty ratified in 1999), strengthening the existing customs and monetary union, which originated in the colonial era.
· The Economic Community of the Countries of the Great Lakes (CEPGL): Burundi, the Democratic Republic of the Congo, Rwanda (1976).
· The Common Market for Eastern and Southern Africa (COMESA): Angola, Burundi, Comoros, the Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Tanzania, Zambia, Zimbabwe. Created in 1993. (COMESA has replaced the Preferential Trade Area/PTA)
· The Cross-Border Initiative (CBI): Burundi, Comoros, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe. Created in 1992.
· The Economic Community of Central African States (ECCAS): Angola, Burundi, Cameroon, the Central African Republic, Chad, the Democratic Republic of the Congo, the Republic of Congo, Equatorial Guinea, Gabon, Rwanda, São Tomé and Principe.
· The Economic Community of West African States (ECOWAS): Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, and Togo. Created in 1975.
· The Indian Ocean Commission: Comoros, Madagascar, Mauritius, and Seychelles. 1984.
· The Mano River Union (MRU): Guinea, Liberia, and Sierra Leone.
· The Southern African Development Community (SADC; formerly Southern African Development Coordination Conference): Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe. 1980. (1990: Namibia; 1994: South Africa; 1995: Mauritius; 1998: Democratic Republic of the Congo, Seychelles).
· The Central African Customs and Economic Union (UDEAC, formerly Union Douanière et Economique de l'Afrique Centrale): Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea, and Gabon.
· The West African Economic and Monetary Union (UEMOA): Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. (Economic Community of West Africa: 1973: revived in 1994 as WAEMU)
· East African Cooperation: formerly East African Community, broke up in 1977 and recently revived, Kenya, Tanzania, Uganda. (1967).
· The Southern African Customs Union (SACU): Botswana, Lesotho, Namibia, South Africa, Swaziland. Created in 1910+a monetary union was formalised with the Common Monetary Area. Renegotiation of the SACU in 2002 (end of apartheid)
The Southern African Development Community (SADC) out of an earlier defence-based organisation, the Southern African Development Coordination Conference. Supplemented for many members by the Cross-Border Initiative.
The East African Cooperation: from the failure of the East African Community/EAC (divergence/Kenya, Tanzania, Uganda, collapsed in 1973).
ECOWAS=bulk of trade made of manufactured goods from Nigeria, Côte d'Ivoire and Senegal.
Other schemes of integration: monetary integration, e.g. the Franc Zone.
For more details, see their website: COMESA: Common Market for Eastern and Southern Africa: http://www.comesa.int/index_html/view
UEMOA: Union Économique et Monétaire Ouest Africaine: http://www.uemoa.int/index.htm
4. the low-level of intra-trade and integration in SSA
· See UNCTAD Handbooks of Statistics, UNCTAD LDC reports, see for data the IMF direction of trade statistics (DOTS). Official statistics are very unreliable.
From Yang and Gupta 2005. RTAs in SSA
Intra-SSA trade is a small fraction of each country's total commerce, roughly constant: mild increase in the early 1990s.
Very little intra-industry or in the manufacturing sector trade (1/2 of this trade = petroleum, cotton, live animals, maize and cocoa).
Revealed comparative advantage does not suggest a strong unexploited potential for intra-SSA trade: see Goldstein 2002 The New Regionalism in SSA.
SSA trade, as fraction of total commerce ($billion) (from Goldstein 2002)
1980 | 1980 | 1985 | 1990 | 1995 | 1998 |
Africa | 5.2 | 4.9 | 7.3 | 10.3 | 11.4 |
EU | 60.8 | 59.2 | 65.9 | 62.4 | 60.2 |
Mercosur | 14.3 | 6.7 | 10.6 | 21.6 | 25.5 |
NAFTA | 33.6 | 43.9 | 41.4 | 46.2 | 51.0 |
East Asia | 22.4 | 20.7 | 20.7 | 26.4 | 22.2 |
Trade blocs: groups of countries that have established special preferential arrangements governing trade between members.
SSA merchandise exports within blocs: % of total bloc exports (WDI 2005-2008) (important discrepancies from one WDI to the other…)
1970 | 1980 | 1990 | 1995 | 2000 | 2005 | 2006 | |
CEMAC | 4.8 | 1.6 | 2.3 | 2.1 | 1.0 | 0.9 | 0.9 |
CEPGL | 0.4 | 0.1 | 0.5 | 0.5 | 0.8 | 1.3 | - |
COMESA | 9.6 | 6.4 | 4.2 | 5.4 | 3.7 | 3.4 | 3.2 |
CBI | 9.3 | 8.8 | 10.3 | 11.9 | 10.5 | 14.0 | - |
EAC | 16.9 | 10.2 | 13.4 | 17.4 | 20.5 | 15.1 | 16.5 |
ECCAS | 9.6 | 1.4 | 1.4 | 1.5 | 1.1 | 0.6 | 0.6 |
ECOWAS | 2.9 | 10.1 | 7.9 | 9.0 | 7.9 | 9.3 | 8.3 |
IOC | 8.4 | 3.9 | 4.1 | 6.0 | 4.4 | 4.6 | 4.7 |
MRU | 0.2 | 0.8 | 0.0 | 0.1 | 0.4 | 0.3 | - |
SADC | 8.0 | 2.0 | 6.8 | 9.2 | 9.4 | 9.2 | 9.1 |
UEMOA | 6.5 | 9.6 | 13.0 | 10.3 | 13.1 | 13.4 | 13.1 |
SSA total merchandise exports by trade bloc: % of world exports (WDI 2005-2008)
1970 | 1980 | 1990 | 1995 | 2000 | 2005 | 2006 | |
CEMAC | 0.2 | 0.3 | 0.2 | 0.1 | 0.2 | 0.2 | 0.2 |
CEPGL | 0.3 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | - |
COMESA | 1.6 | 0.6 | 0.8 | 0.5 | 0.6 | 0.8 | 0.9 |
CBI | 0.8 | 0.3 | 0.2 | 0.2 | 0.2 | 0.1 | - |
EAC | 0.3 | 0.1 | 0.1 | 0.1 | 0.0 | 0.1 | 0.1 |
ECCAS | 0.6 | 0.3 | 0.3 | 0.2 | 0.3 | 0.4 | 0.5 |
ECOWAS | 1.1 | 0.4 | 0.6 | 0.4 | 0.6 | 0.6 | 0.6 |
IOC | 0.1 | 0.1 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 |
MRU | 0.1 | 0.0 | 0.1 | 0.0 | 0.0 | 0.0 | - |
SADC | 2.2 | 1.6 | 1.0 | 0.8 | 0.6 | 0.8 | 0.8 |
UEMOA | 0.3 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 |
CBI: Cross Border Initiative. MRU: Mano River Union. IOC: Indian Ocean Commission.
