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AfricaSeptember 1 2011

Redrawing the map of Africa

African countries are being held back by a lack of integration across the continent. Some say it is time to redraw the map by breaking down borders and deepening regional blocs, which will enable free trade to flourish. 
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Redrawing the map of Africa

African economies have been far from sluggish in the past few years. Five of them were among the world’s 10 fastest growing countries between 2005 and 2009, according to the International Monetary Fund (IMF). And they seem unlikely to slow down soon. Sub-Saharan Africa’s real gross domestic product (GDP) is expected to increase about 6% both this year and in 2012.

Yet economists believe that the continent’s development is being hindered by its fragmentation. Despite outsiders often portraying Africa as a homogeneous entity – sometimes even calling it a ‘country’ – it is anything but. It comprises 54 countries, more than any other region. South America has just 12, while Asia (depending on which are included) has about 30.

Africa’s lack of integration is perhaps borne out most starkly by its trading patterns. Only 12% of African commerce happens within the continent. That is the world’s lowest rate of intra-regional trading. Members of the EU, by contrast, carry out about 65% of their trade with one another.

Greater regional integration and trade are seen as crucial for Africa’s future. They are needed to help it overcome the fact it is not just a collection of many countries, but small ones too. Only 11 have populations of more than 30 million, according to the African Development Bank (AfDB), and this puts off foreign investors looking to exploit large markets and economies of scale. “The big stumbling block to further development in Africa is that individual economies are too small to offer investors the scale needed to drive returns,” says Razia Khan, head of African research at Standard Chartered. “There’s no question: it’s almost a matter of survival that African countries come together and form bigger trading blocs.”

Mega-cities wanted

Academics stress that small markets are also holding back Africa’s industrialisation. Paul Collier, a professor of economics at the University of Oxford and author of The Bottom Billion, a best-selling book about global poverty, says that a lack of mega-cities on the continent – mainly caused by barriers to migration – has stalled its efforts to boost efficiency. “Political fragmentation in Africa has led to market fragmentation,” he says. “There’s a clear relationship between city size and the productivity of people in them. Each time you double a city, you raise productivity by an average of about 6%.

“If you could rub the barriers [to further urbanisation] out, about 85% of cities would get bigger and there’d be a big increase in productivity.”

Another factor is that Africa has many landlocked nations. Those without direct access to coastlines struggle to grow their exports, due to the high cost of getting products across borders and eventually on to world markets. “African countries definitely need to carry out more integration,” says Mthuli Ncube, a professor and the chief economist and vice-president at the AfDB. “There are a lot of landlocked states and they need to integrate with those that have access to ports.”

Shallow rhetoric

Rhetoric from African leaders has long suggested that they view regional integration as a priority. Many still have lofty goals of creating great political unions. In July, at the launch of negotiations to establish a pan-African free trade area (see box), Sindiso Ngwenya, chairman of the so-called Grand FTA, said: “Perhaps we stand on the threshold of the realisation of the United States of Africa.”

In reality, however, little progress has been made. Regional bodies, many of them overlapping, abound. But free formal trade between neighbouring countries exists largely in theory only, while few have made meaningful attempts to coordinate the development of the regional infrastructure needed for commerce to flourish. Institutional reforms to harmonise standards and regulations have been weak.

The lack of advancement is partly because a lot of African states still fear integration. This is especially the case when it involves powers being taken away from individual countries and handed to regional bodies. The East African Community (EAC), a customs union made up of Kenya, Tanzania, Uganda, Rwanda and Burundi, and which newly independent South Sudan is set to join, envisages eventually establishing a single currency. Yet Tanzania is far from comfortable about giving up control of its monetary and exchange rate policies, let alone of some of its fiscal policies, which most economists say would be a prerequisite for an east African currency.

“So far there’s been political buy-in for the idea of liberalisation of trade,” says Standard Chartered's Ms Khan. “But as soon as the suggestion is that you’ll lose control over not just monetary policy, but fiscal policy too, there is a great deal more political resistance. There are very few African countries, if any, that are ready to go into this wholeheartedly.”

Equal benefits?

Another political obstacle is immigration. Integration involving the free movement of labour is an especially emotive topic. Negotiations to implement this usually lag far behind those regarding the free movement of goods and services. “Immigration is always a sensitive subject wherever you go,” says Mr Ncube.

