beyondbrics

The African Union summit last month sounded the rallying call for intra-African trade as the key driver for economic growth on the continent, and called for the creation of a free-trade area. Now this week the World Bank has released a report on exactly that subject.

The stakes are high: the World Bank forecasts that economic slowdown in the eurozone could shave Africa’s growth by up to 1.3 percentage points this year. Africa is “losing out on billions of dollars in potential trade earnings every year”. So what’s the verdict? Can Africa make a free-trade area happen?

It’s worth taking a deep breath before delving into De-Fragmenting Africa: Deepening Regional Trade Integration in Goods and Services – it runs to 191 pages. Distilling that volume of information into a simple yes/no conclusion isn’t really possible. But there are some interesting pointers in the report.

Firstly, the statistics point one-way: as beyondbrics previously reported, Africa’s level of internal trade is very low compared to other regions. Only about 10-12 per cent of African trade is with other African nations – the comparison figure for North America is 40 per cent; Western European intra-trade is 63 per cent; Asean nations trade around 30 per cent with each other. This dependency on world trade makes African countries susceptible to global shocks and protectionism.

So what’s the remedy? Broadly, there are three areas: facilitating cross-border trade by simplifying procedures; removing non-tariff barriers to trade (such as product bans or onerous licences); and reforming regulations and immigration procedures.

But what of the standard economic objection that African economies are too similar, too dependent on commodities for the free-trade area to either work, or have much effect? The report tackles this head on:

It has been commonly argued that regional integration can only play a limited role in Africa because of the similarity of endowments between countries. However, this does not reflect the enormous opportunities for cross-border trade in agricultural products from areas with a food surplus to food deficit areas that result from differing seasons and production patterns… regional trade integration can have a substantial impact by better linking farmers to consumers across borders and in ameliorating the effects of periodic national food shortages and increasing global food prices.

But this is not the same as manufacturing – adding value to the raw commodities before they leave. The problem here becomes a bit ‘chicken-and-egg’. Are trade barriers preventing the development of production facilities, or do they exist because countries are uncompetitive in the first place? The report picks the former:

Production processes have not been broken down into smaller processes due to the persistence of trade barriers that raise trade costs and create uncertainty. And in those few cases where integrated production networks have appeared, they have been stifled by restrictive policies. If all countries were to open up to the region, exploiting these advantages collectively would encourage… the emergence of regional value chains, creating employment and promoting export diversification.

The report also raises the subject of rising levels of informal trade between African countries – a grey economic area. Although hard to quantify, it is estimated that in some African countries, informal regional trade flows represent up to 90 per cent of reported trade flows. For products such as commodities, livestock, and low quality consumer goods, overall informal cross-border trade may represent over half of the official amount. What we should make of this is unclear – is this a good thing? It may show that African trade is in ruder health than we think, albeit outside of the existing customs agreements. If anything, it shows the appetite for trade is there.

So what’s stopping the plan?

As some economists have pointed out, Rome wasn’t built in a day: or more specifically, it took the European Union around 15 years to create a free-trade area. The African plan is supposed to take five years. Equally, there is no existing overseeing organisation, such as the EU, to make it happen and enforce the rules. How do you get agreement across 20-plus countries each with their own agenda?

This is a much more complex agenda than reducing tariffs. It requires regulatory reform and building the capacity of the institutions that design and implement regulations. A successful regulatory reform program will include effectively dialogue [sic] among government officials, regulators, academics and researchers and private sector stakeholders… The challenge is one of integrating markets and expanding trade while achieving regulatory objectives efficiently.

Which is a rather bureaucratic way of saying: there will be talks about talks, and it will take a very long time. If it happens at all.

Related reading:
Africa: trade with your neighbours, beyondbrics
Africa can remind the world of the capitalist way, Dambisa Moyo
African Monetary Union risks perpetuating the myth Africa is one country, Economists’ Forum