Trade in Intermediate Inputs and Trade Facilitation in Africa s Regional Integration

Transcription

1 Trade in Intermediate Inputs and Trade Facilitation in Africa s Regional Integration Selected Paper for Presentation in the African Economic Conference, October 203, Johannesburg, South Africa. Abstract: Siope V. Ofa and Stephen Karingi* 28 October 203 Despite concerted efforts, Africa s regional integration process has encountered delays. Since the third stage of the Abuja Treaty in 2008, piece meal progress has been observed. It therefore begs a difficult but relevant question: why is the regional integration process stalling? The conventional answer lies in challenges such as inadequate financial resources and infrastructure for trade among others. However, this paper proposes an approach to regional integration refocused on resource-based industrialisation. A recent UNECA survey found that several Member states believed that regional integration does not contribute significantly to job creation and regional value chains. Resource-based industrialisation could contribute to job creation and inclusive growth if properly managed. We examine the industrialisation level in Africa using Balassa s Revealed Comparative Advantage Indexes based on the BACI dataset. Further, we evaluate Kenya s trade in intermediate inputs vital for industrialisation, using an input-output table analysis on production, based on GTAP 8 dataset. Regional analyses of five African Regions triangulated the Kenya results. The analysis finds that while the level of industrialisation is heterogeneous among African economies, the overall level is low. Also, in the case of Kenya, the manufacturing sector spends significant amounts on imported intermediate inputs from the manufacturing sector critical to all four major industry categories (57 per cent for food, 79 per cent for agriculture, 5 per cent for energy and mining, 83 per cent for manufacturing and 57 per cent for services), demonstrating the importance of trade facilitation measures to ensure timely and cost-effective sourcing. Moreover, results from five African regions triangulate this finding by suggesting that manufacture, energy and mining imported intermediate inputs together make out 76 per cent of total imported intermediate inputs for production in Africa. * Mr. Stephen Karingi is the Director, of the Regional Integration and Trade Division, UNECA. At the time this paper was written, Mr. Siope V. Ofa was Associate Economic Affairs Officer, African Trade Policy Centre, Regional Integration and Trade Division, UNECA. Mr. Siope V. Ofa is now working for UNESCAP. The views expressed in this paper are the authors own and may not necessarily reflect the position of the United Nations Economic Commission for Africa. Any mistakes or omissions are the sole responsibility of the authors. Maja Reinholdsson and William Davis of the Regional Integration and Trade Division, UNECA is gratefully acknowledged for the analyses on African Regions section and useful comments on an earlier draft.

2 . Introduction Against the backdrop of the global economic and financial crisis in many industrialised countries and the failure to reach a comprehensive agreement in the WTO Doha round negotiations, Africa s regional trade integration has emerged as a crucial instrument for sustaining economic growth in Africa. Increased intra-african trade and development of African markets are necessary to serve as a launch pad for enhancing African competitiveness and its integration with the world economy (ECA et al., 202). 2. Africa s Transformative Regional Integration: need for a paradigm shift? A lot of concerted efforts have been made towards Africa s regional integration by African countries, Regional Economic Communities (RECs) and Development partners. Deeper integration would allow the continent not only to achieve sustained and robust economic growth but it will also ensure poverty alleviation, enhanced movement of goods and services, infrastructure development and promotion of peace and security within and between the regions (ECA et al., 200) Despite concerted efforts, Africa s integration process has encountered delays. Since the beginning of the third stage of the Abuja Treaty in 2008 creation of free trade areas and custom unions in each REC with a deadline of 207 piecemeal progress has been observed. While the political commitment at the continental level is undeniable, implementation at the country level is noticeably lacking. In January 202, the AU Summit of Heads of Governments and States endorsed both fast -tracking of the establishment of an African Continental Free Trade Area by the indicative date of 207 and boosting of intra-african trade through the implementation of a comprehensive action plan towards encouraging member states to fast-tracking and boosting intra-african trade. With the deadline for this third stage looming in four years time, and extremely limited progress on the ground, one needs to ask why Africa s regional integration process is stalling. The conventional answer lies in the challenges that member states and RECs encounter in their efforts towards negotiating free trade areas (FTAs) and custom unions. ECA et al., (200 and 202) provide a comprehensive account of the specific challenges for each REC that are hindering the regional integration process within their respective regions. The Visit African Union Action Plan for Boosting Intra-African Trade for further information, English.pdf 2

