Economic Potential for Africa’s Regional Trade Co-operation: Opportunities and challenges

London – 10 March 2012Opening Remarks by Edwin Laurent

Madam Moderator Winnie Mutesi, Dr. Githiora, Chairman of the Centre for Africa Studies of the University of London, distinguished ladies and gentlemen.

It is a signal honour for me to address such an eminent gathering of scholars, business persons, experts, government representatives and students. I take it though as acknowledgement of our work on development and the makeup of our membership with the African bloc of countries being the largest. Africa’s concerns and ambitions are inextricably entwined with our own raison d’être. When working with an intergovernmental organisation it can often be prudent to start presentations with a disclaimer more so when tackling contentious trade policy issues in which there are almost as many diverging perspectives and interests among the 54 Commonwealth Members as exist in the wider WTO. I will therefore present my own views and perspectives rather than pretending to share with you an institutional position or those of Member States.

Let me begin by giving full credit to the organisers for what I see as a most attractive feature of today’s event; it’s orientation The conference approaches the development challenge from the standpoint of what Africa itself can do, not what outsiders can do or think is needed. If history has taught us one thing, it is that Africans’ engagement with the outside world has all too often resulted in weakening rather than improvement in the well-being of its people. Over the centuries, the great powers that established in Africa did so, not to promote its development but to advance their own interests. Ever since the identity of the foreign players and their methods changed but pure altruism never was and probably never will be the general motive. The ultimate responsibility for Africa’s

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development lies with its governments, its entrepreneurs and its people. Income from its mines, from farms, its factories is needed but for self sustaining growth, profits must be reinvested in the continent and the most made of economic opportunities not just for the benefit of foreign entities but in support of the continent’s own development.

The most lasting and fundamental improvement in a country’s ability to provide for its people will come from its own internal economic expansion. For that, it must invest more and invariably if it’s expanded output is to be marketed, it must export.

The new era of globalisation, following the end of the cold war and the creation of the World Trade Organisation (WTO) in the first half of the last decade, ushered in on an unparalleled period of sustained economic growth. The greatest success stories were of developing countries that experienced new prosperity and an expansion of the middle classes. The most notable examples were Asian and Latin Americans. Africa though has not shared in this bonanza but instead has languished on the periphery of the global economic progress.

Africa is of key interest to us. The Commonwealth is seen by many as essentially a political grouping. Admittedly the promotion of democratic values is a fundamental tenet, but the organisation is also founded on the advancing development. Our work in the area of development aims to help foster an international regulatory and economic environment that is conducive to the growth and prosperity of developing countries on the one hand and on the other that these countries are able to access and implement those policies that can make the fullest contribution to the attainment of their development objectives. We have been using advocacy that provides a voice and platform for the interests and concerns of countries that are on the periphery of international discourse and are not being heard or taken seriously. We seek to help more directly as well by researching and presenting policy options to governments and also supporting them in their efforts to strengthen their institutional capacity.

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Is there though hope for Africa? We can be positive looking at cases, such as the rapid growth of South Africa, the discovery and exploration of the new petroleum resources in Ghana, Uganda and elsewhere and extrapolate, as others have done, that Africa will emerge as a significant economic force in the Twenty-First Century. But pessimists point to problems due to climate change, prevalence of major diseases like HIV/Aids and Malaria, corruption etc and fear even further marginalisation with the continent failing to keep up with the rest of the developing world.

The pursuit of regional integration has been the seen as a key tool in the pursuit of development. The Western European experience popularised the concept. After the Second World War its removal of barriers to trade and eventual market unification and ever closer union enabled a period of unprecedented peace and economic prosperity. Of course SACU existed long before (1910).

Can regional co-operation do for Africa what it did for Europe? Can it be sufficient for dealing with the development challenges? The logic of regional trade integration is straightforward, it enables an extension of the “domestic” market for supplies of goods and services beyond the borders of the home country. The value of such an arrangement is most evident in small countries the limited domestic market constrains the ability of firms and businesses to develop within a benign home market without necessarily having to break into markets abroad and face full international competition.

Africa has taken enthusiastically to the regional approach. There is the EAC, SADC, ECOWAS, UEMOA, COMESA, IOC, CEMAC and many more often with overlapping membership. Then we have the Tripartite launched on 28 th October 2008 that brings together EAC, COMESA, and SADC with a combined population of 527 million and GDP of $624 billion. Their aim is the reduction tariff and non-tariff barriers and more general economic collaboration. Paul Collier has said though that despite the talk of solidarity, practical collaboration weak and the “pooling of sovereignty among African Governments is negligible relative to that in Europe”. Nonetheless I firmly believe that the ability of African countries to address their development challenges can be greatly enhanced via effective collaboration at

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the regional level and working together not just with immediate neighbours but others further afield on the continent.

