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African Economic Outlook 2019: Growth Projected To Accelerate To 4pct in 2019 - AfDB

World Bank IMF and Dev Agencies	9319 VIEWS
World Bank IMF and Dev Agencies
9319 VIEWS

Friday, January 18, 2019 10:54 AM/AfDB

This year’s African Economic Outlook examines recent macroeconomic developments and the outlook in Africa, focusing on the implications of external imbalances for growth and the financial and monetary challenges of integration (chapter 1). It next discusses employment creation through the analysis of firm dynamism (chapter 2). It then explores the economics of regional integration in Africa and the policies that can make it deliver economic prosperity (chapter 3).

Africa’s Macroeconomic Performance And Prospects

Africa’s economic growth continues to strengthen, reaching an estimated 3.5 percent in 2018, about the same as in 2017 and up 1.4 percentage points from the 2.1 percent in 2016. East Africa led with GDP growth estimated at 5.7 percent in 2018, followed by North Africa at 4.9 percent, West Africa at 3.3 percent, Central Africa at 2.2 percent, and Southern Africa at 1.2 percent. In the medium term, growth is projected to accelerate to 4 percent in 2019 and 4.1 percent in 2020. And though lower than China’s and India’s growth, Africa’s is projected to be higher than that of other emerging and developing countries. But it is insufficient to make a dent in unemployment and poverty. Of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent. But average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances. East Africa, the fastest growing region, is projected to achieve growth of 5.9 percent in 2019 and 6.1 percent in 2020. Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda, and Tanzania recording above-average rates. But in several countries, notably Burundi and Comoros, growth remains weak due to political uncertainty. Growth in Central Africa is gradually recovering but remains below the average for Africa as a whole. It is supported by recovering commodity prices and higher agricultural output. Growth in Southern Africa is expected to remain moderate in 2019 and 2020 after a modest recovery in 2017 and 2018. Southern Africa’s subdued growth is due mainly to South Africa’s weak development, which affects neighboring countries.

The Drivers of Economic Growth Are Gradually Rebalancing

The drivers of Africa’s economic growth have been gradually rebalancing in recent years. Consumption’s contribution to real GDP growth declined from 55 percent in 2015 to 48 percent in 2018, while investment’s contribution increased from 14 percent to 48 percent. Net exports, historically a drag on economic growth, have had a positive contribution since 2014.

But despite the rebalancing trend, most of the top-growing countries still rely primarily on consumption as an engine of growth. Inflationary pressures have eased. Africa’s average inflation fell from 12.6 percent in 2017 to 10.9 percent in 2018 and is projected to further decline to 8.1 percent in 2020. Double-digit inflation occurs mostly in conflict-affected countries and countries that are not members of a currency union. Inflation is highest in South Sudan, at 188 percent, due to the lingering economic crisis. Inflation is lowest, at 2 percent or less, in members of the Central African Economic and Monetary Community and the West African Economic and Monetary Union and particularly in members of the CFA zone because of its link to the euro.

Fiscal positions are gradually improving

Between 2016 and 2018, several countries achieved fiscal consolidation by increasing tax revenue and, at times, lowering expenditures. Revenue increases were due partly to higher commodity prices and increased growth, but several countries also implemented tax reforms. Domestic resource mobilization has improved but falls short of the continent’s developmental needs. Although current account deficits have been deteriorating, total external financial inflows to Africa increased from $170.8 billion in 2016 to $193.7 billion in 2017, which represents a 0.7 percentage point increase in net financial inflows as a ratio of GDP (from 7.8 percent in 2016 to 8.5 percent in 2017). Remittances continue to gain momentum and dominate the other components of capital flows, at $69 billion in 2017, almost double the size of portfolio investments. Meanwhile, FDI inflows have shrunk from the 2008 peak of $58.1 billion to a 10-year low of $41.8 billion in 2017. Underlying factors include the global financial crisis and the recent rebalancing of portfolios due to rising interest rates among advanced economies. Official development assistance (ODA) to Africa peaked in 2013 at $52 billion and has since declined to $45 billion in 2017, with fragile states receiving more ODA as a percentage of GDP than nonfragile states. All regions saw ODA increase between 2005–10 and 2011–16; East Africa and West Africa remain the highest recipients.

