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Paper series on transatlantic trade and development policy issues


Analysis
June 7, 2011 Number 3

Summary: African economic South Africa, the G20, and Regional


integration suffers from a litany
of problems so a much more Integration in Sub-Saharan Africa
limited approach to African
economic integration is required. By Peter Draper
Experts identify extensive
business opportunities that will
be fueled by the rising urban
consumer classes emerging Introduction elsewhere, a much more limited
in many African countries. Support for regional economic approach to African economic
What role could regional integration in sub-Saharan Africa1 integration is required, one that
economic integration play in runs high amongst the continent’s prioritizes network services, infra-
addressing African development international development partners structure provision, trade facilitation,
challenges? Aggregate levels and African elites. This is most loftily and regulatory cooperation in areas
of intra-regional trade in Africa expressed in the African Union’s goal related primarily to the conduct of
remain the lowest in the world. of achieving a continental economic business.3 Care should be taken to
Pooling markets through regional integration scheme, the African design the ensuing schemes in such a
economic integration in principle
Economic Community, by 2028. Not way as to avoid contributing to major
affords greater economies
surprisingly, support for African implementation and capacity chal-
of scale and the potential for
regional production sharing. economic integration featured promi- lenges in African states that are gener-
The G20’s main contribution nently in the Development Commit- ally weak, sometimes not viable, and
will be through influencing tee’s recommendations at the G20’s occasionally illegitimate. In doing so,
key donor governments and recent Seoul summit. the presence of regional leaders with
agencies, particularly the relatively deep pockets – South Africa
multilateral and regional However, often the rhetoric does not in the Southern African case – points
development banks, and using match the reality. African economic to the imperative of building such
its networks to leverage private integration suffers from a litany of limited regional economic arrange-
sector investment into African problems, ranging from overlapping ments around key states.
economies. South Africa is memberships, through unfulfilled
well-placed to act as a bridge commitments, to unrealistic goals.2 Consequently it is appropriate to
between external and African Therefore, as the author has argued ask what the role of external actors,
stakeholders in the regional notably the G20, is in supporting such
economic integration space 1
Throughout this paper “Africa” should be read as “sub- an approach. This paper examines
and to champion alignment of Saharan Africa.”
this question from several angles,
regional priorities with external 2
Dinka, T. and Kennes, W. (2007) “Africa’s Regional
making specific reference to the
interventions in support of Integration Arrangements: History and Challenges,”
economic integration. ECDPM Discussion Paper No. 74, September; Draper, particular role that South Africa, as
P., Halleson, D. and Alves, P. (2007), “SACU, Regional
Integration, and the Overlap Issue in Southern Africa:
the most significant African economy
From Spaghetti to Cannelloni?,” South African Institute and only African G20 member, can
of International Affairs, SAIIA Trade Policy Report no 15; play in securing the G20’s support for
UNECA (2006), Assessing Regional Integration in Africa
1744 R Street NW II: Rationalizing Regional Economic Communities, Addis
Washington, DC 20009 Ababa: United Nations Economic Commission for Africa
and African Union. http://www.uneca.org/aria; UNECA
T 1 202 683 2650
(2008), Assessing Regional Integration in Africa 2008: 3
Draper, P. (2010) “Rethinking the (European) Foun-
F 1 202 265 1662 Towards Monetary and Financial Integration in Africa, dations of African Economic Integration: A Political-
E info@gmfus.org Addis Ababa: United Nations Economic Commission for Economy Essay,” OECD Development Centre Working
