Can regional integration save Africa?
Africa’s share of global flows of foreign direct investment (FDI) also fell, from 1.8% in 1986-90 to 0.8% in 1999-2000. Can regional economic groupings, such as the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC), help increase trade and bolster growth?
Overall trade flows in southern Africa fell from $131.1 billion in 2002 to $112.3 billion in 2003, with South Africa – one of only three countries in the region that recorded current-account surpluses – accounting for 65% of the total. Whereas South Africa’s foreign trade almost doubled between 1994 and 2002, exports from, say, Malawi to Tanzania or from Mozambique to Zambia remained negligible, despite their geographic proximity.
The low level of intraregional trade, despite the SADC and COMESA, reflects several factors, including a range of non-tariff barriers – mainly communication and transport problems, customs procedures and charges, and a lack of market information. Moreover, in the past, southern African countries put their faith in protectionism and import substitution policies. Relying on “infant economy” arguments, major exports were restricted and legal obstacles were erected against foreign participation in the development of natural resources, as well as financial and other services, further impeding regional integration.
Nowadays southern African countries are committed to reinforcing their regional integration through economic harmonization. A regional plan approved in August 2003 in Dar-Es-Salaam, Tanzania’s capital, by the SADC focuses on promoting trade, economic liberalization, and development as a means of facilitating the establishment of an SADC Common Market. This requires completing the formation of a free-trade area, with 85% of SADC trade to be liberalized in 2008, and 100% in 2012.
A common market – including harmonized policies for free movement of factors of production – will enhance competitiveness, industrial development, and productivity. However, protocols and political treaties are not sufficient to boost integration. The major barrier is the region’s great diversity in economic and institutional development. The SADC’s regional plan establishes a timeframe for policy implementation over the next fifteen years that takes these constraints into account, focusing on macroeconomic policies, debt problems, and establishing a stable secure investment climate.
Macroeconomic policy harmonization is needed to ensure that changes in one SADC member country do not adversely affect economic activity elsewhere.
The new initiative calls for all member states to harmonize their economic, fiscal, and monetary policies completely, beginning with currency convertibility and followed by exchange-rate unification and, finally, a common currency. Several currencies have attained some measure of regional convertibility, which should encourage monetary harmonization and promote intraregional trade, as countries’ trade flows shift from partners that require payment in foreign currency.
A form of monetary harmonization in southern Africa already exists between South Africa and Lesotho, Namibia, and Swaziland, whose currencies are traded at par with the South African Rand. The Reserve Bank of South Africa implements monetary policy after consultation with the other countries’ central banks. Despite tight monetary policy and foreign exchange regulations, the scheme has boosted trade and investment while reducing intraregional indebtedness.
But debt remains a grave challenge for southern Africa as a whole. The region’s total aggregate external debt stood at $75.6 billion in 2003, up from $56.6 billion in 2000, with Angola, Mozambique, and South Africa accounting for 75.9% of the total. Angola, Malawi, Mozambique, and Zambia owe an average of 150% of their GDP, and servicing the debt swallows billions of dollars annually.
Moreover, SADC has faced a sharp decline in FDI inflows, which fell from $9.8 billion in 2001 to $3 billion in 2003. This is attributable mainly to Angola, Botswana, and Namibia, owing to cyclical investment behavior in the petroleum and extraction industry, and to South Africa, where privatization and acquisitions activity have slowed.
Indeed, South Africa and Angola alone accounted for 73% of the region’s inward FDI in 2003.
For southern Africa – indeed, for the continent as a whole – global competitiveness requires diversification to higher value-added and manufactured exports. In order to attract the FDI needed to achieve this, southern African countries have enacted laws aimed at encouraging greater private sector participation, with special emphasis on foreign investment. But, despite these efforts, FDI inflows in the region (excluding South Africa) remain too low to have a significant economic impact.
This reflects the real and perceived risks associated with investment in the region. Southern Africa’s leading economies must therefore make every effort to promote regional integration. Removing all trade barriers, as called for by SADC’s plan, would enable them to take full advantage of the region’s abundant natural resources and point the way toward deeper global integration for all of Africa.