The September 2016 issue is an introduction to regional integration – What are the key RECs in the region? how are the countries and institutions organised? what are the outcomes? why do countries pursue regional integration at all? what does regional integration look like in practical terms? how does it affect the average citizen? The PESA Regional Integration Monitor, Sep 2016 examines some of these questions.
Regional integration is still elusive, especially to those not familiar with the international political economy. For the most part, this process is understood through the plethora of political institutions and regional economic communities (RECs) such as the European Union (EU) and the Association of Southeast Asian Nations (ASEAN). The African Union (AU), Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Customs Union (SACU) are the most prominent RECs in Southern Africa. These political institutions are the face of Southern African regional integration, but what do these institutions do and what is the role of member states within them?
These RECs, like most multilateral groups, have Secretariats, which coordinate the administrative process of meetings and trade negotiations. On occasion, the Secretariat may be tasked with managing common regional development projects or a central ‘Work Programme’ in conjunction with individual member states, other RECs and other appointed organisations and agencies involved in regional integration. This involves, but is not limited to, activities such as project management of infrastructure development, trade roadshows and multilateral trade negotiations. The political structure often consists of a ‘Summit’ of Heads of States and Government that is often the highest decision-making body. This is often followed by a Council of Ministers constituted by one, or a combination of the troika, of Minister of Finance, Minister of Trade and Industry, and Minister of Foreign Affairs from the respective member states. Lastly, there is usually a Commission of senior government officials or various sub-committees, which report to the ‘Council’, which in turn reports to the ‘Summit’.
Regional integration is not purely a political process because the plethora of trade agreements and political bargains are often informed by economic considerations such access to markets and production networks and sometimes by geopolitical or security considerations. The abovementioned institutions are also central to regional economic and industrial policy as is the case with the common external tariff applied by the SACU, which means individual member states do not set their own customs duty rates. In these instances, states give up individual sovereignty in return for direct or positional benefits, which are only possible through regional cooperation such as greater markets, better regional security, increased trade and freer movement of capital, goods and people. For example, in SADC there are various protocols which are multilaterally-determined rules governing various parts of the regional development process like the SADC Protocol on Finance and Investment that seeks to harmonise finance and investment policies of SADC member states to make them consistent with the objectives of SADC. Another example of this is the SADC Regional Industrialisation Strategy and Roadmap that aims to harmonise industrial policy of SADC member states based on three principles namely: industrialisation as champion of economic and technological transformation; competitiveness as an active process to move from comparative advantage to competitive advantage; and regional integration and geography as the context for industrial development and economic prosperity.
It is often this tradeoff that states consider as a primary criterion for participation in RECs. If perceptions that participation has led to encroachment on sovereignty in the context of benefits that do not adequately compensate this loss, the public may push for the state to exit the REC as was seen in the most recent ‘Brexit’ case. Therefore, regional integration is not a natural consequence of the development of capitalism, despite it being encouraged by the regional sourcing behaviour of multinational corporations in the context of global capitalism. Instead, states always seek to secure national interest through involvement in RECs; and if the process of regional integration contradicts national interest, they are willing to reverse the process of regional integration. In this context, the role of the state is to coordinate complex processes towards concerted national or regional goals in order to harness economic growth and development.
Most Southern African states are members of more than one REC and involvement in RECs is often informed by the need to balance various benefits in one REC, which may not be achievable in another REC. States also use their position and voice in one REC to bargain for their position and voice in another. This process enables businesses to conduct trade and business across different regions more easily and expand markets thereby encouraging economic growth and development. Despite best efforts, the outcome of a state’s involvement in RECs is not always consistent with the national interest. This is why South Africa’s involvement in SACU is often criticised as costly and unsustainable despite the economic and political benefits that accrue disproportionately in favour of South Africa. Moreover, even when a current agreement is not beneficial or strategically leveraged towards the national interest, a state may remain a member of a REC for political expedience or prestige.
