A MIXED ECONOMIC INTEGRATION MODEL FOR AFRICA

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1 A MIXED ECONOMIC INTEGRATION MODEL FOR AFRICA Uzziel Ndagijimana Vice-Rector National University of Rwanda (NUR) Butare -Rwanda Tel: Fax: Etienne Musonera Assistant Professor of Marketing College of Business-Station # 49 Eastern New Mexico University Portales, NM Tel: (505) Fax: ( Etienne.Musonera@enmu.edu ABSTRACT This paper asserts that economic integration is essential for the development of Africa, but the model of integration adopted by developed countries cannot be applied to the current conditions of Africa. We analyzed problems of regional integration in developing countries, and we developed a theoretical mixed integration model that deals with the creation of prerequisites and the realization of the integration of the markets, and responds specifically to the needs of Africa. We analyzed the relevance of classical models of integration to African economies, and suggested an alternative model that takes into considerations African Issues. Dr. Uzziel Ndagijimana is the Vice-Rector of the National University of Rwanda, in charge of Administration and Finance. He is the former Rector of the School of Finance and Banking in Rwanda. His research interests include: Economic Integration, Finance and Banking, Investment and Enterprises Development Dr. Etienne Musonera is an Assistant Professor of Marketing at Eastern New Mexico University. He is the founder and president of M Optimal Global Solutions Systems Inc. ( His research interests include: International Marketing, Foreign Direct Investment, World Class Best Practices and Manufacturing Strategies, Technology and Knowledge Transfers. 1

2 INTRODUCTION Economic integration is not a new phenomenon, and it has been with us since the travels of Marco Polo through trade and factor movements. However, regional economic integration characterized the world political economy since the end of the Second World War, and has become a universal process. It started in the 1940 s and 1950 s in Europe and expanded to other continents from the 1960 s. In 1949, East European countries together with the Soviet Union established the Council of Mutual Economic Assistance. In 1957, the European Economic Community was created and the European Free trade Association was established in In Latin America two major integration groupings were created in 1960: the Latin American Free Trade Association (LAFTA) and the Central American Common Market (CACM). In Asia, the Association of South-East Asian Nations (ASEAN) was created in1967, and the North America Free Trade Agreement was established in In Africa, many regional integration groupings were created in all five regions: in the North-the Union of Arab Magreb (UAM) was created in 1989; in the West-the Economic Community of West Africa States (ECOWAS) was formed in 1975; in Central Africa-Customs and Economic Union of Central Africa (UDEAC) was created in 1964 and the Economic Community of the Great lakes (CEPGL) was formed in 1976; in East and South-East African Community (EAC) was formed in 1967, and the Zone of Preferential Exchange (ZEP) for Eastern and Southern Africa was formed in 1981, as well as the Southern African Coordination Conference (SADCC) in Economic integration has been with us since travels of Marco Polo through trade and factor movements. In every major region of the world, countries are pushing towards economic groupings, and the main economic objectives is to achieve a rapid economic growth and development of the member countries through trade liberalization, free movement of capital and labor, harmonization and to establish a unified market. While economic integration has proceeded smoothly in Western Europe and North America, the results of regional integration in developing countries, especially in Africa, have had little success. In this paper, we analyze classical models integration and we suggest an alternative mixed model for Africa that take into considerations the features of African economies. To do so, we first explore the characteristics of African economies, and the need for integration. AFRICAN ECONOMIES AND THE NEED FOR INTEGRATION There are many factors that justify the necessity of economic integration in Africa. In this paper we consider four major ones: small size of the market; agricultural based economies and low level of industrialization; external dependency; and low levels of intra-african trade. Small size of domestic markets Africa is a big continent with 29,072,003 km², but made of small nations in population, with the exception of four relatively big countries: Nigeria ( million inhabitants), Egypt ( million), Ethiopia ( million), and the Democratic Republic of Congo ( million). These four countries make a total million people, which represents 41% of total African population. Eleven countries in Africa have less than one million inhabitants and 13 countries have between 1 and 5 million inhabitants. Almost half of the African countries (24 countries) have less than 5 million inhabitants, and 70% of African countries have less than 10 million people. The small size of African countries has economic implications. Luma (1990) argues that only a