Africa R e g i o n a l I n t e g r at i o n i n Stakeholder Consultations on Key Elements of a World Bank Assistance Strategy October 20, 2007 THE World Bank Africa R e g i o n a l I n t e g r at i o n i n Summary and Points for Discussion Global trends in international trade and economic, assistance focusing on a limited number of areas social, and political relations continue to forge where the Bank has comparative advantage among closer integration among countries and regions development partners. The proposed strategy and remain an important engine of economic is thus organized around three main pillars of growth throughout much of the world. The engagement: (i) cross border infrastructure, (ii) need to embrace these trends is nowhere more trade, investment and financial integration, and urgent than in Africa, where the combined impact (iii) regional public goods. Bank assistance in these of relatively small economies, international terms of areas will be provided in manner that assists Africa with trade, conflict and the legacy of colonialism has prevented two important cross-cutting challenges: strengthening regional the continent from realizing a presence in global markets strategic planning and connections with national planning, and commensurate with its needs and potential. Creation of a donor alignment and harmonization. The proposed assistance pan-African common market through regional integration strategy has an open architecture, in which the Bank envisages has been a central vision of African leaders since the early continuation of extensive collaboration with existing and new years of independence. Undoubtedly regional integration can development partners. contribute strongly to key aspects of Africa’s development: This note, prepared as a background note for the Stakeholders it can improve market integration, facilitate economies of Consultations’ Meeting on October 20th, 2007, briefly scale and economic diversification, and, crucially, stimulate summarizes the key considerations and proposed elements of intra-regional and continental trade to strengthen growth. the Bank assistance strategy as they are currently reflected in the Regional integration can also assist management of the draft RIAS. The note is thus intended to stimulate discussion continent’s shared natural resources and help improve human at the Stakeholder Meeting with the objective of providing development outcomes. guidance to the Bank in its work to finalize the strategy. To Given the political vision of regional integration in Sub- facilitate discussion at the meeting and to organize feedback to Saharan Africa, hard-fought progress in recent years and the the Bank, this note and the Stakeholder meeting are developed World Bank’s increasing involvement to assist these efforts, around three clusters of issues set out below: it is timely to take a fresh look at the Bank’s activities from a 1. Does the discussion in section II capture the key challenges strategic perspective. The key objective of the new Regional facing regional cooperation and integration in Sub- Integration Assistance Strategy (RIAS) is to guide the Bank’s Saharan Africa? assistance to regional integration in a coherent and effective manner. The RIAS is situated within the framework of the 2. How can the donor community best assist Africa to revised Africa Action Plan, which sets out the World Bank’s strengthen regional strategic planning and linkages to overall assistance strategy to Africa, and aims to complement national development programs? and leverage the Bank’s traditional country-specific assistance 3. What is the Comparative Advantage of the World Bank in strategies. The new strategy proposes a framework for Bank supporting Regional Integration? Regional Integration in Africa  I. Integrating Africa—Globally and Regionally 1. Sub-Saharan Africa encompasses 741 million people: its share in global manufactured exports (about 0.5 percent) citizens of 48 countries speaking several hundred languages and has hardly changed since 1970, while its share of textiles and living in cities, deserts, rainforests, grasslands, and mountain clothing exports - the spearhead of an export push for many reaches. This mosaic of cultures, talents and resources is a developing countries - has remained stagnant. And while unique global endowment. Harnessing this endowment for FDI inflows tripled between 2000 and 2005, at $20 billion the betterment of African livelihoods is an equally unique annually, receipts by Sub-Saharan Africa still barely account development challenge. The role in this challenge of the levers for 2 percent of the world total. Moreover, inflows are heavily of regional and global integration is the overriding theme of skewed toward mining industries (especially petroleum) and this note. telecommunications and are highly concentrated in just a few countries. Africa’s export prospects have improved with the 2. Global trends favoring closer economic, social, and po- recent commodity boom and rapidly growing economies, litical relations have forged closer integration among countries especially in Asia, offering new export markets of considerable and between regions and spurred sustained and strong growth potential. Nevertheless, the continent is lagging significantly in international trade. This has been the mainstay of economic behind other developing regions in terms of its progress growth throughout much of the world - and for developing towards achieving the Millennium Development Goals and countries in particular. Globally, low- and middle-income in developing the competitiveness and facilities for trade to economies doubled their market share of world merchandise exploit this potential. exports between 1990 and 2005, from about 15 per- 4. At the roots of Africa’s marginal role in the world economy cent to almost 30 percent, are factors such as the changing nature and attributes of with merchandise exports exports, restrictions in market access to major developed between developing econ- economic blocs and a cluster of important supply-side omies growing on average constraints. Improved trading agreements with developed at nearly 15 percent an- partners clearly would help Africa boost exports. But it is nually. In parallel, inter- doubtful whether these alone will facilitate a breakthrough national private financial onto a higher trajectory of export-led growth. Analysis the flows tripled as a share Bank has undertaken shows that in key sectors factory gate of world GDP, and net production costs in Africa compare favorably with other inflows of foreign direct developing countries, including India and China. However, investment (FDI) to de- indirect costs of business and trade facilitation sap Africa’s veloping countries soared competitiveness badly, effectively destroying comparative tenfold, from less than $25 advantage in global markets where Africa should otherwise billion in 1990 to more than $275 billion in 2005. Regions and be a formidable competitor. To a considerable extent these sub-regions around the world are continuing to extend the in- internal competitiveness challenges can be traced back to the tegration of their economies to create larger and more com- small size of many of Africa’s economies, the large proportion