Presentation on theme: "REGIONAL INTEGRATION: CONCEPTS, ADVANTAGES, DISADVANTAGES"— Presentation transcript:
1 REGIONAL INTEGRATION: CONCEPTS, ADVANTAGES, DISADVANTAGES AND LESSONS OF EXPERIENCELolette Kritzinger-van Niekerk Senior EconomistWorld Bank: SA Country OfficeCentral Bank of Mozambique May 2005, Maputo, Mozambique
2 OUTLINE Why Regional Integration? What is Regional Integration Pre-conditions and Principles for Regional Integration
3 Why integration in Sub-Saharan Africa? Africa is the most fragmented continent47 small economies in SSA = Belgian economy or 50% of SpaiIntegration helps overcome fragmentationCreate larger markets to permit economies of scale, wider competition and increased foreign investmentAccelerate opening of economies to the rest of the worldEnhance credibility of national reform through lock-in policy mechanismsStrengthen unity for international negotiationsReduce/resolve inter-state conflictsThe case for accelerated subregional integration in sub-Saharan Africa seems to rest basically on three arguments.First, the imperative to make economies more competitive and capable of participating in globalization. Regional integration can provide economies of scale and increased competition on a larger and open subregional space. This can be achieved by integrating goods markets and factor markets, including traditionally non-trade activities such as infrastructure services (transports, energy and telecommunications).Second, the imperative to make policy more “open”, consistent and credible, and thus attractive to investors across the subregion. Regional integration could help achieve this by providing joint commitments acting as lock-in mechanisms and agencies of restraints against unsound and inconsistent policies. This would improve macroeconomic convergence and stability, and strengthen national liberalization programs.Third, the imperative to deal with common problems more effectively. Enhanced regional integration may provide government as well as private operators an important networking device. This would improve capacity to deal more effectively with common issues – shared resources, security, health –, to increase visibility and bargaining power in world forums, for example in negotiations with the EU, WTO as well as multilateral organizations.
4 Why integration in Sub-Saharan Africa? Traditional gains from RIAstrade gainsIncreased returns and competitionIncreased InvestmentNon-traditional gains from RIAsLock in to domestic reformsSignalingInsuranceCoordination and bargaining powerSecurityA. Political Aspects: These include security, governance, democracy, human rights, improve visibility or bargaining power. How does RIA contribute to security? (i) more exchange; (ii) greater economic dependency; (iii) access to strategic raw materials. Examples include:(i) Security: EEC 1957 (France-Germany). France knew the issue was political and military, but the only way to deal with that over time was through economic agreements and institutions. MERCOSUR Rubens Ricupero, Secretary-General of UNCTAD and former Minister of Finance in the Brazilian government, confirms the importance of MERCOSUR’s security aspects: Both countries were emerging from a period of military governments, during which considerable tension had characterized the bilateral relationship, centered on a long-standing controversy about competing hydroelectric projects in international rivers of the Plata Basin. Both militaries had also continued to pursue their secret nuclear programs. It was essential to start with agreements in the economic areas in order to create a more positive external environment that rendered it possible to contain the military nuclear programs, and to replace rivalry by integration. This effort was developed along successive stages and eventually led to signature by the two governments of Brazil and Argentina. Thus, as with the EEC, the indirect path to enhancing security provided by economic integration was deemed an essential step. In 1996, a rumored coup in Paraguay stifled by declaration of Presidents of MERCOSUR on democracy. Democracy later became an explicit condition of membership and association, e.g. Association of Southeast Asian nations - ASEAN (Malaysia-Indonesia) and conditions on human rights part of Euro-Med agreements. However, if motivations differ, a RTA may worsen security, especially if it entails large transfers which lead to conflict, e.g.: US — Tariff of abominations; EAC — Tanzania and Uganda losing to more developed Kenya; CACM — Honduras and El Salvador, 1969 (Honduras felt it did not receive a fair share of the revenues of the RIA); and East and West Pakistan. One way to remove source of conflict is to reduce external trade barriers. This will reduce size of transfers between members and also provide general benefits to the bloc. (ii) RIAs have also served as protection from a hegemonic neighbor, e.g.: SADCC in 1980 against South Africa. (iii) RIA for visibility: CARICOM; and (iv) RIAs for bargaining power: MERCOSUR in FTAA.
5 Regional Integration & Trade an effective means for accelerating trade reform in Africa? Empirical evidence suggestsUTL is superior to trade blocsN-S RIAs are likely to be superior to S-S RIAsThus guiding principle:Gains from S-S RTAs may be >with deeper RTAs (it extent of trade diversion) &with openness with rest of the world (generates usual ‘gains from trade’B. Economic Aspects1. South-South agreements will typically involve losses for the bloc (under homogeneous goods and no corner solutions: diversion and no creation), though the poorer one will lose the most because: (i) the more advanced country has a more developed manufacturing sector and exports to the poorer country at high (protected) prices. This often goes with agglomeration in the more advanced country-EAC, CACM; (ii) the poorer country had more to gain from trading with the world than the richer partner because of its comparative advantage associated with a larger difference in endowments with the world; it therefore loses more from forming the bloc and trading less with the world.2. N-S RIAs are likely to be superior to S-S ones because: (i) they can provide lock-in mechanisms and improve policy credibility [but must be explicit in the agreement, South must fear North’s threatened action (must trade a lot), and North must care; e.g., US-Mexico, not EU-many small distant SSA countries]; (ii) the lock-in in terms of democracy and governance is also more likely in North-South than in South-South RIAs; (iii) benefits from RIAs in terms of larger markets are only likely to occur if ‘deep integration’ takes, and since the developed partner’s institutions are superior to those of the South, a North-South RTA is likely to provide more benefits from ‘deep integration’; (iv) endowment differences are larger between members of a North-South RTA than between members of a South-South RTA, so that the Southern member is likely to better exploit its comparative advantage in a North-South RTA than in a South-South one; (v) a Southern member is more likely to be able to attract FDI in a N-S RIA though these benefits are unlikely to take place unless it undertakes needed economic reforms; (vi) in order to raise long-term growth, the crucial ingredient seems to be knowledge and technology, and since most of these are produced in the North, opening up to the North through a North-South RIA is likely to result in greater knowledge absorption and generate more growth than opening up to the South through a South-South RIA. (vii) S-S RIAs can of course lead to positive scale and competition effects. But these require deep integration. And they can be attained through UTL. Of course, it may be easier to do regionally from a political viewpoint (less competition, plus reciprocal).3. Though N-S RIAs are likely to be superior to S-S RIAs for the Southern member, N-S RIAs are not necessarily superior to UTL. Countries should consider UTL as an alternative, especially if they are unlikely to be able to join a RIA with a Northern member (countries in Central and South Asia or in Sub-Saharan Africa).4. Lowering external trade barriers is beneficial for S-S RIAs because (i) it generates the usual “gains from trade” (from UTL), and (ii) because it reduces the extent of trade diversion. Thus, countries forming a trade bloc should liberalize their external trade policies. This will also reduce the risk of tension and conflict between members of a CU by reducing the size of transfers. And it will reduce the risk of tension with non-members by improving their access to RIA markets
6 Regional Integration and Trade an effective means for accelerating trade reform in Africa? Most African countries are members of regional trade blocs (FTAs or CUs) with a set of intra-regional and external trade policies (new trend for open regionalism based on open and free market)Serious implementation of RIAs rules by individual countries would lower, not higher trade barriers (“zero” intraregional tariff, and lower average external tariff)Example:UEMOA – average nominal tariff went down from ~ 25% (pre-1996) to 12% (2000). Intra-regional trade went up from ~10% (pre-1996) to to 14% (2000).Tariffs remain high for countries that did not implement reforms seriously (CEMAC, Nigeria).
7 Regional Integration and larger markets an effective means for positive scale and competition effects?Empirical evidence suggestsDiversification towards manufacturing requires: scale, low transaction costs, “investment friendly” and “noticeable” economic space. Implied growth in manufacturing will go a long way to spur trade – regional as well as global – attract FDI and promote regional investmentHowever, positive scale & competition effects through UTL > through RIAs, but then often easier to do regionally from a political viewpoint – less competition, plus reciprocalGuiding principle are:Deeper regional integration: can help by enlarging and opening up the economic space, driving down production and transaction costs.Broader substantive coverage than strictly ‘market integration’ may be required to address supply-side constraints
8 Pluses and Minuses of Regional Integration ‘Poland’‘EU’‘Brazil’‘Argentina’‘Burkina Faso’‘Coted’Ivoire’‘Kenya’POLITICAL:Security+?+?BargainingBeing noticedPolicy lock-in0?CooperationECONOMIC:Scale and competitionTrade diversion-?-FiscalTrade and locationTechnology transfer
9 What is regional integration ? Integration understood to have three dimensions
10 GEOGRAPHIC SCOPE: RIAs in AFRICA CEMACNile Basin InitiativeAMUECCASAlgeria Libya Morocco TunisiaCOMESAIGADSão Tomé & PríncipeMauritaniaECOWASSomaliaCameroon Central African Rep. Gabon Equat. Guinea Rep. CongoDjiboutiConseil de l’EntenteChadGhana NigeriaCape Verde GambiaEgyptBurundi*Rwanda*Ethiopia Eritrea SudanBenin Togo Côte d’IvoireNiger Burkina FasoDR CongoGuinea-BissauMali SenegalAngolaKenya*Uganda*EACLiberia Sierra LeoneGuineaWAEMUTanzania1*ACRONYMSAMU: Arab Maghreb UnionCBI: Cross Border InitiativeCEMAC: Economic and Monetary Community of Central AfricaCILSS: Permanent Interstate Committee on Drought Control in the SahelCOMESA: Common Market for Eastern and Southern AfricaEAC: East African CommunityECCAS: Economic Community of Central African StatesECOWAS: Economic Community of Western African StatesIGAD: Inter-Governmental Authority for DevelopmentIOC: Indian Ocean CommissionSACU: Southern African Customs UnionSADC: Southern African Development CommunityWAEMU: West African Economic and Monetary UnionMano River UnionCILSSMalawi*Zambia* Zimbabwe*SACUMauritius*Seychelles*Comoros*Madagascar*South Africa Botswana LesothoNamibia* Swaziland*SADCReunionMozambique1/ Tanzania is also a member of theNile Basin Initiative* CBIIOC
11 Substantive CoverageProblems whose solutions lie in a regional approach and less at problems that are common to all the concerned countries. Three main categories of regional issues:Regional commonswhich have no real national borders, such as certain infectious diseases (e.g. malaria) or air pollution.Public goods with trans-boundary implicationse.g. cooperation in the management of shared natural resources (e.g. watersheds and international rivers), or regional safety and security, requiring participation of all countries to increase likelihood of success of any approach. Imbalance between individual country costs and benefits may hamper progress on cooperationSectors which are best tackled through a regional integration approach also due to fragmentatione.g. convergence of macroeconomic policies harmonizing legal and regulatory frameworks; and improving scale and competition through the integration of infrastructure and markets for goods, finance, labor, and energy. Cooperation of all the countries greatly enhances the effectiveness of the sector.But still differences in range depth of sector/issue coverage among RIAs
12 Depth of IntegrationCooperationHarmonisationIntegration
13 Pre-conditions for successful Regional Integration PoliticalDomestic peace/security in countriesPolitical and civic commitment and mutual trust among countriesEconomicStabilize: Minimum threshold of macro-economic and financial management in countries (price stability, realistic real exchange rates, etc.)Sufficiently broad national reforms to open markets
14 Key Principles for Successful Regional Integration Openness: National and regional markets too small: openness to the rest of the world essentialSubsidiarity: Regional organizations should do only what national governments cannot do as wellPrivate sector leadership: Integration must be for the people; private sector is the engine of integrationPragmatism: Variable geometry (countries join when ready and appropriate); variable speed (not all issues simultaneously); variable depth (degree of supranationality)