Africa’s debt is rising, but there is no systemic risk of a debt crisis

By the end of 2017, the gross government debtto-GDP ratio reached 53 percent in Africa, but with significant heterogeneity across countries. Of 52 countries with data, 16 countries—among them Algeria, Botswana, Burkina Faso, and Mali —have a debt-to-GDP ratio below 40 percent; while 6 countries—Cabo Verde, Congo, Egypt, Eritrea, Mozambique, and Sudan—have a debtto-GDP ratio above 100 percent. The traditional approach to estimating debt sustainability classifies 16 countries in Africa at high risk of debt distress or in debt distress. Debt situations in some countries have thus become untenable, requiring urgent actions whose range and modalities depend on the precise diagnosis of the source of debt distress. Even so, while debt vulnerabilities have increased in some African countries, the continent as a whole is not exposed to a systemic risk of debt crisis.

External imbalances have implications for long-term growth

Africa’s external imbalances have worsened, measured by both the current account and the trade balance. The weighted average current account deficit was 4 percent of GDP at the end of 2017 (the median was 6.7 percent) and, despite recent improvement, has been deteriorating since the end of the 2000s. This could threaten external sustainability and require sharp adjustments in the future. Based on the balance-of-payments constraint theory (that external financing gaps must turn into surpluses in the long run to avoid external default or sharp consumption adjustments), Africa’s current external deficits may be justified if they sow the seeds for future surpluses. This will be the case as long as higher imports are consistently associated with rising capital formation, followed by an increased share of manufacturing and tradable industries in value added, an improved position in global value chains, and a gradual repayment of external liabilities.

Risks to the outlook

Clouding the macroeconomic forecasts for Africa are several risks. First, further escalation of trade tensions between the United States and its main trading partners would reduce world economic growth, with repercussions for Africa. These tensions, together with the strengthening of the US dollar, have increased the volatility of some commodity prices and pressured the currencies of emerging countries. If global demand slows, commodity prices could drop, reducing GDP growth and adversely affecting trade and fiscal balances for Africa’s commodity exporters. Second, costs of external financing could further increase if interest rates in advanced countries rise faster than assumed. Third, if African countries are again affected by extreme weather conditions due to climate change, as they have been in recent years, agricultural production and GDP growth could be lower than projected. Fourth, political instability and security problems in some areas could weaken economies. Countries that have improved their fiscal and external positions and that have low or moderate debt will probably be resilient to new external shocks. But those that have not rebuilt their fiscal buffers are unprepared for significant downside risks.

Monetary integration is always challenging

As noted in last year’s Outlook, countries engage in monetary unions with the hope of macroeconomic and structural benefits. The benefits include a stable exchange rate and macroeconomic environment, less external vulnerability, greater intraregional trade, more financial integration, lower transaction costs (as currency conversion costs fall)—and thus faster growth and more convergence among member countries. But there also are costs. By definition, monetary unions limit the flexibility of member countries to use monetary instruments to adjust to external shocks. The immediate gains from African monetary integration, one of the aspirations of regional and continental integration, may be much more elusive —and the macroeconomic challenges much greater—than conventional analysis predicts. The standard framework that many economists use (the optimal currency area) can be difficult to validate for countries with too little accurate data on key macroeconomic variables. It is unlikely that differences in labor markets will disappear rapidly over time. It is also unlikely that shocks will hit only one member and not be generalized to many or all of them. So it is unlikely that an African supranational authority will have the resources to come to aid of countries facing severe economic difficulties. For countries in a monetary union, wellfunctioning, cross-country fiscal institutions and rules are needed to help members respond to asymmetric shocks. The free movement of labor, capital, and goods should be a reality—not just a goal. Debt and deficit policies should be consistent across the union and carefully monitored by a credible central authority. And the financial and banking sector should be under careful supervision by a unionwide independent institution capable of enforcing strict prudential rules. Each of these four requirements is a tall order. Together, they present enormous macroeconomic challenges.