market of 20 to 30 million inhabitants could ensure demand for a big factory and that with such requirements a few third world countries can individually install a refinery, a petrochemical plant, or a big mechanical plant which is competitive. In Africa, not only the total population is small but also the economically active population is also small. It represents 37.8% of total population compared with 46.9% in Europe, 48.8% in the US, 36% in South America, and 46.3% in Asia (FAO yearbook, 1994). In addition, this small economically active population includes a small number of qualified workers due to the weak education sector. The majority of African population is rural and poor, and it survives on subsistence agriculture. Its participation in the domestic market as supplier 2

3 and/or consumer is very limited due to low productivity and low income. In terms of purchasing power, 30 of the 53 African countries are classified as low income. The low levels of per capita income explain why domestic markets are not attractive to foreign investors. Dobosiewicz (1974) states that it is impossible for any country of less than 1 billion US dollar gross national product to develop large domestic industries such as naval construction, paper industries, automobile industries. In Africa 12 countries have less than $1 billion GNP, and to reach the optimal size of markets for such big industries small domestic markets must join and make a wider regional market trough economic integration process. Predominance of agriculture and low level of industrialization African economies are dominated by the agricultural sector, which employs 62.5% of labor and contributes to GDP with 31%. However, productivity in agriculture in Africa is the lowest in the world, except for some export crops such as coffee, tea, and sugar canes, which are supported by governments as their primary sources of foreign exchange. The industrial sector employs only 8.6% of the labor force in Africa on average, and its contribution to GDP is about 20%. The industrial sector is based mainly on extractive industries and small processing plants like textile and food processing that produce mainly for domestic markets. Most manufactured goods are imported from outside the continent and this explains why intra-african trade is so small. The small size of domestic markets, absence of appropriate infrastructure and lack of capital for investments are some obstacles to industrialization in Africa. External dependency The external dependency of Africa in international economic relations can be observed in areas of international trade, international flows of capital and international transfers of technologies. African foreign trade is dominated by exports of primary products. For most African countries, exports are limited to one, two or three major primary products and this makes their economies highly vulnerable to external shocks. Consequently, the frequent fluctuations in international prices for primary products may result in balance of payment deficits. The African countries import almost all industrial goods from developed countries, and their deficits in balance of payment put them in external finance dependency in terms of loans, development aid or grants. Africa is the most indebted region in terms of long term debt calculated as a percentage of GNP. In 1990 for example, the long term debt of Africa was 75% of its GNP, compared to 36% for America and 22, 2% for Asia (World Bank Development Indicators). Low level of intra-african trade The level of African foreign trade, its direction and its structure reflect the production structure in Africa. In fact the report from the UN Economic Commission for Africa (1983) highlights that African countries produce what the international economic system wants them to produce, not what is required for the welfare of African people. The main exports of African countries, which are primary products, have no market in Africa, but in industrialized countries. Therefore they can not generate intra-african trade at the current level of industrialization in African countries. In 1992, intra-african trade reached its highest level and was about 7, 1% of total exports compared to 37.4% in Asia, 18% in Western hemisphere, and 8.6 in Middle East (IMF, 1993). Static approach CLASSICAL MODELS OF ECONOMIC INTEGRATION The term economic integration can be used to describe how various structures of economic groupings with varying mixes of politics and economics are integrated. The contemporary meaning of economic 3

