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South Africa, the G20, and Regional Integration in Sub-Saharan Africa

South Africa, the G20, and Regional Integration in Sub-Saharan Africa

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This policy brief examines South Africa's role in the G20 as a champion for African economic development.
This policy brief examines South Africa's role in the G20 as a champion for African economic development.

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Published by: German Marshall Fund of the United States on Jun 07, 2011
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12/25/2012

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Summary
: African economicintegration suffers from a litanyof problems so a much morelimited approach to Africaneconomic integration is required.Experts identify extensivebusiness opportunities that willbe fueled by the rising urbanconsumer classes emerging in many African countries.What role could regionaleconomic integration play inaddressing African developmentchallenges? Aggregate levelsof intra-regional trade in Africaremain the lowest in the world.Pooling markets through regionaleconomic integration in principleaffords greater economiesof scale and the potential forregional production sharing.The G20’s main contribution
will be through inuencing 
key donor governments andagencies, particularly themultilateral and regionaldevelopment banks, and using its networks to leverage privatesector investment into Africaneconomies. South Africa iswell-placed to act as a bridgebetween external and Africanstakeholders in the regionaleconomic integration spaceand to champion alignment of regional priorities with externalinterventions in support of economic integration.
Analysis
Connections
Introduction
Support or regional economicintegration in sub-Saharan Arica
1
 runs high amongst the continent’sinternational development partnersand Arican elites. Tis is most loily expressed in the Arican Union’s goalo achieving a continental economicintegration scheme, the AricanEconomic Community, by 2028. Notsurprisingly, support or Aricaneconomic integration eatured promi-nently in the Development Commit-tee’s recommendations at the G20’srecent Seoul summit.However, oen the rhetoric does notmatch the reality. Arican economicintegration suers rom a litany o problems, ranging rom overlappingmemberships, through unullledcommitments, to unrealistic goals.
2
 Tereore, as the author has argued
1
Throughout this paper “Africa” should be read as “sub-Saharan Africa.”
2
Dinka, T. and Kennes, W. (2007) “Africa’s RegionalIntegration Arrangements: History and Challenges,”
ECDPM Discussion Paper No. 74
, September; Draper,P., Halleson, D. and Alves, P. (2007), “SACU, RegionalIntegration, and the Overlap Issue in Southern Africa:From Spaghetti to Cannelloni?,” South African Instituteof International Affairs, SAIIA Trade Policy Report no 15;UNECA (2006),
 Assessing Regional Integration in AfricaII: Rationalizing Regional Economic Communities
, AddisAbaba: United Nations Economic Commission for Africaand African Union. http://www.uneca.org/aria; UNECA(2008),
 Assessing Regional Integration in Africa 2008:Towards Monetary and Financial Integration in Africa
,Addis Ababa: United Nations Economic Commission forAfrica. http://www.uneca.org/aria
South Africa, the G20, and RegionalIntegration in Sub-Saharan Africa
By Peter Draper 
1744 R Street NWWashington, DC 20009T 1 202 683 2650F 1 202 265 1662E info@gmfus.org
June 7, 2011 Number 3
elsewhere, a much more limitedapproach to Arican economicintegration is required, one thatprioritizes network services, inra-structure provision, trade acilitation,and regulatory cooperation in areasrelated primarily to the conduct o business.
3
Care should be taken todesign the ensuing schemes in such away as to avoid contributing to majorimplementation and capacity chal-lenges in Arican states that are gener-ally weak, sometimes not viable, andoccasionally illegitimate. In doing so,the presence o regional leaders withrelatively deep pockets – South Aricain the Southern Arican case – pointsto the imperative o building suchlimited regional economic arrange-ments around key states.Consequently it is appropriate toask what the role o external actors,notably the G20, is in supporting suchan approach. Tis paper examinesthis question rom several angles,making specic reerence to theparticular role that South Arica, asthe most signicant Arican economy and only Arican G20 member, canplay in securing the G20’s support or
3
Draper, P. (2010) “Rethinking the (European) Foun-dations of African Economic Integration: A Political-Economy Essay,”
OECD Development Centre Working Paper 293
.
Paper series on transatlantic trade and development policy issues
 