Africa. http://www.uneca.org/aria Paper 293.
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regional economic integration in a way that is consistent Similarly, Radelet argues that 17 mostly Southern and East
with the G20’s core agenda. African countries are rapidly becoming emerging markets.6
He argues that in these countries democracy and account-
What is “the” Sub-Saharan Growth Story? ability, whilst not perfect, is increasingly entrenched; that
Before considering what role(s) the G20 could play in new and relatively enlightened leadership is supportive of
promoting regional economic integration in Africa, it is this new dynamic; that these leaderships have sustained
critical to locate such integration in the broader context of the hard-fought economic reforms of the 1980s and 1990s
its contribution to economic growth at the national level. under the tutelage of the multilateral financial institutions;
that consequently they have reduced their external debts
Interest in sub-Saharan Africa’s economic potential has to manageable levels; and that in some cases, such as with
grown sharply in recent years. It is primarily concentrated mobile phones in Kenya, these countries are engaging in
in resource extraction, particularly minerals and food- technological “leapfrogging” relative to developed country
related industries, but there is growing interest in network peers.
services, reflecting major pent-up demand for development
projects, and, to a lesser extent, in African manufacturing.
Pre-global financial crisis
The International Monetary Fund notes that aggregate pre-
global financial crisis economic growth across sub-Saharan
Africa was the highest since independence; was driven by economic growth across sub-
sustained foreign direct investment inflows and remittance
levels, which in turn reduced aid dependence; was accom- Saharan Africa was the highest
panied by record foreign exchange accumulation in many
countries; and resulted in sustainable aggregate debt levels since independence.
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 macroeco-
nomic reform programs were more resilient in the crisis, Add to these positive perspectives the fact that China,
which in turn enabled them to pursue macroeconomic followed by India and Brazil, is actively investing in the
easing in response. continent and it is clear that the old “hopeless continent”
paradigm is outdated. Nonetheless, there are still grounds
The McKinsey Global Institute argues that African for caution:
medium- to long-term growth prospects are good, and
that this comes on the back of sustained, diversified, and • Many African countries continue to rely on Western,
strong growth experienced in the 2002-2007 period.5 They particularly European, markets and investment.
note that the continent is now much better integrated into Europe’s medium-term growth prognosis does not
the global economy than in the period of painful struc- seem to be dynamic.
tural adjustment, a process they see as having accelerated
that outcome. Consequently they identify extensive busi- • Recent African economic growth is driven by invest-
ness opportunities that will be fueled by the rising urban ment in resources and strongly positive terms of trade
consumer classes emerging in many African countries. owing to high commodity prices. It is not clear how
Within this, they identify a group of “diversified” econo- much longer this boom will last, although it is likely to
mies, mostly in North and Southern Africa, which is rela- persist into the medium term.
tively well-placed for growth, and a group of “transition” • Savings and investment rates on the continent remain
countries en route to longer term growth. low, and consequently dependence on foreign capital
is high. While the worst of the global financial crisis
4
International Monetary Fund (2010a) “Regional Economic Outlook Sub-Saharan Africa:
seems to be behind us, the possibility of things taking a
Resilience and Risks,” Washington, DC, October.
5
McKinsey Global Institute (2010) “Lions on the move: the progress and potential of 6
Radelet, S. (2010) “Emerging Africa: How 17 Countries are Leading the Way,” CGD
African economies.” Brief.