4 integration can be slotted into several categories: a Preferential Trade Agreements (PTA) which lower tariffs on trade among member countries; a Free Trade Area (FTA) which has no internal trade restrictions within the area, but each member country retains its own tariff and quota system on trade with the rest of the world; a Custom Union (CU) that has a common external tariff and no internal customs; a Common Market (CM) that removes all restrictions on the movement of factors; a Monetary Union (MU) which is a customs union, but also harmonize monetary and fiscal policy, as well as exchange of goods, services, capital and labor; and finally a Full Economic Integration that has all elements of an Economic Union plus unification of monetary, fiscal and social policies, and the establishment of supranational bodies. The theory of the market economic integration is based on customs union theory whose founder is Jacob Viner (1950). Viner s theory is based on static hypotheses, such as the fact that factors of production, technology, and consumers tastes, are constant or are autonomous variables. However, his theory does not reflect economic reality since economic integration will result in changes that are attributed to production and technology-change in methods of production of new goods, as well as changes on consumption-change in consumption structure due to change in prices resulting from the establishment of a customs union. Viner (1950) analyzed the static effects of the economic integration and he distinguished how trade creation effect ends trade diversion-effect. In other words, trade creation indicates an increase in trade between member countries, while trade diversion indicates a change in trade direction by which competitive imports are substituted by non competitive imports from member countries of the Customs Union. Consequently, trade creation is considered a positive effect of the economic integration, while trade diversion is considered a negative effect. Effects of the customs union on production depend on the competition among member countries, on the costs of production, on the size of the union, on the propinquity and transport costs, and on tariffs (Balassa, 1962). Robson (1968) adds that the share of foreign and intra-union trade can also determine the effects on the customs union. Viner s theory of the customs union has been subject to critics in the field of economics. Most critics relate to its static hypotheses, which do not reflect the economic reality, as well as its incompatibility with economic integration among developing countries. Robson (1968) states that the static effects related to the traditional theory of customs union are not significant for developing countries. Robson (1968) argues that the static theory was developed from the experience of BENELUX and the European integration and is only relevant for developed countries, and cannot be applied to African economic integration for several reasons. First, African economies compete with each other by exporting similar products to developed countries. Most of the primary products are sold in international markets (auctions and commodity exchanges) at international prices, which are independent from the production costs in exporting countries. For such products that are exclusively exported outside of Africa, the removal of tariffs as a measure of regional integration can not create intra-african trade-therefore lack of complementarities. Furthermore, regional integration in Africa still remains small in economic sense, because people have low income, and lack purchasing power. In general, regional integrations in Africa are organized among neighboring countries, and the propinquity in Africa doesn t necessarily imply the reduction of economic distances. Furthermore, transportation costs between African neighboring countries may remain high because of lack of appropriate infrastructure. In general the share of the foreign trade of African countries as percent of GDP is significant but the share of intra-african trade as percent of total foreign trade is still small. Thus, the theoretical static effects of a customs union-market integration model-are not significant for African economies. Dynamic approach Dynamic aspects of economic integration are influences by the impact of an increased of the market size. Some of the major dynamic effects of economic integration are economies of scale, specialization, and technological change. Other dynamic effects include: intensification of competition within the union; elimination of the risks related to uncertainty do to the regulations of member countries-tariffs, trade restrictions and barriers; elimination of risks related to uncertainty associated with changes in economic 4

5 policies; and threat caused by foreign companies (Balassa, 1962). Balassa argues that economic integration will result in economic efficiency, growth of production, diversification of the production, growth of incomes, and improvement of the welfare of the population. Dobosiewicz (1974) states integration within a customs union will increase competition and specializations, and consequently lead to changes in technologies and production structure. Theoretically, this reasoning is correct. However, the application of market integration model faces many difficulties in developing countries. The major question arising from this model is the inequitable distribution of costs and benefits of integration among member countries. Therefore, the removal of trade barriers within a regional integration grouping allow industrialized member countries to expand their intra-regional exports while poor countries within the union may lose customs duty related revenues (Diouf, 1984).This in contradiction of the customs union theory which assumes that every member country should benefit from integration on the basis of its comparative advantages (Robson, 