Introduction:
History tells us that trade began as a barter system in which people exchanged one object for another. Then over time currencies and coins began to emerge, hence giving birth to the concept of value and making transactions much easier. History also tell us about how trade had evolved across global and regional trade routes or corridors, across centuries, industrial revolution and technological advancements till we reach the current digital revolution of the late 20th and early 21st centuries.
Across years, different forms of trade exist and have played vital roles in business and economies. Africa, generally and in particular the Horn of Africa region, trade is nothing new. A commissioned study by Afreximbank (2015)[1] has provided a comprehensive and rich historical overview of trade in Africa from the pre-colnoial period to the present. The study has as well highlighted and emphasized intra-African trade as a driver of economic development and structural transformation of African economies.
Intra-regional trade refers to the exchange of goods and services between countries located in the same geographic region. Lessons from around the world have shown us how countries have come together to promote intra-regional cooperation and integration through trade. As part of Africa, the IGAD region is composed of landlocked countries, with small and scattered markets and thick or hard borders that isolate neighbouring countries, their population and markets from one another.
Integration can lead to enlarging the size of markets by grouping together those small markets into one larger integrated regional market with more consumers, producers and hence greater levels of competition. As economics tells us this competition will contribute to lower prices and good qualities and these are direct benefits to the consumers. This will also lead to growing demands that can encourage entrepreneurship and development of new business opportunities and enhanced employment opportunities. Larger markets stimulate innovation and enable efficiency gains, thereby achieving economies of scale as firms keep costs down while assuring
[1] Emmanuel Akyeampong, the Afreximbank, (2015). The History of African Trade
quality. This becomes possible through utilization of technology in producing in larger amounts to reduce the unit cost of production.
Due to the unique geographical characteristics of the continent, integration is perceived to solve many challenges of its development and it is considered as an urgent need. Some examples of those characteristics include, among others, the continent has many landlocked countries, many countries have low population densities, there is a disconnection between rural and urban settings, and there is as well remoteness from the major marketing places.
Trade between countries or international trade plays an important role in the countries growth and development. Without trading across borders, nations would be limited to the good and services produced within their own borders. Trade can help boost development, reduce poverty, enhance competitiveness, encourage innovation, expand businesses and choices, improve quality and strengthen ties between nations. Trade creates jobs, attracts investments, attracts new technology and materials, and offers a wider choice in products and services.
Regional Integration: An Overview
In general, regional economic cooperation is the fuel firing the push towards a global economy. Nations will need to belong to some type of regional economic cooperation unit to compete with other regionally aligned nations[1].
Cooperation in its simplest form involves working together towards a common end or purpose. It tends to be more selective in its coverage and requires less long-term commitment as compared with integration. It can cover areas of policy harmonization, joint production of public goods including infrastructure and institutions working on delivery of public goods.
Integration aims at removing discrimination between foreign and domestic goods, services and factors of production. It helps, according to the World Bank[2], countries overcome divisions that impede the flow of goods, services, capital, people and ideas. These divisions are a constraint to economic growth, especially in developing countries. These divisions are created by geography, poor infrastructure, and inefficient policies. Regional integration can help countries to overcome those constraints and enable them to cooperate in many areas including:
- Trade, investment and domestic regulation;
- Transport, ICT and energy infrastructure;
- Macroeconomic and financial policy;
- Provision of other common public goods (natural resources, security, education,…).
Regional integration can lead to substantial economic gains. Regional integration allows countries to:
- Improve market efficiency;
- Share the costs of public goods or large infrastructure projects;
- Decide policy cooperatively and have an anchor to reform;
- Have a building block for global integration;
- Reap other non-economic benefits, such as peace and security.
Regional integration is a process in which countries enter into an agreement in order to upgrade cooperation through common institutions and rules. Normally, the objective of this agreement could range from economic to political to environmental, where commercial interests are the focus for achieving broader sociopolitical and security objectives.
Different efforts of regional integration have been reported worldwide with focus on removal of barriers to free trade, increasing the free movement of people, labour, goods, and capital across national borders, reducing the possibility of regional armed conflict, and adopting cohesive regional stances on policy issues, such as environment, climate change and migration[1]. Globally, there are as well, many Regional Integration Agreements (RIAs) that have led to major development between and among countries.
According to Van Langenhove[2], regional integration initiatives should at least fulfill eight (8) important functions:
- The strengthening of trade integration in the region
- The creation of an appropriate enabling environment for private sector development
- The development of infrastructure programmes in support economic growth and regional integration
- The development of strong public sector institutions and good governance
- The reduction of social exclusion and the development of an inclusive civil society
- Contribution to peace and security in the region
- The building of environment progarmmes at the regional level
- The strengthening of the region’s interaction with other regions of the world
To encourage economic development and regional integration, intra-regional trade is often promoted between countries and in specific regions or continents. Intra-regional trade refers to the exchange of goods and services between countries located in the same geographic area. Taking an example from Southeast Asia, the Association of South East Asian Nations (ASEAN) have increased the level of trade and commodity exchange between themselves and this has contributed to reductions of inflation and tariff barriers associated with foreign markets resulting in growing prosperity. Other very good examples include European Union, North America Free Trade Agreement (NAFTA), Asia Pacific Economic Cooperation (APEC), and World Trade Organization (WTO).