petitive regional economic blocs, leveraging additional growth of population which is landlocked (7 times the world average), through further expanding trade with the ‘global society’. limited economic diversification and crucially, a near exclusive focus hitherto on national programs of development. Limited 3. Nowhere is the need for a shift towards regional and global regional integration has throttled opportunities to achieve integration more urgent than in Africa— a continent still, economics-of-scale, diversify economic production and despite strong growth in recent years, largely marginalized in a global perspective. While home to almost 15 percent of the  More than 90 percent of FDI inflows are thus destined for the continent’s main oil producers (Angola, Equatorial Guinea, Nigeria world’s population (in 2006), Sub-Saharan Africa still accounts and Sudan) and South Africa. With new investors, including Chinese, only for about 1 ½ percent of world income and 2 percent Indian and Southern and Northern African operators, patterns of FDI have started to diversify into agriculture, manufacturing, construction of global trade, down from about 4 percent in 1970. Africa’s and services. Still, Africa has not attracted many foreign investors be- share in global agricultural exports has declined continuously; cause the prevailing business environment and the market conditions failed to attract even domestic investors.  Regional Integration in Africa open-up economies in the continent’s vast interior. A more 7. The most cost-effective solutions to meeting Africa’s infra- integrated Africa could help tackle some of the most stubborn structure needs, especially among small economies, are often constraints and unlock much more of the continent’s potential regional—arterial transport corridors to connect landlocked for stronger export-led growth. countries to the sea and interconnect regional neighbors, power pools to achieve economies of scale in generation and 5. Inadequate connectivity (transport and communications strengthening supply reliability and multi-country fiber optic infrastructure) and costly and unreliable power emerge is installations. There is broad agreement on this among Africa’s a damning constraint to thousands of African enterprises leaders and strong political commitment to regional integra- that might otherwise be in a position to increase exports. tion, manifest in the comprehensive institutional architecture While Africa has abundant energy resources (from oil, coal, which Africa has constructed to drive and coordinate regional hydroelectricity, natural gas, to biomass and other renewable initiatives. Today, regional economic communities (RECs) op- sources) investment climate surveys indicate that unreliable erate in West, East, Central, and Southern Africa and in total power supply and poor access to power are major constraints the continent is home to some 30 regional or sub-regional or- to business and investment. Similarly, though roads are ganizations (with each country on average belonging to four). the dominant transport mode in Africa (accounting for 90 The effectiveness of these bodies in driving priority regional percent of interurban transport) road density is less than 7 programs has often been constrained by obligations arising kilometers per 100 square kilometers of land. This compares from their overlapping memberships and responsibilities and with 12 kilometers in Latin America and 18 kilometers in Asia by chronic shortages of professional capacity. Against the back- and is especially constraining in view of the high proportion drop of increasing regionalism worldwide, slow progress in of Africa’s population in land-locked countries. Meanwhile, the ongoing Doha Round three railway gauges continue to coexist on the continent, of multilateral trade ne- exacerbating challenges to interconnect regions and open gotiations and rising frus- corridors to the sea. For landlocked countries, the overall tration with the slow pace impact is that transport costs can be as much as 75% of the of implementation of pri- value of exports. The weaknesses of physical interconnectivity ority regional programs in Africa combined with inadequate and unreliable power in Africa, the continent’s supplies raise the cost of doing business in Africa significantly, leaders have in recent and likewise deter investment. years renewed their efforts 6. Adding to challenges presented by weak physical to broaden and deepen in- infrastructure, webs of ‘behind the border’ constraints further tegration and spur the ef- undermine Africa’s competitiveness. These include poorly fectiveness of key regional developed financial markets and limited financial integration and continental bodies. at a regional level, complex and lengthy procedures regulating The New Partnership for private business activity, high and unpredictable trade tariffs, Africa’s Development (NE- complex customs arrangements and limited harmonization at PAD) under the Africa Union has regional integration as a core a regional level of policies, regulations and procedures in each objective and is encouraging the RECs to delineate their roles of these areas. Numerous informal road blocks along trade and responsibilities, with a focus on “open regionalism”. How- arteries present a further layer of challenge. Thus while better ever, for all this, Africans remain frustrated that progress has regional infrastructure is a sine qua non to strengthen Africa’s been hard in coming and that so much more of the continent’s competitiveness, improvements also depend in no small way on undisputed potential remains locked in the need to accelerate tackling ‘behind the border’ constraints to business efficiency progress on regional integration. The main challenges Africa and trade facilitation. faces lie in how to do this.  Factory floor costs across African countries compare well with India and China. For example, direct costs per male shirt are $0.16 in Madagascar, $0.18 in Kenya, $0.12 in Ghana, $0.16 in Mozambique, $019 in Lesotho, $0.65 in South Africa, compared to $0.17 in India and $0.29 in export processing zones (EPZ) in China. Source: World Bank Indicators 2007  Around 40 percent of enterprises identifying deficient power supply as a major constraint to doing business and as many as 50 percent maintaining their own generation facilities to insulate themselves from unreliable public supplies. Surveys indicate that unreliable power supply is a major constraint. Around 40 percent of enterprises identify deficient power supply as a major constraint to business and as many as 50 percent maintains their own generation facilities. Regional Integration in Africa  II. Key Challenges for Greater Regional Cooperation and Integration 8. As briefly described in Annex I (which summarizes the at country level. Unfortunately, while political declarations consensus of the academic literature on the topic) the potential on regional integration convey clarity of vision, they mask the benefits to Africa of regional integration are extensive, including Herculean efforts that RECs will need to make to develop the economies of scale, economic diversification, increased needed institutional capacity and align regional and national FDI inflows from reduced