Features

A private sector mandate: think regional

30 March 2012
ITC News

‘The private sector is not thinking regionally’ is an echo I often hear in government circles charged with the responsibility of promoting intra-African trade. Basking in the comfort of supplying domestic markets, private businesses fear competition from across borders and vested interests stoke these fears. The private sector retorts, ‘Yes, we need to think regionally’, but if it is unable to get its goods to a domestic market due to procedural or infrastructure inhibitors, going beyond borders is a non-starter.

Businesses are also tired of rhetoric and broken integration promises, and are disengaging slowly but surely from the integration process. Thus, private sector representatives in Africa are reluctant to embrace fully the idea of regional integration as a catalyst for increasing their trade. In 2010, Africa accounted for just 3% of global trade and 12.3% of intraregional merchandise trade compared to 52.6% in Asia. There is room for improvement, but how can the impasse be broken?

Greater intraregional trade through regionalization of global supply chains has benefitted participating countries immensely and facilitated their integration with the global economy. South-South intraregional trade, particularly in Asia, is growing at a much faster rate than world trade and the export-led growth strategies of many countries have had a direct impact on alleviating poverty. In Viet Nam, for example, export-led growth rates of 7 to 8% contributed to reducing poverty rates from 58% in 1993 to 16% in 2006.

East Asian countries that have pursued export-led growth strategies for many decades have been exploring and exploiting the potential benefits of regionalization. They have taken advantage of geographical proximities and diversities to the extent that economies within the region are linked more closely to one another than economies in any other region. Production networks are at the heart of recent growth in intraregional trade and also play an important part in evolving global production and trade networks.

‘African countries do not trade enough among themselves. The growth of intra-African trade would lay the foundation for stronger and more sustainable economic growth,’ said Jean Ping, Chairman of the Commission at the opening session of the 18th Ordinary Assembly of the African Union on 29 January 2012. Understandably, the African Union has decided to fast track the African Continental Free Trade Area, due to be completed by 2017, by consolidating sub-Saharan Africa regional integration initiatives.

 

Challenges and solutions

At a fundamental level, the low level of intra-African trade is due to a lack of complementary production and product diversification among African countries and low levels of investment. These structural constraints are magnified by poor infrastructure, including roads, transportation, energy, telecommunications and customs systems, as well as by supply-side constraints that are experienced by entrepreneurs that can erode export competitiveness. Further, half-hearted attempts at regional integration, illustrated by continuing high tariffs on products of export interest to regional partners and the persistence of non-tariff barriers (NTBs), sustain unfulfilled processes. Such impediments and challenges have generated uncertainty, increased costs and lost significant time for businesses, all too often leading to their disengagement from the process of regional integration.

For businesses to seize the trading opportunities offered by regional integration, these challenges must be overcome, typically through government and the private sector working in unison. For regional integration to succeed there needs to be strong regional business advocacy. However, instead of grasping the prospect of longer term trading benefits resulting from regional integration and becoming a proactive advocate of change, the private sector frequently succumbs to short-sightedness. Change can only be achieved by a strong public-private partnership based on trust and commitment to the cause of integration.

 

Business logic underpins action

Within the Andean region, regional integration was originally perceived as beneficial to the textile industry as it was suffering strong external competition from Asia and a lack of local, regional and global competitiveness. It benefitted from actions such as harmonized labelling and regionally pooled resources. But when Venezuela left the Andean group in 2006, the regional project collapsed as the incentives to integrate without a major local market became less compelling. The business incentives of the Andean countries are now located outside the region, for example Peru's and Colombia’s free trade agreements with the United States that distance them from the regional project. One point arising from this experience is that regional integration needs to have underlying business logic and possibilities, otherwise it remains a paper project.

 

Look beyond quick wins

Regional integration has played a role in the development of the textiles and clothing industry in the East African Community (EAC), but it has not been maximized. The industry has benefitted from low hanging fruit, such as a regional business directory, market information and a data centre that have helped connect it with potential business partners in the region. These are easy developments to engage in because they are win-win and low cost. They are logical first steps in any integration process, but they mask the challenges of the next stages needed to alter the long-term competiveness of the industry and develop competitive regional value chains. Importantly, many of these integration issues are horizontal and not specific to the textiles industry.

To be more competitive on a global scale, the EAC textiles industry needs to build a regional market based on intraregional competition and a regional value chain that can be easily inserted into global supply chains. These fundamental contextual changes are essential, as is the harmonization of rules of origin (ROO), customs procedures, common external tariff structures and anti-smuggling procedures. However, the industry is shying away from advocating serious change that could entail increased competition and rationalization. 

One of the reasons industry opts for a quick fix rather than grappling with the painstaking processes of regional integration is the high-risk perception of unpredictable policy environments and uncertain political commitment. This is illustrated by the experience of the Andean textiles industry.

 

Business advocacy campaigns

ITC is encouraging businesses to take a long-term view and work for greater integration by aiding them in the identification of core issues that inhibit regional trade and in mounting well-informed and structured advocacy campaigns at regional and national levels. One case in point is the mango industry within the Economic Community of West African States (ECOWAS). It has embraced regional integration as a way to increase trade and has advocated its support for initiatives that are facilitating regional trade, notably the ECOWAS Trade Liberalization Scheme, harmonization of ROO, adoption of regional competition regulation, harmonization of national indirect tax legislation and efforts towards completing the common external tariff.

The regional mango industry has benefitted from these initiatives, but feels it could benefit more if problems related to a number of NTBs, such as police and customs procedures, are dealt with. This would significantly reduce the cost of integrating into regional value chains and consequently could lead to large gains in trade. An important and often understated corollary of attempting to reduce NTBs is an increase in business confidence in the direction of the regional project.

Business advocacy efforts at the regional level are hampered by a lack of strong regional governance institutions. The mango industry in ECOWAS is frustrated that there is no authority vested with adequate power to redress its grievances and drive its agenda forward. Instead, it experiences the dominance of national politics over the regional agenda. This is not unique to Africa. Other regions are beset with similar problems, underlining the necessity for the private sector to build and deliver its own effective regional advocacy.

 

Deep regional integration

Central America is a good example of a group of small developing countries that has made progress in opening up and taking advantage of deeper regional integration, in this case in the financial services sector. The first phase of the project was very successful as Central America made significant progress in integration through accelerated cross-border activities. This resulted in more companies and financial institutions operating regionally and led to the consolidation and creation of a number of regional banks in Central America.

However, the regional market in financial services for businesses and consumers has not been developed further by regional legislation covering issues such as mortgages, consumer rights and cross-border banking. In an area of weak regional institutions, devoid of supranational decision-making, the regulation and supervision of regional banks remains predominantly a national competence, which gets in the way of building on the earlier achievements of integration. The Central American case highlights the need for stronger regional institutions vested with real decision-making powers and the need for greater and more coherent business advocacy at the regional level. 

These are a few business perspectives on regional integration across different regions. They underscore the importance of developing more public-private initiatives to generate confidence and belief in the benefits integration can bring. Without such initiatives, businesses will continue to be reluctant to ‘think and act regionally’.