UEMOA = WAEMU
Preferences (lower tariff duties, exemptions from quantitative restrictions) may be no greater than those available to other trading partners.
But purpose of arrangements: to encourage exports by bloc members to one another, intra-trade.
Exports within bloc: the sum of exports by members of a trade bloc to other members of the bloc.
Total exports by bloc as a share of world exports: the ratio of the bloc's total exports (within the bloc and to the rest of the world) to total exports by all economies in the world.
From UNCTAD. 2007. Trade and Development Report, 2007: Regional Cooperation for Development:
5. North-South preferential schemes: mixed outcomes
· Trade preference schemes have 2 elements.
1) the trade preference - the granting of market access at reduced tariff rates and with less restrictive quotas, possibly going all the way to duty- and quota-free market access.
2) the constraints on participation. These define eligible countries and products, and also impose rules of origin (ROOs).
There has been a tension between these elements, with the constraints severely reducing the effectiveness of preferences as an instrument of development. These constraints are important for manufactured products, and redesign of preferences is needed if they are to facilitate developing country participation in a globalised world trading system: see Collier and Venables. 2007. Rethinking Trade Preferences: How Africa Can Diversify its Exports
The benefits of trade preferences: 2 mechanisms:
1) a transfer of rent to recipient (developing) countries. Instead of being received by the developed country importer as tariff revenue or quota rent, the preference margin is transferred to producers in exporting countries.
2) there may be a significant export supply response, creating employment in developing countries. (..) While the rent-transfer mechanism depends upon the existing quantity of exports, the supply response mechanism depends upon the potential of unrealised opportunities.
For Africa (..), this distinction between actual and potential exports approximates to that between agriculture and manufactures. Africa's rents from trade preferences depend upon market access for its existing agricultural exports, whereas preferences in manufactures might enable the region to break into markets that it has scarcely entered. Of course, rents for agricultural exports will also generate some quantity effect. However, the potential magnitude of the quantity effect is far greater in manufacturing exports.
One reason for the greater potential is liberation from diminishing returns to scale. Production of manufactures for the domestic market encounters diminishing returns due to the constraint of small market size. Traditional agricultural and resource-based exports encounter diminishing returns because of limited endowments of suitable land and hence declining resource base per worker. By contrast, employment in manufacturing exports can be expanded without running into diminishing returns to scale due to markets or endowments.
The other reason for the greater potential is that manufacturing exports are subject to scale thresholds which can generate multiple stable equilibria. The scale thresholds arise because of well-documented external economies that advantage those firms that are located within a cluster of similar firms. Potentially viable export locations may be uncompetitive relative to established clusters and so never develop unless induced. Hence, not only may trade preferences in manufactures generate a large supply response, they may switch a location to a new equilibrium and so have permanent effects even if only implemented temporarily.
· See Christopher Stevens, ID 21 Insight 59, Harnessing Trade for Development, IDS, December 2005: Trade Preferences: Do they work and who gains? 'Preferences' are a feature of the trading system since the 1960s.
Some authors argue that preferences do not work, but they work in cases where they confer a significant competitive advantage on countries that are reasonably efficient sources of supply.
But controversy: this combination of requirements is rare. Some trade regimes claiming to be preferential are not, whereas others making no such claim do confer a substantial advantage. Many of the highest profile 'preference beneficiaries', i.e. majority of SSA states, have failed the 'reasonably efficient supply' requirement.
Preferences are a relative matter: some supposedly preferred states are unable to benefit whilst those that are not members of a preference scheme gain a lot.
Ex: the rules of origin of the EU and, until 2000, the US made it very difficult for most SSA states to benefit since they needed a competitive textile industry supplying inputs (yarn and fabric), as well as a clothing industry in order to comply.
See the new EU GSP (June 2005): for almost every product some old discrimination will be removed but some new ones created.
Many trade blocs between North and South: e.g. NAFTA.
Many preferential market access schemes for developing countries under unilateral trade preferences.
The GSP/Generalised System of Preferences schemes are tariff preferences granted by developed countries to let certain manufactured and semi-manufactured goods from developing countries enter their markets at lower tariffs than other developed or developing countries.
Within the GSPs, special treatment for LDCs provided by developed countries.
· The EU GSP schemes (unilateral) and the Cotonou Partnership Agreement (contractual agreement)
The EU GSP: currently unilateral tariff preferences to 178 developing countries (in 2002, half duty free, half reduced duty, see EU-DG Trade website, see EU-LDC website)
The EU's GSP grants products imported from GSP beneficiary countries duty-free access or a tariff reduction (cycles of 10 years, present cycle: 1995-2004).
Product coverage varies for each arrangement. Lower tariffs than Most Favoured Nation Level (MFN) levels.
Availability and extent of tariff preferences= depend on the arrangement enjoyed by the beneficiary country in which the products originate. Depending on the sensitivity of the product=enter the EU market duty-free or enjoy a tariff reduction.
