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South-South Trade A Path for Africa’s Integration into the Global Economy

South-South Trade A Path for Africa’s Integration into the Global Economy. Eswar Prasad Cornell University and Brookings Institution. Objectives. Enhance trade and other forms of integration within the African continent

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South-South Trade A Path for Africa’s Integration into the Global Economy

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  1. South-South Trade A Path for Africa’s Integration into the Global Economy Eswar Prasad Cornell University and Brookings Institution

  2. Objectives • Enhance trade and other forms of integration within the African continent • Increase Africa’s share of world trade and its prominence in the world economy • Boost industrialization and economic development in the region • Improve economic and social welfare: jobs, equity, inclusiveness

  3. South-South Trade as Catalyst • Building scale: big regional market with considerable growth potential if market fragmentation reduced • Reducing reliance on imports, increasing value added within region • Learning by doing to prepare for global competition • Creation of supply chains within the region that can then be linked to global supply chains

  4. Potential for South-South Trade in Africa Consumer Goods • Large and growing populations • Rising middle class • Consumer aspirations rising Investment Goods • Enormous demand for physical capital, low capital-labor ratios • Need for infrastructure investment Integration into Supply Chains • Opportunities at regional level

  5. Avenues for Expanding Trade • Commodities, raw materials • Vulnerability to global shocks, price cycles • But opportunities for capturing more value added • Low-wage, low-skill manufacturing • Other competitors • Automation/robotics displacing human labor • Low productivity, high unit labor costs in region

  6. Avenues for Expanding Trade • Services • Low-end, low-tech services • Higher-end services, including logistics • New and emerging industries • Green technology • Information, communications technology • Robotics, artificial intelligence

  7. Avenues for Expanding Trade • Supply chains • Capturing more value from commodities trade • Benefiting from comparative advantage in specific tiers of global supply chain • Generating stronger manufacturing base in Africa through regional supply chains • Potential for vertical, horizontal integration within region

  8. Basic Requirements for Trade Expansion • Education, skill upgrading to align quality of labor with needs of externally-oriented industry • Physical (and soft) infrastructure, including reliable power, roads, ports • Transportation and logistics to support trade across continent • Financing • Long-term financing for physical capital • Trade finance, credit guarantees, and other short-term financing needs

  9. Financing for Trade • Harnessing domestic/regional savings effectively • Channeling foreign capital into productive investments, esp. through fixed-income markets • Foreign capital brings many collateral benefits • Technological, process innovations • Better governance • Adds liquidity, depth to domestic financial markets • Regional institutions such as AfrEximBank have important catalytic role

  10. Barriers to Foreign Capital • Underdeveloped financial markets: shallow, lack of liquidity • Vulnerability to global shocks: exposure to commodity price cycles, high levels of external debt, balance of payments risks • Undisciplined macroeconomic policies • Political instability • Weak governance: quality and effectiveness of public institutions, rule of law, corruption

  11. Ancillary Issues Promoting sustainable growth in trade and GDP; spreading benefits more evenly; creating base of support for open trade and economic reforms • Regional financial market development and integration; especially fixed-income markets • Broadening financial inclusion through traditional and new technologies • Social safety nets that are robust, have proper incentive structures

  12. Supporting Framework • Harmonization of trade regimes, elimination of trade barriers • Financial development, regional financial integration • Labor, capital mobility • Uniformity of regulations for current account, capital account transactions • Integration, efficiency of regional payment and settlement systems • Stable macro (monetary, fiscal) policies

  13. Role of Currency • Capital inflows into extractive industries cause exchange rate appreciation, hurts domestic industry (Dutch Disease) • Peg to major reserve currency fosters exchange rate stability, low inflation but can lead to FX misalignment • Solution involves: • Financial markets that allocate domestic and foreign capital in line with trade and development objectives • Flexible (managed) exchange rates that serve as buffer against external shocks • Good domestic policies that anchor exchange rate stability and reduce speculative cross-border capital flows • Systematic undervaluation of exchange rates difficult to sustain, can cause other domestic distortions

  14. Shocks, Risks: Adjustment Mechanisms • Risk sharing mechanism to deal with external shocks that affect countries asymmetrically • Commodity price shocks • Foreign interest rate shocks • Foreign demand shocks • Flexible labor and product markets • Labor and capital mobility • Mechanisms for coping with region-wide risks

  15. Asia’s Approach • Regional Trade Arrangements • ASEAN (1967): 9 countries • APTA (1975): 6 countries • CPTPP (2018): 11 countries • Intra-regional FTAs: 30 RTAs and 11 PTA providers • Regional Risk-Sharing Arrangements • Chiang Mai Initiative(2000): 5 ASEAN countries + China, Korea, Japan; $40 billion commitments, zero paid-in-capital • Chiang Mai Initiative Multilateralization (2010): ASEAN+3; $240 billion commitments, zero paid-in-capital

  16. Asia’s Approach • Regional Financial Development and Integration • Asian Dev. Bank (1966): 67 members; $143 billion capital • Asian Bond Fund 1 (2003): $1 billion (from 11 countries) • Asian Bond Fund 2 (2004): $4 billion • Asian Infrastructure Investment Bank (2016): 86 members; $95 billion capital • Regional Surveillance • ASEAN+3 Macroeconomic Research Office (2011): ASEAN + 3

  17. Trade Tensions Creating Challenging Landscape for Global Trade • U.S.-China economic and trade frictions likely to persist or even intensify • Protectionism on the rise in other parts of world as well • WTO and rules underpinning multilateral trading system under threat • Need to create domestic, global constituencies for trade openness, economic reforms

  18. Progress Underway • African Continental Free Trade Area a major step forward in regional integration • But reality on the ground still short of aspirations • AfrExImBank’s Payment and Settlement Platform • More efficient payments, clearing, settlement • New financial technologies can reduce liquidity needs • Banking supervision and regulation being coordinated among some countries (ECOWAS colleges of supervisors)

  19. The Path Forward • Redoubled commitment to de facto trade integration: policies, implementation • Ensuring macroeconomic stability through right policy frameworks • Structural policies to support trade expansion • Building credibility: meeting commitments, transparency • Improving institutional frameworks, governance • Preparing for shocks, managing risks, building resiliency

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