Analysis
Connections
2
Similarly, Radelet argues that 17 mostly Southern and EastArican countries are rapidly becoming emerging markets.
6
 He argues that in these countries democracy and account-ability, whilst not perect, is increasingly entrenched; thatnew and relatively enlightened leadership is supportive o this new dynamic; that these leaderships have sustainedthe hard-ought economic reorms o the 1980s and 1990sunder the tutelage o the multilateral nancial institutions;that consequently they have reduced their external debtsto manageable levels; and that in some cases, such as withmobile phones in Kenya, these countries are engaging intechnological “leaprogging” relative to developed country peers.Add to these positive perspectives the act that China,ollowed by India and Brazil, is actively investing in thecontinent and it is clear that the old “hopeless continent”paradigm is outdated. Nonetheless, there are still groundsor caution:
•
Many Arican countries continue to rely on Western,particularly European, markets and investment.Europes medium-term growth prognosis does notseem to be dynamic.
•
Recent Arican economic growth is driven by invest-ment in resources and strongly positive terms o tradeowing to high commodity prices. It is not clear howmuch longer this boom will last, although it is likely topersist into the medium term.
•
Savings and investment rates on the continent remainlow, and consequently dependence on oreign capitalis high. While the worst o the global nancial crisisseems to be behind us, the possibility o things taking a
6
Radelet, S. (2010) “Emerging Africa: How 17 Countries are Leading the Way,”
CGDBrief.
regional economic integration in a way that is consistentwith the G20’s core agenda.
What is “the” Sub-Saharan Growth Story?
Beore considering what role(s) the G20 could play inpromoting regional economic integration in Arica, it iscritical to locate such integration in the broader context o its contribution to economic growth at the national level.Interest in sub-Saharan Arica’s economic potential hasgrown sharply in recent years. It is primarily concentratedin resource extraction, particularly minerals and ood-related industries, but there is growing interest in network services, reecting major pent-up demand or developmentprojects, and, to a lesser extent, in Arican manuacturing.Te International Monetary Fund notes that aggregate pre-global nancial crisis economic growth across sub-SaharanArica was the highest since independence; was driven by sustained oreign direct investment inows and remittancelevels, which in turn reduced aid dependence; was accom-panied by record oreign exchange accumulation in many countries; and resulted in sustainable aggregate debt levelsaround 46 percent o GDP on average – much better thanmany industrialized countries today.
4
Furthermore, they note that those countries that stuck with their macroeco-nomic reorm programs were more resilient in the crisis,which in turn enabled them to pursue macroeconomiceasing in response.Te McKinsey Global Institute argues that Aricanmedium- to long-term growth prospects are good, andthat this comes on the back o sustained, diversied, andstrong growth experienced in the 2002-2007 period.
5
Tey note that the continent is now much better integrated intothe global economy than in the period o painul struc-tural adjustment, a process they see as having acceleratedthat outcome. Consequently they identiy extensive busi-ness opportunities that will be ueled by the rising urbanconsumer classes emerging in many Arican countries.Within this, they identiy a group o “diversied” econo-mies, mostly in North and Southern Arica, which is rela-tively well-placed or growth, and a group o “transitioncountries en route to longer term growth.
4
International Monetary Fund (2010a) “Regional Economic Outlook Sub-Saharan Africa:Resilience and Risks,” Washington, DC, October.
5
McKinsey Global Institute (2010) “Lions on the move: the progress and potential of African economies.”
Pre-global nancial crisis
economic growth across sub-Saharan Africa was the highestsince independence.
 