Rules of origin=requirements for products covered by the GSP to be met for being considered as originating in the exporting country
EU-GSP arrangements=5=general arrangements; special arrangements/drug production and trafficking; special incentive arrangements/protection of labour rights, on request; special incentive arrangements/protection of the environment, on request to countries implementing certain standards (tropical forests).
2005: new EU GSP: preferential access to the EU market=add 300 products to the previous 7,200 products. (but some countries excluded) +additional tariff reductions for countries with 'good governance', conventions on human rights, labour rights, and environmental protection. In 2003, EU imports under the GSP amounted to €52 billion
+ EU promise to review the GSP scheme's 'rules of origin': much criticised as insurmountable barriers to trade.
For the least developed countries/LDC's, special arrangements: in particular, the 'Everything But Arms' (EBA) initiative= the most favourable treatment;
EU EBA initiative for LDCs: preferential trade arrangement in the EU's revised GSP scheme: it grants unrestricted duty-free, quota free access to EU markets to all LDCs products, excluding arms and ammunition (2001) (48 LDCs, 34 in SSA).
EBA=longer transition for the phasing-out of customs duties on 3 sensitive products, bananas, rice and sugar.
· The Cotonou Partnership Agreement for the African, Caribbean and Pacific/ACP countries, which include many SSA countries.
It has replaced the EU-ACP countries Lomé Convention.
The successive Lomé Conventions did not contribute to SSA growth, trade integration or trade diversification.
Cotonou Partnership Agreement (2000) = EU trade preferences with ACP countries, preferential duty regime
= a broad framework for supporting the mutually reinforcing effects of trade cooperation and development aid.
EU and ACP: new trading arrangements=trade liberalisation between the 2 parties.
EU provides non-reciprocal duty-free market access to all ACP countries, except South Africa until 2008.
· The EPAs/Economic Partnership Agreements
=new arrangements with the EU that are WTO-compatible.
The EPAs replace the Lomé Convention unilateral preferences: instead of the non-reciprocal and discriminatory trade preferences of the Lomé Convention, it is a new trade regime based on free trade between ACP countries and the EU.
=new trade arrangements involving before 2008 the progressive removal of trade barriers on the basis of the ACP regional integration initiatives
EPAs negotiated between the EU and groups of ACP countries: shift the current non-reciprocal EU trade preferences to ACP countries to that which requires domestic market access for almost all products from the EU within a 12 years period (2008-2020).
Regional integration is regarded as the key to the incorporation of the ACP into the world economy: ACP regional groupings that have already made progress with the integration of their economies. Non-LDC ACP states not belonging to regional groupings capable of concluding a regional EPA: Free Trade Agreement (FTA) with the EU, ex. South Africa, or access to the EU via the less favourable GSP (see UNCTAD 2003, Trade Negotiation Issues in the Cotonou Agreement: Agriculture and Economic Partnership Agreements)
EPAs are regional. Example of the regional EPA between EU and UEMOA. Example of the regional EPA between the EU and the Eastern and Southern African states (February 2004): 16 SSA countries belonging to the COMESA, the EAC, the IGAD, the IOC (Indian Ocean Commission): negotiating as a single block, single voice.
For a review of the issues, see Sindzingre 2008. The European Union Economic Partnership Agreements with SSA.
For those interested, see Stevens, Christopher, Mareike Meyn, Jane Kennan (ODI), Sanoussi Bilal, Corinna Braun-Munzinger, Franziska Jerosch, Davina Makhan and Francesco Rampa (ECDPM) (2008), The new EPAs: Comparative Analysis of their Content and the Challenges for 2008, London, Overseas Development Institute (ODI) and Maastricht, European Centre for Development Policy Management (ECDPM).
From Stevens et al. 2008: Overview of EPAs signatory states
The EPAs in SSA. Source: Bilal, Sanoussi (2007), EU Bilateral and Regional Agreements: The Case of Free Trade Agreements, Initiation to Trade Policy International Trade and EC Trade Policy, Brussels, European Institute of Public Administration (EIPA) for the European Commission, DG SANCO, 14 March 2007.
Stage II of negotiations: 2003 – 2007: Regional negotiations
ECOWAS+: West Africa
CEMAC+: Central Africa
ESA: East and Southern Africa
SADC: Southern Africa
CARIFORUM: Caribbean
Pacific Forum: Pacific
· The controversial outcomes of EPAs
For those interested, see Lionel Fontagné, David Laborde and Cristina Mitaritonna. 2008. An Impact Study of the EU-ACP Economic Partnership Agreements (EPAs) in the Six ACP Regions, Paris, CEPII, working paper 2008-04, April: dynamic partial equilibrium model. In order to be WTO compatible, EPAs must translate into 90% of bilateral trade fully liberalised: criterion to simulate EPAs for each negotiating regional block. ACP exports to the EU are forecast to be 10% higher with the EPAs than under the GSP/EBA option.
On average ACP countries are forecast to lose 70% of tariff revenues on EU imports in the long run. Yet imports from other regions of the world will continue to provide tariff revenues. Thus when tariff revenue losses are computed on total ACP imports, losses are limited to 26% on average in the long run and even 19% when the product lists are optimised.
The final impact depends on the importance of tariffs in government revenue and on potential compensatory effects.
However this long term effect will mainly depend on the capacity of each ACP country to reorganise its fiscal base.
On EPAs, for the WB, see Hinkle and Newfarmer. 2005. Risks and Rewards of Regional Trading Arrangements in Africa: EPAs between the EU and SSA: the EPAs could have a positive impact on trade and incomes in SSA countries. If the EPAs provide enhanced market access to the EU, tear down external and intra-regional trade barriers in the regional EPA groupings, and reduce institutional frictions to trade, the development gains could be great.
But there are some important obstacles in the fundamental design of EPAs: e.g., reducing high tariffs and other border protections that would impose inefficiencies through trade diversion and monopoly pricing in EPA groupings; offsetting revenue losses resulting from lowering tariffs on imports from the EU to avoid undermining public finance in the SSA countries; reducing intra-regional barriers to trade in existing customs unions and FTAs; reconciling common external tariff proposals with diverse levels of regional integration; allowing for enough flexibility to accommodate differing conditions among countries within each EPA grouping.