3 challenges range from inadequate financial resources, inadequate infrastructure for trade, high non-tariff barriers, lack of harmonisation of rules of origin among member countries, and conflict and political instability (see ECA et al., 200 and 202 for detail discussions of these challenges). UNECA recently conducted a regional survey (UNECA, 202) to gauge the progress in mainstreaming regional integration programs, protocols, decisions and activities into national development strategies of member states. Based on the 5 geographic regions in Africa North, West, Central, East and South 32 African economies were selected of which 69 Government Ministries responsible for regional integration were interviewed or given structured questionnaires. The general findings of the survey noted that one of the main challenges underpinning the acceleration of Africa s continental integration is the limited or lack of progress in mainstreaming regional integration agreements into national development plans and strategies (UNECA, 202). In particular, the survey noted that although the AU Assembly requested member states to establish a focal point Government Ministry in charge of Regional Integration, only 8 member states have established such a dedicated Government body. The survey report also highlighted three other gaps worth noting. First, dissemination of information on regional integration decisions to national stakeholders was lacking and this contributed to the lack of implementation and ownership. Second, a noticeable number (43 per cent) of respondents indicated that the level of consultation between the coordinating ministry or entity and the private sector and civil society was weak. Third, the financial costs in terms of multiple memberships 2 in the RECs increases in proportion to number of memberships. Further, multiple memberships stretch financial and human resources in term of the need for representation to different negotiation meetings, and thus coordination and dissemination of information become real challenges. However, one of the findings in the regional survey prompted us to look beyond the conventional answers into the question of why Africa s regional integration stalling. In particular, respondents were asked about the significance of regional integration to different sectors of the economy. The majority of respondents indicated that regional integration does not significantly contribute to job creation and creation of regional value chains 58 per cent and 54 per cent respectively (UNECA, 202). Although anecdotal, these figures do provide 2 The report gave an example of the projected financial costs for Swaziland in 202 which amounted to around USD3.5 million on annual contribution, contribution to COMESA Court of Justice and COMESA Fund. Swaziland was also expected to pay similar costs to SADC, as a member of that grouping (UNECA, 202). 3

4 first-hand evidence of the perspectives of selected Government officials directly involved with implementing regional integration in these member states. Specifically, although renewed political commitments and concerted efforts at the continental level have been made towards the regional integration process, doubts remains in several member states about the impact of regional trade integration on job creation. Indeed, there are good grounds for their reservations. Even the literature on the link between trade and unemployment is undecided. Felbermayr et al (20) empirically tested the relationship between rate of unemployment and openness over two groups of countries 20 OECD countries and 63 countries over the period 970 to They concluded that over time, higher trade openness decreases unemployment 3 for both groups. Also, Mashayekhi et al (202) using the Global Trade Analysis Project (GTAP) model analysed the effects of regional integration in the Southern African Development Community (SADC) and employment. Their findings indicate that regional trade liberalisation among developing countries can lead to increasing or decreasing demand for labour intensive goods and hence the demand for labour can increase or decrease. Hence, a flexible scenario where surplus unskilled labour is available and there is no change in the level of skilled labour 4 would result in greater welfare gains since real wages are fixed and an increase in demand for labour is assumed to be totally accommodated by changes in employment rather than in real wages. In contrast, Chinembiri (200) found that the derived labour demand in the primary sector (agriculture, fishery forestry and mining activities) and the secondary (manufacturing, utilities and construction) industries have been impacted negatively by increased imports implying trade liberalisation. Another country-study by Rattso and Torvik (998) of Zimbabwe found that the drastic trade liberalization implemented in the early 990s resulted in a contraction in output and employment that was accompanied by a sharp increase in imports and a rising trade deficit. Furthermore, study on Morocco by Currie and Harrison (997) found that the substantial trade liberalization implemented during did not have very strong employment effects. Here lies a conceptual proposition for a paradigm shift. While we continue to support Africa s regional integration agenda, we should ask ourselves the difficult but relevant 3 Reduction in aggregate unemployment is primarily due to reduction in high-skilled workers unemployment. 4 Real wages of unskilled labour is exogenous. 4

