DRAFT Keynote Address “Accelerating Intra African Trade and Investment”

By Ngozi Okonjo-Iweala
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Ghana, February 8, 2010 - I am delighted to be given the opportunity to address this dynamic group of investors, business leaders and policy makers today. I particularly congratulate the Commonwealth Business Council and the Government of Ghana on providing this opportune platform, which will help strengthen business partnerships and bring investors together with a view to enhancing trade and investment in Africa.

Over the last decade many African countries grew on the back of export led growth. The flow of global trade more than doubled since 1990. New industrial and knowledge centers emerged throughout the developing world, creating vast possibilities for improved standards of living. However since the onset of the financial crisis external markets have collapsed and many scholars are beginning to question the excessive reliance on export led growth as a strategy. Increasingly there is renewed interest in domestic consumption as an engine for growth. In Africa like in Europe and Asia this also means deepening intra-regional trade.

Fortunately, the region now has a solid market within which to develop intra-regional trade and investment. Last year Africa reached the 1 billion population mark with over 60 percent of the population below the age of 30. This means there is a growing labor force as well as the potential to develop a huge consumer market. This is a huge opportunity which I am sure as businesses you are looking to exploit and as governments you hope can spur growth and provide jobs for the population.

The focus on trade and investment is even more appropriate because as the continent moves away from a dependency on aid to a focus on development, trade will be a critical component of the solution. There is a win-win opportunity here. That is what I will focus my remarks on.

First I will focus on some of the emerging trends in trade and investment in the region, the constraints to more intra regional trade and investment and finally what government and business can do about it.

If we take a long term trade perspective, Africa is on the right path, but lags behind other regions. Exports from Africa increased significantly and continuously especially in the last 8 years. But they have not kept a pace with trade flows in the rest of the world which roughly tripled between 1990 and 2006. During this same period, intra-regional trade within emerging Asia increased 8 fold. By 2007, intra-regional trade accounted for more than 50 percent of total trade in East Asia.

However, intra regional trade in Africa remains low and accounts for less than 10% of total trade . Between 1999 and 2006, for example, intra-African trade increased by an average of just 14 per cent per year, while trade with the United States and China expanded by 26 per cent and 61 per cent respectively. Despite the low level of intra-African trade at the regional level, in some African countries intraregional trade is significant. Five countries export more than half of their goods within Africa, while another 14 export more than a quarter.

South Africa and Nigeria account for one third of exports within Africa. And while oil and primary commodities dominate external trade, intra-African exports are much more evenly distributed between fuels, non-fuel primary products and manufactured goods.

Regional Trade Agreements (RTAs) are contributing to foster intra-regional trade. Intra-group exports for the South African Development Community (SADC) now average about $11 billion annually, while those within the Economic Community of West African States (ECOWAS) have averaged $5.4 billion. Free Trade Agreements such as in the EAC have been established with a view to promote the free movement of goods among its member countries, primarily by dismantling tariffs and customs duties. These numbers could triple with the right policies and incentives.

A look at intra-regional trade in East Asia can help us identify some drivers and policies for Africa. Intra-regional trade in East Asia has increased rapidly and now represents most of the region's total trade. The most prominent manifestation of the intensification of Asian intra-regional trade is “production fragmentation” enabling producers and countries to specialize in particular products along an integrated supply chain. As a result, products and components travel repeatedly across borders before becoming final goods. In East Asia, Japan made a conscious decision to outsource production of component electronic parts to Thailand and Malaysia as part of its overall industrial strategy.

To accelerate intraregional trade three things are needed.

First there must be political commitment from the leaders in the region and or sub region to actively pursue and strengthen regional trade agreements.

African policymakers should consider regional integration as an integral part of their broader strategic development policies with a view towards greater trade facilitation. Regional integration cannot deliver on its promise if it is dealt with as an afterthought and not an essential element of the continent's growth agenda. A policy framework for intra-regional coordination must be developed and countries must be willing to commit to this framework. This means the leader must handle issues of multiplicity of membership for example which weakens member-state's commitment to coordinate policies to promote intra-regional trade.

A policy framework to accelerate intra-regional trade should also address policy issues such as tariff policy within regions. Today, the potential for realizing regional trade is constrained by policy barriers that persist even in the presence of Regional Trade Agreements ostensibly designed to remove them. For eg, in the case of import duties, despite scheduling commitments to liberalize these under the SADC and COMESA FTAs, a number of Southern African countries have failed to meet their obligations and so tariff barriers on intra-regional trade remain. High tariffs lead to trade diversion and reduce the competitiveness of countries on both regional and global markets.

Second, specialization and outsourcing should dominate our trade policies discussions. As we have learnt from Asia and even from Europe we cannot promote greater intra-regional trade if we are all trying to sell the same goods to each other. We need to answer questions such as where and what kind of out sourcing or supply chain production management can be developed on the sub-continent?

A potentially big area for intra-regional trade with the potential for upward and downward linkages is the agriculture sector. When you look at the map of the continent you have food deficit countries beside food abundant countries. With some improvements in the trade facilities we could increase agriculture production and productivity of African staple foods and export to the food deficit countries in raw and or processed forms.

There is huge market potential in this area. President Kikwete of Tanzania and President Meles of Ethiopia have been asking the international community and in particular the business community to invest in one or two fertilizer plants on the continent. The market potential exists ands so does the political will. I ask you in the business community to take advantage of these openings to improve and increase the intra-regional trade. But for this to happen governments must lift all the barriers to trade.

Africa and Ghana in particular have been among the number one exporters of cocoa. But we have not succeeded in developing a quality upstream industry within the continent for our cacao. This must be the next priority of the leadership. Trying to vertically integrate production within the continent will help to accelerate intra-regional trade.