Some African countries are concerned that deepening ties with bigger regional neighbours might leave them trailing. It has been argued that blocs such as the EAC and the Economic Community of West African States benefit their respective main powers – Kenya and Nigeria – at the expense of other members. But several analysts claim that integration is not a zero-sum game and that even small economies benefit from trade liberalisation and their borders opening up to foreign investment.

“People have underestimated the gains,” says Mr Collier. “They tend to think that integration will lead to a few big cities and a few big countries. But that’s not what happens. You actually get a general acceleration of urbanisation and more specialisation in cities and trade between them.”

A significant barrier to progress is the perception among some leaders that there is a short-term disadvantage to trade liberalisation. African states typically have low revenue-to-GDP ratios and trade-related taxes make up a high proportion of the revenues that are collected. Governments often fret about compensating for this loss should they open their borders. The problem is particularly acute at present, with politicians under pressure to boost spending to stave off the effects of slow growth in developed countries.

Old habits die hard

Furthering integration also requires many African countries to change old habits, which few are able or prepared to do quickly. Intra-African trade is so low largely because the continent’s exports have traditionally been dominated by natural resources, which most of Africa has little need for. Even today, commodities make up about 80% of what African nations sell beyond their borders.

“Africa is totally preoccupied with external markets,” says Jeremy Stevens, an economist at Standard Bank. “It doesn’t buy what it can sell, which are commodities. And it doesn’t really have the manufacturing capabilities to sell into its own market. So the fragmentation is an economic reality as much as a political one.”

Intra-African trade is growing as a proportion of overall activity on the continent. But the focus is still on outside markets. In 2000, the same amount of trade between Africa and the BRIC (Brazil, Russia, India and China) economies took place as within Africa itself. In 2010, however, Africa-BRIC trade was almost double that of intra-African commerce, according to the IMF.

Their history of looking overseas has left African countries ill-prepared to do business with their neighbours. The poor quality of infrastructure across the continent and the absence of one-stop border posts add greatly to transport costs and the time it takes to ship goods across land. “You’d think that there’d be more trade between Uganda and Tanzania,” says Roger Nord, a special advisor to the IMF’s Africa department. “But if the roads are in such a poor state, or railroads don’t function, then it becomes physically very difficult to trade. This is a big barrier to regional integration.”

Africa also lacks the institutions needed to promote commerce even when free trade areas are in place. Non-tariff barriers, including corruption at borders, a lack of harmonised regulations and visa restrictions, are rife. Recent research by Cameroon’s University of Doula showed that informal trade between Cameroon and five of its neighbours – all of them part of the Central African Economic and Monetary Community – flourished because of the difficulties of carrying out formal commerce. Informal trade in agricultural products alone was estimated to be worth as much as 96% of the total formal trade between the same countries.

Moreover, African states frequently make exceptions for certain goods within free trade areas. Tanzania, for example, stopped maize exports earlier this year, citing worries about domestic shortages. The move angered other EAC members. “The free trade areas haven’t been as free as the name might suggest,” says Mr Nord. “Some tariff barriers and exceptions remain. And the non-tariff barriers can’t be underestimated. Limitations or bans on certain types of products come back all the time.”

Integration efforts

Nonetheless, efforts to boost integration are growing. The Grand FTA, which will combine 26 countries, including the two biggest economies on the continent, South Africa and Egypt, shows that there is an appetite for intra-African co-operation.

However, analysts believe that the deepest integration will take place on a regional, rather than pan-African, basis. The best example of this is the EAC, which, notwithstanding the lingering presence of non-tariff barriers, is considered the most integrated bloc on the continent.

Its five members have been growing faster than the rest of sub-Saharan Africa since 2005. Rwanda and Uganda both increased their GDP by 8% annually between 2005 and 2009, which placed them among the world’s 10 most rapidly expanding economies.

The EAC’s members have managed this despite none of them having large supplies of natural resources (although Tanzania exports some gold and Uganda has discovered oil, which is not yet being pumped). Three of them – Uganda, Rwanda and Burundi – are also landlocked.

The EAC countries can thank the pro-market reforms they carried out at various times in the past two decades for most of this growth. But the integration of their markets has led to a big increase in trade and welfare, say economists. Trade between members doubled to $1.8bn between 2004 and 2009 and now accounts for 30% of total volumes, which is substantially higher than in the rest of Africa. And the majority of this expansion has involved manufacturing industries such as food products, tobacco and cement, which are labour intensive and thus help boost employment.