5 question of why the regional integration process (despite concerted efforts) is stalling in several countries. We have discussed one key potential reason above which is the linkages between regional integration (including trade liberalisation) and employment. However, we propose a transformative approach to regional integration that would focus on the key role of trade facilitation for trade in intermediate inputs that are crucial for industrialisation in Africa. A transformative industrialisation will not only contribute to create jobs but it could also contribute to inclusive growth if properly managed. Hence, perhaps Africa s regional integration agenda needs to be recalibrated to incorporate a transformative dimension thereby ensuring that any activities planned incorporate inclusive growth and most importantly job creation. The argument for a paradigm shift towards prioritising industrial transformation in Africa s regional integration agenda will continue in the next section of this paper, which will be a discussion on the links between the identification of key industry sectors competitiveness (measured by revealed comparative advantage index) and regional integration. 3. Transformative regional trade integration and industrialisation in Africa Africa is increasingly focusing on regional integration as a strategy for achieving sustainable economic growth as there is consensus that by merging its economies to create one big market and pooling its capacities thereby sharing costs on public infrastructures crucial for development the continent can overcome its daunting development challenges (ECA et al., 200) 5. This agenda as mentioned earlier has intensified in the last couple of years with several continental agreements on boosting intra-african trade made. The importance of the regional integration agenda is more relevant today than ever, particularly in the context of current global economic difficulties. Building resilience through regional integration and trade provides a buffer for most small fragmented African economies. To examine in which industry sectors African countries have comparative advantage, we compute a normalised revealed comparative advantage index (NRCA) 6 of each African country to the world. Using trade statistics, this computation allows us to identify potential industry sectors of comparative advantage when African economies trade with each other by 5 Please refer to ECA et al., (200) for detailed discussions on the links between regional integration (and trade) and sustainable economic growth in Africa. 6 Please refer to Balassa (965) for details on calculating the RCA index, and also to Laursen (2000) for developing a simple normalisation process of RCA. 5

6 comparing the ratio of a particular product (or sector) in a country s exports, to its share in total intra-african trade, as follows: Where, - country i s exports of product or sector s, - country i s total exports, - African total exports of product or sector s, - African total exports, () (2) We use the BACI dataset developed by CEPII, provides bilateral values and quantities of exports at the HS6-digit product disaggregation, for more than 200 countries over 5,000 products based on input data from the United Nations Statistical Division (COMTRADE database). Four African economies were included with Southern African Customs Union (SACU) 7 as one economy. Two years (2000 and 20) were merged to allow for comparison over time. Intuitively, if the share of a particular commodity in a particular country s exports is high relative to the commodity s share in total intra-african trade, then the country has a revealed comparative advantage in the commodity in question. Hence, when interpreting an NRCA, the index ranges from - to with the value of 0 as the ideal index (NRCA). Indexes between 0 and are considered revealed comparative advantages and vice versa. Looking at the overall picture of revealed comparative advantage (normalised) in Africa for 2000 and 20, five important trends stands out. First, we find 27 African economies the biggest group by Broad Economic Categories (BEC) in 20 have NRCA in BEC 8 (agriculture and food). BEC is the only category that African economies showed an average positive NRCA index to world with (0.04) in 20. This implies that the agriculture and food industry is quite competitive in most African countries. 7 Members include Namibia, Lesotho, Botswana, South Africa and Swaziland. 8 - Food and beverages ( Primary & 2 Processed); BEC 2 - Industrial supplies not elsewhere specified (2 Primary & 22 Processed); BEC 3 - Fuels and lubricants (3 Primary & 32 Processed); BEC 4 Capital goods (except transport equipment), and parts and accessories thereof (4 - Capital goods (except transport equipment) & 42 - Parts and accessories); BEC 5 - Transport equipment and parts and accessories thereof (5 - Passenger motor cars, 52 Other & 53 - Parts and accessories); BEC 6 - Consumer goods not elsewhere specified (6 Durable, 62 - Semi-durable & 63 - Non-durable); and BEC 7 - Goods not elsewhere specified (includes, among other commodities, a range of military equipment, postal packages and special transactions and commodities not classified according to kind). 6