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sharp turn for the worse in the next year or two cannot Furthermore, proponents of the “New Economic Geog-
be dismissed, especially if there are more sovereign raphy” advance strong arguments against promoting
debt crises in Europe. south-south economic integration schemes amongst poor
developing countries.9 Essentially these are in regard
• Poverty levels in Africa remain high, as mirrored in to the danger of industrial concentration, or agglom-
very low per capita GDP figures. To substantially raise eration, which over time would generate substantial
per capita GDP will take decades of sustained and political tensions10 that in turn would undermine inte-
rapid growth, which cannot be guaranteed. gration processes.11 They also raise substantial questions
• Meanwhile many countries remain economically and concerning the limits to strong regional leadership in
politically fragile, and acutely vulnerable to external driving economic integration in Africa.
shocks, as Mozambique demonstrated in late 2010
when food riots gripped the capital, Maputo. The major obstacle to economic
• Many countries have huge reform agendas ahead of
them, particularly the kinds of microeconomic reforms diversification in Africa is the
that will improve investment climates. It is arguably
here where regional economic integration could play a very low level of economic
substantial role.
development to begin with.
Regional Integration
and African Development Challenges
In light of these large challenges, what role could regional Nonetheless, there are economic problems associated with
economic integration play in addressing African develop- the fragmentation of states in Africa. For example, nobody
ment challenges? Sub-Saharan African countries gener- knows how much informal and unrecorded trade takes
ally trade mainly with developed countries, from which place across national borders. As Bauer notes, substan-
inward investment is also primarily sourced,7 though there tial economic activity in poor countries happens below
has been some diversification towards emerging markets, the radar of official statistics, which, as it is not formally
especially China, in recent years. Within this, the bulk of captured and amenable to modern policy analysis, often
extra-regional exports is undifferentiated commodities that suffers from poorly designed policies predicated on the
are generally not needed in regional supply chains because erroneous notion that the informal economy is unproduc-
of the serious underdevelopment of manufacturing indus- tive.12 Hence regional trade facilitation measures can help
tries. It is therefore not surprising to find that aggregate to increase both the level of formality and volume of such
levels of intra-regional trade in Africa remain the lowest in trade at the same time.13
the world, at around 10 percent.8
Furthermore, regional provision of public goods, notably
Yet the major obstacle to economic diversification in Africa in the spheres of policy and/or regulatory coordination
is the very low level of economic development to begin and particularly provision of network services infrastruc-
with. Integrating with neighbors that also suffer from this
problem may mitigate it to some extent by promoting 9
World Bank (2000), Trade Blocs, Policy Research Report, Oxford University Press.
specialization in commodities trade, and encouraging 10
This process was a substantial factor behind the unravelling of the original East
African Community, as Kenya attracted manufacturing investment and relocation at the
subsistence farmers and nascent manufacturers to produce expense of Uganda and Tanzania. It also partly explains why South Africa continues to
for wider markets, but does not hold nearly as much poten- “compensate” its customs union partners for their membership in SACU.
tial as integration with dynamic and large external markets. 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:
7
UNCTAD (2009) Economic Development in Africa Report: Strengthening Regional Princeton University Press.
Economic Integration for Africa’s Development. United Nations: Geneva. 56. 13
Lesser, C. and Moisé-Leeman, E. (2009) “Informal Cross-Border Trade and Trade
8
UNCTAD (2009) Economic Development in Africa Report: Strengthening Regional Facilitation Reform in Sub-Saharan Africa,” OECD Trade Policy Working Papers, No. 86,
Economic Integration for Africa’s Development. United Nations: Geneva 23. OECD Publishing.