The process of regional integration is becoming increasingly more consolidated with the rise of agreements that tie together various RECs into super-RECs such as the Tripartite Free Trade Area (TFTA) consisting of SADC, COMESA and the East African Community (EAC) that is currently negotiating agreements with the EU. Another example of these consolidations are the Continental Free Trade Area (CFTA) negotiations, launched in June 2015, aimed at creating a free trade area consisting of all 54 African states by 2017. Some of these objectives may seem overambitious, and given that often various agreements are negotiated simultaneously, the state’s ability to balance involvement in RECs and coordinate the different political and economic outcomes successfully to harness growth and development is diminished.
However, with concerted collaboration with the private sector, the state can participate in RECs and secure national interest through expanded economic opportunities that lead to growth. The ASEAN, which was established in 1967 and consists of 10 Southeast Asian states, is a notable example of the possible benefits, which can be drawn from regional integration. ASEAN has achieved an average GDP growth of 5.23% between 2011 and 2014 with an annual average population growth of 1.28%1. The ASEAN region had a population of 622 million and a nominal GDP of US$2.57 trillion in 2014, which equates to an average GDP per capita of approximately US$41002. Southern African states have also achieved some regional integration milestones despite constraints such as high inequality, low regional incomes, and less integrated production. SADC annual GDP growth was 3.8% between 2011 and 2014 with an annual average population growth of 2.52%3. SADC has a population of 292 million and a GDP of US$ 705.84 billion in 2014, which equates to an average GDP per capital of approximately US$23744.
With concerted collaboration with the private sector in order to develop the necessary infrastructure for regional value chains and production networks, the Southern African regional integration process could deliver the African dream. Moreover, the prospects of consolidating regional integration across the continent could connect the economic centres that are spread across Southern, East and West Africa in order to bridge the divide created by low per capita incomes and high inequality in Sub-Saharan Africa. Thus, the African regional integration story is complicated yet highly promising and exciting to experience as the future unfolds.
1 ASEANstats, 2015. ‘Selected basic ASEAN indicators’, ASEAN Secretariat: Jakarta. Available At: http://asean.org [Date Accessed: 24 July 2016].
2 ASEANstats, 2015.ibid.
3 SADC Statistics Group, 2015. ‘SADC Statistic Yearbook 2014’, SADC Secretariat: Gaborone. Available At: http://sadc.int [Date Accessed: 24 July 2016].
4 SADC Statistics Group, 2015. ibid.
Through membership to regional economic communities, countries commit to a regional programme of action, which encourages trade and productive cooperation in various economic sectors. Swaziland is well integrated in the Southern Africa market and seeks to expand its access to the East African market as well through its membership to the SADC, SACU which includes its membership in the Common Monetary Area (CMA) and COMESA. Additionally, this has strategically positioned Swaziland to leverage the greatest benefits from the ongoing tripartite free trade area negotiations between SADC, COMESA and the East African Community. The TFTA is aimed at expanding the SADC free trade area to include all of Southern and East Africa. Having ratified the relevant SADC instruments as part of its efforts towards deeper regional integration, Swaziland now allows nationals of 17 other SADC countries to cross its borders visa-free. Below are some stylised facts about the impact of regional integration on Swaziland:
- The Government of Swaziland relies heavily on payments from SACU, which constitute approximately 50-60% of its total revenues, excluding grants and aid. Without SACU, Swaziland would face severe fiscal constraints.
- Through the CMA, the Swazi Lilangeni exchanges at parity with the South African Rand, which is also accepted as legal tender in the country. However, the Swazi Lilangeni is not legal tender in South Africa; therefore, the South African Reserve Bank compensates the Government of Swaziland for losses in seigniorage1.
- Under COMESA, Swaziland trades under an indefinite derogation that allows the country not to reciprocate tariff preference on the imports originating from other member states of COMESA as provided by the COMESA Treaty. In 2014 Swaziland had an average applied tariff of 1.2% on imports from COMESA and zero on imports from SADC. Swaziland’s trade with SADC as a share of its GDP is relatively strong, with its merchandise exports (excluding re-exports) having averaged around 26.57% of the country’s GDP between 2009and 20142.This shows considerable growth compared the average of 18.06 per cent over the prior decade ending until 2008.
