Ethiopia: Structural change for regional economic integration

June 19, 2017
Regional economic integration is a key factor to create larger regional market for trade and investment and make use of the advantage of efficiency, productivity gain and competitiveness. In the African context, the small nature of the economies, and the presence of small domestic market and deficit investment climate also call for regional economic integration among the fragmented economies. Moreover, it is also seen by developing countries as a means of promoting development through greater efficiency.

It is clear that first there should be a common interest among nations to chase regional economic integration as a goal. Besides political interests, such as ensuring peace and stability, the indisputable common interest that initiates African countries to go for regional economic integration is economic development.

In recent times, there have been a lot of initiatives for regional integration among African countries. In fact, the idea of economic integration is not a new phenomenon. Earlier, the idea was pursued by African leaders after the decolonization of several countries in the 1970s and 80s. The countries tried to bring about practical economic integration since then. The initiative was not successful though, because the policy of import substitution in many African countries failed, and so did the then inward-looking economic integration strategy.

But since the 1980s, countries adopted open-door policies and the regional economic integration policies also characterized by open regional arrangements. In the last decade, the continent registered remarkable economic growth. However, the growth has not yet brought about structural change in the economies, making the ambition of regional economic integration a daunting task.

According to reports from continental organizations such as the African Union Commission (AUC), Economic Commission for Africa (ECA), the African Development Bank (AfDB), despite the growth, the basic structures of most African economies has not changed. Most of the economies have not yet diversified their base, and hence they are highly reliant on raw material and unprocessed agricultural products for export. Hence, without diversifying their economic basis and bringing about structural change, it would be difficult for African economies to pursue regional economic integration and create a larger regional market and trade interaction.

Despite its significant value, there are two major constrains to create a larger regional market for African economies, according to Arekebe Equbay, special advisor to the Prime Minister. “One is infrastructure connectivity. Logistics and infrastructure costs are quite important in trade. So the big challenge among African countries is weak connectivity,” he said during a recently held African Transformation Forum organized by African Centre for Economic Transformation. “The second factor is, in many cases, the comparative advantages (primary agricultural commodities) of many African economies would be similar. So the net benefit [of trading with each other] may not be quite significant. Hence, we need to work on long term basis to improve the economic integration of the continent.”

Hence, the prerequisite for achieving successful economic integration among African countries include infrastructural connectivity, economic diversification, productive integration through trade and market integration and competitiveness to put in place regional and continental value chains.

Still, majority of African economies remain predominantly natural resource and primary commodity driven, where little value addition takes place, according to the Economic Commission for Africa Committee on Regional Cooperation and Integration (CRCI).

According to reports and studies by ECA and others to improve intra-African trade, the continent must address its overall weak productive capacities and lack of competitiveness and technological sophistication. The studies cite infrastructure as one of the key impediments to productive integration in Africa. An insufficient infrastructure has adverse effects on supply and value chain linkages, not only in the agriculture sector on which the majority of Africans depend, but also in manufacturing and other sectors of the economy, as to the studies. It also affects growth, the creation of jobs and eventual elimination of widespread poverty.

Hence, once infrastructural connectivity is set up between countries in the form of roads, telecommunication, electricity and the likes, intra-African trade and regional value chains can effectively facilitate Africa’s industrialization and eventual entry into global value chains. The value-chain linkage would then facilitate accelerated industrial development among African states.

Foreign and domestic investments are needed if Africa is to achieve product integration; and there is ample opportunities in this regard and a few countries have set the pace for others. First, economic changes taking place in Asia are creating a window of opportunity for late industrializers elsewhere to gain a toehold in world markets, according to The Pan-African Coalition for Transformation (PACT) Manufacturing Chapter Concept. Second, a growing share of global trade in industry is made up of tasks in global value chains, rather than finished products, which could mean lower capital and other requirements for entry. Third, rapidly growing trade in services and agro-industry broadens the range of products in which Africa compete. And fourth, Africa’s natural resource abundance offers another path towards industrial development, concludes the Chapter Concept. Countries such as Ethiopia, Mauritius, Rwanda and Tanzania are taking advantage of these opportunities and implementing significant measures to promote manufacturing.

“African countries are pursuing the policy of structural change and industrialization after successive achievements of rapid economic growth,” Edward Brown, ‎Director, Policy Advisory Services at African Center for Economic Transformation (ACET) said. “Regional integration and trade is important and of course, industrial policies have to be aligned with that. So one of the elements of the conversation we are going to have now and then would be also to look at that dimension of it and to see how countries can begin to work together to enhance regional integration and trade.”

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