Monitoring Regional Trade Integration: The case of Africa

1. Monitoring Regional Trade Integration:The case of Africa LelioIapadre (University of L’Aquila and UNU-CRIS) 4th GARNET Annual Conference IFAD, Rome, 13 November 2009 Based on P. LelioIapadre and Francesca Luchetti, Trade Regionalisation and Openness in Africa, background paper for the European Report on Development

2. The geographic scope of international integration • National perspective • Openness to the rest of the world • Geographic diversification and concentration • The role of distance • Regional perspective • Intra- and extra-regional integration • Global perspective • Global integration as an average of national integration indicators • Intrinsically global processes, without reference to national borders United Nations University - Comparative Regional Integration Studies - UNU-CRIS

3. Regional Integration: Basic Concepts(UNU-CRIS, 2006 World Report on Regional Integration) • Regional integration (a political definition): “the emergence of a governance level between the national and the global levels within the system of world governance, based on (regional) cooperative behaviour and the design of common policies and institutions by actors that traditionally belong(ed) to the national governance level” • Regionalisation “a complex and multi-dimensional social transformation process, whereby the regional level is becoming a relevant space for many aspects of human behaviour and activities, driven by social and technological forces similar to those driving the globalisation process”

4. Regional trade integration • Ex-ante measures: • Regional trade liberalisation • Ex-post measures: • Trade regionalisation

5. Monitoring regional trade liberalisation • Measurement needs • Measuring to what extent barriers to intra-regional trade have actually been removed • WTO consistency of preferential integration agreements • Barriers to intra-regional trade • Barriers to extra-regional trade

6. Monitoring regional trade liberalisation • Quantitative indicators • Average tariff rates • Trade taxation ratios • Effective rates of protection • Non-tariff barriers coverage ratios • Tariff-equivalents of non-tariff barriers • Trade restrictiveness benchmarks • Composite indicators of trade restrictiveness • Indicators of market regulation • Sector coverage of integration policies

7. Monitoring regional trade liberalisation • Qualitative indicators • Harmonisation of regulatory regimes • Rules of origin (symmetry and simplicity) • Transparency of custom procedures • Non-discrimination in the treatment of intellectual property rights • National treatment in investment regulations • Fairness of dispute-settlement procedures • Non-discrimination in government procurement • Harmonisation of competition rules

8. Monitoring trade regionalisation • Measurement needs • Ex-ante: regional integration potential • ‘Natural trading partners’ criteria • Assessing the conditions for trade creation prevailing over trade diversion • Ex-post: trade effects of regional integration • Intensity of intra-regional trade • Trade creation and diversion

9. Monitoring trade regionalisation • Statistical tools • Indicators of intra- and extra-regional trade intensity • Network analysis of regional trade • Methods to assess the impact of regional trade integration • Gravity models • Computable general equilibrium models

10. Indicators of trade regionalisation: the case of Africa • Regional integration is often considered an important element of development strategies in Africa • Welfare and growth effects of regional integration policies pass through their effects on trade • Traditional indicators of intra-regional trade intensity can be misleading • A correct measurement of intra-regional trade intensity is essential to estimate the impact of policies and improve the specification of gravity models

11. African regions • Six non-overlapping African regions • Arab Maghreb Union (AMU) • North East Africa • Economic Community of West African States (ECOWAS) • Central Africa • East African Community (EAC) • Southern Africa

12. Trade shares • Intra-regional trade share: Srr = trr / trw 0 ≤ Srr ≤ 1 where: trr = intra-regional trade of region r; trw= total trade of region r. • Extra-regional trade share: 1 – Srr

13. Intra-regional trade shares in Africa are very low

14. Problems of trade shares

15. Trade intensity indices • Intra-regional trade intensity Ir = Srr / Wr = (trr / trw) / (twr / tww ) where: Wr = region r’s weight in world trade twr = world trade with region r = trw tww = world trade • Extra-regional trade intensity Er = (1 – Srr) / (1 – Wr) • Geographical neutrality (no preferences) Ir = 1 ↔ Er = 1

16. Intra-regional trade shares in Africa are very high in proportion to the regions’ shares of world trade.

17. Problems of trade intensity indices • Range variability: their maximum value is a function of the region’s total trade. 0 ≤ Ir ≤ (tww / twr) 0 ≤ Er ≤ [tww / (tww – twr)] • Range asymmetry: their range below the threshold value of 1 is much smaller than above. • Dynamic ambiguity: intra- and extra-regional trade intensity indices can move in the same direction, if certain conditions hold.

18. A possible solution: revealed trade preference indices • Regional trade introversion index Jr = (HIr – HEr) / (HIr + HEr) -1 ≤ Jr ≤ 1 where: HIr = Srr/Vr ≡ (trr/trw)/(tor/tow) HEr = (1 – Srr) /(1 – Vr) tor = region’s r extra-regional trade; tow = total trade of the rest of the world. • Regional trade extroversion index Fr = (HEr – HIr) / (HEr + HIr) = – Jr -1 ≤ Fr ≤ 1 • Geographical neutrality (no preferences) Jr = 0 ↔ Fr = 0 • Bi-regional symmetry: for i = 1, 2 J1= J2and F1 = F2

19. Regional trade introversion is very high in Africa

21. Geographic direction of regional trade • Anotherimportantaspectoftraderegionalisationis the geographicdiversificationofintra-regionaltradeflows. • If the distributionofintra-regionaltradeflowswereproportionalto the tradesizeofregionalpartners (neutrality), thiscouldrevealthatdistance-relatedintra-regionalbarriers do notaffect the direction ofbilateraltradeflows. • Intra-regional geographic neutrality index (IRGNIi): IRGNIi = 1 – Σj≠i|ISij – IVij| /2 where: ISij = partner j’s share of region i’s intra-regional trade; IVij= partner j’s share of region i’s total extra-regional trade.

23. Regional trade openness • A region’s relative degree of openness (Oi) can be measured by its trade-to-GDP ratio relative to the world average trade-to-GDP ratio: Oi = (ti./yi)/(T/Y) where: ti. = region i’s total trade. T = world trade. yi = region i’s gross domestic product (GDP) Y = world GDP. • Symmetric indicator of relative trade openness (SOi): SOi = {(ti./yi) – [(T – ti.)/(Y – yi)]} /{(ti./yi) + [(T – ti.)/(Y – yi)]} –1 ≤ SOi ≤ 1

24. The degree of trade openness of African RIAs is relatively low, notwithstanding the small size of their economies.

25. Raw materials and Africa’s trade

26. Conclusions • Traderegionalisation in Africa isnot low • Regionaltradeintroversionisvery strong, even in comparisonwithotherRIAsamongdevelopingcountries • Thisis due totheirverylimitedcapabilities in extra-regionaltrade (domestic and externalbarriers) ratherthanto the processofregionalintegration • Tradeintroversionisfalling in some Africanregions • Increase in Africaninter-regionaltradeintensity in the ‘90s • Increase in tradeintensitywith the restof the world, butnotwith the EU

27. Conclusions • Africa’s world export share hasbeensustainedbysalesofrawmaterialstoemergingcountries • Butits share of world manufacturing exportsisstillvery low and hasbeendeclining in the last fewyears • Regionalintegrationpolicies can beveryimportanttopromotesustainabledevelopment in Africa • Their success will, however, be measured more by their ability to create the necessary infrastructure for a more effective integration of African countries into world markets, than on their effect on intra-regional trade.