perceptions of political risk, planning. improved intra-regional and continental trade through better 11. As regards regional projects, Africa does not have readily competitiveness and (hence) stronger growth overall. Other available the considerable resources needed to simultaneously gains include increased bargaining power in international lead technical and financial preparation of a large number relations, enhanced cooperation and greater security. To of complex regional projects. Neither are donor partners realize these benefits Africa must tackle challenges within accustomed to providing assistance with project preparation the institutional architecture established to drive regional on the required scale. The resulting slow pace of project integration and thematic challenges related to priority areas development has slowed project implementation and raised for action. political frustrations. This has led to pressures on RECs to supplant project development roles more usually shouldered Key Institutional Challenges by associations of technical bodies (such as power utilities). 9. The full institutional architecture Africa has established The shortages of resources for project development and unclear to support processes of integration comprises strata of ex- responsibilities between regional bodies have combined to ecutive continental bodies, aggravate progress in this critical area. regional economic commu- nities, regional sector tech- 12. Through the Bank’s first hand experiences of these issues nical bodies, and linkages to as a partner in regional integration, overcoming the following concerned national planning four institutional issues have been identified as critical steps bodies. The responsibilities toward accelerating progress: of each strata vis-à-vis its • Clarifying the roles and responsibilities of each strata of neighbor are not yet clearly the institutional architecture Africa has established to defined. So in addition to drive regional integration, and delineating overlapping complexities arising from membership of regional bodies; overlapping memberships of • Strengthening the professional capacity of key regional regional bodies, functional bodies to improve regional strategies and achieve required responsibilities for strategy, policy harmonization in areas considered priority; program development, proj- • Strengthening concerned national planning organs, ect development and financing are not yet fully clarified. This to strengthen linkages between regional strategies and has slowed progress in translating the political vision of inte- national development plans; gration of Africa’s leaders into clear regional strategies, defin- • Strengthening delivery mechanisms for regional initiatives ing realistic programs for priority aspects of integration (for (for example regional infrastructure) to underpin example regional infrastructure and trade integration) and de- confidence in integration through early tangible results. fining technical plans for specific projects. Particular areas of 13. Africa’s effort to bring about strengthened regional challenge have been in developing regional strategic plans and integration has primarily focused on the last challenge. Yet planning often complex regional projects – though there has national support for regional programs overall has been been progress in both areas. limited in the face of governments’ national priorities. 10. As regards planning, completion by ECOWAS and Limited reflection of regional priorities in national plans has UEMOA of a regional Poverty Reduction Strategy for West slowed progress in priority programs, sapping governments’ Africa (in 2006) was a significant milestone. Other regions willingness to cede sovereignty to other regional initiatives—a have also completed strategic planning exercises, for example vicious circle. The Bank’s experience—along with that of the the Regional Indicative Strategic Plan developed by SADC Africa Union, the United Nations Commission for Africa and and the EAC Master Plan developed by the EAC Secretariat. others—suggests that faster progress on integration is feasible Significantly, linkages between these regional plans and national through a re-balancing of effort among the four institutional programs as yet are limited. These linkages are key and will challenges. The proposed Regional Integration Assistance need to be developed to ensure coordinated implementation Strategy aims to position Bank assistance to regional integration of regional programs, which is essential to leverage outcomes so as to contribute to this effort strongly.  Regional Integration in Africa Key Thematic Challenges financial sector integration. Increased capital flows to African countries will likely place additional burdens on a mostly 14. Regional integration is not an end in itself, but rather a fragmented and fragile banking sectors. Banking regulation means to an end. As a complement to national development and supervision need to be strengthened while financial programs, it is a means to achieve superior economic growth structures need to modernize to reflect the rapidly changing and poverty reduction through leveraging outcomes at the needs among businesses operating in regional and global country level in specific areas. In Sub-Saharan Africa, the main markets. The development of capital markets and deepening areas of opportunity lie in improving cross-border physical of financial intermediation are crucial to the mobilization connectivity, expanding trade and investment, promoting of resources for growth and sustainable development. financial integration and in the provision of regional public Main challenges include considerable needs for capacity goods and management of regional commons. Macro- development, harmonization of policies and procedures across economic stability is of course a necessary pre-condition for countries and the development of new types of cross-border regional integration to be able to provide growth and poverty and medium and long term financial instruments. reduction dividends in these areas. While mostly a national concern, some groups of countries (for example UEMOA and 18. Regional public goods and regional commons are critical EAC) are pursuing regional macroeconomic convergence to to underpin the foundations of growth and to support pov- strengthen this bedrock of development. erty reduction efforts by limiting vulnerability. The impacts of diseases such as HIV/AIDS and malaria on labor force 15. Improved cross-border physical connectivity can productivity can be considerable, while agricultural output contribute to growth and poverty reduction by enlarging is periodically vulnerable to migratory pests such as locusts markets, facilitating economies of scale and promoting to an alarming degree. Both economic diversification – all of which extend opportunities impacts damage growth for the poor to participate in production and trade. Cross- but also disproportionately border infrastructure programs - principally transport, fall on the shoulders of the energy and telecommunications - are prerequisites to speed poor. Similarly, the poor movements of goods, services, people, and information across are most vulnerable to wa- borders and (hence) lower the burden which transport costs ter shortages, and have the impose on Africa’s competitiveness. Such programs enlarge most to gain from collabora- market access, reduce economic distance and facilitate trade, tive management of shared investment, and labor mobility. The resulting intensification water resources which are of cross-border economic activities also helps to generate vital to subsistence agricul- employment, particularly in labor-intensive sectors, further ture and basic consumption. contributing to poverty reduction. And while mitigation strat- 16. Expanding trade and investment through integration egies for negative regional of markets, free trade agreements and customs unions can commons such as weather catastrophes and climate change likewise spur growth and poverty reduction. Trade openness have yet to be elaborated, examples from other regions sug- and FDI inflows can connect developing economies with global gest there can be cautious optimism that regional approaches markets with demand for developing country products. As can help limit impacts on growth and the vulnerability of the developing economies have comparative advantage in labor- poor. intensive products, creating demand for such products can 19. Programs of macroeconomic convergence and monetary increase demand for labor and small plots of land, which are unification can be strong policy measures to underpin typically the only assets the poor own. Trade and investment stability, growth and poverty reduction among groups of at the regional level has a similar, and even greater, impact on countries politically committed to deep integration. RECs, poverty reduction by alleviating the great difficulties small, such as UEMOA and EAC have established macroeconomic poor countries have in accessing global markets. These convergence criteria to orient member states towards structural countries usually need physical connectivity, market expertise, reforms and have enhanced macroeconomic stability through and distribution networks. By integrating these economies mutual interdependence in a unified economic space. These with neighboring, larger economies, they become better are ambitious programs even among developed economies. positioned to participate in regional and global supply chains. Intermediate stages of integration, including effective free 17. To advance economic integration and to create an enabling trade areas and customs unions are important stepping stones environment for sustainable growth, regional economic which in themselves present considerable challenges communities have established new institutions to support Regional Integration in Africa  III. The World Bank’s Support for Regional Integration to Date 20. The Bank’s long-standing support for global priorities and tion; (ii) fold this assistance into the mainstream of the Bank’s region-wide programs gained considerable momentum in Africa program, specifically in the context of the Africa Action 2003 with launch of the IDA Regional Pilot Program. Created Plan (AAP) and; (iii) deliver this assistance within the Bank’s in recognition of the increasing importance of regional country-based approach; to avoid regional assistance being integration for growth and poverty reduction in poor countries, viewed as a separate activity. especially in Africa, the Regional Pilot strengthened the ability 22. As of September 1, 2007, the Regional Integration of IDA to support regional actions in Africa by leveraging its Department’s project portfolio contains 29 projects, with a total country-based engagements. Resources earmarked for this commitment of almost US$2.2 billion, making it the largest mobilizing nearly US$1.3 billion of IDA assistance to regional portfolio in the Africa Region in terms of number of projects and programs under IDA13 and IDA14. Following commitment second in terms of net commitments. Regional infrastructure of US$375 million to assist five operations in FY04-FY05, the (power, transport corridors and communications) make up Pilot leveraged financing for five projects of US$480 million nearly two-thirds of this portfolio with the remainder divided in FY06 and more than US$700 million for four projects in between water resources management and environment (20 FY07. So far in FY08 (by October 1, 2007), two projects have percent), financial sector integration (about 10 percent), and been approved with a commitment of US$280 million, thereby HIV/AIDS and regional agriculture. By sub-region, West virtually exhausting the Pilot funding envelope almost a year Africa with 15 projects has received most assistance followed ahead of schedule. by Central Africa (10 projects) Eastern Africa (nine projects) 21. Strategically position- and Southern Africa (seven projects). The Regional Integration ing the Bank’s regional assis- Department’s portfolio of projects is listed in attached Table I. tance has been challenging. 23. Partnerships and coordination are critical levers for the Despite extensive political Bank’s regional integration assistance. The African Development commitments, reflections of Bank has become a particularly close partner, sharing in the regional priorities in national development of complex infrastructure programs and co- planning have been limited. financing most large investments. Other significant partners Regional plans largely have include the EC as well as the IDB, the DBSA, DFID, AfD, focused on setting invest- USAID, Germany, Japan and Nordic countries. An important ment priorities, for example Bank contribution to partnerships has been support of regional the NEPAD Short Term Ac- policy alignment, through the Bank’s engagements in country tion Plan (STAP) of 2002. policy dialogue. Increasing Bank internal coordination and For the Bank, and other consultations among Bank country teams, sector teams and partners, the challenge has the Regional Integration Department are leading to improving been to identify among groups of countries strategic conflu- recognition of regional priorities in CAS and sector strategies. ences of willingness to work regionally. This proxy approach Partnerships with IFC and MIGA have also been significant in of revealed preferences was used to develop four sub-regional leveraging private financing for regional infrastructure. interim strategies that have guided the Bank’s engagement un- der the Pilot. Overall, the Bank has had three main objectives: 24. Assisting regional capacity building is problematic for (i) scale-up assistance to priority programs of regional integra- IDA. The Regional Pilot does not include the possibility to  The World Bank’s first involvement in global programs dates back provide grants to supra-national bodies. This has throttled to the establishment, in 1972, of the Consultative Group on Interna- possibilities for the Bank to support capacity development of tional Agricultural Research. Since then, the Bank’s participation in global programs has steadily grown, reaching over 160 global programs regional bodies and their ability to drive regional policy debate. and partnerships by FY06. Specifically concerning Africa, the Bank Limited support has been provided through partnerships and provided assistance to 10 regional projects with total IDA commitment of US$315 million between 1979 and 2002. bilateral trust funds. The fragmentation of resources and  To anchor ownership of the regional effort within the national IDA program of participating countries, the Regional Pilot Program  Of the total Africa Regional Integration Portfolio, 16 projects com- requires that country IDA allocations cover one-third of the regional mitting US$1.9 billion have been funded through the IDA Regional project costs attributable to each country; the remaining two-thirds of Pilot Program, and 13 projects committing US$297 million have been project costs come from the separate Regional Pilot Program funding funded through GEF, HIV/AIDS funds or pre-dates the Pilot Program. envelope. The Regional Pilot thus provided separate funding to top-up  An example is the Regional Communications Infrastructure Pro- country resources to the tune of about US$580 million for the last two gram (US $424 million). The Program supports development of a tele- years of IDA13 and nearly US$1 billion under IDA14. Combined with communications system for Eastern Africa which may interconnect up country contributions, the total envelope available for regional projects to 24 countries. Considerable private financing for the submarine cable under IDA14 amounted to about US$1.3 billion, of which more than system was mobilized by IFC, facilitated by complementary financing 80 percent is made available for projects in Africa. for essential terrestrial linkages and transmission provided by the IDA Regional Pilot.  Regional Integration in Africa limited funding has made it difficult for the Bank to provide and sometimes uncoordinated, because of the lack of a assistance commensurate with the strategic importance of region-wide strategic perspective. Although the sub-RIAS’, regional capacity development. particularly in West Africa, have provide a guiding framework for some sub-regional activities, they have been very uneven 25. The Bank’s support for regional integration in Africa in nature and construct and have, thus, only to a limited extent has been largely activity-based. An activity-based approach served as a coherent and strategic instrument for the Bank’s can secure interests, sense of ownership, and generate Africa-wide support for regional integration. In developing tangible results—through enlarged economic space, a comprehensive strategy, implementation experience to date reduced economic distance, and regional public goods—to suggests a number of important lessons related to the design create initial momentum for cooperation. This approach and implementation of regional projects, the most important is particularly relevant in sub-regions where confidence of which are summarized in Box I. among participating countries was limited at the outset. However, activity-based arrangements tend to be fragmented, IV. An Emerging World Bank Strategy A. Key Principles of Engagement 28. In shaping the strategy these principles have been applied to identify aspects of the Africa Action Plan where outcomes 27. Regional integration offers significant “win-win” at country level can be lev- possibilities for the region’s economies, particularly those eraged through assistance which are land-locked. To a large extent these advantages to regional integration. In arise because integration offers possibilities to leverage and planning for implementa- extend economic comparative advantage at a regional level in tion of the strategy, a fourth ways not accessible through national development programs. guiding principle is that the Advantages in managing regional ‘commons’ and in creating Bank’s assistance to regional new regional public goods are similarly accessible. To focus integration should reinforce Bank assistance in ways that help countries unlock these rather than weaken country advantages, the new strategy has been developed within a assistance programs conceptual boundary set by three guiding principles: 29. Development of the Re- • Open Regionalism: Promotion of an outward-oriented gional Integration Assistance approach to integration, to contribute to reducing Strategy has benefited from obstacles to trade and investment through a market-driven extensive inputs from stake- integration process. Collaboration to expand markets and holders: regional bodies, national governments, academia, encourage competition across borders will help sharpen private sector representatives, civil society representatives and competitiveness and comparative advantage. development partners. In addition to numerous meetings with • Subsidiarity: Regional bodies should be responsible only individual stakeholder groups, a first Stakeholder Consultation for those activities that are not more effectively handled at held in Nairobi in January 2007 provided a valuable forum in national level. Respecting subsidiarity avoids overloading which the Bank was able to reveal and test its early thinking scarce regional capacity and will help strengthen on how to re-position and re-balance assistance to leverage interconnection between regional and national planning, Africa’s leadership. together with ownership of regional initiatives at the 30. The Bank plans that the new strategy will have an open national level to underpin implementation. architecture, to facilitate partnerships and leverage the • Pragmatism and Gradualism: Moving methodically comparative advantages of other multilateral and bilateral and emphasizing measurable and pragmatic gains will agencies assisting regional integration. A continuation of help build constituencies of support for further steps in extensive collaboration with partners is envisaged across all integration and strengthen implementation mechanisms. aspects of the strategy and the Bank looks forward to extending Targets need to be credible and realistic, and activities partnerships with important new actors, for example China underpinned with adequate regional knowledge and and India. analyses.  Reference to minutes of the Stakeholder Consultation Regional Integration in Africa  B. Key Pillars of the Strategy Trade, Investment and Financial Integration 31. The inputs received from stakeholder consultations 35. In addition to the direct benefits of stronger intra- have helped the Bank distill proposed main features of the regional trade, more integrated regional markets offer other new strategy, which are organized around three main pillars significant advantages. They facilitate economies of scale to of engagement: (i) cross border infrastructure, (ii) trade, hone competitiveness, promote diversification to avoid that investment and financial integration, and (iii) regional public African firms themselves competing against each other in goods. Bank assistance in these areas will be provided so as also global markets and provide learning-by-exporting experiences to assist Africa with two important cross-cutting challenges in that help African firms launch successfully into global markets. regional integration: strengthening regional strategic planning Regional markets can also assist in mobilizing FDI, through and connections with national development plans, and donor enabling potential investors to manage perceived political risks alignment and harmonization in regional programs. Assisting by limiting exposure to separate and mostly small domestic Africa to maintain regional macroeconomic and financial markets. stability will be an important ancillary objective, with which 36. Connecting markets to improve the environment for private the Bank will assist through its country programs in parallel business, investment and trade is a multi-faceted challenge. with the specific assistance to regional integration. In this Together with strengthened cross-border infrastructure, regard particular attention will be given to groups of countries developing more integrated and deeper financial markets is of pursuing macro-economic convergence and monetary union. fundamental importance. Other challenges include the need for trade policy reform and harmonization, simplification and Cross-Border Infrastructure standardization of customs arrangements and improved ‘behind 32. Physical connectivity is the foundation for many Box 1: Lessons from Implementation of the world’s economic Experience of Bank Projects communities. Transport and • Ensuring ownership among regional and national stakeholders communication connections is essential for successful implementation. This requires are essential for the move- coordination among sector agencies in each country and between regional and national agencies. ment of goods, services, capital, and people across • It is critical to carry out project planning with a regional perspective while implementation is typically best managed countries and borders while at a national level. This leverages the strength of national integrated power systems institutions and limits performance risks of comparatively lower costs and improve re- weak regional institutions. Capacity development of Regional Economic Communities and member country institutions is key liability. In Africa, stronger to supporting regional programs. and better-connected plat- • Weaknesses in regional M&E systems hamper efforts to forms of infrastructure will track project impacts against outcomes targeted in regional unlock economies of scale and help sharpen competitiveness. strategies. This requires considerable capacity development of This will facilitate more intra-regional trade and exports from regional institutions. the continent, supporting Africa’s growth agenda strongly. • Procurement responsibility for supranational project components is particularly challenging and places special 33. However, new physical structures are only part of the emphasis on harmonizing national systems. challenge. Equally important is accompanying ‘software’ • In terms of Bank instruments, the Adaptable Program Loans to enable infrastructure systems to be utilized effectively. (APLs) have proven to facilitate the implementation of regional Such accompanying ‘software’ includes harmonization of projects when concurrent effectiveness is not required, allowing countries to enter project arrangements only when technical standards and development of common regulations, they are ready, and limiting the lending commitment of the procedures and legal codes. Crucially it also includes Bank to components and countries that are ready to borrow. developing the capacity in national and regional agencies to As a consequence, six out of eleven regional integration drive the harmonization agenda and design and implement projects supported over the past two years have used the APL instrument. cross-border regulatory arrangements. • Because of their complexity, regional projects should routinely 34. Bank support for cross-border infrastructure and related be subject to quality reviews of preparation and supervision to software will focus on: (i) expanding and upgrading selected capture learning from other regional operations, drawing from across Bank regions. trade corridors and transport networks; (ii) improving access to clean energy and improving supply reliability; and (iii) • Continuing efforts are needed to strengthen coordination across country units and teams. Development of management improving telecommunication connectivity. Financing for information systems to show regional projects within country infrastructure hardware will be complemented with significant programs has been a key step. assistance for related capacity development.  Regional Integration in Africa the border’ trade logistics to speed the movement of goods and example regional associations of national power utilities or services, especially removal of informal road blocks. river basin authorities. Thus regional initiatives to date – while individually important – have tended to be activity-based 37. Bank assistance to trade, investment and financial rather than strategically selected at the regional economy level. integration will be organized in four main areas of work: (i) This opportunistic approach has been pragmatic while regional improving regional environments for business, investment strategic planning has been in a nascent stage. However, it and industrial cooperation, including through capital markets exploits only partially the leveraging of outcomes feasible development and integration, (ii) assisting regional efforts to through more strategic approaches to regional integration. reduce tariff and non-tariff barriers to intra-regional trade; Since activity-based initiatives tend to be championed by (iii) assisting implementation of customs unions and free national technical agencies the approach does not naturally trade agreements and (iv) contributing to analytical work and evolve into strategic engagement at the level of whole technical assistance related to new trade agreements. economies. In the absence, hitherto, of coherent statements Regional Public Goods of regional priorities it can make only limited progress towards the vision of integration set out by Africa’s leaders. 38. Some important development challenges cut across national boundaries and can be addressed more effectively 41. The opportunity to further leverage regional integration through collective action. National campaigns against HIV/ is thus inextricably linked with the challenges to strengthen AIDS, for example, are reinforced by action along regional regional strategic planning and build stronger interconnec- trade corridors. Campaigns against malaria and avian tions with national development planning. These, in turn, influenza likewise are more effective when organized on a are linked with the challenges to develop the capacity of key regional basis. Similarly considerations apply to controlling regional bodies and the na- migratory pests, for example locusts. Collective action is tional planning organs to also needed for sustainable management of shared natural which they relate. Under the resources, water and sensitive ecosystems in particular. The new strategy the Bank aims forty seven countries of Sub-Saharan Africa share sixty nine to step up its assistance to re- international water basins. Africa is also moving to create new gional strategic planning, in types of regional public goods based on improved regional particular for development knowledge, for example more effective agricultural research of regional poverty reduction and dissemination through developing regional centers of strategies. Through its coun- excellence. Conversely, collaborative approaches are also being try