Has Regional Economic Integration Promoted Trade In Southern Africa?

The Spaghetti Trap by Danandjay Luximon Department of Economics and Statistics, Faculty of Social Studies and Humanities, University of Mauritius, Rduit, Mauritius

November 2003

Abstract The proliferation of PTAs in Sub-Saharan Africa has led to a spaghetti-bowl situation, where trade barriers (including duties) vary across regional blocs depending on origin and complex protection-accommodating rules of origin (RoO). Occurring at a time of rapid globalization, which makes identification of local content, and hence origin of trade and services, difficult and arbitrary, PTAs constitute one big step backward in nondiscriminatory trade agreements. This spaghetti-bowl situation, besides being a potential source of confusion in customs procedures and RoO provisions, is administratively cumbersome to manage. Mauritius considers its participation in regional trading arrangements (RTAs) as a step in the direction of fuller integration into the world economy, as a catalyst of deeper trade liberalization, and as a political force to reckon with in the international trade negotiation arena. This paper focuses on one specific objective of RTAs, namely to promote intraregional trade. Using an augmented gravity model, the paper presents empirical evidence on the impact of RTA membership on Mauritian exports to membercountries. The general conclusion is that regional integration has not had a statistically significant effect on Mauritian exports to the region. A key reason for this dismal finding is that the trade patterns of countries in the region are not mutually compatible. Using trade compatibility and export similarity indices for Mauritius major exports, the paper shows that many SSA countries do not import those goods in which Mauritius has a comparative advantage. This is due either to the fact that the countries export similar goods or that African countries are typically demand-deficient.

INTRODUCTION Regionalism is not a new phenomenon in Africa. Indeed, the worlds oldest customs union exists in Southern Africa, and the list of both past and present multilateral economic agreements is probably longer than that of any other continent. However, while some successful examples of regional co-operation do exist, Africas record of creating and sustaining regional frameworks is generally poor. While economic theory points to various benefits of integration as economies of scale, efficiency, stronger voice, policy credibility -, these benefits are more limited than elsewhere because of low incomes and limited complementarity of the economies. On this background, it is not astonishing that the actual progress of regional economic integration in Africa has remained very modest, as indicators on various economic dimensions show. Further drawbacks of the progress include multiplicity of schemes and objectives, persistence of colonial ties, and concerns about distributional impacts. STEPS TO ECONOMIC INTEGRATION Economic integration proceeds in five distinct steps starting with preferential trading area (PTA), free trade area (FTA), customs union (CU), common market and economic union. The first three are most common, FTA most popular with all trade barriers, tariffs and nontariff barriers (NTBs) on goods and services eliminated across the board rather than item by item at preferential rates among members as in PTA. From the very first post-colonial meetings, African leaders emphasised regional integration as a key element of their strategies. This was based on the view that the economic constraints imposed by the smallness and fragmentation of national markets was a main economic constraint that could be overcome by regionalism (Lyakurwa et al. 1997). The Lagos Plan of Action (LPA) of 1980 envisaged the formation of an African common market by the year 2000, to be achieved in stages: the formation of free trade areas as a start, followed by a common market and an economic union. The same process was to be followed in the three sub-regions identified by the LPA: Eastern and Southern Africa, Central Africa, and West Africa. The LPA led to the establishment of the Preferential Trade Area (PTA) in Eastern and Southern Africa, transformed to the Common Market of Eastern and Southern Africa (COMESA) in

1993. Regional integration schemes in other regions the Economic Community of West African States (ECOWAS), Economic Community of Central African States (ECCAS) had already been established before 1980. In 1991 the African leaders signed the treaty to establish a Pan African Economic Community (PAEC). This treaty provided for the existing sub-regional groupings to serve as building blocks for this new Community. The most recent African plan for economic development is the New Partnership for Africas Development (NEPAD) that is based on the New African Initiative (NAI), a merger of the Millennium Partnership for the African Recovery Programme (MAP) and the Omega Plan. Regional and sub-regional approaches to development are again a key element. Starting from the observation of the small size of countries, low incomes, and consequently limited markets, the plan sees this as a limit to economies of scale, denying attractive returns to investors, and retarding diversification of production and exports. This is the key reason for pooling resources in order to enhance regional economic integration. However, there are enormous differences in size, the role of trade, and factor endowments among the regions. South Africa is the prominent economy in the region it accounts for almost 76 percent of SADC GDP, followed by the rest of SADC, which accounts for 8 percent of regional GDP. The other countries in the region are quite small, each accounts for less than 5 percent of regional GDP. However, South Africa (and Africa in general) is small compared to other major trade partners for the region. A similar pattern holds for exports South Africa is the major exporter among the SADC countries, but it is small in the global market when compared to the EU. SADC countries are more dependent on trade than is the EU. At the extreme, exports are 58 percent of GDP for Botswana and 52 percent of GDP for the rest of SADC. In contrast, the EU exports 14 percent of its GDP. A similar pattern holds for imports as a share of GDP. This high trade dependency means that trade liberalization can induce large structural changes in South Africa and the rest of Southern Africa.

