Trade Integration

Trade Integration:

A Pressing Issue for the New AU Executives

The 28th African Union (AU) Summit on Harnessing the Demographic Dividend through Investments in the Youth was attended by heads of State and Governments in late January 2017.
A key issue for discussion, however, was the election of the new leadership for the AU Commission. More now than ever, the Commission aspires to deepen continental integration. This is a cornerstone for the creation of a prosperous Africa, envisioned under Agenda 2063, which is a strategic framework for the socio-economic transformation of the continent. The Agenda seeks to accelerate the implementation of past and existing continental initiatives for trade and economic integration as well as growth and sustainable development. EBR’s Samson Hailu explores the level of intra-Africa trade and analyses what the role of the newly elected AU executives may take in contributing to the creation of a prosperous Africa.

During the 28th AU summit held in Addis Ababa, Ethiopia last month, African states elected Chadian Foreign Affairs Minister, Moussa Faki Mahamat as the new chairperson of the African Union (AU) Commission, beating Kenya’s top diplomat Amina Mohamed.
The outgoing Chairperson of the Commission, Nkosazana Dlamini Zuma (PhD), explained the assignment waiting Mahamat and his new team including Thomas Kwesi, deputy chairperson and other elected commissioners she recalled the vision of Agenda 2063 during the opening of the 28th Ordinary Session of the AU Executive Council, stating that the AU should achieve prosperous Africa relying on the potential of the African people.
“Agenda 2063 is not only the programme of the AU but also the various diversities of African people from all walks of life [and] the Diaspora,” Zuma emphasised.
The Agenda aims to make Africa a leader in its own development through intra-continental trade. One of the most important instruments to bring about advances in regional integration are Regional Economic Communities (RECs), is essential to assess the possibility of achieving the objectives of Agenda 2063.
Ever since African countries started liberation from colonial powers in the 1960s, continental integration has been at the centre of the debate for establishment of the Organisation of African Unity (OAU) on 25 May 1963 in Addis Ababa, with 32 signatory governments. Even after
the chapter of OAU was closed on 9 July 2002 during the time of its last chairperson, South African President Thabo Mbeki, and replaced by the African Union (AU), regional integration remained top on its Agenda.
In order to initiate and take the integration further from bilateral and sub-regional levels and gradually evolve it to continental level, the AU recognises eight RECs throughout the continent instrumental. These are CEN–SAD (The Community of Sahel–Saharan States), COMESA (Common Market for Eastern and Southern Africa), EAC (East African Community), ECCAS (Economic Community of Central African States), ECOWAS (Economic Community of West African States), IGAD (Intergovernmental Authority on Development), SADC (Southern African Development Community) and UMA (Arab Maghreb Union).
Although it is mainly motivated by political groupings, the fact that one African country is a member of at least one of these economic groups demonstrate that regional integration is crucial for economic development.
However, regional economic blocs are yet to accomplish the largest part of the objectives they were set up to achieve, which is enhancing economic and trade integration and improving the lives of their population.
Of course, in the first decade after independence, Africa performed relatively well economically, with 4.5Pct gross domestic product (GDP) growth rate, according to the World Bank. However, since the 1980s, economic, social and political problems increased in the continent. This situation was later exacerbated by global oil crisis and African countries failed to generate and sustain economic growth. This resulted in stagnation of per capita income compared with other continents.
For instance, nominal GDP per capita in Africa and Asia stood at USD240 and USD325, respectively, in 1970. This rose to USD1, 869 in Africa and USD5,635 in Asia by the end of 2015, according to the International Monetary Fund. Although African countries are wealthier now than two decades ago, with 23 countries reaching the middle income category based on the USD1,242 per capita income threshold, Africa is still home to hundreds of millions of poverty stricken people.
On the trade front, intra-African trade has increased from USD32 billion in 2000 to USD130 billion in 2011, according to a report published by the United Nations Conference on Trade and Development. However, its share to the total trade of the continent remained stagnant at 12Pct for over the last decade while this figure reached 50Pct among Asian countries.
This shows that, Africa’s economic growth has not been translated into intra-African trade. Rather trade with external partners, particularly with emerging economies in Asia and Europe has improved.
Given the unsatisfactory performance of the RECs, scholars like Alemayehu Geda, Professor of Economics at Addis Ababa University, analysed the potential of intra Africa trade. The Professor and Edris Hussein, an economist at the Horn Economic and Social Policy Institute, used the Gravity Model, which helps to estimate the potential of trade interaction among countries. They found that REC’s potential to contribute to the growth of intra-Africa trade was low. For example, the actual trade interaction in western and central Africa regions were significantly low. These were more so in the years between 1993 and 2010.
