Regional Integration Imperatives and Aid for Trade in Africa

10 July 2017

Aid for Trade (AfT) has already been shown to be a valuable means for developing trade in Africa. In what ways could a reorientation of these flows from a national to a regional level further increase the benefits that African economies can obtain from AfT?


Aid-for-trade flows have evolved over the years. Even though the amount of support granted has periodically dropped, disbursements remain relatively important. Between 2005 and 2015, i.e. over a ten-year period, donor countries gave some US$ 264.5 billion in the form of aid for trade to finance 250,000 projects in 146 developing countries, 38.4 percent in Asia and 35.1 percent in Africa.[1] The OECD indicates that the impact of this aid on jobs, national and foreign investments, and living standards in recipient countries is significant, because the return on investment on this form of aid is around eight dollars of trade created in developing countries, and twenty dollars in low-income countries, for every dollar invested.[2]

It is generally accepted that aid for trade has had beneficial effects for numerous developing countries, especially in Africa. There is a need, however, to go beyond the intrinsic financial flows to analyse, on the one hand, the quality and the targeting of aid for trade and, on the other, to examine the approaches that govern its distribution between the various sectors to which it is directed.
 

Shedding light on the targeting of aid for trade in Africa

Why is the aid for trade directed towards Africa so massively concentrated in only two sectors? That is the question that one is tempted to ask looking at the division by sector of the aid-for-trade flows entering the continent. In 2015, more than half of this support, approximately 55 percent, was dedicated to trade-related infrastructure, while only 42 percent was dedicated to productive capacity building.[3] These two sectors account for the overwhelming majority of all the granted resources, leaving a congruent portion of around three percent of disbursements for trade policy and regulations, as well as a marginal part (less than one thousandth of the total) for trade-related adjustment. In the case of infrastructure, a large part of the resources are generally directed to transport, notably roads, and storage.

It can be noted that the distribution by sector of aid for trade in Africa is generally similar to that observed elsewhere in the world. There is also a certain rationality that justifies the concentration of support in the to the two sectors of trade-related infrastructure and productive capacity. It is indeed in both these sectors that African countries face the strongest trade constraints, as much internally as within regional markets or in commercial corridors leading to external frontiers, whether they are land, maritime, or air-based.

In a country like Nigeria, the second-largest African economy, for example, a study by the World Bank on domestic obstacles to trade has shown that the extra costs to transport a 20-foot container by road represents 21 percent of the total transport costs from Kano to Lagos, and 35 percent going the other way, principally due to high road-transport costs and, to a lesser extent, to informal payments.[4] The comparison between this internal corridor in Nigeria, which goes from Lagos to Kano, and the regional corridor which links the port of Tema in Ghana and Ouagadougou, the capital of Burkina Faso, shows that using the Lagos-Kano corridor is 25 percent more expensive and 150 percent longer. It is thus clear that internal trade costs can weigh heavily on the international competitiveness of African products, notably due to infrastructure weaknesses.

The rest of West Africa is also globally confronted with the same constraints, especially with regard to transport and road infrastructure. In a region where road transport represents nearly 90 percent of freight and human movements, the weakness of the highway network is one of the region's biggest obstacles to trade. West Africa only has 4.7 km of roads for 100 km², which is less than the average of 6.8 km for the African continent.[5]

This analysis also applies to productive capacity. The poor exporting performances of African countries can be explained by the weakness in their producing capacity. African economies' dependence on the export of a reduced number of primary products, on which they benefit from longstanding trade preferences, is a limiting factor which hinders the creation of regional value chains on the continent. Several African countries, like Cameroon, Ghana, Ivory Coast, and Nigeria, among others, are large-scale exporters of cocoa beans and could have, together, constituted a dynamic hub in the cocoa value chain. But they add little value to this product before exporting it.

The concentration of African countries in producing and exporting unprocessed raw materials leads them to abandon important financial resources as a result of the lack of value addition, and to export jobs that are deeply needed by their own young population to countries which have adequate productive capacity. Seen this way, support for African countries should not be looked at only from the angle of market access improvement, especially by maintaining certain trade preferences, which is a prior condition, but should be centred on developing productive capacities, especially in the food-processing sector. This sector is, in effect, at the heart of industrialisation, job creation, and food security for many countries.