7 Second, the NRCA index for 20 indicates that a substantial number 9 of African economies 27 African economies in 2000 had a positive NRCA index, with indices for the said countries ranging from (0.006) to (0.448), while in 20 9 African economies had a positive NRCA index for BEC 2 (industrial supplies not supplied elsewhere), with indices for these countries ranging from (0.6) to (0.458). BEC 2 economies were the second highest group with positive NRCA index among the 7 BEC categories. While it reflects competitiveness in trading in industrial supplies among African countries, it also provides further support towards African economies trading in more sophisticated goods compared to trading with external partners. For example, it is estimated that intra-african exports in 20 totalled around USD 69 million, 36 per cent of this amount the highest of all product categories was export in industrial supplies (BEC 2) (see Table ). Table Intra-African Exports by BEC, 20 BEC USD (000) % Share 9,34, ,0, ,932, ,396, ,564, ,620, , Total 69,782, Source: Author's estimation based on BACI Dataset (CEPII), 203. Third, our estimation shows that Somalia held the ideal 0 NRCA index for BEC (0.030) and BEC 6 (0.049) in 20 (see Figure ). In the case of BEC, Somalia has shown a significant improvement from an NRCA index of in 2000 to in 20, and similarly for BEC 6, an index of in 2000 compared to in 20. For the other BECs, in 20 Senegal hold the ideal NRCA index for BEC 2 (0.6), Cote d Ivoire for BEC 3 (0.072), Madagascar for BEC 4 (0.065) and Tunisia for BEC 5 (0.005) African economies in 2000 had positive NRCA index (ranges from to 0.448) while 9 African economies had a positive NRCA index in 20 with NRCA index ranging from 0.6 to BEC 2 economies were the second highest group with positive NRCA index among the 7 BEC categories. 0 Closest index value to zero. 7

8 NRCA 2000 NRCA 2000 NRCA 2000 NRCA 2000 NRCA 2000 Figure Top 5 African Economies - NRCA Index by BEC (20) Somalia : BEC & 6 Senegal : BEC 2 Cote d'ivoire:bec 3 & NRCA NRCA NRCA 20 Madagascar : BEC 4 Tunisia : BEC NRCA NRCA 20 Source:Author's estimations based on BACI dataset (CEPII), 203 Fourth, our estimation identifies the potential for African economies in each of the broad economic categories to improve revealed comparative advantages. These are African economies that showed revealed comparative disadvantages in each BEC, but approaching the ideal NRCA index of zero. The top 5 potential African countries for each BEC are listed in Table 2. Cetris paribus, these identified African economies are expected to progress next to the revealed comparative advantages in the respective broad economic categories. Fifth, when computing African countries NRCA indexes to the world, we find a different set of countries holding the top spots (see Figure 2, Annex ). For example, for BEC, we find Zimbabwe (0.033), Mozambique (0.077) and Tunisia (0.094) ranking closest to the ideal NRCA index in 20, with 32 African counties holding a positive NRCA index. In the case of BEC2, we find that Cameroon (0.037), Morocco (0.4) and Egypt (0.64) ranked the highest with 6 countries holding positive NRCA indexes, while Gabon (0.208), Republic of Congo (0.245) and (0.255) ranked the highest among African countries in BEC 3 with only 9 countries holding a positive NRCA. 8