1968). Ostergaard (1993) adds that the major cause of low level of intra-african trade is the lack of capacity to demand, and that the problem is not so much a matter of tariff barriers, but the inability of countries to produce the goods which satisfy the import needs of their neighbors. Development integration model The market integration is characterized by maximizing economic efficiency capacities, while the development integration model consists of stimulating the creation of such productive capacities by conscious intervention of regional partners (Ostergaard, 1993). The development integration model focuses on dynamic approach of economic integration by analyzing the effects of integration of economic growth similarly to the market integration model. This model proposes compensation measures in favor of the poorest member countries, which may not benefit from integration in the short term. These compensatory measures consist of transfers of funds to poor member countries in order to compensate their loss in customs revenues as a result of the abolition of tariffs. As a result, special funds were created under different names: for example the common development fund in CEAO, and the fund for cooperation, compensation and development in ECOWAS, and the solidarity fund in UDEAC were created. Note that the impact of compensation transfers on the economic transformation of the beneficiary country will depend on how the government uses those funds. For those relatively industrialized countries that expand their intra-regional exports, their economies may grow further and increase the already existing economic disparities within the regional integration grouping. To deal with these disparities, corrective measures that ensure a balanced development within the regional integration have been put in place. For example, in the East African Community, the distribution of industries was as follows: radio receivers, car assembly, production of wheels for Tanzania; and bicycles and fertilizers for Uganda, according to the Kampala agreement of 1964 (Diouf, 1984).Needless to say that all these measures being corrective or compensatory have been unable to achieve their objectives. Neo-functional integration model This model is based on the doctrine of functionalism and it was necessary to establish an international system order to solve security problems after the Second World War (Ostergaard, 1993). Therefore, the neo-functional integration model was a necessary means to create international organizations for cooperation in concrete areas, where states would find immediate interest for cooperation such as: health and welfare, production and trade, transport, and to reduce the risks of aggression and war. Functionalists believed that at the advanced level of international cooperation, states could transfer part of their sovereignty to transnational organizations for cooperation. The model assumes that the major actors of integration are different interest groups, such as technocrats and business people. Such interest groups are still weak in many African countries to influence the integration process. Nevertheless, this model has some qualities for African economies, notably its approach of cooperation sector by sector, which gradually may lead to total integration. The model approach can reduce conflicts related to inequitable 5

6 distribution of costs and benefits of integration, since it focuses on cooperation in sectors of common interest and every country can select its priority. For example, for the countries of SADCC and CEPGL, a number of common development projects were implemented with satisfactory results. Despite these positive aspects, it seems that this approach cannot achieve rapid economic growth and development. Therefore, the model needs to be enriched by other measures that can mobilize all available forces in a given region to achieve that growth and development objective. The mixed economic integration model Almost all regional economic integration groupings in Africa have adopted the market integration model, but each model was found inappropriate for their economic structures. We explained why African countries and other developing countries are unable to implement fully the market integration model with success. Considering all weaknesses and strengths of each model, we concluded that none of them alone is appropriate for African economies. However, we believe that an economic integration model that takes into account strengths and positive aspects of each model could be more relevant to Africa economies. Therefore, we need a mix economic integration model that takes into consideration the features of African economies. There is a need for those countries to go through a preliminary phase that focuses on cooperation in areas of infrastructure and production to improve their production capacity before moving to the market integration which in turn will facilitate intra-regional trade. Recognizing this prerequisite, we suggest two phases of economic integration in our model: a preparatory phase for the implementation of the market integration model, followed by a phase of full implementation of the market integration model. The first phase: The objective of the