Policy implications

The recovery of Africa’s GDP growth from the trough of 2016 suggests resilience as well as vulnerability to regional and global shocks. The projected growth of 4 percent in 2019 and 4.1 percent in 2020 is welcome progress. But dependency on a few export commodities to spur growth and vulnerability to volatility in commodity prices has impeded most African economies from sustaining high growth. Commodity dependence has also reduced macroeconomic levers, creating tensions and tradeoffs between growth-enhancing and stabilization policies. As a result—and as often advocated—Africa needs deep structural reforms to successfully diversify its economy, both vertically and horizontally. Diversifying and undertaking deep structural change require considerable development finance. Apart from revenue from extractive sectors and taxes, most African countries receive remittances that now exceed ODA and FDI—not including remittances transferred through informal channels,which could equal half of remittances through formal channels. Policies to lower the cost to transfer money and to improve platforms for diaspora investment and other incentives can increase the availability of critical resources for financing development. Intra-Africa remittances flow largely through informal channels because of high transfer costs and limited interbank services within Africa, which stymie formal remittance flows.

Widespread illicit financial outflows are hurting most African countries, limiting the financial resources available for investing in infrastructure, power, and other long-term projects. (Illicit financial flows account for 5.5 percent of GDP in SubSaharan Africa and have cost $1–$1.8 trillion over the past 50 years.) And continuous monitoring of the debt situation in the most fiscally fragile African economies is required to develop early-warning systems and feedback mechanisms to avoid debt distress. In addition, there is a need to raise awareness of debt sustainability at the highest political level, lay the foundation for efficient use of existing resources to limit recourse to additional debt, strengthen countries’ capability to manage their public debt, support efficient and productive use of debt, and build fiscal capacity.

As interest rates gradually normalize in advanced economies and rates of return in Africa fall, policy adjustments are needed that continue to attract investors to the region through strong performance in macroeconomic fundamentals, such as high GDP growth, stable and low inflation, and security of lives and property. One way to achieve export-led growth is to accumulate physical capital and expand the economy’s productive capacity.

Policy interventions focused on increasing the share of intermediate and capital goods in imports could help countries benefit from scale and scope economies and exploit knowledge transfers from more advanced production processes.

Higher private investment is associated with future improvement in the trade balance. Countries may thus sustain current large external deficits, as long as tax incentives, institutional frameworks, and basic infrastructure are in place to channel capital investment toward the sectors most likely to drive a trade balance reversal.
Emphasizing urbanization and a reallocation of the most productive resources toward export-intensive areas that are well integrated into global value chains appears to be key to aggregate productivity growth.
Among African success stories of export diversification, improving the external tariff structure to avoid an undue burden on intermediate and capital goods is also a relevant policy intervention to level the playing field and foster a structural shift in the import mix from consumer to capital goods.
Ensuring integration into global value chains by upholding technical and labor standards and reinforcing regional integration enables countries to move up the ladder of specialization and reverse external imbalances.
Reinvesting surpluses from commodity price windfalls toward sectors with higher productivity growth and more potential for integration into global value chains is crucial to make trade an inclusive part of structural change in Africa.

Jobs, Growth, And Firm Dynamism

Creating jobs in higher productivity sectors

Africa’s working-age population is projected to increase from 705 million in 2018 to almost 1.0 billion by 2030. As millions of young people join the labor market, the pressure to provide decent jobs will intensify. At the current rate of labor force growth, Africa needs to create about 12 million new jobs every year to prevent unemployment from rising. Strong and sustained economic growth is necessary for generating employment, but that alone is not enough. The source and nature of growth also matter. Africa has achieved one of the fastest and most sustained growth spurts in the past two decades, yet growth has not been pro-employment. A 1 percent increase in GDP growth over 2000–14 was associated with only 0.41 percent growth in employment, meaning that employment was expanding at a rate of less than 1.8 percent a year, or far below the nearly 3 percent annual growth in the labor force. If this trend continues, 100 million people will join the ranks of the unemployed in Africa by 2030.