Realism about the challenges is essential and I begin with the problem of transportation

The growth and structural transformation in Africa is most affected by the so-called “natural barrier to trade” of the excessive transport costs. Unfavourable geographical locations increase the costs of both export and import trade relative to countries with more favourable geographical characteristics. A 10-percentage point increase in transport costs is found to reduce trade volumes by about 20 per cent (Limao and Venables, 2001). When export structure is characterised by a high share of bulky low-value products (e.g., agricultural commodities), countries face much higher freight costs than high-value products with low storage factors (e.g., many manufacturing exports). Therefore, transport costs alone perhaps have made many African countries uncompetitive internationally.

Transport costs and unfavourable geographical location, as reflected in the long distance from the global centres of economic growth and export markets, also have far reaching policy implications for diversification and structural transformation of the economies. For a small price taking country ad valorem transport costs of 20 per cent on both final output and intermediate goods are found to reduce the domestic value added (and thus GDP), including wages and profits, by 60 per cent when intermediate goods account for 50 per cent of costs. The implication is that only because of their geographical location many countries experience much lower gains from trade, and foreign firms might be reluctant to move or relocate their production to these countries even when the wages are low (Redding and Venables, 2001).

Another relevant consequence of high transport costs is that they raise the effective protection for non-export sector in the domestic economy. There are estimates (Milner et al, 2000) demonstrating that natural protection on domestic sales in Uganda arising from transport costs is 48 per cent. Similarly, on the export side the implicit tax associated with transport costs was as high as 100 per cent

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for manufactured foods and almost 25 per cent for coffee, cotton and tea.1 This testifies how difficult it is to achieve diversification of production structures favouring the export sector.

One way of breaking this problem of geographical disadvantages is to trade more with regional growth centre. South Africa, Nigeria, Kenya, amongst others, have appeared to be emerging as African growth hubs providing opportunities for increased intra-regional trade including the North South Corridor.

But let us look more closely at the situation.

Africa’s transport facilities are poor and badly integrated. True there is an estimated 2.3 million kms of road but of that only 580,666 kms is paved and of this 49% are in North Africa and 27% in Southern Africa with 13% in the West 10% in the East and 1% in Central Africa

In the EAC there are various routes for getting goods from the ports to the hinterland. One is the Northern Corridor, 160 km of single track rail served by the Rift Valley Railways (RVR) running from Mombassa to Nairobi to Nakuru and Malaba and then Uganda through Tororo, Kampala and ending in Kasese in western Uganda. From there transit to Rwanda, Burundi and DR Congo is only by road. The rail should have been able to handle 7 million tonnes of cargo per annum but does only a third of that. Wagons are unavailable, locomotives and tracks dilapidated and investment inadequate (Imani). Transit from Mombasa to Kampala is 4-5 days (down from 14) is long but the Central Corridor From Dar es Salaam to Kampala is 19 days after the 25-35 days on average that the ship would have to spend in the post. Transporting a cubic metre of oil via Mombassa would be $50 but Dar $200. Not surprisingly Uganda imports just 1% of its imports via the central corridor and 90% via the Northern. The costs though are high a container from Mombassa to Kampala costs $2,700 which is twice what it costs from Europe to Mombassa. I remember a few years ago, Uganda which is a big producer of bananas being interested in exploring the European market and taking advantage of its everything but arms concession for LDCs, but with such high transport costs such an export just would not be feasible. 1 These estimates are based on transport costs alone; transaction costs and the impact of poor infrastructure are not included. Had they been included implicit taxes on exports would have risen further as Uganda is a landlocked country with poor physical infrastructural facilities and the sea-ports it uses for its shipment of exports are either in Kenya or in Tanzania also lacking efficient infrastructure.

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What of railways? This is the most cost effective means of transporting bulk items long distances overland. But Africa has only 89,380 kms of track. The networks use different gauges are under maintained with poor and dilapidated rolling stock and poor management. There are a few notable exceptions like Trans Gabon and Trans Cameroon and the mining railway lines built since the 1970’s. It is of little surprise that only 2% of overland cargo is transported by rail.

Until the transportation hurdle can be overcome the benefits of intra-regional liberalisation and market unification will always theoretical not just in the wider continent but even among neighbours. The challenge is not only with regional integration but just importing and exporting. 14 countries, that account for 40% of the continent’s population are landlocked, a factor that considerably increases their costs of doing business.

The customs posts with over-conscientious and thorough officials, numerous weighbridges and roadblock increase transit times and can sometimes constitute opportunities for corruption.

Africa’s telecommunication services are also woeful, they are in general most expensive and inefficient and Africa has the lowest internet diffusion in the world.

