The ‘Tweel’ of African trade: Understanding the dynamics of intra-continental economics

Thinking about the economic might of Carthage(2), the vast trading links of the Axumite Kingdom of Ethiopia(3) and the extensive commerce of the Swahili Kingdoms of Southern Africa(4) might make paltry Africa’s three percent of global trade(5). To add insult to injury, one is faced with the lowly 10 to 12% of intra-African trade to African trade as a whole.(6) Compare this to North America’s forty percent and Western Europe’s sixty-three percent then the statistic gains even more poignancy.(7)

What are the current patterns of trade in Africa?

The fundamental premise of this paper is that intra-African trade matters: trade is the funnel through which surpluses and necessities are managed, making use of a country’s comparative advantage, engendering efficiency gains and economies of scale.(8) Even though the empirical, causal connections between trade and economic growth are still contested, there are enough consensuses to agree that trade has a general welfare effect to the extent that it affects economic variables, structures and populations, especially through positive externalities.(9)

In order to shed more light over the importance of intra-African trade one needs to see it within Africa’s institutional and structural context.(10) The foundational Lagos Plan of Action for the Development of Africa (1980)(11) in conjunction with the establishment of the African Economic Community (AEC) in 1991, by the ‘Abuja Treaty’(12), resulted in the Regional Economic Communities (REC).(13)  The RECs are the bricks on said foundation that would enable the various regions to move towards economic integration through the New Partnership for Africa’s Development (NEPAD) and within the framework of the African Union (AU) – the former being a programme of the latter structure.(14)

The goals set by these institutions include economic growth, development and poverty alleviation.(15) Of the many persistent issues on the agenda is overcoming the crippling structure of African trade itself: exports are still mainly in primary products(16) imports in more value-added manufactured products from Europe, Asia and North America, while the overwhelming majority of exports are outbound to these selfsame regions.(17) The perceived problem here is that the seeming cornucopia of primary products that are touted as essential for ensuring stellar economic growth (oil, agriculture, raw materials etc.) also places downward pressure on Africa’s terms-of-trade so that welfare actually stagnates or worsens. To conceptualise, one can turn to Richard Baldwin’s ‘hub-and-spoke’ analogy, which compares the trade destinations of African goods to the hub of a wheel and African countries to the spokes, entailing that is it easier to trade along the spokes (extra-African trade) than between the spokes (intra-African trade), with the effect that Africa trade is marginalised.(18) This type of trade is dubbed as easier because intra-African trade is hampered by four ‘plagues’ that make intra-Africa trade very costly: high transport costs; high transaction costs; high cost of information; high cost of services. This points to those general aspects of Africa that inhibit intra-continental trade: lack of sufficient and satisfactory infrastructure; policy inefficacy (pointing to lack of political will); instability(19); non-tariff barriers; connectivity problems(20).

Coupled with Africa’s small share of world trade, sparse savings and capital, weak institutions and poor macroeconomic polices, trade assumes an important role in the dynamic of Africans’ development and growth, especially for reasons related to the condition of the world economy, which must be understood from Africa’s trade perspective(21). High commodity prices have helped Africa in the past but can just as easily become a curse because of their volatility, which further attracts speculative activity. In addition, the short term capital flows accompanying the above place upward pressure on African currencies that hurt export potential. Still considering current trends in the world economy, one must note the supportive role played by domestic demand in economies, as the recent few years have shown. The problem in Africa is that domestic consumption is low due to high unemployment and poor growth in wage rates.(22)

Working out a new model for intra-African trade

Intra-African trade, along with the broader goal of regional integration, aims to achieve growth, developmental and integration in a manner that can be conceptualised by way of an analogy with a ‘tweel’: this portmanteau of ‘wheel’ and ‘tyre’ has a hub that connects to several interconnecting and flexible spokes (which can be interpreted as trade flows) that support an outer rim, which can absorb shock.

The reasoned solution qua trade (as imagined by the ‘tweel trade analogy’) is to diversify the structure of African trade, the main obstacles of which are market size (this can limit specialisation) and availability of (and capacity for) technology, which has implications for production.