The countries of ECOWAS for example import over $3 billion a year of rice, fish, meat, and palm oil from the rest of the world. Meat comes all the way from Argentina and Australia, rice and palm oil all the way from East Asia. Some of the fish comes from West African waters but is caught illegally by foreign freighters. All these goods can be produced and processed efficiently on the continent creating jobs for millions of people.

The third important issue for intra-regional trade is the need to improve the investment climate, that is improve the provision of infrastructure, improve the regulatory framework, and simplify trade logistics.

On just every measure of infrastructure coverage African countries lags behind their peers in the developing world. The differences are particularly large for roads, telecommunications and power generation. Although roads are the dominant transport mode in Africa, road density is less than 7 kilometers (km) per 100 sq km of land, compared with 12 km per 100 sq km of land in Latin America and 18 km per 100 sq km of land in Asia. There are fewer kilometers of roads in Africa today than there were 30 years ago.

For landlocked countries, the overall impact is that transport costs can be as much as 75 percent of the value of exports. These weaknesses in connectivity combined with poor power supplies significantly raise the cost of doing business in Africa, constrain trade, and undermine competitiveness. The costs of energy in Africa is in some places over 200 percent higher than in other low income countries.

A recent World Bank report estimates that over $93.3 billion in infrastructure investments is needed in Africa over the next 10 years to make the continent competitive. This is good news for investors because it shows there is opportunity on the continent. Some of these investments will be for intra-regional provision of energy. Trade in energy in Africa over the next five to 10 years will make up a large part of our Regional trade, already we have the South African Power Pool, the West African Power pool is being developed and we have the Inga Dam in DRC all of which will lead to intra-regional trade.

But infrastructure costs and availability are not the only constraints to intra-regional trade, competition is a big problem. Poor business practices are imposing a huge toll on intra-regional trade. Let me take the example of something concrete for intra-regional trade, the trucking industry. The costs for Africa's trucking operators are not much higher than costs in other parts of the world, even when informal payments are counted – I will come back to this. However the profit margins are exceptionally high particularly in Central and West Africa where they reach over 60 to 160 percent according to a recent World Bank Study on Infrastructure. The main cause of this monopoly structure this is the existence of limited competition combined with highly regulated market practices based on a queuing quasi monopoly system rather than open competitive systems. There are monopoly suppliers regulated or not in many countries in the region. To accelerate intra-regional trade the regulatory framework will need to change.

However, African countries are doing much better today. In 2010, 11 countries in the region according to our Doing Business index put in place policies to improve cross border trade. In Mali Uganda and Benin, traders saw the time it took to clear cargo reduce by 2 days. In Rwanda greater border cooperation has allowed more trucks from Kenya and Uganda into the markets according to the DB, while, the upgrading of the port of Dakar has led to substantial improvements in port clearance times. Today it is the only port in West Africa that faces no congestion surcharges.

It would take large investments in industry, technology, irrigation schemes, and other agro-processing and industy for example to develop supply chain –vertically integrated industries in Africa.

Let me turn to the issue of investment and availability of financing.

Despite recent progress, financial systems in the region are by and large small, fragmented and incomplete and do not support business. Deepening financial markets at the sub-regional level will: (a) enhance service delivery by financial intermediaries, (b) pool limited savings to facilitate local funding of larger investment projects and (c) boost scarce regulatory & supervisory expertise and financial sector infrastructure. Cross-border trade in financial services will inevitably augment competition in the sector thereby pushing down the prices of financial services, increasing their availability and affordability.

The arguments in favor of regional financial integration are strengthened by the current mood in international financial markets. As global financial markets search for a “new normal” in the aftermath of the global financial crisis it would serve African countries well to leverage the benefits of increasing South-South investment and financial service provision as is already being undertaken, for example, by South African, Nigerian and Kenyan banks.

To tap into the potential gains from enhancing trade in financial services in the region policy makers need to address a range of issues.

• Reduce formal and informal barriers to trade, as trade in financial services at least in the early stages usually follows trade in goods;

• Address incompatibilities among countries' financial infrastructures (e.g. as regards payments systems, security clearing & settlement systems, property registries e.g. for credit and collateral) — to facilitate cross-border transfers;

• Strengthen collaboration in developing regulatory and supervisory capacity in the financial sector — to lower the risk of regulatory arbitrage.

Africa needs to finance its growth and trade. Weak domestic resource mobilization remains a great handicap. Until recently Africa has been relying on external financial sources. The intraregional foreign direct investment (FDI) that does exist is concentrated geographically in the more developed African countries in Southern Africa and North Africa, and more recently, West Africa.

But this is changing rapidly. A case in point is South Africa- whose sophisticated financial services system has attracted significant investment inflows from the rest of the continent. An emerging pattern appears to be that portfolio investment inflows from West Africa to South Africa are then redirected to investments in the rest of the continent, especially East Africa and Southern Africa .

The level of domestic savings in Africa must increase. On the continent we must be able to do more to raise resources for much needed investments. For this to happen countries will have to improve the tax framework – expand the base and adopt new policies including allowing local governments in decentralized countries to raise and manage resources, develop transparent predictable incentive systems for foreign and domestic direct investors. Countries must also develop their capital markets. But for investors I want to emphasize that here you must also be good corporate citizens and not try to extract as much rent from the government as possible.

The good news is that African government's and the private sector are aware of these constraints and the potential benefits of increased intra-regional trade and investment.

The World Bank Group is working with many countries to provide trade logistics support, our IFC colleagues are working with Banks and others to help provide financing. In some countries we are working to build a regulatory framework for capital market development. Overall our funding for regional projects has increased over the last decade and we hope to continuing doing more in this area in the future to support deeper intra-regional trade and investment.

Thank you.
2/9/2010 12:18:00 AM