On EPAs, also a WB perspective, see Hoekman 2005, Designing North South Trade Agreements: the EPAs go beyond merchandise trade and include trade in services.
The challenges for ACP countries are significant. EPAs are not bilateral, but between the EU (a common market) and counterpart ACP regional blocs. A number of the relevant African PTAs are FTAs that incorporate smaller customs unions, and include both LDC and non-LDC members.
Differences in priorities across members of these counterpart PTAs make it more difficult to negotiate. The EU prefers to negotiate with customs unions, implying that PTA members need to also agree on a common external tariff (CET) for each partner PTA. This is complicated by very different 'sensitivities' in terms of products currently obtaining protection.
· For a positive view of EPAs, or less negative than most studies, as EPAs can be a forum of negotiations where some SSA countries may have weight,
See Ponte, Raakjær and Campling. 2007. Swimming Upstream: Market Access for African Fish Exports in the Context of WTO and EU Negotiations and Regulation: on the impact of changes in the international trade regime for the fish industries in SSA: on how WTO and EU trade negotiations and regulation impact market-access possibilities for African fish exports.
Findings: bilateral negotiations with the EU have been beneficial for some African countries, and collective bargaining power in the context of EPAs might produce more strategic outcomes in the medium term.
· EPAs are criticised by several studies, including NGOs
E.g., they are asymmetrical devices with the EU as a winner and the developing countries as losers, not focused on development.
See Dominique Njinkeu, ID 21 insight 59, Harnessing Trade for Development, IDS, December 2005: EPAs aim to enhance market access for products in which ACP countries have comparative advantage = agriculture and labour-intensive services. They also open up ACP markets to EU exports. The benefit EPAs can generate depends on the reforms that ACP countries will have to undertake and on what the EU and its member states will do to help these countries achieve their development objectives.
On EPAs, see Milner, Morrissey and McKay. 2005. Some Simple Analytics of the Trade and Welfare Effects of Economic Partnership Agreements: the Cotonou Agreement offers ACP countries preferential access to EU markets by establishing EPAs between the EU and blocks of ACP countries that are members of regional trading arrangements. ACP countries entering such arrangements could retain preferential access to the EU market, but on a reciprocal basis.
Measure the short-run welfare consequences, static effects on trade flows and tariff revenue, of such an arrangement for ACP countries: case of the East African Cooperation (Kenya, Tanzania and Uganda)
=the welfare effects (excluding revenue effects) from a reciprocal agreement with the EU will be small, whether positive or negative, but ACP countries will experience short-run adjustment costs, especially in the form of revenue losses.
On EPAs, see Stevens and Kennan. 2006. Agricultural Reciprocity under Economic Partnership Agreements: how EPAs with the EU might affect the ability of 6 SSA countries to continue to provide protection to their domestic agrifood sectors. Various scenarios are constructed on the assumption that 'substantially all' trade with the EU must be liberalised if the EPAs are to be compatible with WTO rules on regional trade agreements.
EPAs are unlikely to require major changes in existing levels of border protection provided to domestic agriculture in Ethiopia, Lesotho, Mozambique and Zambia but the effects on Tanzania and Uganda could be greater.
For Stevens, Cali, Bilal – see the ODI studies, ODI website: Models show that the EPA impact on goods is small relative to multilateral liberalisation; considering potential exclusion of sensitive products. But impact greatest in Africa: positive welfare effects for almost all countries; tariff revenue losses may be large in some cases.
On EPAs uncertain outcomes, see Perez and Njuguna Karingi. 2007. How to Balance the Outcomes of the EPAs for SSA Economies?: GTAP model. The FTAs between the EU and ACP countries raises concern.
First, SSA exporters already enjoy quasi-duty-free access to the European markets through the Lomé scheme for non-LDCs ACP exporters, and via the Everything But Arms (EBA) initiative for LDCs. While European exporters are likely to significantly increase their sales in the African markets, will ACP exporters be able to do the same in the European markets? Market access issues are not major obstacles for African producers on the European markets, but these producers face high transaction costs and supply-side rigidities.
If the gains of the EPAs for SSA exporters are limited, the costs of the agreement could be high. Local and regional producers may lose significant market share to the benefit of their European counterparts, resulting in a decline in output and shrinkage in intra-African trade. The adjustment costs of the EPAs would be even more unbearable given the inevitable loss of customs revenues currently being derived from European imports.
The global implications of these agreements are uncertain. One issue for SSA economies is to determine the optimal equilibrium in the EPAs: the question of the level of reciprocity these countries have to respect could prove crucial for the future of these agreements.
EPAs will exacerbate strain on fiscal systems in SSA; undiversified economic Structures in SSA will face unprecedented challenges. Hence a large level of asymmetry between the European and African commitments has to be allowed.
There are potential negative impacts induced by the EPAs on SSA trade integration processes: the integration of the intra-SSA markets, with the complete elimination of regional tariffs and the constitution of customs unions, is a prerequisite for the implementation of the EPAs.
On the fiscal impact of EPAs on a particular region, i.e. ECOWAS, with a WB perspective, see Zouhon-Bi and Nielsen. 2007. ECOWAS: Fiscal Revenue Implications of the Prospective Economic Partnership Agreement with the EU: on the fiscal revenue implications of the prospective EPA between ECOWAS and the EU: eliminating tariffs on all imports from the EU would increase ECOWAS' imports from the EU by 10.5–11.5 % for selected ECOWAS countries, i.e. Cape Verde, Ghana, Nigeria and Senegal. This increase in imports from the EU would be accompanied by a 2.4–5.6 % decrease in total government revenues, owing mainly to lower fiscal revenues. Tariff revenue losses should represent 1.0 percent of GDP in Nigeria, 1.7 percent in Ghana, 2.0 percent in Senegal and 3.6 percent in Cape Verde.
