Trade Reform and Regional Integration in Africa

INTERNATIONAL MONETARY FUND

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1998
• eBook ISBN: 9781557757692

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1 Opening Address

Alassane D. Ouattara

It is a great pleasure for me to welcome you all to this seminar on Trade Reforms and Regional Integration in Africa, sponsored jointly by the International Monetary Fund and the African Economic Research Consortium (AERC).

The topic of the seminar is central to today’s African development paradigm. That so many ministers, senior officials from member countries and multilateral institutions, and academics have taken time from their busy schedules to attend this seminar obviously attests to the importance that issues related to trade reforms and regional integration have for Africa both now and in the future.

As you are all aware, trade liberalization has long been of major interest to the IMF. We see trade liberalization as an engine of growth, one that must be an integral part of comprehensive adjustment and reform programs. We are therefore encouraged to note Africa’s progress in this area during the past decade, but we are also well aware that much more needs to be done. This is why we welcome the greater degree of interest in trade reforms, which has come about partly at the initiative of the Group of Seven countries, and partly as a result of the general trend toward market-friendly approaches across Africa. There is no question that opening up further their economies will enable African countries to take advantage fully of the globalization process.

We will also be discussing regional arrangements in the seminar, and here too there is a considerable interest for several reasons. First, regional cooperation is increasing. I have in mind the increased coordination within the West African Economic and Monetary Union, for example, and the implementation of the Cross-Border Initiative. Second, the prospective renewal of the Lomé Convention provides a powerful incentive to consider the role of regional arrangements. Third, regional arrangements can provide the impetus for trade liberalization, as well as mutual support to their members in their reform efforts, and can assist African economies to face the challenges of a globalized environment.

Of course, the beneficial effects of trade liberalization and regional integration presuppose the continued implementation of accelerated structural reforms within the framework of macroeconomic stability. Africa has already made important progress in this regard, which has led to a reduction in inflation, a decline in internal and external imbalances, and a pick up in per capita growth in many countries.

We are particularly pleased to have the AERC as the cosponsor of this seminar. I am sure Benno Ndulu, executive director of the AERC, will tell you more about what the AERC is doing. Let me just say that I think it is the premier organization supporting policy-oriented research in sub-Saharan Africa. Its success has made it a model that is being emulated in other parts of the developing world. The quantity and quality of macroeconomic research in Africa have risen markedly as a direct result of the AERC. We will see some of the best of this research in the papers being presented here by AERC-affiliated economists.

The IMF has had a long association with the AERC. Mohsin Khan was involved in the discussions among donors, foundations, policymakers, and researchers in Africa in the late 1980s that led to the creation of the AERC. Since the formal establishment of the AERC in 1989, we have had IMF staff participate regularly as resource persons in the semiannual AERC workshops. The IMF has also had an arrangement with the AERC by which a number of AERC-supported researchers visit us for short periods of time. This program—known as the IMFAERC Visiting Scholars Program—provides opportunities for AERC researchers to work and interact with IMF staff. Since May 1994, when the program was initiated, some 40 African researchers—and many of them at this seminar—have visited the IMF Headquarters. We believe this program has been a major success, and we certainly intend to continue with it. More generally, the IMF will try to provide the AERC with the necessary support to help further its mission to create a broadly based community of economic scholars and a culture of economic scholarship in Africa. Everyone—the governments in the region, multilateral institutions, donor countries, and the economics profession—stands to gain if the AERC achieves its goals.

Coming back to the seminar we have organized, I believe that there are several critical questions that need to be addressed. These include:

• What is the analytical basis for the proposals for trade reforms and regional arrangements?
• How can regional trade arrangements help facilitate progress toward nondiscriminatory, multilateral liberalization?
• What have African countries achieved in these areas to date?
• What remains to do, and how best can it be done?

I hope the arguments we will hear in the seminar will help us identify the directions that policymakers like you, as well as the IMF and other multilateral agencies, need to take. In conclusion, I trust you will find the seminar both interesting and productive. And I want to thank all of you for making the effort to attend. I hope that soon we will be discussing the liberalization of capital movements in Africa as countries accept the proposed amendment to the IMF Articles of Agreement. Then Africa will reap the full benefits of the globalization of international goods and financial markets.