Without meaningful structural change, most of the jobs generated are likely to be in the informal sector, where productivity and wages are low and work is insecure, making the eradication of extreme poverty by 2030 a difficult task. One of the most salient features of labor markets in Africa is the high prevalence of informal employment, the default option for a large majority of the growing labor force. On average, developing countries have higher shares of informal employment than developed countries. While data on informal employment are sketchy, it is clear that Africa has the highest rate of estimated informality in the world, at 72 percent of nonagriculture employment—and as high as 90 percent in some countries. Furthermore, there is no evidence that informality is declining in Africa. While evidence from other developing countries shows a fairly competitive labor market structure, Africa has a more segmented labor market. Segmented labor markets tend to improve with economic policies that facilitate labor mobility, a competitive environment for private sector operations, and better skill development programs.

Growth accelerations and job growth

Growth accelerations, or economic take-offs, are often underpinned by structural change, which is the result of changes in growth fundamentals. In Africa, long-term economic performance is closely related to these growth episodes. Sectoral labor reallocations that capture structural change patterns are important aspects of these growth dynamics. In Africa, most growth acceleration episodes were associated with a reallocation of labor to services (18 of the 20 episodes) and to industry (16 of the 20 episodes). Of nine industry-driven growth acceleration episodes, seven were characterized by a higher growth in employment shares in industry than in services. Growth acceleration episodes are also associated with a rise of employment in the mining sector (10 of 20 episodes), confirming the specific role of the extractive sector in Africa. The overall picture is consistent with the notion that growth accelerations are associated with structural change. Industry-driven growth acceleration episodes increased total employment growth considerably and had stronger effects on employment elasticities, boosting employment’s elasticity by about 0.017 percentage point (or by 3 percent)—three times higher than the effects of service-driven episodes.

Moreover, industry-driven growth acceleration episodes have larger cross-sector effects—0.034 percentage point higher growth elasticities of employment for industry, 0.038 for services, 0.022 for agriculture, and 0.053 for mining. In addition, mining-driven growth acceleration episodes had a similarly robust effect as industry-driven episodes. This could be explained by the simultaneity of the two types of growth acceleration episodes in a large number of cases: of the eight mining-driven growth acceleration episodes, six were also industry-driven. Overall, industry-driven growth acceleration episodes led to positive structural change, with potentially stronger dynamic effects in the long run.

The implications of such a strong association between industry-driven growth episodes and jobs is that industrialization is the key to the employment conundrum in Africa. Large firms are more productive and pay higher wages than small firms. For instance, a 1 percent increase in firm size is associated with a 0.09 percent increase in labor productivity. The return to firm size is even higher in Africa than in other developing regions, with a 0.15 percent increase in labor productivity for a 1 percent increase in size. The size effect is even stronger for manufacturing firms in Africa, with 1 percent increase in size associated with a 0.20 percent increase in labor productivity—well above the 0.12 percent increase for firms in the services sector. Wages are also much higher in medium and large enterprises than in small firms—and in manufacturing than in services. Wages are twice as high in large manufacturing firms as in large service firms and 37 percent higher in small manufacturing firms than in small service firms. Differentials in productivity and wages by firm size are partly due to the fact that large firms tend to have more educated and skilled workers and to be more capital intensive in production than smaller firms, commanding higher output per worker.

Overall, there is little firm dynamism in Africa, particularly for small firms’ chances of transitioning into medium and large firms. The implication is that the dominance of small firms drives down aggregate productivity, particularly in the manufacturing sector, and prevents firms from creating enough high-quality jobs for Africa’s growing labor force. More needs to be done to encourage large companies to set up businesses in Africa and to help small firms grow by removing constraints such as poor infrastructure, political instability, and corruption. Identifying and building the necessary clusters at the right scale also might help firm growth. This implies a concerted industrialization effort that builds on countries’ comparative advantage in Africa’s manufacturing sector. Creating better jobs and enabling sustainable development require diversifying at the product level by developing a strong manufacturing sector. This is all the more the case in Africa, where growth acceleration episodes driven by industry have generated more employment than acceleration episodes driven by services or agriculture and where premature deindustrialization points to more challenges ahead. Fostering industrialization in Africa to promote decent jobs and sustained growth requires that firms be allowed to grow and thrive relatively unfettered. Thus, industrial policy and how countries industrialize matter.

