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Expanding intra-African trade

By: Cecil Lwana 2014-08-26 05:15

African is a continent in conflict with itself, when our leaders talk about the diplomatic relations of our countries; we know there is more to what meets the ear. Amongst young Africans we hear loud shouts about Robert Sobukwe`s ideologies about pan Africanism but how willing are African to work together to create an Africa that is independent of foreign aid?

African countries would rather export their oil, diamonds and maize to foreign countries rather than to other African countries. Africa can only be freed by the same strategy that has liberated us in the first place as Africans ‘unity’, working together to create a better Africa for all.

 Africa’s greatest asset is not its gold, it’s not its diamonds, but it is its youth working together beyond the limitation of borders and political dipomacy to create economic solutions that are viable for our people. The main factors that encroach on increasing intra-African trade include regional integration, economic diversification, conflict, infrastructure and border issues.

The Motivation of Integration

Although intra-African trade is not a panacea for development, it is quite important. It can help the continent’s small businesses to become more competitive by creating economies of large scale and weeding out big useless corporates that are less productive in the African marketplace. It can establish and strengthen product value chains and facilitate the transfer of technology and knowledge via spill-over effects. And it can incentivize and spur infrastructure development and attract foreign direct investment.

For these reasons, expanding intra-African trade is a key to accelerating economic growth on the continent. It is especially important for the continent’s many small, non-coastal countries that face tremendous challenges trading internationally. Unfortunately, however, Africa’s current internal trade is low. Most of its exports go to the world’s advanced economies like the US,UK and China, and most of its imports come from those same advanced economies.

Economic Diversification

Many African countries specialize in the same products as their neighbours, especially commodities like oil and gas. With few complementary goods to exchange with each other, these countries cannot exploit the gains to be made via comparative advantage.

Conflict

Political tension, conflict and violence also diminish the capacity for African states to engage in intracontinental trade. These factors lead to low levels of economic growth, destroy needed export infrastructure, and slow and reverse regional integration.

Infrastructure

Infrastructure is and has always been a major issue for Africa, especially for Sub-Saharan countries. Like conflict, infrastructural deficiencies reduce economic growth and productivity, and raise transportation costs. According to a 2010 report from the UN Economic Commission for Africa, only about 30 percent of African roads are paved and, as a consequence, “shipping a car from Japan to Abidjan costs $1,500, while shipping that same vehicle from Addis Ababa to Abidjan would cost $5,000” (UN Economic Commission for Africa, African Union and African Development Bank 2010). Africa’s maritime ports have their own problems; the same report estimates that the continent’s port productivity is only 30 percent of the international norm.

It is likely that part of the reason for this underperformance is the unequal usage of the continent’s ports only six of its 90 total ports (three in Egypt and three in South Africa) handle 50% of its trade. A related issue deals with cost; the port in Durban - Sub-Saharan Africa’s busiest port- charges more to dock a ship than any other major harbour in the world and double the world’s average.

Border Issues

Africa’s notoriously bad customs environment poses yet another impediment to intra African trade. The high fees that custom offices charge is part of the problem; according to the Doing Business 2011 report, Sub-Saharan Africa is the world’s most expensive region to trade within (World Bank and International Finance Corporation 2011). The costs to businesses in time delays is another issue; the same Doing Business report shows that delays are up to three times as long in Sub-Saharan Africa compared with other regions of the world. One culprit for this is excessive bureaucracy.

The former secretary-general of the East African Community once described the congestion at the border between Zambia and Zimbabwe as rife with duplicated paperwork and procedures that could involve up to 15 government agencies (World Bank and International Finance Corporation 2011).

Increased trade between African countries holds promise for shared growth and development in South Africa and the rest of African countries. However, before small businesses in South Africa can fully exploit the benefits associated with increased trade with other African countries, they must first address the barriers to the movement of goods and people within South Africa first. It is difficult to imagine how small businesses in South Africa will be able to move goods from Cape Town to Cairo when they are unable to move goods from Cape Town to Johannesburg.

Take the case of poor healthcare services in the Eastern Cape and Limpopo: While some of the problems about our healthcare system have been bestowed on the shoulders of government, most of those problems can be easily solved by the private sector. Businesses must be able to exploit domestic markets and develop competitive edges before they can expand internationally. Unfortunately, South African small businesses are yet unable to fully exploit resources within their own countries due to physical, ethnographic and institutional barriers.

Physical Barriers

 The Infrastructure Deficit South Africa’s infrastructure deficiencies—lack of adequate road, rail, water and other physical infrastructure— continue to hamper trade within South Africa and between African countries. According to the World Bank’s Rural Accessibility Index, only 34 percent of the rural population in Sub-Saharan Africa lives within 2 kilometers of a road that is passable in all weather.

Similarly, the region has some of the worst urban connectivity in the world, with only 128 meters of road per 1,000 residents, compared with 700 meters per 1,000 residents in other low-income regions (Lesser et al., 2009). Roads account for 80 to 90 percent of all merchandise and passenger movement in Africa. Road density is an effective proxy of how well connected areas of a country are.

Africa has a road density of only 16.8 kilometers per 1,000 square kilometers, compared with 37 kilometers per 1,000 square kilometers in other low-income regions. Likewise, rail density in Africa is only 2.8 kilometers per 1,000 square kilometers—much lower than the 3.4 kilometers per 1,000 square kilometers in other low-income regions. Air travel within Africa continues to be more expensive per mile than intercontinental travel.

Africa’s inland waterways present an excellent opportunity to connect cities and other African countries. Five rivers—the Nile, Congo, Niger, Senegal and Zambezi—and three lakes—Victoria, Tanganyika and Malawi—could be utilized to move goods across the region. However, due to political instability, social unrest, and the lack of high-level government support for such projects, Africa’s waterways remain the region’s greatest untapped connectors. Addressing Africa’s transportation infrastructure deficiencies will require an innovative combination of strategies, including prioritizing maintenance, creating mechanisms to engage the private sector, leveraging China’s and America’s growing interest in the region, and increasing connectivity between existing infrastructure.

Maintenance

Policymakers should come to terms with the importance of the infrastructure maintenance. Maintenance projects are often neglected and underfunded, even though they are significantly more cost-effective than creating new infrastructure or rehabilitating decrepit infrastructure. A 2008 joint report by the Organization for Economic Cooperation and Development (OECD) and the New Partnership for Africa’s Development (NEPAD) found that “due to poor maintenance, many African countries have lost half of their road networks over the last 40 years” (Biau, Dahou and Homma 2008).

This trend is likely to continue unless African governments reverse their views on infrastructure maintenance. It is time for infrastructure maintenance to become a national priority in African countries. National agencies should be created to ensure the maintenance of infrastructure and draw upon infrastructure usage fees better but similar to e-tolls. For effective oversight and management of resources, these national agencies need to have certain institutional features.

They need an independent auditing process, mechanisms that allow for transparency in decision making and revenue collection, the ability to coordinate with local governments, and the obligation of providing full public information on contracting and operations. In addition, South African citizens should be informed through public media platforms detailing how much has been allocated for infrastructure maintenance in their given locale, so that they can hold governments accountable when the quality of infrastructure declines.

The private sector must be part of the solution to address Africa’s infrastructure challenges. Governments in the region should adopt new and innovative approaches to public-private partnerships (PPPs). In fact, infrastructure projects that are only undertaken by the public sector should be a thing of the past.

Instead, African governments should use PPPs to leverage their infrastructure stimulus spending by coupling government resources with private sector resources. The private sector can be engaged at multiple and different stages of projects, ranging from design to construction, service operation, maintenance and finance. To maximize public value, policymakers should try to find an optimal mixture of public and private sector participation in infrastructure projects.