In Europe, regional economic integration began in the 1950s and has continued to develop into more advanced stages. However, the U.S. abandonment of its longstanding opposition to regionalism in the late 1980s was the crucial event leading to the subsequent proliferation of regionalism. In the 1990s, regionalism became a worldwide phenomenon. As of March 2001, out of the total 152 regional trade agreements notified to GATT/WTO, 122 were formed since 1991. By the end of last year, 250 FTAs had been notified to the WTO. If those currently under negotiation are concluded, that number will approach 300. In a famous phrase, Bhagwati characterised these deals as "stumbling blocks to and not "building blocks of trade liberalisation. Even more colourfully, he once wrote that as preferential trading agreements spread, the world's trading system comes to look like a spaghetti-bowl of ever more complicated trade barriers. Occurring at a time when multinational corporations (MNCs) are globalised making identification of local content and hence origin of trade goods and services difficult and arbitrary, PTAs constitute one big step backward in nondiscriminatory trade agreements. REASONS FOR RISING REGIONALISM Economists are unanimous in their support for worldwide free trade, but when it comes to the desirability of regionalism, economists are divided. Some consider trade blocs as stumbling blocks to global liberalization, while others regard them as building blocks toward worldwide nondiscriminatory trade liberalization. Opponents of regionalism argue that the member countries of trade blocs will be less interested in multilateral liberalization talks. They also point out that small countries will be in a disadvantageous position when they negotiate with large ones. For the advocates of regionalism, removal of trade barriers, no matter how it happens, is good for free trade. They believe that trade liberalization through regional trade agreements is politically easier than multilateral or unilateral liberalization. A WTO report seems to share this relative optimism when it says that regionalism has been complementary to multilateral trade liberalization. According to Anne Krueger, the evidence is that preferential trade arrangements (PTAs) have, on balance, been more

trade-creating than trade-diverting, partly because increased integration within PTAs took place concurrently with increased openness of most economies. Furthermore, African countries are generally too small to take part in a meaningful way in international negotiations. A regional bloc has a stronger voice in international negotiations than do small countries (even the regional giant South Africa is a dwarf in the global economy). However, there are also costs of membership in a bloc: participating countries have to sacrifice their own position, and a need for internal bargaining arises (Andriamanjara and Schiff 1998). This is especially important in case of unequal negotiation partners where differences in benefits can be expected and has proved to be a major handicap in SSA. One can argue that the often substantial unrecorded cross-border trade is an indication of both the failure of regional integration schemes and potential for regional trade in SSA (Azam 1999). Estimates are that the unrecorded trade may be as high as the official one. However, this trade seems to be more an issue in regions other than Southern Africa Quite unique to SSA is the multiple memberships in regional bodies. Regional groupings are overlapping a particular problem for the SADC countries. These are not only uncoordinated, they have partially conflicting membership obligations, different strategies and internal liberalisation objectives, inconsistent external liberalisation goals, different timetables and phase-in periods, different coverages, and different and conflicting rules and administrative procedures. These definitely undermine investor confidence. Furthermore, members who are impatient to reap the benefits of regional integration, or who are faced with difficult decisions, have the option of choosing an easy exit strategy if they enjoy membership in different organisations. Kenya and Uganda are members of IGAD and COMESA, from which Tanzania exited in 1999. Tanzania is a member of SADC, which Uganda may also be invited to join. While the objectives

may be similar, these regional integration groups choose conflicting routes to achieve them. Deciding on the rules of origin and the list of exceptions have also been thorny issues in COMESA and different criteria may be decided in the EAC region. Another effect regionalism may cause on the international system, is that it can make the (WTO) negotiation process very slow. This can be caused by regional interest groups who want control of the negotiation process. Negotiations then become a process in 2 levels, where negotiators need to pass back and forth between interregional and regional negotiations. The question is: Is this disappointing record of economic integration due to a lack of implementation or inappropriate methods of implementation, or does it rather reflect inherent limits of the potential for regional integration? OVERLAPPING MEMBERSHIPS The regional arrangements are like pasta. Five members of the SADC belong to the SACU, and all, except Botswana and South Africa, also belong to Community of Eastern and Southern African countries (COMESA). From Table 1, seven of these countries are also signatories to the Cross Border Initiative (which aims to promote trade and investment, but is not a formal grouping). Tanzania is also a member of the revived East African Community. Zimbabwe has bilateral trade agreements with three of the five SACU countries: South Africa, Botswana and Namibia, and the SACU countries have a free trade agreement with Malawi. South Africa, which is classified by the EU as an economy in transition, has an agreement with the EU that requires reciprocity in tariff reduction. In addition to these RTAs, several bilateral trading arrangements exist as of 1999 within the SADC context: three between South Africa and Zimbabwe (confined to clothing and textiles), Malawi as well as Mozambique. Also, three FTA exist between Zimbabwe and Botswana, Malawi as well as Namibia. The other major trade arrangements are the Lom/Cotonou Preferential Trade Agreement between the EU and Southern African LDCs and the US African Growth Opportunity Act.

