Regional integration as a strategy for African development

One of the best observations I’ve ever heard about African economics came from Dr. Nancy Birdsall, director of the Center for Development Economics in Washington, DC. Answering a question about Africa’s slow growth in comparison to developments in China, she posed the following question: “Imagine Mississippi as an independent nation, in 1950. Do you think it would have grown at the same pace as the rest of the United States?”

Birdsall’s thought experiment points to one of the major constraints on economic growth on the African continent – lack of regional integration. The borders of African states are largely the legacy of the European colonization of the continent; the solidity of those borders, as represented by trade tariffs that make it more expensive for African nations to trade with their neighbors than with European countries, is the legacy of economic mismanagement post-independence.

For Africa to succeed economically, Birdsall suggests, nations need to trade with each other more, creating larger, more attractive markets and reaping economies of scale. It makes very little sense for each state in Africa to build their own garment industry… and even less sense for each country to protect their industry against their neighbors with tariff barriers – if trade between countries was easier and cheaper, nations could specialize in sectors of the economy, begin trading to neighboring states, then grow and trade with the wider world. But at present, Sub-Saharan African nations levy tariffs on average of 17% on trade with each other; OECD nations have dropped these tariffs to an average of under 4%.

James Shikwati, the outspoken Kenyan economist who was widely quoted in the wake of last year’s G8 summit, has a similar argument. Asked by a reporter from Der Spiegel whether Africans would starve if European and North American nations ended food aid to African nations in crisis, Shikwati responded:

In such a case, the Kenyans, for a change, would be forced to initiate trade relations with Uganda or Tanzania, and buy their food there. This type of trade is vital for Africa. It would force us to improve our own infrastructure, while making national borders — drawn by the Europeans by the way — more permeable. It would also force us to establish laws favoring market economy.

I take issue with some of what Shikwati has to say – he’s a bit of a free market fundamentalist – but I see the logic of this contention. Anything that improves trade between African nations is a major mover for positive economic change.

This, by the way, is one of the major conclusions of the World Bank’s recent report on the state of African development. A truly dispiriting graph in the report shows that exports to Africa represent about 10% of the total exports of the continent as a whole. Tariffs aren’t the only issue – bureacracy is a major factor as well. The report’s authors state, “Moving goods to and from African countries takes the longest of any region – 60 days on average to import, 48 to export. Regulations in the typical African country require 30 signatures to import, 19 to export.”

And logistics are a major issue as well. African transport systems often focused on connecting colonies to their colonizer, not to each other – railroads run from the interior to seaports, not across national borders. You can see the legacy of these systems if you try to travel from an Anglophone nation in west Africa to a Francophone nation – it’s hard to do without transiting through Europe.

James Forsyth, writing in Foreign Policy’s Passport blog, sees this as an argument for a pan-African free trade area, citing an interesting speech from UK’s shadow secretary of state for international development, Andrew Mitchell, which proposes such an initiative. Forsyth goes further, suggesting that the US and EU could promote such a scheme by unilaterally cutting tariffs with any nation that would sign onto such a free trade area. (Of course, given our unwillingness to cut agricultural tariffs, it’s hard to believe such a deal could be brokered.)

Against this backdrop, it’s encouraging to see signs of market integration in Africa. Telecoms.com reports that CelTel (Mo Ibrahim’s company, before he sold it to a Kuwaiti firm) has eliminated roaming fees between Kenya, Tanzania and Uganda, effectively turning the three cell networks into a single system. This is a huge step towards economic integration in these countries, but it’s even more radical than it looks, because mobile phones are increasingly becoming a payment platform in these countries: “…Celtel subscribers can now not only roam in three major African markets gratis they can also make secure, instant payments across three different currencies, begging the question: How soon will mobile operators compete with banks in Africa?” (Thanks for pointing me to this story, Alex.) For a sense of why this is so important, it’s worth looking at recent McKinsey research that suggests that the impact of wireless phones – and all they enable, including transactions – may add up to 8% of a nation’s GDP…

There’s tons of money to be made in building infrastructure – particularly regional infrastructure – in Africa over the next decade. If I were in the position to start a business in Africa right now, I’d be building low-cost regional airlines. Most African nations built a national carrier for reasons of government convenience and national pride – these carriers have often collapsed, and if they run, they often just connect the capital city with a single European or American capital. As these carriers go bankrupt or ground their airlines for safety reasons, there’s lots of opportunity to fly small jets and connect regional hubs and secondary cities. If you’ve got a few million bucks and some Bombardier jets to spare, give me a call…