Although the extent of interaction varies from country to country, the majority of them had low level of trade interaction with their counterparts, which is only 18Pct of their potential, on average. Only some countries in these regions such as Central African Republic, Guinea-Bissau and Liberia’s actual trade were 90Pct of their potential, on average.
Similar results also found in the North, East and Southern Africa regions. Most countries in these regions exhibited a significantly lower actual performance, which is only 10Pct of their potential, on average, according to Alemayehu’s study. This figure is half the level found among West and Central African countries. However, this performance does not reflect the level of trade interaction between countries like Djibouti, Madagascar and South Africa, which heavily trade with Ethiopia, Mauritius and Mozambique, respectively.
Yet, another study reveals a different picture for Eastern African countries. According to the 2016 African Regional Integration Index (ARII) report, which calculates integration in five key areas which are trade, infrastructure, production, free movement of people, finance and macroeconomic dimensions to measure levels of integration, EAC is the top performer regional bloc in Africa in overall integration.
Kenya is the top performer in the EAC, IGAD and COMESA, with 0.8, 0.6 and 0.7 overall scores in the five dimensions, respectively, while Ethiopia is in the low performing category in both blocs, with 0.2 overall average score in COMESA and 0.4 in IGAD.
Tariff barriers pose formidable obstacles on trade in most regional blocs like COMESA. For instance, Ethiopia, Djibouti, Kenya and Sudan are members of COMESA and IGAD. But, most of the trade among these countries is based on bilateral agreements, which works for short term and varies, depending on negotiations.
Under COMESA, Ethiopia allows only 10Pct tariff deduction for imports from member countries. Despite negotiations to create non-tariff trading bloc, Ethiopia has been against it.
Officials say this is a strategic development tactic. “This has been maintained to protect the local manufacturing sector, which is not well developed and cannot compete with products from other superior African countries. It is also to save loss in the form of tax revenues,” Shemeles Arega, communication officer at the Ministry of Trade, told EBR. “However, there are short-term bilateral agreements with neighbouring countries and also intensive negotiations going on.”
Officials at the Ministry argue that most challenges with free trade will be solved after Ethiopia joins the WTO, which the government is considering to realise after the second phase of the Growth and Transformation Plan (GTP II), which ends in 2020.
Despite such challenges, the creation of COMESA Free Trade Agreement in October 2000 led to a six-fold increase in intra –COMESA trade between 2000 and 2010, according to the 2016 ARII report. Ethiopia, Sudan and Kenya were principal contributors to the combined wealth created by IGAD member countries, accounting 29Pct, 28.5Pct and 27.7Pct of regional GDP, respectively, while Egypt is the top contributor of wealth among COMESA members, with 35Pct of GDP share.
Cote D’ivoire, Kenya, Cameroon, South Africa, and Morocco are top performers in their respective blocs. South Africa scores high across all the five dimensions, while 18 countries are performing stronger in three or more dimensions.
As a result, the report suggests “there is a strong foundation to build up on and achieve agenda 2063. But, sharing lessons and insights of best performing RECs is important, in each integration dimension.”
“Prices of African products will also become cheaper for African countries due to trade integration”, says Abebe Nigusu, Economic Integration and Strategic Partnership officer of African Union Directorate at the Ministry of Foreign Affairs (MoFA). “Capitalising on existing potentials fuels national growth; [this is helpful to] scale up continental capacity to create mega trade blocs.”
According to Abebe, Africa must integrate to improve its impact on global trade. He says the continent is a low-level contributor to global trade.
However, many studies indicate that a simple analysis of actual and potential trade interactions among RECs is not sufficient to know the extent of intra Africa trade and its future promises.
For instance, Benedict Okey Oramah (PhD), President and Chairman of the Board of Directors of the African Export–Import Bank in a study entitled ‘Commodity Composition of African Trade’, argues that what matters is whether a specific commodity exported by a given African country that is a member of a specific REC is needed by other members in the same bloc. For Oramah, complementarities of products traded among these partners are imperative to analyse the potential of intra Africa trade.
It is essential to examine the structure of demand and supply of exports in Africa using trade similarity index that measure the extent to which two countries export the same products.
Using a similar method, Alemayehu and his colleague found out that only few African countries have the potential to export to another country in the region because of the low level of production diversification. To this end, countries such as Comoros, South Africa, Egypt, Sudan, Congo, Cote d’lvoire, Gabon, Algeria and Cameroon are better positioned to gain from intra-Africa trade because of the products they export, which includes manufactured products as well as oil, minerals and cacao. On the other hand, due to the poor complementary nature of their exports to the imports, countries like Ethiopia, Burundi and Namibia are likely to lose in trading with their African peers, according to Alemayehu.