2 Trade Reforms and Regional Integration—An Overview

Zubair Iqbal; Mohsin S. Khan

During the past few years, economic performance in sub-Saharan Africa has improved significantly. Growth of real GDP has picked up, inflation has moderated, and fiscal and external current account imbalances have contracted. The external debt situation started to improve, access to international capital markets was restored for some African countries, and the HIPC Debt Initiative was put into effect to address the excessive debt burden faced by a number of the countries in the region. These improvements in economic performance appear to have resulted mainly from strengthened policies rather than from favorable external developments such as terms of trade gains or increases in foreign economic assistance.¹ Nor did Africa benefit from better weather conditions, which were basically unchanged in the 1990s. In conjunction with macroeconomic stabilization, there have been concerted structural reforms in many African countries, including domestic price decontrols, public sector reforms and privatization, progress toward the introduction of market-based interest rates, rationalization of exchange rate and payments policies, and trade liberalization initiatives.

Although a clear break with the past is discernable, the overall economic outlook for sub-Saharan Africa remains difficult. Domestic saving and capital formation continue to be low relative to other developing regions. Only a few countries have been able to attract substantial private foreign capital, while official flows have declined. Moreover, output remains concentrated in a few primary products that are highly sensitive to weather conditions and terms of trade developments. In the period ahead, sub-Saharan Africa will encounter several challenges that will, unless addressed urgently and comprehensively, militate against sustaining the recent economic turnaround. More specifically, it will be necessary to raise investment rates and strengthen the economic environment by pursuing appropriate macroeconomic and structural policies and establishing an appropriate institutional framework to raise productivity in a sustainable fashion so that Africa can effectively participate in, and benefit from, the ongoing globalization. An important element of such transformation will be the liberalization of the generally restrictive trade regimes in sub-Saharan African countries.

To discuss the role of trade liberalization in the African context, the IMF, in collaboration with the African Economic Research Consortium (AERC), held from December 1 to 3, 1997, a seminar on Trade Reforms and Regional Integration for high-level officials from selected African countries, regional and multilateral organizations, and academics. This volume consists of papers presented at the seminar. They have been grouped into two broad areas, covering: (1) trade liberalization, including its role in promoting sustained growth, interdependence of trade and macroeconomic policies, impediments to effective trade reforms, and steps needed to speed up trade policy reform in Africa to accelerate the integration of African countries into the world economy; and (2) experience with regional integration in Africa and the role that regional trade arrangements can play in facilitating trade reform. This chapter summarizes the thrust of discussions and highlights the broad conclusions reached at the seminar.

Trade Reform, Macroeconomic Adjustment, and Growth

Part I of the book consists of 10 papers analyzing the linkage between trade reform, macroeconomic adjustment, and growth and its application to sub-Saharan Africa. In his paper, “Trade Liberalization,” Mussa emphasizes that distorted trade regimes operate as impediments to both macroeconomic reform and structural adjustment. Trade reform can contribute importantly to improving the efficiency of resource allocation, reducing the anti-export bias of the economy and exposing it to competition, promoting realistic exchange rates and balance of payments adjustment, spurring investment, and diversifying the economy, thereby promoting growth. However, trade reform in turn cannot function as an agent of growth in the absence of complementary prudent macroeconomic and structural policies. In fact, Mussa contends that reversals of trade liberalization were more commonly associated with poor macroeconomic policies than with any other factor, including power of protectionist interests. Inappropriate fiscal, monetary, and exchange rate policies constrain the ability of economic agents to compete abroad and thus intensify protectionist pressures. To be effective, trade liberalization must be bold and sustained, with the consistency and credibility of the reform being more important than the size of the reduction in trade barriers. Moreover, trade reforms should be appropriately sequenced in concert with macroeconomic policy reform. At the outset, quantitative restrictions (QRs) should be converted into tariffs, followed by a reduction in the range of tariffs to simplify the tariff structure, broadening of the tax base, and lowering of the average level of tariffs. Experience suggests that major trade reforms are easier to initiate and sustain when accompanied by an improvement of the fiscal position and a real exchange depreciation to avoid adverse balance of payments effects. Ideally, adjustment programs should integrate trade policy with fiscal and exchange policies while adhering to a medium-term trade reform strategy with clearly established short- and medium-term goals.