The above constraints thus show that targeting aid for trade on infrastructure and productive capacity is appropriate, because help is given to the sectors which most restrain African trade. We still need to know whether the extreme concentration of aid at a national level should remain the primary option, or whether we should on the contrary turn more towards regional economic communities to support efforts to construct regional markets and create regional value chains.
 

Towards reinforcing the regional dimension of aid for trade

More than just a priority, regional integration throughout Africa seems to be a development imperative. Policies and initiatives aimed at realising regional integration struggle, however, to produce structuring and long-lasting effects, notably because the material and infrastructural bases they build on are fragile, when they even exist.

The crucial importance of regional integration is, however, barely taken into account in the distribution of aid for trade. Even though everyone recognises the importance of supporting the ongoing economic integration processes on the African continent, few countries or international institutions are inclined to devote important financial resources to projects which are designed and executed at a regional level. By habit or by pragmatism, donors seem to favour a national approach in disbursing aid for trade. In 2015, only 12 percent of aid for trade was directed at regional projects, which clearly shows the low level of importance given to regional integration regardless of current discussions. There is therefore substantial room for improvement at this level, which must be used in giving greater support to initiatives that correspond to regional priorities.

On the African continent, the priority given to regional integration and the acceleration of initiatives such as the Continental Free Trade Area and customs unions in the different regional economic communities should push bilateral donors and international institutions to give more attention to regional projects, relating to infrastructure as much as productive capacity.

In the context of West Africa, aid for trade could act as a catalyst with important impacts in terms of opening of the regional market, free circulation of goods, capital, and services, and competitiveness of companies. It could, in particular, support the principal driving forces behind regional trade, such as the WTO’s Trade Facilitation Agreement (TFA), ECOWAS’ Common External Tariff (CET) and ECOWAS’ Trade Liberalization Scheme (ETLS).

The TFA is an external factor contributing to make trade more dynamic. Of the nineteen African countries which had ratified it by the date it came into force, eight are West African. The TFA’s aim of increasing the speed of commercial transactions by modernising and rationalising border procedures, while encouraging better trade governance, goes hand in hand with the aims of the ECOWAS free-trade area established by the ETLS and of the customs union being set up following the adoption of the CET.

A good link between the TFA, the ETLS, and the CET, notably through the targeted financing of regional projects concerning infrastructure (regional road corridors; modernising transport systems) and productive capacities (helping develop regional value chains; setting up special economic zones for regional integration) could represent a significant opportunity.

By way of conclusion, it can be recognised that aid for trade has helped an increasing number of African countries to participate in world trade. One must, however, also recognise that, for various reasons, often linked to the conditions underlying public development aid, aid for trade has only benefitted a few countries within each regional economic community. Now that all the regional communities are moving towards greater integration of their markets, aid-for-trade programmes should also take this into account in order to help the latter build economic infrastructures that their member countries could not achieve individually. This would allow the removal of unequal treatment between countries in the same region, increase their complementarity, encourage both specialisation and scale economies, and create regional value chains as a precondition to integrating global value chains.
 

Author: Cheikh Tidiane Dieye, Executive Director, Centre africain pour le commerce, l’intégration et le développement (Enda Cacid)


[1] OECD and WTO. Aid for Trade at a Glance 2015. Paris and Geneva: OECD and WTO, 2015.

[2]Angel Gurría. “L'Aide pour le commerce, ça marche.” L’Observateur, OECD, 2015.

[3] See the article written by Lily Sommer, Heini Suominen and David Luke in this issue.

[4] Coste, Antoine. “Domestic Obstacles to Trade and Transport in Nigeria and their Impact on Competitiveness.” Africa Trade Policy Notes, Policy note No. 42, World Bank, 2014.

[5] Document from ECOWAS’ Community Development Programme (CDP), 2013.

This article is published under
10 July 2017
Gender-focused aid for trade initiatives in Africa have the potential to considerably accelerate the achievement of the Sustainable Development Goals. This article sets out the case and highlights...
Share: 
10 July 2017
Taking stock of aid for trade in Africa over the last decade, how can the targeting and delivery of this development assistance be improved to achieve the continent’s structural transformation,...
Share: