54798 No. 166 September 2000 Cross-Border Initiative in Eastern and Southern Africa: Regional Integration by Emergence Introduction Over the past few decades Sub-Saharan African (SSA) countries have tried various arrangements to promote economic integration. Most of these arrangements have focused on promoting greater intra- regional trade. Nevertheless, despite some increase in intra-regional trade in some of the groupings (e.g., COMESA, SADC and UEMOA), overall intra-regional trade in SSA is less than 10 percent of the region's total trade. In the past decade, some of the arrangements have also started to focus on promoting greater intra-regional investment flows (e.g., UEMOA, COMESA). The experience to date has brought out two key issues that are likely to shape the debate over the integration approaches in SSA over the next decade. These are: a choice between "integration by design" and "integration by emergence"; and the relative importance given to the promotion of intra-regional trade and investment. This article presents a synthesis of the issues as well as the experience in dealing with these issues under the Cross Border Initiative (CBI) in Eastern and Southern Africa and Indian Ocean countries. "Integration by design" versus "integration by emergence" The first issue relates to the choice between an approach based on treaty obligations of participating countries (i.e., "integration by design") and an approach that emphasizes harmonization of policies and regulatory frameworks, wherein countries act collectively and in unison within a common framework, but in the absence of formal treaty obligations (i.e., "integration by emergence"). Most of the integration arrangements in SSA have followed the approach of "integration by design" (e.g., COMESA, UEMOA, etc.). Some progress has been made under this approach in removing the barriers to cross-border flows especially of goods and services among the participating countries. Nevertheless, the treaty-based approach may have a built-in bias whereby the slowest reformers generally set the pace of integration of the group. CBI experience Under the CBI, the fourteen participating countries have been experimenting with a form of "integration by emergence". The basic thrust of this approach is to let the faster reformers set the pace of integration, within a framework of harmonized policies that accepts the principle of variable geometry (i.e., where different sub-groups of countries can proceed at different speeds). Within the framework of a Road Map for Tariff Reform -- a set of common targets for harmonization of the trade regimes, but without a treaty (see box for details) -- the CBI participating countries have generally made good but uneven progress in removing the barriers to trade among themselves, while in parallel also lowering the barriers to trade with third parties. For example, it is estimated that the trade openness rating of the CBI participating countries (based on IMF methodology with 0 representing most openness and 10 least openness) has improved from an average of 8.3 in 1993-95 to 5.9 in 1998 (compared with an average rating of 6.2 for all non-CBI countries undergoing economic reform in SSA, and 4.4 for the rest of the world, excluding Africa). Moreover, a few countries (e.g., Uganda and Zambia) have made substantial progress in reaching openness levels (rating of 2) that are in line with some of the global good practice countries (e.g., Chile, Colombia, Singapore). Nevertheless, since this approach relies exclusively on peer pressure and example effect without any formal treaty-based enforcement rules, the reform lock-in mechanism may not be robust. Moreover, there may be complications arising from proliferation of overlapping bilateral reciprocal deals and complex sets of rules of origin. CBI Road Map for Trade Reform · a tariff structure of no more than three (non-zero) rates with a maximum rate of 20-25 percent covering all import-specific taxes and charges; · lowering trade-weighted average of tariffs vis-à-vis third parties to no more than 15 percent; · complete elimination of all tariffs on intra-regional trade; · application of the lowest customs duty rate to raw materials and capital goods, a middle rate for intermediate goods, and a higher rate for finished goods (based on a 6-digit harmonized system tariff code); · elimination of the remaining non-tariff barriers except those justified for health, security and environmental reasons; and · reduction in customs duty exemptions to a minimum consistent with international treaty obligations. Trade versus investment promotion The second fundamental issue for the future of integration in SSA is the relative balance between free trade and investment promotion measures as the principle focus of the integration effort. The various approaches to integration mentioned above notwithstanding, the fact remains that African economies individually and as sub-groups are very small: the average GDP of an African country is about $8 billion, compared to $50 billion in developing countries in other regions; the total GDP of CBI or UEMOA countries is only about $55 billion; and even including South Africa, the GDP of all Sub-Saharan African (SSA) countries together is about the size of Mexico. Therefore, the potential welfare gains from freer trade among the countries in such groupings in SSA may be very limited, at least in the short to medium term. This raises the issue of whether the principal focus of integration should be on the promotion of intra- regional free trade. While lowering barriers to trade are important necessary conditions, they may not be sufficient to promote growth, unless there is a parallel effort to also facilitate investment, not only from within the group but more importantly foreign direct investment. Creating an economic space where investors can operate to produce for both the regional as well as the global markets may provide the small economies in SSA with better growth opportunities than simply removing the barriers to trade amongst themselves. CBI experience The participating countries have recently moved in the direction of a more balanced approach, whereby increasingly more attention is given to investment facilitation. For example, within the framework of a Road Map for Investment Facilitation (RMIF), the participating countries have agreed to take action collectively and in unison to harmonize not only tariff regimes but also investment promotion policies and the regulatory environment (see box for details). CBI Road Map for Investment Facilitation A. Essential Conditions for Attracting Investment · Political stability; good governance; macroeconomic reform and stability; trade liberalization; market integration; exchange system liberalization; investment deregulation; consistency in policy and application. B. Principal Actions Needed to Increase Investment over the Medium-Term · Tax reform; legal and judicial reforms; institutional reforms; capital market development; human capital development; credible privatization; new/upgraded infrastructure; investment promotion. C. Program of Immediate Actions · Accelerate implementation of the CBI trade reform agenda. · Investment promotion measures at the national and regional level. Conclusion The approach pursued under the CBI thus combines tariff reform to lower the anti-export bias of the trade regimes with specific measures to remove barriers to the cross-border flow of investment within a framework of "integration by emergence". The participating countries have committed to specific actions on investment facilitation within a flexible framework of harmonization of policies, but without formal treaty obligations. The potential benefits of this approach would derive from attracting additional foreign investment (currently only about 1.2 percent of GDP of the participating countries) for production not only for the regional market, but more importantly to the global markets where the welfare gains are likely to be superior to whatever could be achieved within a sub-regional market in the short to medium term. This article has been contributed by Nicolas Gorjestani, Chief Knowledge and Learning Officer, Africa Region, the World Bank, and is based on the author's experience with the CBI process since 1993, during which time he coordinated the Bank's activities related to the CBI. For more information, please e-mail Ngorjestani@worldbank.org