What advantages of overlapping RIAs can one think of? (i) A country with memberships in several RIAs might be an interesting production location for foreign investors. It should attract foreign direct investments, if the other members of the RIA impose more protectionist measures (tariffs or NTBs) than the country in question. The moment Rules of Origin are enforced, this advantage diminishes. (ii) Based on the history of European integration, usually founding members enjoy more economic advantages than late joiners. Their political cloud is higher, as they determine the conditions under which new member countries join the club. In this respect SADC is an exception, as the late joiner South Africa in 1994 is the regional powerhouse in Southern Africa. While these economic advantages of overlapping RIAs are difficult to measure, the problems that are involved with a messy cluster of Preferential Trade Agreements can easily be detected: (i) Countries with memberships in several RIAs might be interesting for foreign investors, but the latter are often also detered by the complexity of trade regulations that arises due to different RIAs especially, when there many exceptions to the rule like NTBs. Also, the complexity due to various RIAs often reduces the commitment and pace by which the government agencies implement the trade arrangements. This is especially the case for low-income countries in Southern Africa with limited administrative manpower and know-how. (ii) For governments trying to implement the regulations of various RIAs one finds usually a declining commitment for trade liberalization on a multilateral base. Especially, when the fiscal implications of opening the domestic market (loss of tariff revenue) are severe. (iii) Some Countries face conflicting obligations and inconsistencies: as members of a future Customs Union (COMESA) they will not be able to offer

preferences to non-members with whom they are partners in another free trade arrangement (SADC) (IMF 2001). (iv) Political conflicts, within or between member countries, delay further integration (or its implementation). Unfortunately, these are quite common in Southern Africa; e.g. the civil wars in Angola, Congo, Burundi and the social unrest in Zimbabwe. Others argue that multiple memberships are a hindrance to regional integration since, among other things, it introduces duplication of effort. For instance, Aryeetey and Oduro (1996) quote McCarthy as arguing that, It is difficult to envisage how SADC and COMESA, given their convergence to both sectoral cooperation and trade integration, can live and prosper with the overlapping membership of the Southern African countries. An OAU Study to understand problems of country participation in SADC and COMESA shows that countries do face problems by participating in many RTAs. These problems include human and financial costs associated with membership, lack of harmonization of policies especially in the areas of rules of origin and customs procedures, a large information gap at policy making and implementation levels, and changing political position of member countries of different RECs are few among many (Alemayehu 1998). Thus, because of its discriminatory nature, a preferential agreement must distinguish non member originating from member originating products in order for a product to be granted preferential access. In reality, few goods are produced wholly in one place. Goods exported by a country often contain components imported from elsewhere. This fact opens the door to the rules of origin (ROOs) within FTAs. These rules usually specify a certain proportion of the value added that must have withinunion origin to qualify for duty-free status in the FTA. We assume that there are no traded inputs. SPAGHETTI BOWL EFFECT This RIA proliferation in most of the world has been the formation of the so-called spaghetti-bowl. This concept has traditionally been associated with the negative

effects of RIAs, especially due to the lack of transparency and complexity of overlapping trade rules among commercial partners. While we cannot dismiss the costs associated with the spaghetti-bowl, we must also measure potential benefits. It is a reflection of the revealed preferences by nation states in search of their commercial and economic interest, as a potential first stage towards greater interdependence. This poses the danger of generating a spaghetti bowl phenomenon where trade barriers, including duties, vary depending on origin, and complex and protectionaccommodating rules of origin find their way into practice. Apart from these ongoing debates on the desirability of regionalism using theoretical arguments, the fact that regionalism has become a worldwide phenomenon is clear proof that most countries think joining regional trade agreements will be beneficial at least to themselves. MORE COMPLEX SPAGHETTI BOWLS, HUBS & SPOKES SYSTEM Wonnacott (1996) introduced the terminology of hubs and spokes. Wonnacott described a hub as arising from the decision of an outside country to form a bilateral agreement with only one member of a multi-member pre-existing RTA. The inside country is called the hub. This definition of a hub is too narrow. The general phenomenon is one of intersections between RTAs. A hub exists where one country (customs territory) is a member of two distinct RTAs. In such cases, the spokes may be called bilateral spokes. Or they may arise when one country is a member of one (bilateral or plurilateral) RTA and then forms a new bilateral RTA with another RTA; for example the US has an agreement with the CACM countries. These spokes may be called plurilateral spokes. One can measure this effect by counting the number of spokes for each hub, that is, the number of parties with which one hub country has separate regional trade agreements. The one country that will benefit more is the hub because the preferences it gets in each spoke market in competition with all other spokes. Spokes face discrimination in the hubs market if the hub negotiates more favourable bilaterals with new spokes. Even spokes may lose control if they sign bilaterals with outsiders, which damage the hub by reducing it to spoke status in new

H&S system. In the event, the result would be example of more complex spaghetti bowls which evolved in EU, Latin America and Southern Africa.

Table 1

Membership of Southern African Countries in Regional Trade Agreements

COUNTRY

CBI

COMESA

SACU

SADC

Angola Botswana Comoros DR Congo Lesotho Madagascar Malawi Mauritius Mozambique Namibia Seychelles South Africa Swaziland Tanzania Zambia Zimbabwe BIBLIOGRAPHY

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