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ture (energy, finance, telecommunications, transport), especially network services infrastructure. A key question
grounded in a trade facilitation agenda, has an important is how regional leaders can be supported and boosted, with
role to play in addressing development challenges. a long-term view to pulling their regions up with them.

In addition, Collier and Venables note that African markets


are very small when considered individually, whereas The G20’s Role in Sustaining African Growth:
pooling markets through regional economic integration in Macroeconomics and Trade
principle affords greater economies of scale and the poten- Regional economic integration in sub-Saharan Africa can
tial for regional production sharing (though still running play a limited role in promoting development in the sub-
the twin risks of diverting trade and agglomeration).14 continent, provided it is correctly conceived and targeted.
And since small markets are vulnerable to monopoly/ The G20’s core agenda is arguably of greater significance
monopsony capture, which may discourage investment in to African development prospects. Therefore this section
them, widening the market may minimize this problem by briefly discuss its contours before turning to what the G20
offering the prospect for greater competition. If supported could do to support regional integration efforts.
by appropriate trade facilitation measures, the productivity
gains through widening regional markets could be substan- While regional economic
tial.

Overall, while regional economic integration in Africa integration in Africa could yield
could yield net benefits, it is not likely to drive economic
development in the manner of European or East Asian net benefits, it is not likely to drive
economic growth. Rather, it must be buttressed with
north-south economic integration that plays to the region’s economic development in the
comparative advantages, should promote income conver-
gence, and over time should also promote knowledge
transfers from developed to developing countries.15 While
manner of European or East Asian
this approach at first glance would seem to “condemn”
African countries to the status of perennial suppliers of economic growth.
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 Africa’s recent “golden growth period” depended in large
commercial contact with dynamic regions of the world that measure on the global growth environment. In the after-
developing countries grow and diversify their economies.17 math of the financial crisis, and with tensions concerning
macroeconomic imbalances on the rise amongst the major
These undercurrents point to a limited regional economic G20 players, that environment could be subjected to major
integration agenda, tailored to regional capacities. To shifts, particularly if it leads to retaliatory actions with
summarize, this agenda should comprise three essential implications for global trade and investment. This raises
elements: promoting productivity gains through widening the possibility of creeping protectionism in major markets.
regional markets by establishing free trade areas (FTAs);
trade facilitation; and provision of regional public goods, 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
Adherents to strategic trade theory would add that it also offers the potential to build
impact of African trading partners’ protection measures
14

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) appli- on African trade and finds substantial incidence of harm
cability to the African context. (80 percent of total measures versus 20 percent that were
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 18
Baldwin, R. and Evenett, S. (2009) “The collapse of global trade, murky protectionism,
Theory and Intellectual History. London: Routledge, 40-50). and the crisis: Recommendations for the G20,” VoxEU.org, March 5th. Corden, W. Max
17
Bauer, P. (2000) From Subsistence to Exchange – and other essays. Princeton: Princ- (2007), Those Current Account Imbalances: A Skeptical View, The World Economy, Vol.
eton University Press. 30, pp. 363-382.

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Regional economic integration agencies, particularly the multilateral and regional devel-
opment banks, and using its networks to leverage private
sector investment into African economies.
in sub-Saharan Africa can play
This broad thrust is encapsulated in the G20’s Development
a limited role in promoting Working Group, co-chaired by South Africa. In line with
the argument developed above concerning the contribution
regional economic integration can make to African devel-
development in the sub-continent, opment, three broad focus areas stand out: infrastructure,
particularly network services; trade facilitation; and regula-
provided it is correctly conceived tory capacities linked to the first two.
Given that these areas are already subject to many support
and targeted. packages provided by OECD donor nations and develop-
ment banks, this prioritization does not represent anything
liberalizing).19 Not surprisingly these harmful measures new. It does, however, proffer a sharper focus than would
mostly affected the more diversified African economies, otherwise be the case. The G20, through its Development
particularly South Africa (80 measures) followed by Egypt, Working Group, should play the role of “honest broker” in
Tunisia, Morocco, and Kenya (56, 40, 33, and 31 measures, tasking development banks and regulatory agencies with
respectively). Ogunleye also notes that a substantial portion coordinating their support packages to relevant African
of these measures are concentrated in the agricultural institutions at all levels in support of this agenda, with the
sector, in which many African countries have a compara- underlying principle being to make such support much
tive advantage, and that the World Trade Organization’s more “user-friendly” than is currently the case. This is no
(WTO) rules specifically allow for developed countries to small task, since there are many different views and inter-
increase payments to their farmers in times of declining ests amongst G20 members. But it is a task appropriate to
global prices, including export support payments. As a the G20’s coordination and leadership mandate. Critical to
result, concluding the Doha round is urgent, if unlikely. its success, however, will be the extent to which the process
enjoys African ownership.
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 medium- What Role Should South Africa Play?
term, pressure on the trade front should diminish. This is where South Africa becomes a critical player, since it
Furthermore, if this was combined with a serious and is the only African G20 member and an essential member
successful push to conclude the Doha Round, and expand of relevant African development-oriented institutions such
the purview of the WTO into those areas of interest to as the African Development Bank, African Union, and
African economies not covered by current disciplines, the the New Partnership for Africa’s Development (NEPAD).
G20 would make a very important contribution to leading Notwithstanding perennial suspicions of South Africa
the world out of the very choppy waters in which it finds and its African agenda, the country is well-placed to act
itself, and by extension would do African economies a great as a bridge between external and African stakeholders in
service. the regional economic integration space and to champion
alignment of regional priorities with external interventions
in support of economic integration. The South African
Can the G20 Collaborate to Build African Integration?
government takes its “African mandate” very seriously, and
The G20, unlike the G7, is not a pledging or donor organi-
rolls it out in many different multilateral forums even if
zation. Therefore it has very limited modalities to directly
its interests sometimes diverge from those of its partners.
support African integration. Rather, its main contribution
Most recently, this was in evidence during the BRICS20
will be through influencing key donor governments and
summit held in Sanya, China, where a core part of the
South African delegation’s agenda was to leverage financing
19
Ogunleye, K.E. (2010) “Effects of Post-Crisis Foreign Trade Policy Measures on
Economic and Trade Performance in Africa,” Global Trade Alert, 5, May. 20
Brazil, Russia, India, China, South Africa.