engagements the Bank developed to tackle some types of negative public goods, such will also strive to strengthen as food insecurity from flooding or drought and the impacts of linkages with national plan- climate change. ning bodies. Assistance to regional planning, however, 39. Bank assistance with regional public goods will focus on: to a considerable extent depends upon availability of a suitable (i) improved management of trans-boundary water resources, regional grant instrument. (ii) research and knowledge-sharing on likely implications for Sub-Saharan Africa of climate change and assistance in Donor Alignment and Harmonization developing mitigation strategies; (iii) increased access to HIV/ 42. Africa’s regional investments, knowledge activities and AIDS prevention methods along main transport corridors, capacity development are assisted by a broadening platform and improved preparedness to respond to trans-boundary of donor engagement. Some partners have been working pandemics, other infectious diseases and pests; and (iv) regionally with Africa for a considerable time. Others, including regional rationalization of research and tertiary education to the Bank, are relative newcomers. Most face challenges of strengthen regional knowledge assets and technical capacity. working regionally through country-based business models C. Cross Cutting Themes using mostly national financial instruments. And like the Bank, partners have been challenged to arrange assistance Connecting Regional and National Planning strategically in advance of Africa’s clear articulation of strategies 40. Successful regional initiatives are rooted in coordinated for regional integration. Limitations in the capacity of regional national actions: in harmonizing policies, developing economic communities has added to challenges, both by over complementary institutional capacity and knowledge and stretching possibilities for clear and strong client leadership in coordinating implementation and management of shared on alignment and by frustrating development of management programs at national levels. Presently, convergences of political and fiduciary arrangements to facilitate harmonization of willingness to work regionally largely reflect constituencies assistance using client systems. As a result, donor alignment developed through cross-border technical associations, for and harmonization in regional programs has yet to mirror the Regional Integration in Africa  impressive progress in country programs spurred by the Paris for increased use of MIGA guarantees for infrastructure and Declaration. While there have been encouraging initiatives financial sector integration. among groups of donors, alignment and harmonization in 47. As a knowledge partner, the Bank will assist regional regional programs generally will benefit further from stronger bodies to create and disseminate knowledge on integration client leadership set within clearer strategic frameworks. opportunities and challenges, particularly as regards 43. The Bank will participate strongly in efforts among donors strengthening regional strategic planning, developing regional to strengthen client leadership of engagements by donor policies and creating and managing regional public goods. The partners, including through needed institutional development Bank’s analytical program will have an emphasis on learning of regional bodies. In this regard, the Bank would support from integration experience in other regions. extension of the Paris Declaration to cover alignment and 48. To assist capacity development the Bank will help regional harmonization in regional programs. economic communities and selected other regional bodies 44. The current pipeline of regional integration projects for FY08 strengthen their institutional capacity to drive regional policy thru FY11 is presented in the attached Table II. debate. Work will have a particular focus on trade policy, regional infrastructure, trade facilitation, financial sector D. The World Bank in Different Roles integration and regional public goods. This will call for 45. In implementing the new strategy the Bank will play four further strengthening of the Bank’s partnership with the ADB distinct roles to assist regional integration: (i) a source of and enhanced coordination with the G8 Capacity Building funding, (ii) a knowledge partner, (iii) a partner in capacity Initiative on Infrastructure and the NEPAD Infrastructure development, and (iv) a facilitator and honest broker. Project Preparation Facility. 46. In the role of financier, the Bank will continue to provide 49. Finally, implementation of the new strategy will require financial resources for regional integration projects of high substantial cooperation and more effective coordination priority, together with related capacity development and between a large number of international and regional technical assistance. An important aspect of this role will be to organizations. The Bank aims to play an active role as an continue to assist in mobilizing needed private financing and honest broker to facilitate agreements among regional bodies co-financing. The Bank will make a concerted effort to mobilize and with donor partners where there are needs to de-bottleneck additional regional financing from IFC and explore options important initiatives. V. Discussion Points To develop the Regional Integration Assistance Strategy further, 2. How can development partners best assist Africa to the World Bank would value stakeholders’ views on the three strengthen regional strategic planning and linkages to sets of issues set out below. Stakeholders’ views will deepen national development programs? What is the balance the Bank’s understanding of challenges Africa must overcome of effort between clarifying roles and responsibilities of to bring regional integration more fully into the mainstream regional bodies and developing capacity of the RECs and of continental and national development. This, in turn, will national planning bodies? assist the Bank in framing the strategy to assist these efforts 3. What are the areas of comparative advantage for the effectively, having regard to the comparative advantage of the World Bank to assist regional integration? Are the Bank among development partners. proposed elements of a Bank strategy discussed in section 1. Does the discussion in section II capture the key IV the right ones? Do the proposed three pillars and two challenges facing regional integration in Sub-Saharan cross-cutting themes provide the right focus? Africa? What is the relative priority among these? Would it be realistic to address all these challenges in the near- World Bank Contacts: term; if not, which ones take priority? Mark D. Tomlinson, Director, Regional Integration Department, ph: 202- 473-4936 Jacob Kolster, Lead Operations Officer, Regional Integration Department, ph: 202-458-8957 10 Regional Integration in Africa Annex I: Benefits and Costs of Regional Integration Benefits and Costs of Regional Integration Arrangements (RIAs) Benefits of/Rational for Regional Integration: of protectionism in developed countries, etc.). With asymmetric external shocks related to climatic • Increased returns and increased competition—the conditions and terms-of-trade shocks