The importance that African countries attach to regional integration has been reflected in the high number of integration schemes on the continent. The integration is geared toward empowering Africa to take its rightful position in the global economy. It is a strategy toward partnership for transformation.
Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration.
Economic integration is a process where barriers to trade are reduced or eliminated to facilitate trade between regions or nations -- thus, the elimination of tariff and non-tariff barriers from the flow of goods, services and factors of production between a group of nations, or different parts of the same nation. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the states’ combined economic productivity.
Many sub-Saharan economies are small and have to import most inputs in order to manufacture. They also lack a large domestic market that would provide some form of natural protection for their manufacturers.
These challenges are ultimately surmountable through becoming competitive on global export markets.
But at the early stages of industrial development they make it more difficult for domestic firms to compete against foreign firms that have the advantages of scale and dense industrial clusters (2014 African Transformation Report, ACET).
As the degree of economic integration increases, the trade barriers between countries decrease and their fiscal and monetary policies are more closely harmonised. Regional economic integration is not only about trade in goods, it covers other issues such as investment, services and labour. It encompasses regional cooperation on a wide range of matters.
The dream of a united economy or regional economic integration in Africa started in the early years after independence. African leaders' quest for unity clearly demonstrated their commitment, which gave impetus to the formation of Organisation of African Unity (OAU) in 1963, now the African Union (AU). The African Union Commission (AUC), the Economic Commission for Africa (UNECA), the African Development Bank (AfDB), and the Regional Economic Communities (RECs) are among the key players of regional integration.
Diversity
Regional economic integration can be manifested and implemented across the continent on several of these platforms, such as below.
There can be Preferential Trading Areas. A PTA is a trading bloc that gives preferential access to certain products from certain countries. This is usually achieved by reducing, but not eliminating tariffs.
Free Trade Areas, on the other hand, are agreements made between countries where the countries agree to trade freely among themselves but are also able to trade with countries outside of the FTA in whatever way they wish.
Customs Unions are agreements made between countries where the countries agree to trade freely among themselves, and also they agree to adopt common external barriers against any country attempting to import into the Customs union.
All common markets and economic and monetary unions are also Customs unions.
Common Markets: A common market is an extension of a Customs union. It is different to a Customs union because there are common policies on product regulation, free movement of goods, services, capital and labour. The best known example of a Common Market on the continent is Common Market for Eastern and Southern Africa (COMESA).
Economic & Monetary Union: An economic & monetary union is a common market with a common currency. An example is the West African Monetary Institute.
Complete Economic Integration: This would be the final stage of economic integration, at which point the individual countries involved would have no control of economic policy. There would be full monetary union and complete harmonisation of fiscal policy.
The Challenge
Despite the enormous benefits that regions stand to gain if they are able to integrate economically, there are some challenges impeding the smooth implementation of all economic integration policies across the continent of Africa.
Firstly, if integration reaches the stages of Customs unions, then political decisions start to be made by a central body and this reduces the power of the country’s domestic government. This may not be popular with domestic politicians and also those members of the population who are especially patriotic.
Economic decisions also start to be made by a central body. Governments and citizens in any given country may be reluctant to give up rights to make decisions about economic matters. Integration into a common market may `force` a country to change its economic policies. If there are greater tax benefits in one country and factors of production are free to move from one to another, then the government in the country with higher taxes may have to lower them in order to discourage such movement. The greater the level of economic integration, the more member-countries will lose control over political and economic affairs.
Furthermore, the many challenges include lack of complementarities among regional partners in goods and factors of production, and potentials for product differentiation between regional partners emanating from differences in income levels and consumption patterns, coupled with no strong private sector support. There is also the lack of viable mechanisms for redistributing benefits from the net gainers to the more disadvantaged regional partners; and almost complete non-implementation of agreed trade liberalisation schedules as well as other obligations by members.
Then again, there are institutional challenges which include bureaucratic and physical hindrances -- such as road charges, transit fees and administrative delays at borders and ports.
These hindrances raise transport costs and render deliveries unreliable. Other challenges are related to the lack of coordination and harmonisation of policies and regulations at the regional level, non-implementation issues, and overlapping membership.
Partnership for transformation
Economic integration fosters growth. The standard argument that an economic integration can affect the rate of output growth is realised through a faster growth of factor inputs, particularly return on investment in human and physical capital, and through increases in the growth of total factor productivity.
Regional economic integration, which typically encompasses reduction in regional trade barriers and reduction in investment restrictions, can provide an important stimulus that may attract foreign direct investment (FDI), both from within and outside the regional integration arrangement (RIA) as a result of market enlargement -- which subsequently serves as an engine for economic growth. However, a concerted effort should be made so that the benefits accruing as a result of the availability of larger markets would be made clear and evenly distributed among all members. This is to avoid the situation whereby member-countries would turn to be blocks against the smooth running of the integration.
Pro-competitive effects may relate to increased scale of economies and falling costs through the mechanism by which economic integration changes price-cost mark-ups. Economic integration that encourages trade liberalisation might successfully erode market power of dominant firms in member-countries through market entry of competing firms from other member-countries. The effect of trade liberalisation arising from economic integration would result in falling market power and expanded output in imperfectly competitive sectors, thereby reducing average production costs due to mass production -- which subsequently increases the welfare of society and also encourages private sector investment.
Developmental and environmental efficiency gains may thus arise from adopting a regionally integrated approach toward the provision of regional public goods (like environment, water management and migration, all of which have an impact on the economy).
Integration can help provide or protect regional public goods that cannot be effectively addressed individually, but are best tackled in a cooperative framework. In this regard, economic integration can also be an effective approach toward conflict prevention by establishing ties with economic partners in a region. For this reason, regional economic integration may have the potential to complement ongoing efforts to support peace-building and regional good-governance initiatives.
Economic integration can contribute to pro-poor growth by integrating labour markets and lowering the barriers of investment for enterprises. Regional economic integration processes can create single market economies that are characterised by common administrative and juridical procedures, a harmonised application of standards and norms or aligned rules for foreign investors. Creating these solid and effective frameworks for economic operators can help stimulate investment.
Economic integration also results in harmonisation of the exchange rates of member-countries into a unified exchange rate mechanism. This would lead to the elimination of exchange rate risk among member-states, and hence encourage increased intra-regional trade and investment.
Regional integration may serve as a platform for enhancing a country's security in its relationship with other members. The idea that increasing trade reduces the risk of conflict has a distinguished pedigree. Collective bargaining power may help countries to develop common positions and to bargain as a group rather than on a country by country basis, which would contribute to increased visibility, credibility and better negotiation outcomes in international fora such as the IMF, WTO, WB, EPA, G7, among others.
Entering into regional trade agreements (RTAs) may also enable governments to pursue policies that may improve the welfare of its citizens. Regional integration arrangements work best as a commitment mechanism for trade policy, and the degree of openness of regional integration arrangement may help discipline in macro- economic policies.
Africa has come of age to be able to foster a faster growth of economic integration. This will help the continent to realise it dreams of economic growth and transformation and to take its rightful position in the global economy. Regional economic integration is an agenda of partnership for transformation.
By: Paul FRIMPONG The writer is a Chartered Economist (Ch.E. |ACCE Global) and a Member of the American Academy of Financial Management (AAFM). He is also an African Affairs Analyst and Emerging Markets Strategist.
Email: py.frimpong@yahoo.com/py.frimpong90@gmail.com
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