Business obstacles and lost jobs

Business obstacles also have an impact on job creation, largely through lower firm survival rates and staff cutbacks. When obstacles are too severe, firms may decide to shut down, resulting in a loss of job opportunities. Firms that survive despite severe obstacles might decide to optimize profits or minimize losses by hiring fewer workers or by laying some off. In Africa, the biggest impact on jobs is through firm survival; the employment effects are less severe among surviving firms. Firms that survive seem to cope reasonably well with business obstacles, though firms still report them as a detriment to their operations. Each obstacle to doing business reduces annual employment growth among surviving firms, controlling for age, by 0.1–0.34 percentage point. This translates into a 1.5–5.2 percent loss in annual employment growth. On rough estimates, the continent loses an average of 176,000 private sector jobs every year because of each of the business obstacles examined, for a total of 1.2–3.3 million jobs lost every year. The number of estimated jobs lost ranges from 74,000 due to customs and trade regulations to 264,000 due to licensing and permitting.

These rough estimates are indicative only, and actual and potential job losses could be much higher. They do, however, indicate how detrimental the obstacles are to both creating new jobs and maintaining existing high-quality jobs in the formal sector. Licensing and permitting, courts, political instability, and corruption are associated with the highest numbers of private sector jobs lost in Africa. Related to governance, these obstacles are thus amenable to reform. Firm productivity, and thus firm growth, are shaped by four interrelated factors, often determined by policy choices.

The first, and perhaps most frequently mentioned, is getting the basics right. These include adequate infrastructure (utilities, transport, communications, and the like), human capital (skills), and functioning institutions. The second is identifying the type of market firms target to sell their products. A wealth of research in Africa and other developing regions has identified manufactured exports as an important source of productivity growth. Third is forming industrial clusters, and fourth is attracting foreign direct investment. One way to relieve the infrastructure constraints for firm entry and survival is to set up industrial zones.

African firms that engage in exporting, operate in proximity to other firms, and attract foreign direct investment tend to be more competitive and therefore to thrive. With many African countries dependent on extractive industries, building economic complexity is challenging. The capabilities and productive knowledge in extractive industries have little overlap with those needed to produce more complex manufactured products. Policymakers should identify the frontier products that countries can diversify into, as well as the capabilities needed. And they should alleviate unnecessary constraints to doing business, especially those that firms have identified as primary obstacles and that are within government’s ability to deal with quickly.

Industrial strategies should be developed in collaboration with stakeholders, particularly the private sector, and focus on identifying priority issues and creating a strong competitive environment. Countries need to clear their own paths to sustainable economic transformation. Finally, to avoid redundancy and increase synergies between neighboring countries, regional industrial zones could be established to reap the benefits of externalities and agglomerations and to build a critical mass of skilled labor.

Integration For Africa’s Economic Prosperity

A borderless Africa is the foundation of a competitive continental market that could serve as a global business center. It would allow agricultural and industrial production across national boundaries and therefore offer economies of scale to investors, while creating much bigger markets and providing new opportunities for small firms and large. It would help eliminate monopoly positions while enhancing cross-border spillovers between coastal and landlocked countries. At a deeper level, regional integration can improve regional security, since the expansion of international trade often correlates with a reduced incidence of conflict.

Reducing tariffs and non-tariff barriers

The first expected outcome of an effective preferential trade agreement is an increase in trade among members—through three channels. The first is reducing tariffs between members. The second is reducing nontariff barriers that arise from policies and from non-policy-induced rent extraction. The third, and hardest to achieve, is through the two components of trade facilitation: a “hard” component, related to tangible infrastructure such as ports, roads, highways, and telecommunications, and a “soft” component, related to transparency, customs management, the business environment, and other intangible institutional aspects that affect the ease of trading. The first two are the outcomes of measures taken under shallow integration, and the third is associated with deep integration.