As Africa seeks economic advancement, collaboration through joint action and regional integration has been driven by the recognition of the value of the consolidation of regional supply and demand. Countries sought to create larger and more efficient internal markets and supply bases. This model has delivered primarily by enabling production in some countries to be exported throughout the wider region without having to meet higher import duties paid on competing imports. But this was only feasible because up till recently the region could pursue what was essentially an inward looking policy without excessive intrusion from the outside world. Hence the direction of regional integration was not unduly defined by external influences. However, with the Uruguay Round accords of the early 1990s, notably the establishment of the WTO, the pace of globalisation accelerated, with rules set for all which also constrained domestic policy flexibility. Now several countries have concluded interim economic partnership agreements (IEPA) with the EU, and all regions are negotiating full EPAs which provide for phased-in reciprocal free trade access, the scope for

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influence of the EU in the functioning of the common market would be expected to increase. This means that policy space and the scope for protection of domestic industry and agriculture are reduced. Africa is therefore facing a different ballgame. Hence the original premise of integration in which regional producers could be shielded by a common protective tariff barrier against cheaper imports has disappeared as the logic of integration. This of course does not undermine the case for integration but just suggest that it needs to be founded on different premises.

What then? What existence of the transport, communication, policy and other challenges mean that until they can be overcome, conventional trade in goods integration will not be the answer. But real and meaningful progress is possible via alternative routes.

There is though scope for liberalising Government procurement via transparency and access. According to Charles Kendal transparency accounts for 30% saving. Admittedly neighbours will not be expected suddenly win major shares of Government contracts but the overall size is so huge that even a small additional share would be significant. In the EU Gov’t procurement is 16% of GDP and in a study of Uganda and Tanzania Steven Woolcox put the figure at a massive 70% of GDP. InvestmentThis is another area in which progress can be made without being constrained by the physical problems of transportation. COMESA has made the most progress in this area towards setting up a regional zone in which investors can be facilitated. Provision of national treatment, right of establishment, free circulation and repatriation of capital will encourage investment within regional groupings themselves and the development of larger regional rather than purely domestic firms.

Competition

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This is as much precautionary as an opportunity. The enabling of free trade in goods and services behind a protective barrier of course helps consolidate domestic markets for the regional suppliers whilst giving them an advantage over imports. This they expect would help create larger and stronger producers of goods and services that would eventually be better able to hold their own against outsiders. Such an arrangement is of course not neutral in terms of competition. Setting up a protective barrier around the members of the RTA disadvantages excluded parties but it can open the possibility of insiders dominating the now expanded but restricted market.

The RTA is therefore a two edged sword from the competition standpoint. Those fledgling industries that might normally have been shielded from competition from abroad by domestic regulation or other policies lose their protection from regional competitors who might be stronger and more advanced. This would occur in a common market where, because of the removal of restrictions on the right of establishment, more advanced operators are able to secure access to hitherto shielded locations within the common market. For Africa, the concerns regarding competition policy in RTAs are both to ensure fairness and equity in which there is no market domination and anti-competitive behaviour. But there is also the other policy aim of ensuring that fledgling industries that do have the potential to grow and develop, can actually do so without being snuffed out before they can establish and get to grips with, and hopefully flourish in their new competitive environment. Trade and gender issues. Agreements that determine the conditions trade are not always gender neutral. So for instance, facilitating export and production of garments can help women, who constitute the bulk of the labour force in the garment factories. Also we look at government actions. Even at fairly mundane level, for instance, the physical arrangements at border crossings can be significant. Facilitating informal cross border trade particularly in Africa could have major implications for the empowerment of women who often are responsible for most of this trade. They, though, can be disproportionately subject to harassment and violence, so addressing their security makes a real difference.

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External support

Can Aid for Trade help?

The aid for trade initiative has been found to be having some positive impact. Since sub-Saharan Africa, on average, has higher transport costs than compared to all other developing countries, and such costs are thought to be a major constraint to trade and growth in the region. Given these types of constraints, infrastructure assistance and trade facilitation provided by AfT could be especially beneficial.

Aid for Trade, which can be a valuable instrument for boosting the capacity of African countries to produce and supply internationally competitive goods and services. But the facility will not deliver if it is merely a substitute for already committed development aid that does not specifically address the actual impediments to investment, production and getting goods to and from markets. Developing countries need to expand their ability to produce competitive goods and services, but this often requires financing for infrastructure, product development, marketing, export promotion that is not available domestically, hence Aid for Trade. The concept though had initially been debated and perceived from the standpoint of the Bretton Woods institutions and donors. We got involved in order to change the outlook. We undertook a number of studies, released publications and staged consultations and other encounters engaging leading experts and economists like Joseph Stiglitz and experts from the South like Havelock Brewster to help secure a reorientation of the concept to focus on the needs of the recipients rather than the perspectives of donors. Those ideas have informed much of the subsequent debate on the subject and influenced many of the recommendations of the WTO Task Force on Aid for Trade.