Moreover, integration is said to have attracted foreign investors keen to tap into the EAC, an area containing 130 million people and which has a $75bn economy.

Multinational companies are increasingly viewing the EAC as one entity. “We have seen investment into east Africa, particularly Kenya, that looks at the market as a whole,” says David Cowan, chief Africa economist at Citi.

What next?

How far will Africa take integration? For now, most regions are trying to consolidate free trade areas and, in a few cases, establish common markets (which allow for free movement of labour and capital, as well as goods and services).

Some have already gone further. Two monetary unions exist in west and central Africa among mostly French-speaking countries. The CFA franc zones – whose currencies are both pegged to the euro at the same rate – have been resilient over the past three years during the global financial crisis.

Their members have gained from monetary stability in the past decade and reduced transaction costs when trading with each other. “Inflation has been low,” says the IMF’s Mr Nord. “They’ve also benefited in terms of regional integration. There’s been more in French west Africa because of the common currency, which makes it easier to move goods and people across borders.”

But Mr Nord adds that the export-orientated industries in the zones have been hurt by the euro’s strength in the past few years.

Despite the largely positive precedent of the CFA franc, economists doubt there will be many more monetary unions created in Africa in the near future. The EAC is the regional body nearest to that goal. But the crisis in the eurozone will not have been ignored. “After what’s gone in Europe recently, the appetite for further monetary integration may have gone down,” says Mr Collier.

Others say the eurozone’s woes show that some form of fiscal harmonisation is necessary for monetary unions and that Africa’s regional blocs, including the EAC, are not yet ready for them. “In the absence of monetary and exchange rate policy, you need to be able to adjust your other economic policies,” says Mr Nord. “Our advice to African countries intent on monetary unions is that they should have mechanisms for adjustment, such as flexible labour markets. They also need a way of coordinating fiscal policies.”

Three pillars

Analysts say that African countries should avoid what John Page of the Brookings Institution calls "politically visible, but practically limited gestures" – such as common currencies and common political policies. Rather, their priority should be measures that increase trade with their neighbours. Mr Ncube of the AfDB says the key is establishing the free movement of goods, people and capital. “These are the three core pillars,” he says.

Boosting regional trade is also seen as a necessary step for African countries to expand their commerce with the rest of the world.

There are examples for Africa to follow. “What China did so well in the past 20 to 30 years was to recognise that trade mattered,” says Mr Stevens at Standard Bank. “It created special economic zones with tax incentives that attracted foreign direct investment and had first world infrastructure.”

Africa is far from being at that stage. Breaking down barriers to integration – such as poor infrastructure, lack of standardised regulation and political apathy – still has a long way to go. But examples such as the EAC show that deep integration is not only greatly beneficial to individual countries, but possible too.

From Cape Town to Cairo: a pan-African free trade area 

In June, heads of state from 26 African countries launched negotiations to create the continent’s biggest free trade area (FTA) and the first stretching from Egypt in the north to South Africa on the southern tip.

The so-called Grand FTA, first mooted in 2008, will join the Common Market for East and Southern Africa (Comesa), the East African Community and the Southern African Development Community. The aim is eventually to form a single customs union.

The bloc, when established, will comprise 570 million people and have a gross domestic product (GDP) of almost $900bn.

The prospect of such a union has excited governments and economists, who say there is plenty of potential for increased trade between the member states. Moreover, the Grand FTA, by including South Africa and Egypt, will contain the continent’s two biggest economies. It is also an area with plenty of potential for growth. About 60% of its population is under the age of 30, which is partly why its GDP is expected to rise to more than $1000bn in the next two years.

“Our future lies in deepening integration and the opportunity we have now, to create a market covering half of Africa, does not come every day,” said Sindiso Ngwenya, chairman of the Grand FTA and secretary-general of Comesa, shortly before the June launch.

The bloc could also help prevent countries that are part of more than one FTA – which is the case with many in Africa – having to trade off between them. “The [Grand FTA] will do away with that,” says Razia Khan, head of African research at Standard Chartered. “Countries will no longer have to make a choice.”

But there are already divisions within the body’s ranks. Some countries want to maintain internal tariffs to protect certain infant industries, while others think there should be no exceptions.

These problems, and the fact there is no timetable for the FTA’s enforcement, have led some analysts to doubt that members will benefit meaningfully. “The more countries you involve and the bigger the area, the more likely you are to make grandiose statements without actually moving ahead constructively,” says David Cowan, chief Africa economist at Citi.

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