“Export diversification has become an issue for every country in the continent, which indicates that nations have big jobs in transforming their economies,” said Abebe.” “Because Africa’s outputs are few in varieties, the current global commodity price decline has big impact on Africa’s growth.”
In this regard, Sub-Saharan African countries like Ethiopia are undertaking massive industrialisation projects in recent years. These include the recently inaugurated Hawassa Industrial Park, which has induced a wave of optimism in the country. The Park, dubbed as the first of its kind in the continent, houses six local and 15 global manufacturing giants. The government also constructed and leased the Bole Lemi Industrial Park I on the outskirts of Addis Ababa last year.
In a press conference held before the inauguration, Arkebe Okubay (PhD), Board Chairman of the Ethiopian Industrial Parks Development Corporation said that Hawassa Industrial Park, which specialises in textile and apparel, has attracted US fashion brands operator Phillips-Van Heusen Corporation, among others. “The Park will help the country to generate one billion dollars from export revenues,” he told reporters. “In addition to that, factories in the Park are expected to create 60,000 jobs.”
According to government officials, Hawassa is only the beginning since the construction of Dire Dawa, Mekelle, Adama and Kombolcha industrial parks are expected to be finalised in the coming March 2017 while Bahirdar, Jimma, Debre Birhan, Aysha Dewalle and Kilionto industrial parks are expected in 2017/2018. In fact, government has recently signed ETB10.5 billion worth contracts for the construction of the Kilinto, Bole Lemi II and Jimma industrial parks.
Despite such efforts by some of African countries, however, the intra Africa trade still encounters multi-tiered challenges, obstacles ranging from limited infrastructure to poor trade logistics. Alemayehu argues that infrastructure and logistic problems would hinder trade integration more adversely than other missing ingredients.
“A 1Pct increase in the stock of transportation and telecommunication infrastructure in the exporting country boosts export towards other African countries by about 3Pct,” Alemayehu and his colleague indicated in their research. “Poor infrastructure, or its complete absence, makes trade physically difficult, quite independent of the trade regime.”
Abebe agrees with the professor: “In Africa, there is limited power supply for industries and no fast mechanism to transport products. Africa’s power generation capacity is very low while road access is limited.”
According to Fekadu Shumet, director of Strategic Management Directorate at the Ministry of Transport, transport costs are very high in Africa due to limited infrastructure. “About 25Pct of Trans African Highways Project is [yet] to be completed”, he reveals. “Limited port capacities and facilities also cause long delays.”
Ethiopia has done a fairly good job in terms of building infrastructure, especially road and power generation. “Some asphalt roads are completed and some are under construction, which connect Ethiopia with Sudan, Kenya, Somalia and Djibouti,” he states. “However, this is not equally matched by other neighbouring countries. Some of these countries are not willing to launch passenger transport service on the completed roads, due to fear of labour migration from Ethiopia.”
After eight years of negotiations, Sudan and Ethiopia has reached agreement to launch the Addis Ababa-Khartoum passenger transport service in 2016, according to Fekadu. However, implementation has not yet materialised. Some of the big inter-state projects include the Modjo-Hawassa-Kenya expressway, which is part of the Cairo-Cape Town Highway project. In addition, Ethiopia and Djibouti recently launched a USD3.4 billion electrified railway line, which connects the two countries.
Despite some progress, all round trade integration seem remote in the continent. There is a long way to go as far as meeting longstanding trade integration goals that the AU sets in its Agenda 2063 in 2013. Many agree that the best way the new leadership at the AU Commission can serve the continent and its future generations is by focussing in eliminating trade barriers between and among African countries. This, of course, takes a long time to achieve, however, the foundations has to be laid for the forthcoming generations to build upon.
As Zuma said in her remarks at the 28th Ordinary Session of AU, the strength of Africa lies in its unity and its Pan-Africanism. “When our forebears were united, Africa was able to win its independence from colonialism against countries with armies and economies far bigger than ours. We should, therefore, never allow ourselves to be divided by anyone, or by anything,” she told participants. “We should, as much as possible, coordinate our positions and adopt common positions.” EBR

5th Year • February 16 2017 – March 15 2017 • No. 48

Samson Hailu


Leave a Reply

Your email address will not be published. Required fields are marked *

Ethiopian Business Review | EBR is a first-class and high-quality monthly business magazine offering enlightenment to readers and a platform for partners.

2Q69+2MM, Jomo Kenyatta St, Addis Ababa

Tsehay Messay Building

Contact Us

+251 961 41 41 41