Increasing labor mobility

Migration is happening in Africa even if not all free movement of persons protocols are ratified and implemented. Fully implementing all of them might increase flows among African countries. That makes it important to focus on what prevents countries from implementing the protocols. The Africa Union Passport, launched in July 2016 at the African Union Summit in Kigali, encourages the free movement of people in general and labor mobility in particular. And the first objective of the African Continental Free Trade Area is to “create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.” For these initiatives to be successful and effective, it is useful to proceed by first improving the effectiveness of the policies within each regional economic community (REC) before scaling up efforts to the continent. And because integration should happen not only in the goods market but also in factors of production, the discussions should attend more to the free movement of persons.

Integrating financial markets

Despite progress, financial markets in Africa are still weakly integrated. Measures of institutional restrictions to financial flows suggest that a lot more needs to be done from a governance perspective. The correlations between domestic savings and investment rates are still strong, even though they should have been weakening in the absence of barriers to capital movements. Interest rate spreads on retail banking are still wide but have stabilized in the past few years. And African stock markets are more sensitive to global benchmarks than to the South African benchmark. Bold reforms, especially at the institutional level, are needed to synchronize financial governance frameworks across the region and to remove any remaining legal restrictions to cross-border financial flows and transactions. It is important to pursue stronger technological advances in the harmonization of payment systems across the continent, as this would facilitate actual movement of funds across borders.

As an extension of regional integration, monetary unions in Africa are seen as a way to achieve prosperity and better governance, sparked to some extent by the example of European monetary integration. But African monetary unions have underperformed, failing to bring about economic prosperity and poverty reduction. In many cases, even the weaker requirements of free trade areas and customs unions have not been met. Yet African political leaders have consistently chosen to forge ahead without first taking the bold institutional and economic coordination measures that would enable monetary unions to strengthen integration in Africa. In the absence of true fiscal and economic coordination, the opportunity cost of maintaining a single currency can be high. While the treaty creating the African Union envisions a single currency for Africa, and many RECs have plans to create regional currencies, these plans are in most cases more aspirational than concrete guides to national policy. Countries need to implement the institutional building needed to make a monetary union successful, such as close coordination of banking supervision, a willingness to come to the assistance of countries in economic crisis, and political federation to coordinate fiscal policies and control deficits.

Enhancing cooperation for regional public goods

Regional integration has always been about more than market access. Regional cooperation has always been important, if only because of the need for rail, roads, and other means of communication, and it is now attracting more attention on several fronts. Beyond the eight RECs and seven other regional organizations aiming at deepening intraregional trade, the majority of regional organizations deal with regional public goods: 5 deal with energy, 15 with the management of rivers and lakes, 3 with peace and security, and 1 with the environment. Collective action by governments in the region should create positive spillovers across the region that are greater than the spillovers that individual governments acting alone could generate. This requires regional governance by a regional body with real authority over member states to deliver regional public goods. States must be willing to cede a significant amount of authority to the body, something that has so far occurred only in the European Union. That is why most regional cooperation is intergovernmental. Each state retains veto power, and the regional organization is a secretariat to coordinate and harmonize policies, set standards, and provide services—but with no authority.

Hard infrastructure

Roads, ports, railways, pipelines, and telecommunications have always been important for African integration. And recently, China and the African Union Commission signed a far-reaching agreement within the framework of the African Union’s Agenda 2063 to link all African capitals by road, rail, and air transport. By reducing trade costs, new roads, railways, and ports are intended to improve connections across cities, accelerate urbanization, and encourage regional integration. A virtuous cycle leads from investments in hard infrastructure to increased trade that in turn makes further investments profitable. By contrast, poorly functioning logistics markets lead to a vicious circle of low trade volume and high trade costs. The quality and quantity of hard infrastructure are key determinants of trade costs.