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from its partners to support African infrastructure devel-
opment projects. About the Author
Peter Draper is the founder and director of Tutwa Consulting. His
Clearly South Africa has an interest in seeing such initia-
current domestic affiliations include senior research fellow in the
tives succeed since its companies stand to benefit both
Economic Diplomacy programme at the South African Institute of
from better infrastructure provision and the contracts that
International Affairs, visiting adjunct professor of international busi-
may arise, but that is precisely the point. South Africa’s
ness at Wits Business School, and research associate of the Depart-
advocacy for the rest of the subcontinent is a win-win
ment of Political Science at the University of Pretoria. His current
scenario whereby African recipients are provided with
international affiliations include board member of the Botswana
much-needed infrastructure and institutional support,
Institute for Development Policy Analysis, non-resident senior fellow
South African and other external partners’ companies
of the Brussels-based European Centre for International Political
profit in the process, and the region receives a much-
Economy, non-resident Fellow of the OECD’s Development Centre,
needed boost to its integration process. This approach also
member of the IMD-Lausanne’s Evian group, member of the World
squares with the Development Working Group’s emphasis
Economic Forum’s Global Agenda Council on Trade, and member of
on promoting private sector capacities in Africa.
the World Economic Survey Expert Group.
Furthermore, South Africa supports regional economic
About GMF
integration in Southern and Eastern Africa with its own
institutions, notably the Development Bank of Southern The German Marshall Fund of the United States (GMF) is a non-
Africa, which funds infrastructure, and the Industrial partisan American public policy and grantmaking institution dedi-
Development Corporation, which funds industrial projects. cated to promoting better understanding and cooperation between
In order to lead by example, greater emphasis should be North America and Europe on transatlantic and global issues. GMF
given to these institutions, and their mandates aligned with does this by supporting individuals and institutions working in the
the G20 Development Working Group’s recommendations. transatlantic sphere, by convening leaders and members of the policy
and business communities, by contributing research and analysis
Finally, South Africa also has an essential voice in inter- on transatlantic topics, and by providing exchange opportunities to
national arenas, such as the WTO. It should continue to foster renewed commitment to the transatlantic relationship. In addi-
use this voice to pressure its G20 counterparts to amicably tion, GMF supports a number of initiatives to strengthen democra-
resolve their differences concerning macroeconomic cies. Founded in 1972 through a gift from Germany as a permanent
policies in the interest of maintaining stability in the memorial to Marshall Plan assistance, GMF maintains a strong
international trading system. As the Doha round hovers presence on both sides of the Atlantic. In addition to its headquarters
precariously closer to the precipice of oblivion, South in Washington, DC, GMF has seven offices in Europe: Berlin, Paris,
Africa should consistently point out the implications Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has
for African countries of failure to maintain the system’s smaller representations in Bratislava, Turin, and Stockholm.
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.