This is where it all starts to come together. The RECs seek to create larger markets that make specificities needed by manufacture feasible (larger markets with better investment climates due to improved infrastructure and sound, salutary policies that are harmonised). Furthermore, intra-African trade is a matter of primary importance in creating this unified market space, which will hopefully integrate national and then regional markets to assure the required production efficiency. This is the reasoning behind free trade areas (FTAs) and customs unions.(23)

The importance here is linked to two other concerns that relate to key issues for RECs, intra-African trade and the goal of integration. Firstly, African exporters are not yet significant importers of African goods and secondly, is the lesson learned from the European Union (EU) that integration should be an extension of domestic reforms. This all illustrates that there is the need to focus not on trade specific regional agreements that grant preferential status to countries and regions (intra-African trade is limited in certain circumstances by the similarity of their economies) but rather that growth fundamentals would by virtue of themselves bolster intra-African trade. This would demand something that hasn’t received enough emphasis: a dual pronged strategy whereby policy harmonisation is combined with regional infrastructure projects – the aforementioned quote now seems to be a maxim.(24)

The above conclusion is revealed by looking at challenges to intra-African trade and at what will promote intra-African trade.(25) Challenges to intra-Africa include: market integration through policies that deal with production and supply-side constraints; lack of infrastructure (transportation, energy, communications); non-tariff barriers; restrictions on the free movement of people and means of production.(26)

Promoting intra-African trade would include: RECs fast tracking their trade liberalisation programmes and placing more emphasis on trade facilitation programmes; harmonisation of trade policies; infrastructure; monetary, fiscal and financial policies should buttress RECs’ operational efficiency.(27) The onus is clearly on the state to cultivate the necessary environment for investment through policies and infrastructure. At the same time the private sector has a role to play as a provider and facilitator especially in fields such as energy. This can be seen in South Africa, where international, private sector bidders now await to fill the country’s energy needs by way of a proposed nuclear-programme.(28) Another sector that would benefit intra-Africa trade through privatisation is that of communications.(29) Once this is all done the private sector can use this policy development through cooperation with the state to bolster business growth, such as intended by SADC Business Forum, ECOWAS Private Sector Department and IGAD Business forum.(30)

Challenges to intra-African trade and ways to address them

Two major issues then arise pertaining to encouraging intra-African trade, namely supply constraints to intra-continental trade and trade facilitation. These two issues encapsulate the core concerns that must be addressed to promote intra-African trade and to achieve the ‘tweel’ dynamic in Africa.

Before one can talk about facilitating intra-Africa trade one must ask the more pertinent question concerning the actual potential for this type of trade and its major inhibitors. As mentioned, a major concern is the similarity of the structure of many African economies, yet this has its solutions in the RECs and their respective integration programmes. The overriding concern is that African countries are still largely dependant on developed countries for manufactured goods. The potential, however, exists only if African countries can diversify production and increase competitiveness, once again linking the argument to what has been said above.(31)

These issues can also be coupled with that of growth fundamentals, as the solution to the two issues here can be found in infrastructure development, macroeconomic policy harmonisation and coordination, and trade facilitation. There is, however, the mistake of grouping African countries into the label ‘Africa’ without fully appreciating the diversity amongst their constitutive elements. Yet, within this anomaly lies the solution if one rethinks the growth process sought by the RECs. Instead of following the strictures of the Lagos Plan of Action one might rather opt for a process of differentiated integration that would allow the more willing and able concentric circles of RECs (such as is being done with the tri-partite ‘Grand Free Trade Area’) to move towards common goals as others follow at their own pace.(32) Such a methodology appreciates the diversity of forward moving potential within what is perceived to be a uniform and moribund whole.(33) It is specifically within this flexible (think, ‘tweel’) and more pragmatic context that policy has such an important role to play and so too the holy grail of Africa’s desired rise, the ‘developmental state’.

Policy should work towards encouraging exports and product diversification that is best suited to each country’s comparative advantage, especially qua factors endowments.(34) This is exactly what China did by targeting new technologies that would diversify production and exports, and to a certain extent what India did by encouraging specific imports to bolster domestic sectors that drive growth.(35)

Succinctly said, trade facilitation streamlines and harmonises trade relationships qua logistics and technicalities. In a world of increasing trade and trade related activity African countries need to address issues such as the high costs of doing business, poor transport infrastructure, the high cost of transport, taxing and trying customs practices, high communication costs and high levels of corruption.(36) SADC and COMESA stand out among RECs as the forerunners of trade facilitation. For example, initiatives such as SADC’s Free Trade Area (FTA) in 2008, plans to establish a common external tariff, and an eventual common market and monetary union.

