| World Bank IMF and Dev Agencies |    6046 VIEWS  |
| World Bank IMF and Dev Agencies | |
| 6046 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.
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.
Then, put much more emphasis on regional public goods,
a no-brainer because every country benefits, but especially the low-income
countries.
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Outlook Report - Resilience in Vulnerability
7. NSR H1 2019 (2)
- MEA Region: A Year of Fragile Growth
8. NSR H1 2019 (1)
- Global Growth: New Year, Same Rhetoric, Matching Growth
9. 5 Key Global
Developments to Watch in 2019
10. Nigeria Outlook
2019: Sailing Through The Storm
11. FSDH Research
Expects Modest Recovery in Equities’ Market in 2019
12. Nigeria Economic
Outlook Conference 2019
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