Building a future of borderless trade

Building a future of borderless trade

The African economy has been experiencing unprecedented growth for a full decade – about 5% GDP growth annually – and

the forecast for the next ten years is positive. The region’s unprecedented economic growth holds the potential to improve the living standards of millions of people – particularly if a business in the region expands, creating jobs and lifting incomes.

Producers of food, light manufactured goods and fast-moving consumer goods in the region are not benefiting from its recent economic expansion to the same extent as industries such as telecommunications and finance. This is due in great part to the region’s formal and informal barriers to trade in goods. Corruption, delays, inappropriate application of duties and taxes, inefficient procedures, lack of reliable information and poor infrastructure restrict the opportunities for producers to service domestic, regional, and international markets.

High trade barriers with neighboring countries are costing African nations billions of dollars of potential earnings and depriving the continent of new sources of economic growth, says the World Bank in a report released 7th Feb. 2012. As a consequence, Africa has integrated with the rest of the world faster than with itself, stresses the report.

While tariffs, in general, have been lowered within regional communities, many non-tariff and regulatory barriers still raise transaction costs and limit the movement of goods, services, people and capital across borders. Moreover, Political motives, geography, and the uneven distribution of gains trumped the traditional efficiency gains across Africa’s Regional Economic Communities (RECs).

The small, sparsely populated, fragmented, and often isolated economies across Africa make a compelling case for these economies to integrate regionally to reap efficiency gains, exploit economies of scale, and reduce the thickness of borders.

But lack of complementarities among partners and diminishing returns to the exploitation of resources has reduced supply response to market-integration-oriented regional policies. Additionally, a very uneven distribution of resources has sharpened the trade-off between the benefits of common policies needed to tackle cross-border externalities and their costs, which are heightened by the sharp differences in policy preferences across members.

African RECs have pursued the ‘linear model’ of integration with a stepwise integration of goods, labor, and capital markets, as well as eventual monetary and fiscal integration. With the exception of the franc zone, the RECs have not yet completed goods-markets integration; the lack of adjustment funds to address the uneven distribution of benefits across partners contributing to the delay.

Estimates reported here reveal the shortcomings of the linear model of integration, as behind-the-border measures aiming to reduce trade costs were largely ignored across African RECs until recently. While this is probably due to the difficulty in gaining the confidence necessary to get collection action started, many behind-the-border measures could still have been undertaken unilaterally.

There are only two years left until Africa’s Regional Economic Communities (REC) will hit a deadline for the creating of free trade areas and customs unions within their territories, as stipulated by the 1994 Abuja treaty.
However, regional integration remains a significant challenge for this region of 54 markets.
The Global Entrepreneurship Summit – hosted by the White House in Nairobi, Kenya, as part of President Obama’s state visit to the region in July – highlighted the need for the next generation of African businesses to be able to be borderless, both in terms of operations and sources of financing. There are still several issues that must be addressed before this can become a reality.

The African Union (AU), an institution that has been closely following the progress of the 1994 Abuja Treaty, notes that African countries, as an economic bloc, currently rank low in terms of global economic classification. The continent is home to 14 percent of the global population and yet it accounts for less than 3 percent of the global GDP and receives only 3 percent of foreign direct investment. Africa accounts for only 1.8 percent of imports and 3.6 percent of global exports.

Clearly the region is punching below its weight. One significant factor is the underdevelopment of intra-regional trade. Currently, it stands at around 12 percent, versus the 60, 40, and 30 percent in Europe, North America and the Association of Southeast Asian Nation (ASEAN), respectively.

Africa’s growth has long been stifled by the fact that its 54 markets are small, poorly integrated politically and economically, and poorly linked physically. That now stands to change fundamentally as the private sector begins to play an active role in addressing some of these issues.

African governments are now seriously trying to create an enabling environment for investment and trade. For example, at the Egyptian Economic Development Conference earlier this year where $50bn in new investment commitments were made, the government announced several reforms. These include the introduction of unified investment law, the removal of costly and inefficient fuel subsidies, the rationalization of the tax regime, and the settling of legacy debts to foreign companies.

Across the region, smarter regulation, a commitment to cutting red tape and a willingness to develop partnerships with the private sector are encouraging new investment, which in turn supports government revenue collection. This enables governments to invest in infrastructure and capacity building (e.g. education, health), which improves investor confidence.

Improved infrastructure is vital to growing regional enterprises and intra-African trade. For example, Trademark East Africa (TMEA), an organization that supports the growth of trade in East Africa, announced in February the European launch of its Logistics Innovation for Trade (LIFT) fund. The $14.1m fund is a new source of financing for transport and logistics companies interested in doing business in the East African Community block, which includes the countries of Burundi, Rwanda, Uganda, Kenya, and Tanzania.

In recent years, the economies of East Africa have grown by an average of about 6 percent per year, despite the fact that there are no major mineral exports from the region. Since 2008, freight volumes through the region’s major ports, Mombasa and Dar-es-Salaam, have grown at 8 percent and 13 percent per year, respectively.

Mombasa now handles more than 22 million tons per annum and is expected to handle 27 million tons per annum by 2016, serving Kenya, Uganda, South Sudan, Rwanda, Burundi, Zambia and the Democratic Republic of Congo.
As Africa continues to realize its resource potential following an exploration boom, opening up the continent by integrating transport networks will improve export capacity and conversely raise the region’s economic standing. These growing trade volumes engendered through improved shared infrastructure also provide an alternative avenue to economic growth aside from raw materials exports.

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Trade is growing up to 8 percent per annum across the region and economic growth is picking up. However, without building the transport and logistics sector to match, growth will soon hit a ceiling. Reducing cost and time of transport and logistics increases trade, reduces the cost of living, and contributes to higher exports and faster growth for Africa.

Coupling the compelling African demographic narrative, with the results of the growing resource-based industrialization, the private sector cannot ignore the need to design investments around these needs.
Currently, Qalaa Holding is investing in the bricks and mortar of intra-African trade.

Their projects that target opening regional trade routes include Nile Logistics, our platform for river and port logistics management, and their investments in east African railway connectivity through Rift Valley Railways (RVR).

Through RVR, they are not only investing in modern rail technology and rebuilding infrastructure to expand haulage capacity, but they are also developing the skills of the railway’s 2000 strong workforce. They are consciously investing in the dynamic needs of a future of borderless trade.

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