WB perspective: the large differences in fiscal revenue loss across countries suggest that domestic tax reforms and fiscal transfers within ECOWAS could be important complements to EPA implementation.
On EPAs in the sector of services, see Jansen 2006. Services Trade Liberalization at the Regional Level: on banking, telecoms, insurance, transport, tourism: flows in services from and to Southern and Eastern Africa.
· The US GSP: the AGOA (Africa Growth and Opportunity Act) with the US (2000): exchange of policy reform for preferential access of SSA exports to the US.
US law amended its GSP to SSA countries in 2000, to provide duty-free and quota-free market access to certain SSA products, e.g. textiles and apparel, until 2008. In July 2004, this was extended to 2015.
Among limitations of AGOA: the Rules of Origin condition
= inputs must be from SSA or the US: it is detrimental e.g. in the SSA apparel sector (especially after the elimination of the quotas of the Multi-Fiber Agreement (MFA). It exposes SSA to greater competition. SSA apparel exports=30% lower: see Mattoo, Roy, Subramanian 2002 The Africa Growth and Opportunity Act and its Rules of Origin: Generosity Undermined.
On other limitations of AGOA, see Olarreaga and Orden. 2004. AGOA and Apparel: Who Captures the Tariff Rent in the Presence of Preferential Market Access? The US has granted preferential (tariff and quota free) market access to a list of products from eligible countries in SSA through the AGOA.
Increase in prices received by apparel exporters who benefited from AGOA preferences? In the presence of competitive markets, export prices should increase as much as the tariff which was previously collected by the US: this price increase = the "tariff preference rent" since exporters receive this income as the rent for their preferential status.
In fact, exporters receive only 1/3rd of this rent and smaller exporters receive less than larger and established ones: because of the degree of market power enjoyed by US importers when facing African exporters.
On AGOA, see Collier and Venables. 2007. Rethinking Trade Preferences: How Africa Can Diversify its Exports:
AGOA is an example of the effects of trade preferences – and in particular of Rules of Origins/ROOs – it gives trade preferences to African countries in the US market. This offers duty-free access for a wide range of products. AGOA is not restricted to LDCs, and is available to 38 African countries, including Kenya, Nigeria and South Africa. AGOA ROOs are strict (varying across products, but generally with inputs having to come from the US or other AGOA countries). However, they were relaxed for apparel under the 'special rule' clause.
The 2005 downturn is apparent in Figures 1–3 and is largely due to the end of the Multi-Fibre Agreement. Some 70 per cent of the total decline in SSA apparel exports to the US is attributable to South Africa, outside the AGOA ROO waiver.
See http://www.agoa.gov/ for details.
· The problem of rules of origin: the low utilisation of trade preferences
On underutilisation of trade preferences because of rules of origin, see UNCTAD 2003, Trade preferences for LDCs.
QUAD countries (Canada, EU, Japan, US): GSPs for the LDCs.
QUAD import 3/4 of total LDC exports=both tariff-free and quota-free treatment, "consistent with domestic requirements and international agreements", under their preferential schemes for "essentially all" products originating in the LDCs.
"Essentially all"=concerns of the QUAD countries in agriculture (the EU), textiles and clothing (US, Canada) and fish (Japan).
Realising competitive advantage depends critically on supply capabilities. Improved market access is meaningless if the LDCs cannot produce in the sectors in which they have preferential treatment and they lack the marketing skills, information and connections to convert market access into market entry.
Past experience with unilateral trade preferences: tariff preferences or duty-free market access to exports originating in LDCs does not ensure that the trade preferences are effectively utilised. See UNCTAD LDC report 2002
For all schemes, rules of origin are one of the determinants of the low utilisation of trade preferences.
See UNCTAD 2003 on Trade Preferences for LDCs: utility of QUAD preferences concentrated in a few countries and a few products. Ex. US AGOA=mostly oil from Angola; EU EBA= duty-free import for textile-clothing, but effective utilisation only 56% in 2002 because of strict rules of origin.
Many schemes aimed to improve market access to developed countries, but market access still protected against developing countries.
A fully unrestricted access to QUAD countries would produce substantial gains for SSA, exports and real incomes: especially access to the highly protected Japanese and EU agricultural markets, with negligible costs of trade diversion for the QUAD countries, given the smallness of SSA countries: see Ianchovichina et al. 2001 Unrestricted Market Access for SSA.
· For some studies, trade preferences are utilised
See Candau and Jean. 2005. What Are EU Trade Preferences Worth for SSA
EU preferences to developing countries were well utilised in 2001, especially in SSA.
For several SSA countries, the value of EU tariff preferences, even without accounting for tariff rate quota rents, is worth a significant proportion of their world exports.
But for non-African LDCs, the EBA initiative was only half-utilised approximately, although it is the only preferential regime available to most of them. But 2001 was the first year of enforcement of EBA, and figures for 2002 show utilisation is on the rise, but rules of origin appear to limit significantly the value of this scheme. This also explains why the GSP scheme is significantly under-utilised in the manufacturing sector, even when the receiving country is not eligible to any other preferential regime.
For Candau and Jean, in 2001, 48.9% of EU's imports were dutiable, i.e. concerned products for which the MFN duty is not zero. Among these dutiable imports, 56.5% were eligible to a preferential regime, and the benefit of a preferential regime was requested for 81.3% of eligible imports. The utilisation of one single regime considered in isolation is not meaningful, because many countries are eligible to several preferential regimes; when all preferences are considered together, however, the above figure shows that their utilisation rate is rather high.
This is the case for SSA LDCs: they made virtually no use of the Everything But Arms (EBA) initiative, because they preferred exporting using the Cotonou regime, which is already extremely favourable both in terms of rates and of associated constraints. For SSA as a whole, the utilisation of the Cotonou scheme is as high as 94%.
· A key issue: the impact of the erosion of preferences on developing countries, especially SSA.
For a review of the issues, see Hoekman, Martin and Primo Braga. 2006. Preference Erosion: The Terms of the Debate: on the features of unilateral, non-reciprocal preferential regimes
See Francois, Hoekman and Manchin (2006), Preference Erosion and Multilateral Trade Liberalization. Non-reciprocal trade preferences have been long granted to various developing countries. Early in the post-WW II history of the GATT system, the pattern of these preferences reflected past colonial trade ties. In 1968, UNCTAD recommended the creation of a 'Generalized System of Preferences' (GSP) under which industrialised countries would grant trade preferences to all developing countries on a non-reciprocal basis. UNCTAD goal was to modify the most-favoured-nation (MFN) clause underpinning the GATT by (partially) exempting developing countries from this obligation, while encouraging developed countries to discriminate in favour of imports from developing countries.
A key principle: such 'special and differential treatment' be granted on the basis of 'non-reciprocity', reflecting the premise that 'treating unequals equally simply exacerbated inequalities' (UNCTAD)
For François et al., the developing countries that were granted the fewest preferences in the 1960s, those in East Asia, have subsequently grown the fastest.
Conversely, those granted the deepest preferences, including SSA LDCs, have not managed to increase their per capita incomes or diversify their export bundles significantly in the last 40 years. Tariff reductions in OECD countries will translate into worsening export performance for the LDCs, the erosion of trade preferences may become a stumbling block for multilateral trade liberalisation.
Econometric analysis of actual preference use: preferences are underused because of administrative burdens= 4% of the value of goods traded. Taking into account administrative costs eliminates erosion costs and reduces the losses for countries most affected by preference erosion.
Source: UNCTAD Trade and Development Report 2007: with the progress of multilateral trade liberalisation, and the substantial reduction of most-favoured-nation (MFN) tariffs over the past 20 years, the potential for preferences to advance regional integration has diminished.
6. SSA regional arrangements: limited effectiveness
· This great number of agreementsàinefficiency in terms of growth and intra-trade: coined as the 'spaghetti bowl'…..
See UNCTAD Trade and Development Report/TDR 2007
Poor Nations Left Swimming in 'Spaghetti Bowl' of Rules. "When global trade talks collapsed in Cancun in 2003, African delegates and their supporters danced for joy in the conference centre. But there was no sign of rejoicing by the World Trade Organization's (WTO) poorer members on Monday as Pascal Lamy, WTO Director General, announced an indefinite suspension of the Doha round negotiations," reports The Financial Times (UK). "Though economic models suggest that the direct benefits of a successful trade round would accrue to a relatively small number of competitive exporters, such as China and Brazil, many more developing nations have reason to fear the consequences of failure. First, and most importantly, the breakdown of the talks risks weakening the multilateral rules-based trading system and giving new impetus to the already burgeoning network of preferential trade deals. The 250 accords already in operation, double the number 10 years ago, are estimated to account for more than half of world trade, and the 'spaghetti bowl' of different rules is increasingly making trade more difficult, especially for exporters from poor nations. … (see WB Development News, Wednesday, July 26, 2006)
Source: McIntyre 2005. Trade Integration in the East African Community.
From Yang and Gupta 2005. RTAs in SSA
· Problems of multiple objectives, overlapping memberships
+poor private sector participation, non implementation of Treaties provisions, inadequate compensation mechanisms, stringent trade liberalisation based on rules of origin more than on value added and ownership of enterprises, absence of strong supra-national institutions, little political commitment: see Aryeetey1998 Sub-Saharan Experiences with Regional Integration.
Problem of the multiplicity of schemes: e.g., in Southern Africa, SADC, COMESA, SACU, overlap and contradict.
· Colonial history, path dependence, resilience of the small open economy model, imports of manufactures from the colonising countries, exports of primary goods.
Similarity of constraints among countries.
See the example of the CEMAC: low historical growth, highly dependent on oil, volatility resulting from reliance on commodity exports, conflicts of interest between richer coastal and poorer landlocked countries, very limited intra-regional linkages, and political instability: see Zafar and Kubota,2003, Regional Integration in Central Africa: Key Issues.
Low complementarities in goods and factor of production, export of similar products. The question of the comparative advantage of SSA countries: primary products, with growth in the manufacturing sector supported by growth in the agricultural sector.
See Yang and Gupta. 2005. Regional Trade Arrangements in Africa, IMF: RTAs in SSA ineffective in promoting trade and FDI. Relatively high external trade barriers and low resource complementarity between member countries limit both intra- and extraregional trade.
Small market size, poor transport facilities and high trading costs make it difficult for SSA countries to reap the potential benefits of RTAs.
=> necessary to improve in infrastructure and trade facilitation + strengthen the domestic revenue base in order to compensate revenue losses from trade liberalisation.
Many SSA countries, despite trade liberalisation exhibit significant tariffs. Intra-SSA exports are mainly manufactures, but they meet protective measures. SSA countries have to pursue unilateral non-preferential trade liberalisation, which they do for a decade. But in this case, better to integrate into the world economy than regional integration. However, arguments against unilateral trade liberalisation: countries policies have different speeds, thus unilateral trade liberalisation leads to widening tariffs structures, against regional trade: see Aryeetey 1998 Sub-Saharan Experiences with Regional Integration.
Whether trade integration improves an export-promotion strategy depends on other factors: economies of scale and international competitiveness, feasibility of suitable compensation schemes. This is a key issue: effective regional integration schemes result in geographic concentration of economic activities (e.g. production facilities) within the integrated region.
Many prerequisites for regional integration=pre-existing high levels of intra-group transactions, complementarities in goods and factors of production and potential for product differentiation, a strong private sector, an effective supra-national authority. (see Oyejide 1998 Trade Policy and Regional Integration)
Example of West Africa. ECOWAS ineffective in promoting trade among its members. Directional trade patterns and the interaction of a trade intensity index and a spatial interaction model=trade flows are strong when considered on a relative basis, but the same pattern existed before ECOWAS: ECOWAS did not introduce significant changes: see Hanink and Owusu 1998 Has ECOWAS Promoted Trade Among its Members?.
7. the level of SSA intratrade: lower vs. expected level, given the existence of other determinants?
· A well-known debate: are the actual levels of SSA intra-trade lower than their potential?
Limited trade potential? Integration through factor markets?, e.g. freer movements of labour or capital, but still very limited: see Foroutan 1993 Regional Integration in SSA.
Some studies argue SSAintra-trade has the expected level.
Use of gravity models to compare the actual trade and what the model predicts.
Typical gravity model: bilateral trade flows are determined by the size of the two economies and the distance between them, with the possibility to expand the model to include other relevant determinants of trade.
In the absence of trade restrictions, models show that the scope for SSA intra-trade is intrinsically modest: integration schemes did not increase intra-regional trade: this trade is not low because of trade restrictions, but because it is naturally low, given incomes, geography.
In the case of North-South trade, SSA trade with industrial countries is not unusually low
SSA trade with industrial countries is explained by economic size, geographical distance and population. SSA countries even tend to "overtrade: see Coe and Hoffmaister 1999, North-South trade: is Africa unusual?
In the case of intra-SSA trade, the gravity model predicts low level of intra-SSA trade.
Trade potential depends on total economic size (GDP), trade intensity (trade/GDP) which is affected by geographic determinants and economic determinants (proxied by GDP per capita; trade attraction is determined by the total costs of bilateral trade – e.g. transports costs -, policy choices, history: see Foroutan and Pritchett 1993, Intra-Sub-Saharan African Trade: Is It Too Little?
On the example of COMESA, see Geda and Kebret. 2008. Regional Economic Integration in Africa. On the determinants of trade flows in COMESA
Bilateral trade flows among the regional groupings could be explained by standard variables as demonstrated by the results of the conventional gravity model. The result shows that regional groupings had insignificant effect on the flow of bilateral trade.
+ the performance of regional blocs is mainly constrained by problems of variation in initial condition, compensation issues, real political commitment, overlapping membership, policy harmonisation, lack of diversification and poor private sector participation.
· It is a matter of debate, however.
See Coulibaly and Fontagné 2006 South-South Trade: Geography Matters, on the example of WAEMU: the very low intra-SSA trade justified by the size of the exporting and the importing economies. If that were the explanation, there would be no untapped trade potential.
But the main determinant of this 'missing trade' is geography. Being landlocked and poor àvery high trade costsàimpact of geographical impediments on South-South trade.
8. Constraints on integration: infrastructure and others
· A crucial issue: the very poor infrastructure in SSA
Well-known examples: no adequate road from a SSA capital city to another: e.g., Dakar-Bamako, cheaper to stop in Rotterdam for a shipment between Abidjan and Banjul, etc. No convenient flights between SSA cities (stop in a European city).
Poor road and telecommunication infrastructures. Though telecoms are improving… (e.g., via privatisation and FDIs in the telecom sector) (see the other lectures)
See Zafar and Kubota. 2003. Regional Integration in Central Africa: on the CEMAC: very limited intra-regional linkages, low level of intraregional trade among the six countries, 5% of total trade in the region.
Poor road system connecting Central African capitals, primitive level of telecommunications infrastructure: a "hub and spoke" situation, in which the CEMAC economies are linked to France but not too each other, prevails in Central Africa.
· The WB typically insists on this dimension: infrastructure, regulatory obstacles, ……
See Trading on Time, Simeon Djankov, Caroline Freund, Cong S. Pham, World Bank 2006
=long delays in moving standard cargo from the factory gate to ship.
Based on the data of the WB Doing Business in 2006 report: how time delays affect international trade, using newly-collected World Bank data on the days it takes to move standard cargo from the factory gate to the ship in 126 countries; modified gravity equation.
On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1%. Put differently, each day is equivalent to a country distancing itself from its trade partners by 85 km on average.
Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. A day's delay reduces a country's relative exports of time-sensitive to time-insensitive agricultural goods by 7%.
See Djankov: it takes 116 days to move an export container from the factory in Bangui (Central African Republic) to the nearest port and fulfil all the customs, administrative, and port requirements to load the cargo onto a ship.
It takes 71 days to do so from Ouagadougou (Burkina Faso), 87 days from Ndjamena (Chad), 93 from Almaty (Kazakhstan), and 105 from Baghdad.
In contrast, it takes only 5 days from Copenhagen, 6 from Berlin, 16 from Port Louis (Mauritius), 20 days from Shanghai, Kuala Lumpur or Santiago de Chile.
See World Bank/IFC, Doing Business website: Trading Across Borders, 2006
On the procedural requirements for exporting and importing a standardised cargo of goods, from the contractual agreement between the 2 parties to the delivery of goods.
Main indicators: number of all documents required to export/import the goods, number of all approvals, signatures or stamps that are required to export/import goods, and time necessary to comply with all procedures required to export/import goods.
East Asia & Pacific | 7.1 | 7.2 | 25.8 | 10.3 | 9.0 | 28.6 |
Europe & Central Asia | 7.7 | 10.9 | 31.6 | 11.7 | 15.0 | 43.0 |
Latin Amer & Caribbean | 7.5 | 8.0 | 30.3 | 10.6 | 11.0 | 37.0 |
MiddleEast North Africa | 7.3 | 14.5 | 33.6 | 10.6 | 21.3 | 41.9 |
OECD High income | 5.3 | 3.2 | 12.6 | 6.9 | 3.3 | 14.0 |
South Asia | 8.1 | 12.1 | 33.7 | 12.8 | 24.0 | 46.5 |
SSA | 8.5 | 18.9 | 48.6 | 12.8 | 29.9 | 60.5 |
Each day of delays reduces a country's export volumes by about 1%.
