This action might not be possible to undo. Are you sure you want to continue?
June 7, 2011 Number 3
Summary: African economic integration suffers from a litany of problems so a much more limited approach to African economic integration is required. Experts identify extensive business opportunities that will be fueled by the rising urban consumer classes emerging in many African countries. What role could regional economic integration play in addressing African development challenges? Aggregate levels of intra-regional trade in Africa remain the lowest in the world. Pooling markets through regional economic integration in principle affords greater economies of scale and the potential for regional production sharing. The G20’s main contribution will be through influencing key donor governments and agencies, particularly the multilateral and regional development banks, and using its networks to leverage private sector investment into African economies. South Africa is well-placed to act as a bridge between external and African stakeholders in the regional economic integration space and to champion alignment of regional priorities with external interventions in support of economic integration.
South Africa, the G20, and Regional Integration in Sub-Saharan Africa
By Peter Draper
Introduction Support for regional economic integration in sub-Saharan Africa1 runs high amongst the continent’s international development partners and African elites. This is most loftily expressed in the African Union’s goal of achieving a continental economic integration scheme, the African Economic Community, by 2028. Not surprisingly, support for African economic integration featured prominently in the Development Committee’s recommendations at the G20’s recent Seoul summit. However, often the rhetoric does not match the reality. African economic integration suffers from a litany of problems, ranging from overlapping memberships, through unfulfilled commitments, to unrealistic goals.2 Therefore, as the author has argued
1 Throughout this paper “Africa” should be read as “subSaharan Africa.” 2 Dinka, T. and Kennes, W. (2007) “Africa’s Regional Integration Arrangements: History and Challenges,” ECDPM Discussion Paper No. 74, September; Draper, P., Halleson, D. and Alves, P. (2007), “SACU, Regional Integration, and the Overlap Issue in Southern Africa: From Spaghetti to Cannelloni?,” South African Institute of International Affairs, SAIIA Trade Policy Report no 15; UNECA (2006), Assessing Regional Integration in Africa II: Rationalizing Regional Economic Communities, Addis Ababa: United Nations Economic Commission for Africa and 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 for Africa. http://www.uneca.org/aria
elsewhere, a much more limited approach to African economic integration is required, one that prioritizes network services, infrastructure provision, trade facilitation, and regulatory cooperation in areas related primarily to the conduct of business.3 Care should be taken to design the ensuing schemes in such a way as to avoid contributing to major implementation and capacity challenges in African states that are generally weak, sometimes not viable, and occasionally illegitimate. In doing so, the presence of regional leaders with relatively deep pockets – South Africa in the Southern African case – points to the imperative of building such limited regional economic arrangements around key states. Consequently it is appropriate to ask what the role of external actors, notably the G20, is in supporting such an approach. This paper examines this question from several angles, making specific reference to the particular role that South Africa, as the most significant African economy and only African G20 member, can play in securing the G20’s support for
1744 R Street NW Washington, DC 20009 T 1 202 683 2650 F 1 202 265 1662 E email@example.com
3 Draper, P. (2010) “Rethinking the (European) Foundations of African Economic Integration: A PoliticalEconomy Essay,” OECD Development Centre Working Paper 293.
regional economic integration in a way that is consistent with the G20’s core agenda. What is “the” Sub-Saharan Growth Story? Before considering what role(s) the G20 could play in promoting regional economic integration in Africa, it is critical to locate such integration in the broader context of its contribution to economic growth at the national level. Interest in sub-Saharan Africa’s economic potential has grown sharply in recent years. It is primarily concentrated in resource extraction, particularly minerals and foodrelated industries, but there is growing interest in network services, reflecting major pent-up demand for development projects, and, to a lesser extent, in African manufacturing. The International Monetary Fund notes that aggregate preglobal financial crisis economic growth across sub-Saharan Africa was the highest since independence; was driven by sustained foreign direct investment inflows and remittance levels, which in turn reduced aid dependence; was accompanied by record foreign exchange accumulation in many countries; and resulted in sustainable aggregate debt levels around 46 percent of GDP on average – much better than many industrialized countries today.4 Furthermore, they note that those countries that stuck with their macroeconomic reform programs were more resilient in the crisis, which in turn enabled them to pursue macroeconomic easing in response. The McKinsey Global Institute argues that African medium- to long-term growth prospects are good, and that this comes on the back of sustained, diversified, and strong growth experienced in the 2002-2007 period.5 They note that the continent is now much better integrated into the global economy than in the period of painful structural adjustment, a process they see as having accelerated that outcome. Consequently they identify extensive business opportunities that will be fueled by the rising urban consumer classes emerging in many African countries. Within this, they identify a group of “diversified” economies, mostly in North and Southern Africa, which is relatively well-placed for growth, and a group of “transition” countries 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.”