for commodity notion that bigger markets (through integration of exporters, ‘insurance’ seems to be an important rationale small economies): (a) allows larger firms with greater for integration or continued membership of particularly productive efficiency in industries with economies of the larger RIAs. scale and (b) increased competition induces firms to cut prices, expand sales and reduce internal inefficiencies. • Security—related to the perceived benefits from RIA as a basis for increasing security against outsiders as well • Trade and location effects—as a result of preferential as in relationships with insiders driven by mechanisms reduction in tariffs within the regional agreements such as improved intra-regional confidence and trust, inducing a switch in both demands and supplies, with common defense arrangements, and by increasing the net-effect on national income depending on the socio-economic interdependence among members, costs of alternative sources of supply and trade policies regional integration may reduce the risk of internal toward no-member countries. conflict. • Investments—increased regional cooperation and established agreements may attract more FDI, both Potential Costs of Regional Integration: from within and outside the region, as a result of • Trade diversion—the displacement of lower cost (a) market enlargement (particularly for “lumpy” production from nonmembers by higher cost investment that might only be viable above a certain production from partner countries due to reduced size), and (b) reduced distortion and lower marginal barriers within a regional integration arrangement, has cost in production. been a major problem in several regional integration arrangements. The arrangements generate welfare • Coordination and Collective Bargaining Power—the gains if trade creation dominates trade diversion, but idea that RIA may enable countries to coordinate this outcome cannot be known in advance. their negotiating positions in international fora, which could result in more visibility and possibly stronger • Revenue Loss—RIAs reduce government revenue bargaining power; from tariffs, both directly through tariff cuts among members and indirectly through a shift away from • Lock-in and Commitment Mechanism—relates to the imports from nonmembers subject to tariffs. The cost effect of the regional agreement on domestic politics of this loss depends on how easily members can switch and the view that a regional agreement can provide a to alternative means of raising funds. But it can be quite “commitment mechanism” for trade and other policy high in developing countries that rely heavily on tariff reform measures; it can be a way of raising the cost, and revenue. thereby reducing the likelihood of policy reversal. This argument can apply to political as well as economic • Indirect costs—arising from the free movement of reform. A necessary condition for a RIA to serve people across national borders—for example, the extra as a commitment mechanism is that the benefit of vigilance required to prevent crime across borders. In continued membership is greater than the immediate addition, there could be some diminution of national gains of exit and that enforcement mechanisms within sovereignty and culture due to integration. On balance, the RIA are credible. however, regional integration is likely to bestow more benefits than costs. • Insurance: RIAs can also be seen as providing insurance to its members against future hazards (macroeconomic instability, terms of trade shocks, trade war, resurgence Regional Integration in Africa 11 Table I: World Bank Regional Integration Department’s Project Portfolio— US$ millions (As of September 2007) IDA Regional GEF & HIV/AIDS Total Regional Pilot Funds & Pre-Pilot Projects Project Instrument No $ mls No $ mls No $ mls FY01 0.0 1 122.5 1 122.5 Trade Facilitation Project SIL SIL 122.5 FY03 1 14.5 1 2.9 2 17.4 GEF - Lake Chad Basin # . 2.9 BEAC Reg Payment System TAL 14.5 FY04 2 275.0 4 87.7 6 362.7 GEF - Senegal River Basin SIL . 5.3 Southern Afr Power Mrkt APL 1 APL 178.6 GEF - Niger River Basin SIL . 6.0 WAEMU Capital Markets Dev FIL FIL 96.4 HIV/AIDS Abidjan Lagos Trnspt SIL . 16.6 Regional HIVAIDS Treatment Prj SIL . 59.8 FY05 2 99.5 3 37.0 5 136.5 GEF - Grndwtr & Drght Mgmt TAL TAL 7.0 WAPP Phase 1 APL 1 APL 40.0 HIV/AIDS ARCAN SIL SIL . 10.0 HIV/AIDs Great Lakes Init APL APL . 20.0 Afr Emergency Locust Prj ERL 59.5 FY06 5 477.6 1 5.7 6 483.3 GEF - ‘W Africa Stockpiles 1 SIL . 5.7 E Afr Trade & Transp Facil SIL 199.0 West &Central Afr Air Tran TAL APL 33.6 SRB M. Water Res. Dvpt. APL APL 110.0 WAPP APL 2 (OMVS Felou HEP) APL 75.0 WAPP APL 1 (CTB Phase 2) Project APL 60.0 FY07 6 986.2 3 23.0 9 1,009.2 GEF - ‘Africa Stockpiles1 MMT APL . 9.4 GEF - Africa -Ethiopia Stockpiles 1 2.6 GEF - WIO Marine Highway Dev SIL SIL 11.0 W.Af Agric Prod Prgm APL WAAPP APL 45.0 Telecommunications APL SIL 164.5 Regional & Domestic Power Market Dev SIL 296.7 APL2 S Afr Power Market APL 93.0 CEMAC Transp Transit Facil SIL 201.0 Niger Basin Water Resources SIL 186.0 Overall Status as of September 1, 2007 16 1,852.8 13 278.8 29 2,131.5 12 Regional Integration in Africa Table II: World Bank Regional Integration Department’s Project Pipeline— US$ millions (As of September 2007) IDA Regional Pilot Pillar I: Economic Pillar II: Trade Pillar III: Total Cooperation on and Investment Cooperation in Cross-Border Cooperation & Regional Public Infrastructure Integration Goods Project Instrument US$ Millions FY08 755 420 215 120 East Africa Power Market APL1 APL 200 Southern Africa Power Pool APL1 - Additional Financing APL 100 Telecommunications RCIP II (APL 2) APL 120 CEMAC Financial Sector Integration/Reg Inst Support SIL 40 Regional Trade Facilitation SIL 2 SIL 100 Nacala Corridor SIL 75 Lake Victoria Environmental Project II SIL 90 Southern Africa Technical Advisory Services Project SIL 30 FY09 1004 724 0 280 West & Cent. Air Transport Safety APL 3 APL 50 West Africa Road Transport SIL 135 POWER - NELSAP Rusumo Falls MP SIL SIL 119 West Africa Power Pool - Phase III - 1 APL 100 SRB Multi-Modal Transport Project - Phase II APL 130 Southern Africa - Trade & Transport Corridor SIL 150 ICT -Central Africa Backbone (CAB) SIL 40 AGRIC. - WA Reg. Project for Fisheries SIL Africa Science Technology SIL 80 Senegal River Basin APLII SIL 100 RECs Capacity Building SIL 100 FY10 742 482 0 260 West Africa RCIP APL 80 Transport - Abidjan-Lagos Trans.& Transit-ALTTFP SIL 242 West AFr. Power Pool - Phase IV APL 90 South Africa Power Pool - APL III APL 150 West Africa Multi Disease Surveillence Project SIL 60 Water -Zambezi Project SIL 120 EN Watershed MMgt Program SIL SIL 35 West Africa Agricultural Productivity Prog - APLII APL 45 FY11 760 410 75 275 East Africa Power Market APL - Phase II (EAPP) APL 200 West Africa Power Pool - Phase III - 1 APL 60 West Africa Power Pool - Phase IV -2 APL 50 Telecommunications RCIP III (APL 3) APL 100 Southern Africa Agricultural Productivity Project APL 75 Eastern Nile ENSAP Flood Preparedness SIL SIL 35 Southern Africa Corridor HIV/AIDS Project SPL 120 Niger River Basin - APL2 APL 120 Total Pipeline FY08-FY11 3261 2036 290 935 Regional Integration in Africa 13 THE World Bank 1818 H Street, NW Washington, DC 20433, USA www.worldbank.org