We have also been undertaking research which suggests that aid to trade facilitation has helped reduce the cost of trading in SSA. Among the main SSA regional economic communities, such effects are found to be the strongest in the Southern African Development Community (SADC). In terms of the broad impact of AfT on exports, the estimates of the returns to aid to economic infrastructure on exports are found to be much larger in SSA than in the other developing

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countries. While this is quite important, unfortunately the effects of aid given to productive capacity (such as developing specific sectors other than oils and minerals) are not prominent. That is SSA benefited significantly from infrastructure investments, but not from direct support to its productive sectors. Our analytical work also points to the importance of soft infrastructure investments, particularly in finance and business services, as returns from AfT to these sectors in SSA have been much greater than those that resulted from resources provided for transport, storage and energy projects. The results also suggest that infrastructure support including transport and energy is important. On the whole, the aid for trade can play an important role but achieving diversification of production and export structures seems to remain a major challenge.

Aid for Trade can benefit the Africa. Developing countries need to expand their ability to produce competitive goods and services, but this often requires financing for infrastructure, product development, marketing, export promotion that is not available domestically, hence Aid for Trade. The concept though had initially been debated and perceived from the standpoint of the Bretton Woods institutions and donors. We got involved in order to change the outlook. We undertook a number of studies, released publications and staged consultations and other encounters engaging leading experts and economists like Joseph Stiglitz and experts from the South like Havelock Brewster to help secure a reorientation of the concept to focus on the needs of the recipients rather than the perspectives of donors. Those ideas have informed much of the subsequent debate on the subject and influenced many of the recommendations of the WTO Task Force on Aid for Trade.

It is imperative that the ability of Africa to help itself is enhanced. In this regard I wish to suggest 3 specific areas for action by the international community.

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Encouraging Investment: Greatly increased levels of investment in productive activities are essential for bridging the supply capacity gap in Africa. Given the inadequacy of internally generated investment, the region has to rely on foreign inflows which must be available on acceptable terms if it is to actually contribute to sustainable development. The international community might assist with identifying and supporting practical and implementable measures and instruments to facilitate such transfers and mitigate the risks of investing in vulnerable economies. Efforts need also to be undertaken to make financial markets work better for Small and Medium scale Enterprises (SMEs). A vital complement would be the introduction of effective measures to facilitate the acquisition of appropriate technology.

Fairtrade

At a recent agricultural conference, an Ethiopian coffee farmer lamented that he had to sell top quality coffee beans at just 20-25 pence a kilo as it enters the complex chain from village traders, wholesalers and auctioneers, processors etc before it can eventually sold in Europe for over £8. A serious problem for peasant farmers and workers is poor countries is that is that as the weakest participants at the bottom of the supply chain, they are often denied a fair share of even the low returns. This situation is not justifiable and must be effectively addressed.

To address this situation the device that has increasingly been adopted is that of FairTrade certification. It stipulates and monitors adherence to specific criteria encompassing respect for the rights of workers and small farmers and protect the environment through the minimisation and responsible use of chemical inputs that could have negative health and ecological consequences. A FairTrade premium is paid to farmers which they use for a variety of community development and support projects that the farmers themselves undertake that they themselves consider beneficial and expect to improve the quality of life in their rural areas. To be meaningful Fairtrade has to be more than sanctimonious rhetoric; it will only work when there is a willingness to pay its price. Evidently it will always be possible to sell more cheaply an item where production costs are

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kept to a minimum because of the systematic exploitation of producers, workers and the environment as opposed to the case where they get a fair deal.

Provision of Policy Advice: Various multilateral institutions as well as donor Governments engage in “policy dialogue” and provide economic advice to developing countries, whether or not linked to the provision of financial or other benefits. If the exchange is to actually help the recipients and contribute to development, it must be timely, forward-looking, of high quality, non-ideological and objective and be motivated by a sincere commitment to enhancing the welfare and sustainable development of the recipient countries. It should not simply recycle orthodox solutions or the latest fashionable but untested policy prescription.

In conclusion, the challenge to African countries is to adapt to the new globalised world in which those that are less competitive can no longer rely on effective Special and Differential Treatment. A world where tariffs and other barriers to trade are falling and the market distortions of subsidies are being reduced. Nowadays integration cannot proceed in isolation from the outside world neither can it be inward looking. Policy makers have, in a way that they have not had to before, to take external factors into account as they chart the course for the future. Even in our rapidly changing world there is still a real and valuable prize for Africa from integration, viz. the opportunity for success of member countries in their engagement with the rest of the world that is greater from joint rather than individual action

I eagerly await the outcome of this conference that will, I expect will look at the policy issues holistically exploring how structures can best be designed and function for Africa’s development. With such a range of expertise here, I am confident that valuable new insights will emerge. The greatest long term gain from the deliberations will not just be to those participating here today but rather the dissemination of your findings and adoption of your recommendations by policy-makers.

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