East African countries are progressively improving their policy frameworks governing trade, but governments need to do more to improve the business environment as a whole, according to the second edition of the African Union Commission’s (AUC) economic report produced in collaboration with the Organisation for Economic Co-operation and Development (OECD) Development Centre.
Governments in the region are adopting a series of pro-trade reforms to reduce barriers to trade and improve the overall trade environment. In 2019, at the time of writing, most countries in the region had outperformed the sub-Saharan Africa average for trading across borders, says Africa’s Development Dynamics (AfDD) 2019 report released Tuesday.
However, while some countries like Mauritius, Rwanda and Kenya outperform others in the Ease of Doing Business rankings overall, more countries in the region require additional work to improve the overall business climate. “Complex and burdensome business procedures in many countries undermine efforts to promote business linkages, cross-border firm networks and regional value chains,” the report says.
It says regional integration is a contentious political process to manage and should be deployed tactfully to promote an environment conducive to transforming the economy’s productive structure. “Regional integration exposes businesses to outside influences, opportunities and competition. This can trigger resistance or hesitation among certain stakeholders that fear economic disruption.”
It adds that regional integration initiatives also carry enormous potential for economic and social benefits to ordinary citizens and domestic private sector operators alike. I t says: “A tactful approach with carefully selected initiatives should be deployed as opposed to a wholesale push for larger and more competitive markets.”
Regional integration can create larger markets, increase economies of scale and reduce transaction costs for the region, although this does not seem to take place yet. There is little evidence to suggest that integration in the major East African regional economic communities (RECs; i.e. the Common Market for Eastern and Southern Africa [COMESA] and the EAC) have led to increases in intra-regional trade.
Ten years after its launch, intra-regional imports in the EAC as a share of GDP were lower than prior to its launch. COMESA has fared only slightly. Lack of trade complementarity among member states, overlapping membership and a general decrease in exports’ share of GDP go some way to explain this situation. Consequently, efforts by RECs to promote East Africa’s productive transformation have been largely ineffective, partly due to a poor implementation of regional programmes.
Individual countries’ overlapping membership in RECs further complicates national trade regimes and prevents deeper integration into one group. A tripartite free trade agreement in goods, negotiated between COMESA, the EAC and the Southern African Development Community in June 2015, provided an opportunity to partially rectify this. However, the experience overall has been a disconnect between regional and national objectives for growth and, by extension, a prioritisation by member states of their own interests over those of the region. These factors combined prevent countries from fully benefiting from the regional integration process.
Promoting greater levels of trade facilitation over integration could increase the number of regional value chains (RVCs). Reducing regional transaction and trade costs is critical to supporting RVC integration since goods cross regional borders multiple times.
It is estimated that reducing time to trade by 1% increases the level of foreign value added by 0.18% after two years. Regional projects, such as the Single Customs Territory, which focus on reducing the cost and time for trading across borders, could allow RVCs to play a greater role in East Africa’s productive transformation. Through implementation of the SCT project, transportation costs on the Northern Corridor between Kigali and Mombasa were reduced from USD 5 000 per 20-foot container at the beginning of 2013 to almost USD 3 000 in 2019.
Investments in transformation capabilities are needed to unlock trade’s growth potential
Exports’ share of GDP is decreasing for East Africa, as much of the region’s growth is concentrated in non-tradeable sectors. While exports’ shares of GDP vary across countries, they tend to be above 40% for upper-middle-income countries globally. The East African average was just 14% in 2017, down from 19% in 2000. This low and declining share can partly be attributed to the fact that much of the region’s growth comes from the non-tradable construction, real estate and retail sectors.
The island countries of Madagascar, Mauritius and Seychelles all have relatively higher trade shares. Rwanda stands out for its exceptional rate of sustained export growth since 2000, averaging 17% per year, while its share of exports as a percentage of GDP increased from 6% to 18%. However, even with this level of growth, Rwanda’s share of exports in the national income remains below the average for countries with comparable income levels (around 25%).
The region constitutes of services-exporting economies
Services accounted for 57% of exports from East Africa in 2017 and have remained above 50% for the past decade. Major export sectors for services in the region include tourism, transport, ICT and finance. Services exports have grown 6% on average for the past year, largely in line with the average growth for total exports.
While services have greatly contributed to growth in East Africa’s exports, relying solely on service-driven export growth has its downsides. Firstly, some services tend to require high-skilled labour, which calls for a long-term investment in human capital. Secondly, though services are often traded, they tend to be less tradeable than goods and raw materials. Ultimately, there is no obvious or easy way to rapidly improve productivity in services.
Exports from agriculture and mineral sectors are growing strongly. The shares of exports from agriculture and minerals have increased over time, accounting for 26% and 6%, respectively, in 2017. The positive growth in agriculture is a result of investments to improve productivity in key agricultural export commodities by countries such as Ethiopia, Kenya and Rwanda. As countries push for growth in agriculture exports, markets outside East Africa are becoming increasingly important. Mineral exports also are largely destined for markets outside the region.
The share of the region’s manufacturing export products has fallen, from 20% a decade ago to 12% in 2017. Manufacturing export performance has been particularly disappointing given the efforts that East African countries have put into growing their industrial base.
Increasing the size of manufacturing exports is a critical component for the region’s productive transformation, due to a higher productivity and large employment potential. However, at the current pace, the region will not be able to rely on manufacturing-led export growth to absorb new entrants into the labour force.
The report sheds light on the state of productive transformation in 14 East African countries: Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Mauritius, Rwanda, Seychelles, Somalia, South Sudan, Sudan, Tanzania and Uganda.