Although progress has been made, trade regimes of countries in sub-Saharan Africa remain more restrictive than other regions. Therefore, early and durable trade reform would be helpful in sustaining growth. Mussa proposes a five-year, two-stage approach to trade reform supported by appropriate macroeconomic policies for African countries. In the first stage, QRs will be removed; in the second stage, tariff rates and bands could be reduced. Given the narrow industrial base, supply responses will be somewhat more sluggish than in other regions, but pressures to protect “infant industries” should be resisted. Moreover, the fiscal impact of trade liberalization may be negative, requiring a careful consideration of the manner and speed of reforms. Additional macroeconomic actions might be needed to minimize possible short-run adverse effects on the external and fiscal positions. In the context of regional integration, Mussa argues for larger countries in the arrangement to undertake a more ambitious trade reform program in order to bring along the entire region.

Sharer, in his paper, “Trade Liberalization in Sub-Saharan Africa,” reviews the role of trade reforms in IMF-supported adjustment programs in 14 countries of sub-Saharan Africa and compares their performance with that of 14 countries in Asia, Eastern Europe, the Middle East, and the Western Hemisphere. Although there was a marked reduction in the restrictiveness of trade regimes in sub-Saharan Africa, the paper concludes that the appropriate degree and pace of trade reform depend crucially on country-specific circumstances. Progress toward an open trade regime is affected, inter alia, by the initial degree of restrictiveness of the trade system, the country’s administrative capacity, and the real or perceived short-term adjustment costs. The experience of the “best practices” countries shows that trade reform should be viewed as a medium- to long-term process, hence the importance of well-specified and comprehensive medium-term program targets for trade reforms. The paper points out that fiscal considerations were the main factor having influenced trade reform objectives, even though there was no direct relationship between the strength of trade reforms, achievements, and countries’ initial fiscal circumstances.

Ebrill and Stotsky, in their paper, “The Revenue Implications of Trade Liberalization,” argue that the revenue effects of trade reform depend upon a number of factors, including the nature of existing barriers to trade, the sequencing of reforms, the extent to which improvements are made in tax structure and tax and customs administrations, supporting macroeconomic policies, and other economic adjustments. Reforms that would be expected to have a positive revenue effect include the tariffication of QRs, the reduction or elimination of exemptions, reduced incentives for smuggling through lower tariff rates, and increased minimum tariff rates. In addition, increased customs revenues could be the consequence of improved customs administration as well as increased imports, which could be the outcome of devaluation, higher growth, and generalized liberalization. The authors emphasize that theoretical predictions are ambiguous, while empirical evidence also suggests that a variety of outcomes is possible. Therefore, reforms need to be crafted to avoid negative revenue effects. The negative fiscal impact could be minimized by a proper sequencing of reforms and a concurrent broadening of the domestic revenue base. Therefore, the possible negative revenue effects should not be used as a justification for slowing down or postponing trade liberalization. Ebrill and Stotsky note that, even though the process of reducing reliance on trade taxes has been slow in many African countries, over the long run the share of trade taxes in total government revenues is likely to decline. It is important that sub-Saharan African countries follow the “best practices” in the tax and tariff systems, which generally conform to the results of optimal tax theory; that is, they cause a minimum of distortions in the allocation of resources, are equitable, and are relatively easy to administer. Such an approach implies a minimal dependence on taxes on international trade.

Analyzing factors militating against actual and potential gains from globalization for Africa, Collier in his paper, “Globalization: Implications for Africa,” places much of the blame on the present policy environment. Although inadequate trade and exchange rate policies continue to be central, their negative effects on Africa’s ability to benefit from a more open world economy may have been compounded by domestic policies that have increased the “transactions costs” of doing business in Africa and have added to perceived political risks for investment. In particular, transactions costs are high because of high transport costs, difficulties in contract enforcement, ineffective judicial infrastructure, the high cost of information, and the poor quality of ancillary public services. The high transactions costs have had negative implications for comparative advantage and may have discouraged inflows of portfolio capital and encouraged capital flight. They have also weakened the transition from primary to manufacturing and financial services, which are transactions-intensive activities. African firms face more risks and yet make the least use of risk management financial instruments. In addition, the high political risk derives from the credibility problem, that is, the fear of policy reversal, especially with regard to macroeconomic policy, investor rights, and trade policies. Maintenance of good policies in these areas during a period of time will overcome the credibility problem. In this context, Collier recommends that “agencies of restraint,” which force governments to be “locked in” to policy reforms either by building penalties against policy slippages or by shedding authority, should be created to reduce political risks. These agencies of restraint include not only donor conditionality but also, and more important, domestic agencies such as independent central banks, cash budget, capital account convertibility, public insurance agencies, credit syndications, and investment charters.