Similarly, Radelet argues that 17 mostly Southern and East African countries are rapidly becoming emerging markets.6 He argues that in these countries democracy and accountability, whilst not perfect, is increasingly entrenched; that new and relatively enlightened leadership is supportive of this new dynamic; that these leaderships have sustained the hard-fought economic reforms of the 1980s and 1990s under the tutelage of the multilateral financial institutions; that consequently they have reduced their external debts to manageable levels; and that in some cases, such as with mobile phones in Kenya, these countries are engaging in technological “leapfrogging” relative to developed country peers.
Pre-global financial crisis economic growth across subSaharan Africa was the highest since independence.
Add to these positive perspectives the fact that China, followed by India and Brazil, is actively investing in the continent and it is clear that the old “hopeless continent” paradigm is outdated. Nonetheless, there are still grounds for caution: • Many African countries continue to rely on Western, particularly European, markets and investment. Europe’s medium-term growth prognosis does not seem to be dynamic. Recent African economic growth is driven by investment in resources and strongly positive terms of trade owing to high commodity prices. It is not clear how much longer this boom will last, although it is likely to persist into the medium term. Savings and investment rates on the continent remain low, and consequently dependence on foreign capital is high. While the worst of the global financial crisis seems to be behind us, the possibility of things taking a
6 Radelet, S. (2010) “Emerging Africa: How 17 Countries are Leading the Way,” CGD Brief.
sharp turn for the worse in the next year or two cannot be dismissed, especially if there are more sovereign debt crises in Europe. • Poverty levels in Africa remain high, as mirrored in very low per capita GDP figures. To substantially raise per capita GDP will take decades of sustained and rapid growth, which cannot be guaranteed. Meanwhile many countries remain economically and politically fragile, and acutely vulnerable to external shocks, as Mozambique demonstrated in late 2010 when food riots gripped the capital, Maputo. Many countries have huge reform agendas ahead of them, particularly the kinds of microeconomic reforms that will improve investment climates. It is arguably here where regional economic integration could play a substantial role. Furthermore, proponents of the “New Economic Geography” advance strong arguments against promoting south-south economic integration schemes amongst poor developing countries.9 Essentially these are in regard to the danger of industrial concentration, or agglomeration, which over time would generate substantial political tensions10 that in turn would undermine integration processes.11 They also raise substantial questions concerning the limits to strong regional leadership in driving economic integration in Africa.
The major obstacle to economic diversification in Africa is the very low level of economic development to begin with.
Nonetheless, there are economic problems associated with the fragmentation of states in Africa. For example, nobody knows how much informal and unrecorded trade takes place across national borders. As Bauer notes, substantial economic activity in poor countries happens below the radar of official statistics, which, as it is not formally captured and amenable to modern policy analysis, often suffers from poorly designed policies predicated on the erroneous notion that the informal economy is unproductive.12 Hence regional trade facilitation measures can help to increase both the level of formality and volume of such trade at the same time.13 Furthermore, regional provision of public goods, notably in the spheres of policy and/or regulatory coordination and particularly provision of network services infrastruc9 10
Regional Integration and African Development Challenges In light of these large challenges, what role could regional economic integration play in addressing African development challenges? Sub-Saharan African countries generally trade mainly with developed countries, from which inward investment is also primarily sourced,7 though there has been some diversification towards emerging markets, especially China, in recent years. Within this, the bulk of extra-regional exports is undifferentiated commodities that are generally not needed in regional supply chains because of the serious underdevelopment of manufacturing industries. It is therefore not surprising to find that aggregate levels of intra-regional trade in Africa remain the lowest in the world, at around 10 percent.8 Yet the major obstacle to economic diversification in Africa is the very low level of economic development to begin with. Integrating with neighbors that also suffer from this problem may mitigate it to some extent by promoting specialization in commodities trade, and encouraging subsistence farmers and nascent manufacturers to produce for wider markets, but does not hold nearly as much potential as integration with dynamic and large external markets.
UNCTAD (2009) Economic Development in Africa Report: Strengthening Regional Economic Integration for Africa’s Development. United Nations: Geneva. 56. UNCTAD (2009) Economic Development in Africa Report: Strengthening Regional Economic Integration for Africa’s Development. United Nations: Geneva 23.
World Bank (2000), Trade Blocs, Policy Research Report, Oxford University Press.
This process was a substantial factor behind the unravelling of the original East African Community, as Kenya attracted manufacturing investment and relocation at the expense of Uganda and Tanzania. It also partly explains why South Africa continues to “compensate” its customs union partners for their membership in SACU.
North-north integration schemes will not suffer from agglomeration since intraindustry trade is a strongly established feature of such arrangements; similarly in northsouth 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 Trade Facilitation Reform in Sub-Saharan Africa,” OECD Trade Policy Working Papers, No. 86, OECD Publishing.
ture (energy, finance, telecommunications, transport), grounded in a trade facilitation agenda, has an important role to play in addressing development challenges. In addition, Collier and Venables note that African markets are very small when considered individually, whereas pooling markets through regional economic integration in principle affords greater economies of scale and the potential for regional production sharing (though still running the twin risks of diverting trade and agglomeration).14 And since small markets are vulnerable to monopoly/ monopsony capture, which may discourage investment in them, widening the market may minimize this problem by offering the prospect for greater competition. If supported by appropriate trade facilitation measures, the productivity gains through widening regional markets could be substantial. Overall, while regional economic integration in Africa could yield net benefits, it is not likely to drive economic development in the manner of European or East Asian economic growth. Rather, it must be buttressed with north-south economic integration that plays to the region’s comparative advantages, should promote income convergence, and over time should also promote knowledge transfers from developed to developing countries.15 While this approach at first glance would seem to “condemn” African countries to the status of perennial suppliers of primary products to northern markets, that conclusion assumes comparative advantage is static – which is clearly not the case.16 Rather, it is arguably through trade and commercial contact with dynamic regions of the world that developing countries grow and diversify their economies.17 These undercurrents point to a limited regional economic integration agenda, tailored to regional capacities. To summarize, this agenda should comprise three essential elements: promoting productivity gains through widening regional markets by establishing free trade areas (FTAs); trade facilitation; and provision of regional public goods,
14 Adherents to strategic trade theory would add that it also offers the potential to build regionally, and potentially globally, competitive industries. However, since this theory concerns industries that are global in nature, in my view it has very limited (if any) applicability to the African context. 15 The accession of relatively poor countries into the European Union in various waves provides strong evidence of such convergence effects. 16 Sally, R. (1998) Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History. London: Routledge, 40-50). 17 Bauer, P. (2000) From Subsistence to Exchange – and other essays. Princeton: Princeton University Press.
especially network services infrastructure. A key question is how regional leaders can be supported and boosted, with a long-term view to pulling their regions up with them. The G20’s Role in Sustaining African Growth: Macroeconomics and Trade Regional economic integration in sub-Saharan Africa can play a limited role in promoting development in the subcontinent, provided it is correctly conceived and targeted. The G20’s core agenda is arguably of greater significance to African development prospects. Therefore this section briefly discuss its contours before turning to what the G20 could do to support regional integration efforts.
While regional economic integration in Africa could yield net benefits, it is not likely to drive economic development in the manner of European or East Asian economic growth.
Africa’s recent “golden growth period” depended in large measure on the global growth environment. In the aftermath of the financial crisis, and with tensions concerning macroeconomic imbalances on the rise amongst the major G20 players, that environment could be subjected to major shifts, particularly if it leads to retaliatory actions with implications for global trade and investment. This raises the possibility of creeping protectionism in major markets. Clearly the worst predictions have not come to pass to date, though there has been a substantial escalation in “murky protectionism.”18 Ogunleye documents the contours of impact of African trading partners’ protection measures on African trade and finds substantial incidence of harm (80 percent of total measures versus 20 percent that were
18 Baldwin, R. and Evenett, S. (2009) “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20,” VoxEU.org, March 5th. Corden, W. Max (2007), Those Current Account Imbalances: A Skeptical View, The World Economy, Vol. 30, pp. 363-382.
Regional economic integration in sub-Saharan Africa can play a limited role in promoting development in the sub-continent, provided it is correctly conceived and targeted.
liberalizing).19 Not surprisingly these harmful measures mostly affected the more diversified African economies, particularly South Africa (80 measures) followed by Egypt, Tunisia, Morocco, and Kenya (56, 40, 33, and 31 measures, respectively). Ogunleye also notes that a substantial portion of these measures are concentrated in the agricultural sector, in which many African countries have a comparative advantage, and that the World Trade Organization’s (WTO) rules specifically allow for developed countries to increase payments to their farmers in times of declining global prices, including export support payments. As a result, concluding the Doha round is urgent, if unlikely. If the macroeconomic policy actions implied by the Seoul Action Plan were actually taken, while in the short-term these problems would remain in place, in the mediumterm, pressure on the trade front should diminish. Furthermore, if this was combined with a serious and successful push to conclude the Doha Round, and expand the purview of the WTO into those areas of interest to African economies not covered by current disciplines, the G20 would make a very important contribution to leading the world out of the very choppy waters in which it finds itself, and by extension would do African economies a great service. Can the G20 Collaborate to Build African Integration? The G20, unlike the G7, is not a pledging or donor organization. Therefore it has very limited modalities to directly support African integration. Rather, its main contribution will be through influencing key donor governments and
agencies, particularly the multilateral and regional development banks, and using its networks to leverage private sector investment into African economies. This broad thrust is encapsulated in the G20’s Development Working Group, co-chaired by South Africa. In line with the argument developed above concerning the contribution regional economic integration can make to African development, three broad focus areas stand out: infrastructure, particularly network services; trade facilitation; and regulatory capacities linked to the first two. Given that these areas are already subject to many support packages provided by OECD donor nations and development banks, this prioritization does not represent anything new. It does, however, proffer a sharper focus than would otherwise be the case. The G20, through its Development Working Group, should play the role of “honest broker” in tasking development banks and regulatory agencies with coordinating their support packages to relevant African institutions at all levels in support of this agenda, with the underlying principle being to make such support much more “user-friendly” than is currently the case. This is no small task, since there are many different views and interests amongst G20 members. But it is a task appropriate to the G20’s coordination and leadership mandate. Critical to its success, however, will be the extent to which the process enjoys African ownership. What Role Should South Africa Play? This is where South Africa becomes a critical player, since it is the only African G20 member and an essential member of relevant African development-oriented institutions such as the African Development Bank, African Union, and the New Partnership for Africa’s Development (NEPAD). Notwithstanding perennial suspicions of South Africa and its African agenda, the country is well-placed to act as a bridge between external and African stakeholders in the regional economic integration space and to champion alignment of regional priorities with external interventions in support of economic integration. The South African government takes its “African mandate” very seriously, and rolls it out in many different multilateral forums even if its interests sometimes diverge from those of its partners. Most recently, this was in evidence during the BRICS20 summit held in Sanya, China, where a core part of the South African delegation’s agenda was to leverage financing
Ogunleye, K.E. (2010) “Effects of Post-Crisis Foreign Trade Policy Measures on Economic and Trade Performance in Africa,” Global Trade Alert, 5, May.
Brazil, Russia, India, China, South Africa.
from its partners to support African infrastructure development projects. Clearly South Africa has an interest in seeing such initiatives succeed since its companies stand to benefit both from better infrastructure provision and the contracts that may arise, but that is precisely the point. South Africa’s advocacy for the rest of the subcontinent is a win-win scenario whereby African recipients are provided with much-needed infrastructure and institutional support, South African and other external partners’ companies profit in the process, and the region receives a muchneeded boost to its integration process. This approach also squares with the Development Working Group’s emphasis on promoting private sector capacities in Africa. Furthermore, South Africa supports regional economic integration in Southern and Eastern Africa with its own institutions, notably the Development Bank of Southern Africa, which funds infrastructure, and the Industrial Development Corporation, which funds industrial projects. In order to lead by example, greater emphasis should be given to these institutions, and their mandates aligned with the G20 Development Working Group’s recommendations. Finally, South Africa also has an essential voice in international arenas, such as the WTO. It should continue to use this voice to pressure its G20 counterparts to amicably resolve their differences concerning macroeconomic policies in the interest of maintaining stability in the international trading system. As the Doha round hovers precariously closer to the precipice of oblivion, South Africa should consistently point out the implications for African countries of failure to maintain the system’s integrity. But South Africa could also seize the initiative and align with its BRIC and other developing country counterparts to develop a proactive international trade agenda, in order to ultimately rebalance global leadership on international trade issues in support of the multilateral trading system. Ultimately that could prove to be the most significant South African contribution to African economic development.
About the Author
Peter Draper is the founder and director of Tutwa Consulting. His current domestic affiliations include senior research fellow in the Economic Diplomacy programme at the South African Institute of International Affairs, visiting adjunct professor of international business at Wits Business School, and research associate of the Department of Political Science at the University of Pretoria. His current international affiliations include board member of the Botswana Institute for Development Policy Analysis, non-resident senior fellow of the Brussels-based European Centre for International Political Economy, non-resident Fellow of the OECD’s Development Centre, member of the IMD-Lausanne’s Evian group, member of the World Economic Forum’s Global Agenda Council on Trade, and member of the World Economic Survey Expert Group.
The German Marshall Fund of the United States (GMF) is a nonpartisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.