Also, initiatives that seek to harmonise custom laws such as the REC’s Model Customs Act and its ‘one stop border posts’ are certainly a step forward. What one thus sees is the importance of growth fundamentals in SADC’s concern with establishing an investment friendly climate.(37) The role of the state is a necessarily large one as many of the issues to be addressed are the result of weak institutional policies.(38) Cooperation amongst RECs such as the tri-partite scheme of ECOWAS, COMESA and SADC also go a long way in facilitating trade, but will more importantly address issues of institutional overlap and duplicity of efforts and procedures that serve as barriers to intra-African trade.(39)

Once the above dynamics coalesce one can discern three poles within which intra-Africa trade attains a dynamic of its own: bigger markets are more attractive for cross-border and foreign investment; regional integration will result in growth and developmental nodes (i.e. South Africa, Angola, Rwanda, Nigeria) that produce beneficial spill-over; market integration and product diversification will decrease reliance on developed countries for required manufactured goods.(40)

Trade, especially intra-Africa trade, is not a panacea; it is an integral concern and activity that interlinks with several of Africa’s most important problems and their solutions. As such it should be defined as a strategic policy concern for domestic, regional and continental entities. The most candid reason for this is deduced from the swathes of research that show trade, and in this instance intra-Africa trade, as being vital to overcoming threats that spatially limit Africa in conducting and implementing policies and pursuing goals.

NOTES:

(1) Contact André Dumon through Consultancy Africa Intelligence’s Finance and Economy Unit ( finance.economy@consultancyafrica.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it )
(2) Wikipedia, ‘Ancient Carthage’, http://en.wikipedia.org.
(3) Wikipedia, ‘Foreign Relations, trade and economy of the Aksumite Empire’, http://en.wikipedia.org.
(4) Wikipedia, ‘History of Southern Africa’, http://en.wikipedia.org.
(5) Economic Commission for Africa, ‘Economic Report on Africa 2011’, Addis Ababa.
(6) Business Day, 2011, Free trade in Africa shows a way out of poverty, http://www.businessday.co.za; Longo, R. & Sekkat, K., ‘Obstacles to Expanding Intra-African Trade’.
(7) Economic Commission for Africa, idem.
(8) Economic Commission for Africa, idem.
(9) Mbekeani, K., 2010. Infrastructure, Trade Expansion and Regional Integration: Global Experience and Lessons for Africa. Journal of African Economies; Biggs, T., 2007, ‘Assessing Export Supply Constraints: Methodology, Data and Measurement’, African Economic Research Consortium, http://www.aercafrica.org.
(10) Oyejide, T., 2000. Policies for Regional Integration in Africa. African Development Bank.
(11) Mbekeani, K., idem; Economic Commission for Africa, idem.
(12) Longo, R & Sekkat, K., idem.
(13) Elliott, L. 2010, ‘Economic Potential of Regional Economic Communities in Africa: Spotlight on SADC’, http://www.afribiz.net.
(14) Economic Commission for Africa, idem.
(15) Eyisi, N. 2011, ‘Key Sectors in Southern Africa in 2011’, http://www.afribiz.net.
(16) Mbekeani, K., idem.
(17) Economic Commission for Africa, idem.
(18) Oyejide, T., idem.
(19) Economic Commission for Africa, idem.
(20) Business Day, idem.
(21) Economic Commission for Africa, idem.
(22) United Nations Conference on Trade and Development, 2011, ‘Trade and Development Report: Overview’, United Nations, Geneva.
(23) Economic Commission for Africa, idem.
(24) Oyejide, T., idem.
(25) Gleason, D., 2011, ‘Toll roads are costing us the earth’, Business Day, www.businessday.co.za.
(26) Economic Commission for Africa, idem.
(27) Ibid.
(28) Njobeni, S., 2011, ‘State’s Nuke Plan Could End Eskom Monopoly’, Business Day, http://www.businessday.co.za.
(29) Dikeledi, M., 2011, ‘Africa: Intra-African trade should be encouraged’, All Africa, http://allafrica.com.
(30) Economic Commission for Africa, idem.
(31) Ibid.
(32) World Politics Review, 2011, ‘Global Insider: Africa’s Grand Free Trade Area’ http://www.worldpoliticsreview.com.
(33) Cornford, A., 2004, ‘Variable Geometry for the World Trade Organisation, United Conference for Trade and Development: Discussion Paper 171.
(34) Editorial Staff, 2011, ‘Benefits of Africa and India Trade Relations’, http://www.afribiz.net.
(35) Biggs, T., idem.
(36) Economic Commission for Africa, idem.
(37) Ibid.
(38) Langeni, L., 2011, ‘Leaders agree to $1 trillion free trade plan for Africa’, Business Day, http://www.businessday.co.za.
(39) Ensor, L. & Langeni, L., 2011, ‘African free trade plan must be finalised within three years’, Business Day, http://www.businessday.co.za.
(40) Economic Commission for Africa, idem.

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