In his paper, “Why Is Trade Reform So Difficult in Africa?” Rodrik argues that although there is a broad consensus on what constitutes a reasonable strategy of trade liberalization for Africa, it has been difficult for a number of reasons to implement the strategy. In particular, distributional issues, especially the likely adverse effects on groups with vested interests, have tended to discourage trade reform. Moreover, incomplete information about the losses and gains of policy reform has tended to generate political inertia and resistance to change. Other elements that supplement distribution issues in explaining the pervasive feature of resistance to trade reform include the institutional weaknesses of African countries that highlight the dynamic inconsistency of policymaking across Africa and amplify the lack of credible commitment to policies. Meaningful trade reform will require mechanisms to deal with redistributive conflict, such as those undertaken in Mauritius through the establishment of export zones. At the same time, the credibility of commitments to policies should be increased through the strengthening of agencies of restraint. Therefore, advocacy of reform has to be complemented with a clearer understanding of the real political challenges that have to be encountered through appropriate political action. Rodrik concludes that there is no substitute for creative political leadership in identifying and exploiting the opportunities that difficult times present. Therefore, technical advice should be supplemented with help on political strategies.

Reflecting inward-looking trade policies and narrowly defined product structures, the African economies have become increasingly less visible in global trade flows and have had little involvement in the various rounds of global trade liberalization. In this regard, Wang and Winters, in their paper, “Africa’s Role in Multilateral Trade Negotiations: Past and Future,” reaffirm the view that African economies need to open up to world trade by participating more actively in multilateral trade negotiations, which would help stimulate their growth. Under the Uruguay Round, these economies undertook rather little liberalization and in return received fewer benefits than other developing regions. However, they still emerged from it facing fewer or lower trade barriers than others. In the period ahead, they should play a more active role in multilateral trade negotiations, which will require improvements in domestic resource allocation and enhanced efficiency so that they could offer suitable reciprocal concessions in return for liberalization of access to their exports. This policy stance would benefit from accelerating the unilateral trade reforms. The authors argue that preferences are not a constructive way of pursuing long-run integration with the global economy. Instead, African countries should use their negotiating rights to achieve unfettered access to markets on a sound most-favored-nation (MFN) basis. Presently they stand at risk of not being sufficiently involved in the negotiations to liberalize telecommunications and financial services in which they have high stakes.

In their paper, “Trade and Growth in Sub-Saharan Africa,” Ndulu and Ndung’u demonstrate empirically that trade openness, higher investment, and appropriate macroeconomic policies have a positive effect on real income growth. Openness to trade and international finance facilitate the effectiveness of investment and macroeconomic conditions that are conducive to growth. They distinguish three channels of how trade influences growth: (1) the efficiency-enhancing advantages of a more open trade regime; (2) improved incentives for production of exportables and reduction of the high transactions costs associated with import barriers; and (3) reduction in explicit and implicit barriers to export or outward orientation of production. The increase in the share of exports—a proxy for openness—was found to be positively related to growth. Also, the authors find that strong growth has in turn had an influence on trade performance that facilitates the “virtuous cycle” of liberalization and growth. On the basis of these results, they argue that Africa’s marginalization in world trade will be ended only if conditions are created for improved growth. Therefore, trade-enhancing policies matter because they enhance the effectiveness of macroeconomic policies and thus growth. However, the authors stress that the excessive external debt burden of many countries in sub-Saharan Africa—which crowds out domestic expenditures on building productive capacity and infrastructure—ha...

Table of contents

• Cover Page
• Copyright Page
• Content Page
• Preface
• Acknowledgment
• List of Abbreviations
• 1 Opening Address
• 2 Trade Reforms and Regional Integration—An Overview
• Part I. Trade Reform, Macroeconomic Adjustment, and Growth
• Part II. Regional Integration in Africa
• Footnotes