Soft infrastructure

Good logistics are necessary to operate the close-to-seamless transport corridors necessary for successful regional integration. Efficient services, including trucking, freight-forwarding and handling, and smooth terminal operation, are all necessary. Logistics markets operate more efficiently when freight forwarding and handling services and terminal operations are opened up to competition regionally and goods are submitted and cleared through customs expeditiously. Trade costs due to poorly functioning logistics markets may be a greater barrier to trade than tariffs and nontariff barriers. Lack of well-functioning corridors impedes the development of regional value chains, where goods often cross borders several times during production. Barriers to trade from border impediments have fallen over the past 20 years. These patterns suggest three conclusions. First, although borders are still “thick,” they have become progressively thinner, easing concerns expressed in some studies on regional integration in Africa that concentration of activity has increased. Second, membership in a regional trade agreement does not seem to affect agglomeration. Third, trade facilitation projects—an integral component of current and planned integration efforts—can alleviate the fears of unbalanced development across the continent by leading to the development of peripheral areas.

Reducing trade costs to increase participation in trade supply chains

An immediate objective of the Continental Free Trade Agreement is to increase participation in cross-border supply chains by reducing trade costs through regional integration. African countries have participated little in global trade supply chains except in upstream activities as providers of unprocessed goods and raw materials. But experience in textiles and apparel, supermarkets, and automotives show that African countries are getting progressively more involved in trade in tasks through regional value chains. Key to this is a reduction in trade costs as goods cross borders multiple times. To develop cross-border supply chains, improving customs management and adopting simple and transparent rules of origin are essential. Rapidly implementing the WTO’s Trade Facilitation Agreement would introduce a first set of cost-reducing measures that African WTO members could carry out. The WTO estimates that reducing time delays at customs could lower trade costs by about 15 percent for developing countries. Further estimates at the country level prepared for this report confirm the gains from improving transparency and reducing red tape at customs. In a world of spreading preferential trade agreements and greater trade in tasks, rules of origin stand in the way. One of the challenges of “multilateralizing regionalism” is to prevent rules of origin from working at cross-purposes with the rise in global and regional value chains. Nowhere is this challenge greater than across African RECs. While rules of origin are necessary to prevent trans-shipment, if too restrictive they will undo any trade-creating effects of preferences since product-specific rules of origin are then tailored to producers’ demand for protection.

Taking advantage of the World Trade Organization’s Trade Facilitation Agreement

Reducing the supply chain barriers to trade could increase global GDP up to six times more than removing tariffs. If all countries could bring border administration, together with transport and communications infrastructure, up to just half the level of global best practice, global GDP would grow by $2.6 trillion (4.7 percent), and total exports would increase by $1.6 trillion (14.5 percent). Clearly, global value chains are now the dominant framework for trade. And as seen, African countries such as Rwanda (and Ethiopia and Morocco) are already taking advantage of this paradigm shift. Rather than waste time in unproductive policy discussions over tariffs, they are redirecting their strategies to focus on trade facilitation. The reduction in fixed trade costs related to time in customs and the associated monetary costs should encourage greater diversification of trade to other markets and in other products to the same market. It should also lead to greater participation in supply chain trade at both the regional and global levels, where goods have to cross borders multiple times.

Harmonizing rules of origin

Because duties and import restrictions may depend on the origin of imports, criteria are needed to determine the country of origin of a product. These are referred to as rules or origin, and they are an integral part of all trade agreements. Preferential rules of origin are used to enforce preferential schemes by establishing which products can benefit from preferential access. As in other free trade agreements, the negotiations on rules of origin for the CFTA are likely to be dominated by strong industry lobbying. During the negotiations so far, West and Central Africa have preferred general rules of origin, which would probably resemble those in the East Asia and the Pacific region. On the other side, Egypt, Kenya, and South Africa have pushed for product-specific rules of origin, and South Africa has lobbied for adoption of the Southern African Development Community rules of origin on a sector- or product-specific basis.