If Burkina Faso reduced its factory-to-ship time from 71 days to 27 days (the median for the sample), exports may increase by 45 %. If the Central African Republic reduced its median factory-to-ship time from 116 days to 27 days, exports would double.
Delays have a great impact on exports, especially perishable agricultural products. A day's delay reduces exports of highly perishable agricultural goods, such as corn, apricots, and cucumbers, by 7%, as compared to agricultural goods with a longer storage life, such as potatoes or apples.
Typical WB position: it is unlikely that many countries in SSA will benefit from duty-free access provisions or from future trade liberalisation in OECD agricultural markets under a WTO agreement unless export procedures are simplified.
· See Limão and Venables 1999 Infrastructure, Geographical Disadvantage, and Transport Costs: transport depends on geography and infrastructure. Landlocked countries: high transport costs.
The elasticity of trade flows with regard to transport costs is high: -2.5. The median landlocked country has only 30% of the trade volume of the median coastal economy. Halving transport costs increases the volume of trade by a factor of 5. Improving infrastructure from the 75th to the 50th percentile of countries increases trade by 50%. Infrastructure problems largely explain the relatively low levels of African trade.
· Problem of landlocked countries
Many SSA countries: landlocked or transit countries: a regional approach to transport infrastructure financing, to the development and management of transit systems=important aspect of dynamic investment–export nexus.
The corridor development approach, pioneered in the SADC/Southern African Development Community=concentrates viable productive investment projects within selected corridors connecting inland production areas to ports at the same time as infrastructure investment takes place.
Increase in investment from other developing and emerging countries, e.g. Latin America, China, South East Asia: see Maizels 1993 Recent Trends in South-South Trade; see UNCTAD FDI statistics.
· However, the relationship infrastructure-growth is not always found
See Fedderke and Bogetić. 2006. Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures: econometric analysis on the case of South Africa, of the growth and productivity impacts of infrastructure: they are ambiguous (countervailing signs) and results are not robust.
Explanations of the contradictory findings: the crowd-out of private by public sector investment, non-linearities generating the possibility of infrastructure overprovision, simultaneity between infrastructure provision and growth, and the possibility of multiple (hence indirect) channels of influence between infrastructure and productivity improvements.
Use of panel data for South Africa over 1970-2000 and 19 infrastructure measures, if controlling for the possibility of endogeneity in the infrastructure measures, the impact of infrastructure capital is positive: direct impact of infrastructure on labour productivity, and indirect impact of infrastructure on total factor productivity.
9. The issue of 'informal' integration
· The issue of unrecorded trade, or smuggling: state and non-state actors.
Many factors: wars, good shortages, trade in illegal goods, and government policies. Since the independence, economic policies and domestic political economy have worked against regional integration.
Governments, as well as structural adjustments induced differentials in terms of economic policies, which created incentives for cross-border smuggling.
Role of SAPs in weakening the state: relationship between SAPs and trans-border trade in West Africa, with an official collusion, see Meagher, 2003, A Backdoor to Globalisation? Structural Adjustment, Globalisation and Transborder Trade in West Africa.
Need to properly align exchange rates and improve the underlying macroeconomic framework: it is necessary, albeit still per se insufficient pre-condition for trade creation: see Aryeetey 2001 Regional Integration in West Africa.
Countries have been involved in several different arrangements at the same time, conflicting goals and strategies.
Level of interaction outside of formal arrangements is much larger than that happening through formal trading links. Informality often maintained in order to satisfy the special interests of specific groups that take advantage of the bottlenecks due to policies and institutional structures.
Maintenance of the poor formal institutional arrangements is part of the status quo (see Goldstein 2002).
Exchange rates controls, capital controls→create capital flight.
· 'Informal integration', but also 'informal' obstacles…
Existence of formal RTAs, but in practice, severe limits to the circulation of people and goods: controls, bribes, etc, at borders.
E.g. free flows of goods within UEMOA may be a dead letter. Well-known examples=borders Benin-Nigeria, or Nigeria-Cameroon.
Can regional arrangements help SSA to overcome global competition? Which role of formal regional arrangements in SSA if the informal sector employs about 60% of the urban work force, if informal trade is more important than the formal intra-SSA trade.
See Zafar and Kubota. 2003. Regional Integration in Central Africa: on the CEMAC: Low factor mobility among the economies.
While there are no official barriers to migration, in practice, the lack of common passport with no visa requirements for travel between countries, harassment by customs officials, and unemployment and discrimination in recipient countries have acted as a deterrent to labour flows.
See UNCTAD/LDC/2007/1. 12 April 2007. I. Transport infrastructure for transit trade of the landlocked countries in West and Central Africa: an overview
Roadblocks and other checkpoints have proliferated to the extent that there are involuntary stops at short intervals. Even if the toll fees extorted at each of the checkpoints are small, they add up to sizeable sums in their totality.
They represent a loss to the transport economy and make road taxes on a 2-lane road in West Africa as expensive as on a 4-lane highway in Europe…..
Table 2. Frequency of checkpoints on major transit transport routes in West Africa
Route | Distance(km) | Number of checkpoints | Frequency(km) |
Lagos–Abidjan | 992 | 69 | 14 |
Niamey–Ouagadougou | 337 | 20 | 17 |
Lomé–Ouagadougou | 989 | 34 | 29 |
Cotonou–Niamey | 1036 | 34 | 30 |
Abidjan–Ouagadougou | 1122 | 37 | 30 |
Accra–Ouagadougou | 972 | 15 | 65 |
Source: OECD/Sahel and West Africa Club [5, p. 16].
'Highway robbery'. Source: The Economist.com, 15 August 2007. West Africa "official" checkpoints and bribes to pass through for four interstate roads crossing Mali, Ghana, Togo and Burkina Faso: in Mali, a driver pays over $25 in bribes at some 4.6 checkpoints every 100km; in Burkina Faso, he pays $8.73 at two checkpoints. Customs officers are the most successful for supplementing their income, followed by the police.
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