first phase is the structural transformation of national economies through regional cooperation to generate intra-regional trade. We assume that trade facilitations will be provided by the market integration in the form of customs union in the advanced stages of economic integration. We also suggest that countries should cooperate in development areas of common interest such as: regional infrastructures for transport and communication, electricity, and joint utilization of common resources such as: rivers and lakes, human capacity development, science and technology, facilitation in trans-border transactions, and harmonization of macroeconomic policies. During the first phase, some elements of the market integration can be implemented. For example, tariffs can be reduced or be removed to avoid losses for some member countries, and trade liberalization should take into account the particular situation of some countries. In some cases, we may propose total elimination of tariffs for all goods between some member countries of a regional grouping. We also believe that positive progress in sector-based cooperation and in intra- regional trade liberalization can lead to full or partial (limited to an agreed list of goods) free trade or customs union. At the end of this phase, national economies should have changed from current subsistence economy stage to a market oriented economy, from agriculture-dominated economy to the more diversified economy, and from raw material exports to developed countries to higher value processed goods tradable in the region and beyond. If the existing economic disparities can be reduced, and some forms of market integration can take place, a free trade zone or a customs union can be fully or partially achieved. The second phase: This phase consists of full implementation of the market integration model starting from the market integration step already achieved in the first phase and moving to more advanced steps such as common market, economic union, and finally full economic integration. This phase assumes that all participating economies should be able to benefit from the market integration in the forms of trade creation, economies of scale, specialization and technological change. 6

7 CONCLUSION Economic integration is a universal process that started in the 40s and 50s in Europe and expanded to other continents in the 60s. Evidence shows that the benefits derived from market integration have been limited in developing regions. Almost all regional economic integration groupings in Africa have adopted the market integration model, but the model was found inappropriate for their economic structures. The market integration models are typically commercial, and focus on trade facilitation while there are no marketable products in many member countries. The development of integration model has some relevance for developing economies, but attempted to use compensatory and corrective measures. Despite failure and/or limited success of regional integration in Africa, regional economic integration is still an indispensable strategy for the African countries. The mixed integration model presented in this paper suggests a preparatory phase that allows all participating countries to benefit from the market integration, which shall be implemented gradually in parallel with cooperation programs aimed at building the economic basis necessary for equitable distribution of benefits from the regional integration. We believe that a mixed model that takes into consideration the features of African economies, will improve economies of scale, and will have a positive effect on African economies by developing intraregional trade, and by reducing gradually external dependency. REFERENCES Asante, Samuel, (1996) The political economy of regionalism in Africa: a decade of the Economic Community of West African States (ECOWAS, New York, 1986 Balassa, Bela, (1962) The theory of Economic Integration, George Allen & Unwin Ltd. London, 1962 Buzelay, Alain, (1996) Intégration et désintégration européennes, éd., Economica, Paris, France Chime, Chimelu, (1977) Integration and politics among African States, Limitations and Horizons of Mid-term Theorizing, The Scandinavian Institute of African Studies, Uppsala CNUCED (1993) Manuel de Statistiques du Commerce international et du développement, Nations Unies, New York, 1993 Dobosiewicz, Zbigniew, (1974) Ugrupowania integracyjne krajow rozwijajacych sie (Ameryka Lacinska, Azja, Afryka), Warszawa Dobosiewicz, Zbigniew, (1991) Geografia Ekonomiczna Afryki, PWE, Warszawa FAO, (1993) Production Yearbook, Rome Foroutan, F., (1992) Regional Integration in Sub-Saharan Africa: Experience and prospects, The World Bank, October Gonidec, P.F., (1970) L Etat africain. Evolution-Fédéralisme-Centralisation et Décentralisation- Panafricanisme, Librairie Générale de Droit et de Jurisprudence R. Pichon & R. Durand- Auzias, Paris Hazlewood, Artur, (1975) Economic integration: the East-African experience, Heinemann, London IMF, (1993) Direction of Trade Statistics Yearbook, Washington Makhtar, Diouf, (1984) Intégration économique et Perspectives africaines, Nouvelles éditions économiques, Dakar 7

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