1 AfDB 2013. ‘Kingdom of Swaziland: Country Strategy Paper (2014-2018)’, Southern Africa Regional Resource Centre (SARC): Centurion, South Africa. Available At: http://afdb.org [Date Accessed: 3 July 2016]; van Zyl, L., 2003. ‘South Africa’s Experience of Regional Currency Areas and the Use of Foreign Currencies’ in BIS Papers No. 17: Regional Currency Areas and the Use of Foreign Currencies, Bank of International Settlements: Basel, Switzerland. Available At: http://bis.org [Date Accessed: 6 September 2016].
2 AfDB 2015. ‘Africa Regional Integration Index: Emerging Findings’, Paper Presented at the 8th AU-ECA Conference of Ministers, Addis Ababa, 16 March 2015.
Of the total exports of the 15 SADC countries to the world, 47.3% originate from South Africa and the remaining 52.7% from the 14 other SADC countries. 27% of South African exports are to SADC, while 7.6% of SADC exports are to South Africa. South Africa’s top five exports to SADC are petroleum oils, motor vehicles for transport of goods and persons, precious and semi-precious stones and electric current. Topping South Africa’s export list to the rest of the world is platinum and platinum group metals, motor vehicles for transport of persons, coal, ores and base metal concentrates and iron related products. SADC’s primary exports to the world (excluding South Africa) are petroleum oils, copper, precious and semi-precious stones, tobacco and gold. Similarly, SADC’s top five exports to South Africa are petroleum oils, gold, natural gas electric current and essential oils1.
This data reveals the motivation behind the SADC Protocol on Mining, launched in 2000. Given the potential, economically beneficial, spillover effects of mining for individual economies and the region as a whole, SADC instituted the protocol as a means of maximising the value-accretion from the industry. Member states agree to harmonise their policies and procedures for mineral extraction, to cooperate on improving technical capacity and share knowledge and encourage private sector developments2.
With the end of the commodity super-cycle however, the efficacy and longevity of the mining sector, worldwide, have been called into question. The Sub-Saharan African region is known for its economic reliance on commodities. In oil-exporting countries such as Angola and Democratic Republic of Congo, net commodity exports to GDP are as much as 50% to 60%, and average around 35% for non-oil commodity exporting countries3. According to International Monetary Fund predictions, commodity price projections are not significantly favourable over the immediate term, to 20204.
The policy prescriptions by international organisations have typically admonished Southern African countries to leverage advantages such as population dividends and shift focus to manufacturing and industrial productivity in order to increase employment opportunities for large numbers of low skilled workers. Given that the Southern African mineral sector contributes 72% of the world’s platinum group metals, 55% of diamonds, 41% of chromite, 26% of gold and 21% of zinc5; SADC countries are unlikely to deplete commodities as a meaningful percentage of total exports entirely.
Studies from leading advisory firms suggest that the Southern African mining industry’s foremost challenges, and correlated opportunities, lie in increasing productivity, and planning for long-term growth. Commodity demand has historically been, and will be in future, inextricably linked to global growth. As global growth ticks upward in the medium to longer term, firms will benefit from leveraging the current climate to strategically place themselves, through acquisitions, exploration of opportunities and innovation of capabilities6. Mozambique is a good example of a newly prioritized geographic area and commodity grouping. The discovery of significant reserves of natural gas, along with burgeoning coal and aluminium sectors, are likely to continue boosting the country’s booming growth.
1 See Figure 1.
2 SADC, 2006. ‘Protocol on Mining in the Southern African Development Community (SADC)’, SADC Secretariat: Gaborone, Botswana. Available At: http://sadc.int [Date Accessed: 30 August 2016].
3 Allard, C., Kriljenko, J. I., Chen, W., Gonzalez-Garcia, J., Kitsios, E., & Treviño, J., 2016. ‘Trade Integration and Global Value Chains in Sub-Saharan Africa : In Pursuit of the Missing Link’, International Monetary Fund: Washington, D.C. Available At: http://imf.org [Date Accessed: 30 August 2016].