They should make use of the private sector in areas where it has a comparative advantage, such as service provision, and make use of the public sector when it has a comparative advantage, such as underwriting risk or credit provision (Deloitte 2010).

Recommendations

In order to address Africa’s infrastructure deficit, the region’s policymakers must prioritize maintenance, integrate the private sector in infrastructure development and leverage their engagement with China. Although large-scale new infrastructure projects are needed, Africa could reap significant gains by increasing connectivity between existing infrastructures. In an effort to remove non-infrastructure barriers to commerce, policymakers should redefine citizenship, harmonize interstate or interprovincial commerce rules and regulations, and minimize the incidence of roadblocks within their territory.

African countries will not be able to exploit the full benefits associated with intraregional trade until they eliminate barriers to the movement of goods and people within their own borders. Policymakers should consider infrastructure, regional value chains, the role of corruption and the value of regional integration when identifying priorities for stimulating intra-African trade. Massive investment in critical infrastructure is essential to encourage growth, unlock productive capacity in young South African’s small businesses and induce structural transformation. This will encourage an export supply response in sectors such as agriculture, manufacturing and mining.

Growth corridors and regional hubs can be useful strategies for spurring economic activities and inspiring diversification. National and regional industrialization strategy should focus on transforming agricultural products into manufactured goods and the provision of high-technology services at competitive prices to enhance the potential for trade within Africa. Production sharing, cross-border input supply and conditional incentives for exports can foster the development of local and regional value chains and strengthen export competitiveness.

Certain products e.g., bananas, sweet potatoes and sugarcane could be processed, properly packaged and traded intra-continentally. Regional value chains should be developed for products such as textiles and clothing.

The unnecessary delays, harassments and massive graft associated with corruption among those engaged in intraregional trade in Africa needs to be addressed in order to increase trade. This will require a coordinated and harmonized implementation of stringent protocols on the free movement of goods and people across the region by, in particular, dismantling the numerous security outposts and checkpoints along the borders. This process will facilitate trade, reduce smuggling activities and promote regional investments in trade.

To reduce trade diversion, a supranational body or the region’s more prosperous countries should fill any vacuum created by the stepping back of non-African trading partners. Regional innovation and technology policies should be crafted to ensure the diffusion of technology, and a comprehensive competition policy outlining the rules of the game in the form of rewards and sanctions for the conduct of national economies in intraregional trade could also be designed. There is a need for greater efficiency in the delivery of trade-related services by banks and other financial institutions in the region.

Adequately capitalized export-import banks should be encouraged to support trade within African countries by facilitating the painless and swift transfer of export receipts and import payments. To effectively stimulate growth across sectors and among nations in the region, significant efforts must be undertaken to address these challenges if the benefits of intra-Africa trade are to be truly realized.

References

World Bank. 2007. Accelerating Development Outcomes in Africa: Progress and Change in the Africa Action Plan. Development Committee Paper, Washington: World Bank.WorldTrade Organization. 2004. Trade Policy Review of Mali. Geneva: World Trade Organization.

Lesser, C., and E. Moisé-Leeman. 2009. Informal Cross-Border Trade and Trade Facilitation Reform in Sub-Saharan Africa. OECD Trade Policy Working Paper 86. Paris: Organization for Economic Cooperation and Development.

UN Economic Commission for Africa, African Union and African Development Bank. 2010. Assessing Regional Integration in Africa IV: Enhancing Intra-African Trade. Addis Ababa:
UN Economic Commission for Africa. http://www.uneca. org/aria4/ARIA4Full.pdf.

World Bank and International Finance Corporation. 2011. Doing Business 2011: Making a Difference for Entrepreneurs. Washington: World Bank and International Finance Corporation.

Biau, Carole, Karim Dahou and Toru Homma. 2008. “How to Increase Sound Private Investment in Africa’s Road Infrastructure: Building on Country Successes and OECD Policy Tools.” Paper prepared for NEPAD-OECD Africa Investment Initiative.

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