REGIONAL INTEGRATION: CONCEPTS, ADVANTAGES, DISADVANTAGES AND LESSONS OF EXPERIENCE Lolette Kritzinger-van Niekerk Senior Economist World Bank: SA Country Office Central Bank of Mozambique May 2005, Maputo, Mozambique

OUTLINE Why Regional Integration? What is Regional Integration Pre-conditions and Principles for Regional Integration

Why integration in Sub-Saharan Africa? Africa is the most fragmented continent 47 small economies in SSA = Belgian economy or 50% of Spai Integration helps overcome fragmentation Create larger markets to permit economies of scale, wider competition and increased foreign investment Accelerate opening of economies to the rest of the world Enhance credibility of national reform through lock-in policy mechanisms Strengthen unity for international negotiations Reduce/resolve inter-state conflicts The 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.

Why integration in Sub-Saharan Africa? Traditional gains from RIAs trade gains Increased returns and competition Increased Investment Non-traditional gains from RIAs Lock in to domestic reforms Signaling Insurance Coordination and bargaining power Security A. 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 1991. 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.

Regional Integration & Trade an effective means for accelerating trade reform in Africa? Empirical evidence suggests UTL is superior to trade blocs N-S RIAs are likely to be superior to S-S RIAs Thus 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 Aspects 1. 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

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).

Regional Integration and larger markets an effective means for positive scale and competition effects? Empirical evidence suggests Diversification 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 investment However, positive scale & competition effects through UTL > through RIAs, but then often easier to do regionally from a political viewpoint – less competition, plus reciprocal Guiding 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

Pluses and Minuses of Regional Integration ‘Poland’ ‘EU’ ‘Brazil’ ‘Argentina’ ‘Burkin a Faso’ ‘Cote d’Ivoire’ ‘Kenya’ POLITICAL: Security + ? +? Bargaining Being noticed Policy lock-in 0? Cooperation ECONOMIC: Scale and competition Trade diversion -? - Fiscal Trade and location Technology transfer

What is regional integration ? Integration understood to have three dimensions

GEOGRAPHIC SCOPE: RIAs in AFRICA CEMAC Nile Basin Initiative AMU ECCAS Algeria Libya Morocco Tunisia COMESA IGAD São Tomé & Príncipe Mauritania ECOWAS Somalia Cameroon Central African Rep. Gabon Equat. Guinea Rep. Congo Djibouti Conseil de l’Entente Chad Ghana Nigeria Cape Verde Gambia Egypt Burundi* Rwanda* Ethiopia Eritrea Sudan Benin Togo Côte d’Ivoire Niger Burkina Faso DR Congo Guinea-Bissau Mali Senegal Angola Kenya* Uganda* EAC Liberia Sierra Leone Guinea WAEMU Tanzania1* ACRONYMS AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic and Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Community ECCAS: Economic Community of Central African States ECOWAS: Economic Community of Western African States IGAD: Inter-Governmental Authority for Development IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic and Monetary Union Mano River Union CILSS Malawi* Zambia* Zimbabwe* SACU Mauritius* Seychelles* Comoros* Madagascar* South Africa Botswana Lesotho Namibia* Swaziland* SADC Reunion Mozambique 1/ Tanzania is also a member of the Nile Basin Initiative * CBI IOC

Substantive Coverage Problems 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 commons which have no real national borders, such as certain infectious diseases (e.g. malaria) or air pollution. Public goods with trans-boundary implications e.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 cooperation Sectors which are best tackled through a regional integration approach also due to fragmentation e.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

Depth of Integration Cooperation Harmonisation Integration

Pre-conditions for successful Regional Integration Political Domestic peace/security in countries Political and civic commitment and mutual trust among countries Economic Stabilize: Minimum threshold of macro-economic and financial management in countries (price stability, realistic real exchange rates, etc.) Sufficiently broad national reforms to open markets

Key Principles for Successful Regional Integration Openness: National and regional markets too small: openness to the rest of the world essential Subsidiarity: Regional organizations should do only what national governments cannot do as well Private sector leadership: Integration must be for the people; private sector is the engine of integration Pragmatism: Variable geometry (countries join when ready and appropriate); variable speed (not all issues simultaneously); variable depth (degree of supranationality)