4 See Figure 2.
5 Schlechter, D., 2016. The Resource Curse Still Haunts SADC [Online] Available At: http://newera.com.na [Date Access: 30 August 2016].
6 EY, 2015. ‘Business Risks Facing Mining and Metals: Moving from the Backseat to the Driver’s Seat’. Ernst & Young Global Limited: London. Available At: http://ey.com [Date Accessed: 30 August 2016].
The TFTA is a move to consolidate regional integration between three regional economic communities (RECs) consisting of COMESA, the East African Community (EAC) and SADC. Negotiations towards the TFTA Agreement were launched at the 3rd Tripartite Summit on 10 June 2015 in Sharm El Sheikh, in Egypt. So far the TFTA has been signed by 17 of the 26 African countries and just one more signature is required in order for the Agreement to enter into force.
The TFTA is currently negotiating the Economic Partnership Agreement (EPA) with the EU that has already been negotiated between the EU and the individual RECs. All three African RECs have had to amend or ratify various annexes to their respective agreements to facilitate various trade mechanisms with the EU. Currently SADC member states are ratifying an annex to facilitate the issuance of Supplier Declarations that allows for a meeting of EU trade requirements through cumulating. This will allow SADC member states to share responsibility for achieving EU trade requirements, which could strongly reinforce or encourage the establishment of new regional value-chains.
The data from 1995 to 2014 suggests that the TFTA Agreement and the EU EPA, the SADC region could derive strong trade gains from this, given that intra-regional trade links have been weak but improving. Intra-SADC exports grew from 15.01% to 19.34% over this time period, which equates to an average annual growth of 2.0%. This reflects the fact that, in the post-financial crisis period and the current slow global growth environment, SADC countries have had to increasingly rely on the regional market for their exports. SADC exports to COMESA and the EAC have remained relatively unchanged throughout this period. Meanwhile COMESA exports to SADC and intra-regional exports have almost doubled in the same time period, maintaining an average annual growth of 4.57% and 3.37% respectively. Similarly, EAC exports to SADC and COMESA have increased strongly, maintaining an average annual growth of 2.42% and 1.98% respectively. At first, it may seem that the EAC and COMESA are more prepared to take advantage of the TFTA agreement and further expand exports to SADC. In addition, it may seem that the export profiles of each of the RECs are similar, therefore, one would expect greater competition once the TFTA comes into effect.
However, a closer look at the data suggests that there may be opportunities to develop regional value-chains1. For the EAC, opportunity lies in primary exports and resource-based manufactured exports like prepared meats, fruits, beverages, wood products, vegetable oils, base metals (except steel), cement, gems and glass. EAC exports of these products to COMESA make up an average of 11.27% of the EAC’s total exports. Whilst EAC exports to SADC make up an average of 5.64% of its total exports.
Similarly, resources-based manufactured exports from COMESA to SADC currently constitute 3.35% of COMESA total exports and boast an average annual growth of 12.45% per annum since 1995. There is a great deal of two-way trade in these products amongst the TFTA RECs, which could bring greater competition between the RECs notwithstanding opportunities to establish regional value-chains. Although starting at a lower base, these products present the strong growth potential for SADC in the TFTA. Resource-based manufactures and primary exports from SADC to COMESA respectively constitute 1.41% and 1.02% of SADC total exports, with an average annual growth of 3.17% and 3.53%. SADC primary exports to the EAC have also shown the strongest growth potential with an average annual growth of 7.58% since 1995.
However, SADC also has opportunities in low-technology manufactures like textile fabrics, clothing, footwear, leather, travel goods, pottery, simple metal structures, furniture, jewellery, toys and plastic products; and medium-technology manufactures like passenger vehicles and parts, commercial vehicles, motorcycles and parts, synthetic fibres, chemicals and paints, fertilizers, plastics, iron and steel, pipes and tubes, engines, motors, industrial machinery, pumps, ships and watches.
1 See Figure 5; Figure 6 and Figure 7.