Documented evidence has shown us how trade within EU, NAFTA, ASEAN and APEC has increased over the years as a result of elimination of tariffs and provision of solutions to other trade-related berries.
Intra-regional Trade in IGAD Region: A Brief Analysis
It is quite normal to observe that tastes, needs, and desires of one nation or country can be satisfied using its domestic resources and capacity. In fact, this is might be the basic reason why countries trade among themselves.
Countries enter into Regional Economic Integration with other countries for various economic reasons, for instance to improve on inter-regional trade, increase their market, to get lower cost of doing business, increase investments in their country, pooling of regional resources and better utilization of economies of scale in production[1].
In general, for the whole continent, the intra-regional trade remains low compared to other trading blocs in Europe, Asia and Latin America. This is despite the significant progress made by some Regional Economic Communities in trade liberalization, facilitation, movement of peoples, infrastructure and peace and security.
Based on an analysis spans the years 1995 – 2012 (in some cases also 1994 and 2013), Ceislik (2016) has analyzed trade flow and integration in IGAD region. The analysis for that period indicated the limited trade openness of the region compared to other organizations in the continent. Trade openness as defined is one measure of the extent to which a country is engaged in the global trading system. It is measured by the ratio between the sum of exports and imports and Growth Domestic Product (GDP). The reason for this limited trade openness for the region was reported to be the effect of military conflicts within the region. However, the analysis went further to analyze the trade openness after IGAD was established and observed considerable increase in openness till it was maintained between 40% to 50% in 1999.
Another finding was that IGAD’s share of foreign trade in global trade is not significant and fluctuated considerably (0.25% for imports and 0.1% for exports in 2012). COMESA region seems to be IGAD’s most important export market with food and livestock being the primary exports in 2012. The South African Development Community (SADC) remained a significant export partner for IGAD, where it exported mainly manufactured goods (25% of the total exports to the community) and chemical products (15 %). In terms of imports COMESA is also a leading market which provided the IGAD region with machinery and transport equipment (70% of the total imports from the organization) in 2012. The second significant African bloc that is active in IGAD imports is SADC.
The analysis went further to report that since the region is still unstable, it can be perceived that economic development and integration within the community (IGAD) may be the solution to political, ideological, religious, and ethnic problems which are often compounded by natural disasters like droughts and famines.
On the other hand, a recent analysis during the development of IGAD Regional Trade Policy (2022-2026), has shown that, despite the lack of good quality data on trade in the region, but using existing trade data that the performance is mixed, uneven and characterized by persistent negative trade balance. Throughout the region, it was observed that higher imports that exports
and hence negative trade balance is prevalent for both trade in goods and in services. In addition, the region’s exports to the world are heavily concentrated on primary materials.
The intra-regional trade is estimated at 6%. Looking to exports during the period 2012 – 2018 for example, one can observe that exports of the region to the world were about USD14 bn compared to intra-IGAD exports of around USD 2 Bn. The share of exports to fellow IGAD Members in total exports increased from 12.8% in 2015 to 15.9% in 2018.
Regarding imports, the trend is very limited, only 3% is sourced within the region, with an uneven trend. In addition, compared to other regional integration arrangements in Africa, the share of intra-regional trade for IGAD is low.
The composition of exports destined for other IGAD countries is markedly different from exports to the world. In particular, the share of raw materials is much more limited (at 26% vs. 41% for the world), whereas the share of consumer products is much larger (at 45% vs. 31% for exports to the world). The share of capital goods is also larger (5% vs. 2%), although still limited.
In other words, value addition in intra-regional exports is higher, and these exports are more diversified than IGAD Members’ exports to the rest of the world. This underlines the development potential of intra-regional trade, which will need policy support including for the development of further regional value chains. The pattern also shows that much remains to be done in terms of developing supply side capacity for capital goods – as well as addressing barriers to intraregional trade stemming from inadequate transport infrastructure and non-tariff barriers.
With respect to trade in services, data are even less available and reliable for the region. Despite that the existing analysis had shown that an average of 7.1% per year was recorded for services imports, which is faster than the exports growth rate of 3.9%.
The main services export sectors are transport (the most important sector for Djibouti, Ethiopia and Kenya) and travel (the most important sector for Uganda, and second most important one for Ethiopia and Kenya); reported exports of other services are relatively limited. As well trade deficits have been reported with widened or increasing rates.
