Africa Still Struggling with Regional Integration
With the continuous drop in export receipts for most countries one begins to think and ask themselves if there is ever going to be a way out for Africa. Regional integration has been an initiative that has been applauded for its ability to improve African economies, however there have been some concerns on it failing to kick off.
Regional economic integration is not a new concept in most parts of Sub-Saharan Africa (SSA). Most African leaders called for integration after their countries independence. The first generation regional integration schemes were motivated partly by the African Union. This inward-looking regional strategy failed mainly due to the fact that:
(i) national markets were too small and too poor;
(ii) high input costs adversely affected transformation and exports, causing foreign exchange shortages and overvalued currencies;
(iii) domestic monopolies and trade protection contributed to powerful rent seeking and “nationalistic” lobbies, biased and organised against regional as well as global trade;
(iv) nationalistic governments with spoken interests in regional co-operation gave token support to regional organisations, broke their regional commitments and implementation lapsed;
(v) there was excessive emphasis on joint public investments as opposed to creating a truly unified markets for private operators.
As countries progressively switched from import-substitution to open-door policies since the early 1980s, likewise the second-generation regional integration schemes in SSA have become characterised by open regional arrangements.
The most significant argument for regional integration in SSA is the fragmentation of sub-Saharan Africa, which has small domestic markets, combined with generally high production costs and deficient investment climates result in limited investment. With regional integration the following gains will be seen in African states;
Trade gains: If goods are sufficiently strong substitutes, regional trade agreements will cause the demand for third party goods to decrease, which will drive down prices. In addition, more acute competition in the trade zone may induce outside firms to cut prices to maintain exports to the region. This will create a positive terms of trade effect for member countries.
Increased returns and increased competition: Within a tiny market, there may be a trade-off between economies of scale and competition. Market enlargement removes this trade-off and makes possible the existence of larger firms with greater productive efficiency for any industry with economies of scale and increased competition that induces firms to cut prices, expand sales and reduce internal inefficiencies.
Investment: Regional trade agreements may attract FDI both from within and outside the regional integration arrangement (RIA) as a result of market enlargement (particularly for “lumpy” investment that might only be viable above a certain size), and production rationalisation (reduced distortion and lower marginal cost in production). These are only but a few of the many benefits that come with regional integration. The question that still lies is if this phenomenon is so good and if it is the solution to African economic growth then why is Africa still struggling to implement it more effectively?
There are many issues around regional integration that have been hampering its success and these relate to the existence of domestic peace/security in countries; and political and civic commitment and mutual trust among countries. With regard to economics, there is a need for a minimum threshold of macro-economic stability and good financial management in countries (price stability, realistic real exchange rates, etc.); and sufficiently broad national reforms to open markets.
Furthermore, whatever the scheme, successful integration has to be guided by principles, which would assure that the sub-regional and the national programmes are compatible and mutually reinforcing. One such principle, “open-regionalism”, seeks to insure that a sub-regional strategy is bred in the same ideological paradigm as national reform policies. The other, “subsidiarity”, provides guidelines for dividing responsibilities between countries and regional organizations for facilitating the integration process. This paper will discuss some of the key principles that have been proposed by different experts in trade that the region should considered in implementing regional integration. Surely regional integration is key for the continent but what are its key success factors?
The most central point to this discussion is the principle of open regionalism .This is by far the most central principle for assuring consistency and complementarity between national reform programs and the sub-regional agenda. Sub-regional programmes must be bred in the same outward-oriented, market driven and private sector-led development philosophy that has constituted the heart of national reform programmes, especially since the 1980s. It is precisely the need to reinforce these national programmes that has led to the current resurgence of regionalism worldwide.
Open regionalism would therefore mean coordinated integration rather than collective retreat from the world economy for countries of the sub-region. Open regionalism implies diversification. Experience worldwide indicates that economic diversification and expansion of non-traditional exports to the rest of the world remain the best if not the only strategies for accelerated growth in the sub region. High levels of protectionism not only raise costs for both producers and consumers, they systematically discourage investment in export-oriented activities and inhibit economic transformation.
Open regionalism implies a market-driven integration process, meaning that governments must not develop national monopolies, nor should they collude at the sub-regional level to develop multinational monopolies. National monopolies constitute restraints on competition, free trade and investment; and the thrust of national reform programs is, among other things, to eliminate them.
But as the market expands beyond national boundaries as part of the integration process, the sub-region must guard against the appearance of sub-regional monopolies, which the larger scale does not necessarily prevent and may even make more attractive. Instead, countries must cooperate to expand markets and competition across borders. This is obviously the very idea of a common market. But this must go beyond traditional goods market integration (FTA, custom unions, etc, and extend to infrastructure services, which have traditionally remained the domain of national monopolies and which are now the targets of national privatization and liberalization programs.
For regional integration to be a success there should be strong and committed private sector involvement , integration is for the benefit of the people of a sub-region hence the critical actors, and governments and regional organizations should facilitate the appropriate choices and policies.
Improved performance of private firms and farms, and private operators will enhance production and trade of goods and services and this will result in the growing of markets and investment opportunities. This also means that private operators have to be involved in the design and the implementation of regional activities, which would also help change the widespread perception that regional organisations are simply remote outgrowths of government bureaucracies rather than an instrument for empowering the private sector region-wide.
The second most important principle is subsidiarity, which simply means that regional institutions should be responsible only for those activities that are not better handled at the national level. In return, governments must be selective and parsimonious in creating sub-regional organisations and initiatives. Respecting subsidiarity is important for two reasons: to avoid overloading already scarce sub-regional administrative capacity and resources; and to assure that there is sufficient commitment and trust so that the key sub-regional agencies will be given the authority and the means to implement the sub-regional agenda. If these conditions are not respected, the sub-regional effort loses credibility, which in turn risks undermining future integration efforts. Restrictions reduce growth and that they have done so more catastrophically in Africa than in any other region, partly because of higher trade barriers, but also because of tinier markets. It is worth stressing these points because without outward-orientation as an explicit goal, many regional integration arrangements may have the tendency of raising rather than lowering external tariffs, partly the results of the consensual internal decision making process, or the by-product of increased power of lobbies
The third and final point is gradualism, accelerated integration means, fundamentally, credible integration, built on pragmatic, gradual steps that reinforce trust and commitment, and make the process self-perpetuating. It is certainly valuable to have a clear vision of what regional integration should ultimately mean in a sub-region, but experience also strongly suggests that it would be wise to move forward in a pragmatic, gradual fashion, by building blocs and with timetables and targets that are credible and realistic.
Declarations that are not achieved lead to missed targets, frustrations, and disappointments and, in the end, reversals. Here again, the challenge is poised by the very issue integration is sought to address, namely the diversity, in about every geographic, linguistic, political and economic sense, of countries of the sub-region.
In this context, a strategy combining variable geometry (or sequencing integration in geographic space, allowing subsets of countries to move faster and deeper in certain areas), and variable scope (seizing opportunity to advance integration in areas where conditions are propitious), is probably the most appropriate and effective for most of the sub-regions in SSA. Gradualism provides low risk opportunities to progressively build experience and mutual trust, which are essential for integration to move forward and deeper over time.
Despite the challenges discussed in this article, some countries have recorded significant progress in the regional integration process. However, there is still much to be done. African countries need to be committed and implement the various recommendations they receive with regards to regional integration if it is to become a reality.