Analysis
Connections
3
Furthermore, proponents o the “New Economic Geog-raphy” advance strong arguments against promotingsouth-south economic integration schemes amongst poordeveloping countries.
9
Essentially these are in regardto the danger o industrial concentration, or agglom-eration, which over time would generate substantialpolitical tensions
10
that in turn would undermine inte-gration processes.
11
Tey also raise substantial questionsconcerning the limits to strong regional leadership indriving economic integration in Arica.Nonetheless, there are economic problems associated withthe ragmentation o states in Arica. For example, nobody knows how much inormal and unrecorded trade takesplace across national borders. As Bauer notes, substan-tial economic activity in poor countries happens belowthe radar o ofcial statistics, which, as it is not ormally captured and amenable to modern policy analysis, oensuers rom poorly designed policies predicated on theerroneous notion that the inormal economy is unproduc-tive.
12
Hence regional trade acilitation measures can helpto increase both the level o ormality and volume o suchtrade at the same time.
13
 Furthermore, regional provision o public goods, notably in the spheres o policy and/or regulatory coordinationand particularly provision o network services inrastruc-
9
World Bank (2000),
Trade Blocs, Policy Research Report
, Oxford University Press.
10
This process was a substantial factor behind the unravelling of the original EastAfrican Community, as Kenya attracted manufacturing investment and relocation at theexpense of Uganda and Tanzania. It also partly explains why South Africa continues to“compensate” its customs union partners for their membership in SACU.
11
North-north integration schemes will not suffer from agglomeration since intra-industry trade is a strongly established feature of such arrangements; similarly in north-south schemes, inter-industry trade is the basis.
12
Bauer, P. (2000)
From Subsistence to Exchange – and other essays
. Princeton:Princeton University Press.
13
Lesser, C. and Moisé-Leeman, E. (2009) “Informal Cross-Border Trade and TradeFacilitation Reform in Sub-Saharan Africa,”
OECD Trade Policy Working Papers
, No. 86,OECD Publishing.
sharp turn or the worse in the next year or two cannotbe dismissed, especially i there are more sovereigndebt crises in Europe.
•
Poverty levels in Arica remain high, as mirrored in very low per capita GDP gures. o substantially raiseper capita GDP will take decades o sustained andrapid growth, which cannot be guaranteed.
•
Meanwhile many countries remain economically andpolitically ragile, and acutely vulnerable to externalshocks, as Mozambique demonstrated in late 2010when ood riots gripped the capital, Maputo.
•
Many countries have huge reorm agendas ahead o them, particularly the kinds o microeconomic reormsthat will improve investment climates. It is arguably here where regional economic integration could play asubstantial role.
Regional Integrationand African Development Challenges
In light o these large challenges, what role could regionaleconomic integration play in addressing Arican develop-ment challenges? Sub-Saharan Arican countries gener-ally trade mainly with developed countries, rom whichinward investment is also primarily sourced,
7
though therehas been some diversication towards emerging markets,especially China, in recent years. Within this, the bulk o extra-regional exports is undierentiated commodities thatare generally not needed in regional supply chains becauseo the serious underdevelopment o manuacturing indus-tries. It is thereore not surprising to nd that aggregatelevels o intra-regional trade in Arica remain the lowest inthe world, at around 10 percent.
8
 Yet the major obstacle to economic diversication in Aricais the very low level o economic development to beginwith. Integrating with neighbors that also suer rom thisproblem may mitigate it to some extent by promotingspecialization in commodities trade, and encouragingsubsistence armers and nascent manuacturers to produceor wider markets, but does not hold nearly as much poten-tial as integration with dynamic and large external markets.
7
UNCTAD (2009)
Economic Development in Africa Report: Strengthening RegionalEconomic Integration for Africa’s Development.
United Nations: Geneva. 56.
8
UNCTAD (2009)
Economic Development in Africa Report: Strengthening RegionalEconomic Integration for Africa’s Development.
United Nations: Geneva 23.
The major obstacle to economic
diversication in Africa is the
very low level of economicdevelopment to begin with.

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"African economic integration suffers from a litany of problems so a much more limited approach to African economic integration is required."
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