Barriers to Regional Trade Integration
The previous analysis has shown us that there are limited positive signs of trade outcomes for the region. There is considerable potential for intra-regional trade that remains unexploited due to infrastructure and policy induced constraints. Trade facilitation services include many hassles that constrain the flourishing of private business and trade.
The following is a summary for those factors that are considered as restrictive barriers to intra-regional trade:
- Trade Infrastructure
Infrastructure includes, among others, roads, bridges, railways, airports, sea ports, harbors, canals, subways, dams, water pipes, power plants, communication technologies and networks. The region was reported as one with the highest cost of transport compared to other regions due to poor trade-related infrastructure. Transport costs are key determinants of competitiveness and most important infrastructure barrier to trade. Enhancing trade-related infrastructure is of vital importance. Improving the “software” of trade is equally urgent and important: better trade facilitation and logistics services performance; removing NTBs and putting in place effective transit regimes.
- Productive capacity
It is about limitation of capacity to produce. Generally, in Africa, firms are reported to be operate with at about 50% capacity on average. This is due to many factors, among others, challenges related to policy changes, shortage of working capital, policy-imposed distortions, delays in getting inputs and inefficient technologies.
- Non-tariff barriers, rules of origin and regulatory policies
these include complex and lengthy procedures regulating private business activity; complex customs arrangements; restrictive rules of origin; and limited regional harmonization of policies, regulations, and procedures. Poor transit systems and numerous informal roadblocks along trade corridors create additional obstacles. All these contribute to the cost of trading across borders which is recorded as higher in the region compared to other regions.
- Implementation of Regional Trade Agreements (RTAs) and Multiple (overlapping) Memberships in Regional Economic Communities (RECs)
The ‘Spaghetti bowl’ phenomenon is very famous in the literature of integration in Africa. It was reported that every country in the continent participates in at least two economic communities, 30 countries take part in 3 communities, 18 in four, and one country is participating in 5 reginal blocs. This has negatively impacted the whole picture of regional cooperation and integration[1].
Examples of Some Initiatives, Solutions and Opportunities
- IGAD has managed to put in place some very important regional instruments (polices, strategies and regulatory frameworks) and now they have been put in use and domestication at national contexts. Within the Programme for Infrastructure Development in Africa (PIDA), for example, IGAD has managed to finalize the development of the Regional Infrastructure Master Plan (IRIMP). It is now serving as Strategic Framework for planning, and a powerful tool for policy advocacy and resource mobilization. Within this framework we have managed to get resource from our development partners to work on implementation of some of the regional priorities in the sectors of energy and ICT. This will go far way in contributing to practical solutions of the gap in trade-related infrastructure;
- IGAD has an updated version of a Regional Trade Policy (2022-2026). This has come out of the on-going debate of IGAD Minimum Integration plan and the current debate on the tripartite free trade area (COMESA-ECA-SADC), the WTO participation, and the continental flagship, AfCFTA. It is an updated version of about 10 principles of trade facilitation including those of customs reforms and coordinated border management;
- Good progress on the implementation of other supportive frameworks and protocols such as free movement of persons, transhumance protocol, Regional Policy Framework on Cross-Border Informal Trade and Governance Security and policies on Migration among others;
IGAD recently adopted a new Treaty: between 1986 and 1996, IGAD had undergone a revitalization process and changed from an Agreement of fighting drought and desertification to an expanded mandate on areas of food security, environmental protection, peace and security, economic cooperation and regional integration. Then after June 2023, when a new Treaty has been adopted by an Ordinary Summit, the mandate has been more expanded and came with more
[1] Ceislik, Ewa (2016). Consequences of Economic Integration Initiatives in Africa: Trade in the IGAD Region (Book chapter)
- refined areas of cooperation. The Treat has about 6 Chapters and 63 Articles. Chapter Three was devoted to areas of cooperation where these areas have been expanded into18 articles compared to only one article in the Agreement of its establishment. Most of Articles are directly and indirectly trade liberalization and economic cooperation;
- IGAD as mandated, is working heavily on capacity and skills development covering many areas such as customs and coordinated border management, entrepreneurship skills, value addition, trade facilitation, reduction of tariff and non-tariff barriers among others.
Conclusion
This article is a review of the status of intra-regional trade in the region and it also briefly mentioned the identified constraints to the low intra-regional trade performance and what we can do about it and what solutions IGAD has put in place to enhance its performance.
This brief analysis is based on existing data and information from different sources and based on that there is an urgent need for practical interventions to overcome the identified obstacles and barriers to regional trade integration. In addition to solving the gaps and the missing links in infrastructure, countries need to address the tariff and non-tariff barriers and the other constraints. However, most of the needed solutions to boost integration agenda need political will, in addition to some financial and technical requirements.
There is need as well, to build capacity and skills at national and regional level in development of bankable projects, and in efficient preparation, coordination, and implementation of regional projects.