Rules of origin will also have to deal with the regime-wide rules covering certification, verification, and cumulation. Because there are few differences in certification and verification methods across the African RECs, agreeing on them should be relatively easy—especially if, as recent evidence suggests, administrative costs are not as high as previously estimated. So, it might be easier to agree first on harmonizing rules governing certification and verification. In contrast, provisions on cumulation (treating of intermediates from other countries in the bloc or countries with special cumulation status) differ across RECs.

Dos and don’ts for integration policymakers

All African countries would fare better with well-designed integration than without it. What, then, are the policy responses to maximize the benefits of regional integration and to mitigate the potential risks?

Here, first, are some things integration policymakers should not do.

Do not worry overly about ceding national sovereignty to supranational authority because that facilitates harmonizing regulatory policies, building trust, and checking the political pressure to erect nontariff barriers.
Do not neglect the soft infrastructure (logistics and the like) that’s essential to reap the gains from investments in hard infrastructure (roads, rails, bridges, ports).
Do not believe that integration will necessarily concentrate even more economic activity in big countries because trade facilitation has spread economic activity all along the corridors.
Do not underestimate how poor households are hit most by high-tariff sensitive lists for, say, rice and sugar, as the common external tariffs do in the Economic Community of West African States and (less) in the East African Community.
Do not impose sector-specific or product-specific rules of origin. Word in policy circles, however, has it that African trade negotiators already have identified 800 products for specific treatment. Now turn to the dos for trade.
Monitor progress in reducing bilateral tariffs and nontariff barriers, as the East African Community does with the Common Market Scorecard, tracking compliance in the free movement of capital, services, and goods.
Eliminate all of today’s applied bilateral tariffs in Africa and keep rules of origin simple, flexible, and transparent. That could increase intraAfrica trade by up to 15 percent, for a gain of $2.8 billion, small but welcome in these times of rising protectionist stances in the global economy and the China–United States and Britain–mainland Europe divides.
Remove all nontariff barriers on goods and services trade on a most favored nation basis, since they apply overwhelmingly to all partners for trade across Africa. When added to eliminating tariffs, this would increase trade and boost the cumulative income gains to $37 billion—and the continent’s tariff revenues by up to $15 billion, which is more than small change.
Implement in addition the WTO’s Trade Facilitation Agreement to reduce the time it takes to cross borders and the transaction costs tied to nontariff measures. When added to the removal of tariffs and nontariff barriers, that could yield a cumulative income gain of 3.5 percent of the continent’s GDP, bringing the gains to just over $100 billion.
Consider the effect of other developing countries reducing by half their tariffs and nontariff barriers on a most favored nation basis. That could bring Africa’s gains to 4.5 percent of its GDP, for an additional $31 billion, bringing the total gains to $134 billion.
Also consider a 0.2 percent tariff on imports from high-income countries. That could bring in $850 million a year to finance trade facilitation projects

Then, put much more emphasis on regional public goods, a no-brainer because every country benefits, but especially the low-income countries.

Synchronize financial governance frameworks across the region and tighten prudential frameworks for supervising financial flows, while removing any remaining ill-founded legal restrictions to cross-border financial flows and transactions.
Pool power to tap the enormous potential of cross-border trade in electricity. And as the Nord Power Pool in northern Europe shows, start with a small number of countries, rely on external finance to increase capacity, combine generation with transmission, and have enough transmission capacity to stabilize supply and promote competition.
Open your skies to competition, as with Mozambique, which recently opened to foreign carriers. The African Union’s Single African Air Transport Market, launched in January 2019, has so far been signed by 22 countries with 75 percent of intra-African air transport. Morocco’s open skies policy shows how lowering airfares and opening new routes can increase the seats offered by half (against 10 percent in Tunisia) and boost the share of low-cost airlines from 3 percent in 2006 to 36 percent in 2010 (from 7 to only 10 percent in Tunisia).
Open your borders to free movements of people—say, by ratifying and implementing the African Union Passport, launched in 2016 and expected to be fully rolled out by 2020.

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