9 Table 2 Top 5 African Countries with Potential Industry Development (by BEC), 20 NRCD* Index-BEC NRCD* Index-BEC 4 NRCD* Index-BEC Zambia -0.5 Eritrea SACU SACU Uganda Seychelles Burkina Faso Chad Tanzania Togo Tanzania Kenya -0.6 Tanzania Mali Zambia NRCD* Index-BEC 2 NRCD* Index-BEC Tunisia Kenya SACU Morocco Kenya Equatorial Guinea Uganda Malawi Cameroon Congo NRCD* Index-BEC 3 NRCD* Index-BEC Libya Eritrea Madagascar Gambia Niger Benin Senegal Zimbabwe Kenya Malawi Source: Author's estimations based on BACI Dataset (CEPII), 203. Note: * - Normalised Revealed Comparative Disadvantage in 20. For BEC 4, Djibouti (0.00), Mali (0.008) and Mauritius (0.028) ranked closest to the ideal NRCA index, with 5 countries holding positive NRCA indexes while Sierra Leone (0.002), Gabon (0.003) and Uganda (0.005) ranked closest to ideal NRCA index in BEC 5 (with only countries holding positive NRCA index). For BEC 6, Rwanda (0.066), Tanzania (0.2) and Uganda (0.43) ranked closest to the ideal NRCA index with 4 countries holding positive NRCA indexes, while Guinea (0.297), Burundi (0.46), and Cote d Ivoire (0.45) on BEC 7 with only 8 countries with positive NRCA indexes. It is worthy to note that Africa hold an average positive NRCA index (0.39) in BEC to the world (agriculture and food) although slightly lower than its average NRCA index in BEC for intra-african trade at (0.04). The difference in the composition of countries with NRCA indexes when comparing intra-african trade and trade with the world reflects the nature of trading in Africa with most African countries trading more in natural resources with the world while another set of countries focuses on trading in more sophisticated goods among African countries. Overall, the use of a simple estimation of revealed comparative advantage index allowed us not only gauge industry sectors competitiveness in African economies, but also to identify future African economies and potential industry sectors deemed useful for policymakers in prioritising sectors for industrial development. Through this process, we have provided and 9

10 additional justification for a shift in paradigm towards a transformative regional integration agenda for Africa. Industrialisation for transforming each African economy should be at the heart of a transformative regional integration with a particular focus on the potential for each industrial cluster identified earlier. 4. Industrialisation, Intermediate Inputs and Trade Facilitation in Africa s Transformative Regional Integration Industrialisation and Intermediate Inputs Africa s industrialization has been weak and inconsistent as shown by the share of manufacturing value added to GDP ( ) which increased marginally in North Africa (2.6 per cent to 3.6 per cent) but fell from 6.6 per cent to 2.7 per cent in the rest of Africa (ECA et al., 203). Africa s low export diversification and intra-industry trade in recent years also highlight this weakness. In 2009, Africa lagged behind other major regions Europe, the Americas, Asia and the Pacific in terms of export diversification with a weighted average of 0.4 in 2009 compared to 0.2 in 998, while intra-industry trade was found to be low at around 0 per cent (average) for Africa, with 32 African economies in a sample of 49 were below the average with another 8 African economies below 2 per cent ( Ofa et al., 202). Africa s dependence on primary commodities provides opportunities and risks for industrialisation. On the one hand, Africa should capitalise on the abundant resource endowments and the current commodity price boom to fund its industrialisation efforts; however, focusing on primary commodities carries the risk of further deindustrialisation (see ECA et al., 203 for detailed discussion on this point). A recent report released by ECA et al., (203) advocates that a resource-based industrialisation will yield employment, income and dynamic benefits provided that the resource processing industries which should move up the value chain and develop backward and forward linkages to the commodity sector are internationally competitive and well integrated into global value chains. Resource-based industrialisation via linkage development creates an opportunity to maximise positive externalities derived from clusters due to agglomeration effects 2 of supplier (and therefore Export Diversification using a normalised Hirschman-Herfindahl Index gives values between (export concentration) and 0 (export diversification). Most industrialised economies have indexes very close to zero. 2 Through knowledge and information flows allowing for firms to adopt new technology. It facilitates specialisation and clustering lowers entry barriers for small and medium enterprises (ECA et al., 203). 0

11 extraction) location and resource-processing industries geographical closeness to each other (ECA et al., 203). The resource-based industrialisation path is critical but not sufficient for structural adjustment from the extraction of primary commodities to a manufacturing-based economy in Africa. Production activities require two types of inputs. One is primary factor inputs (land 3, labour and capital) and the second key input is intermediate inputs (different components to make one product) (Burfisher, 20). The primary factor-based industrialisation relies more on Africa s natural resources for industrialisation and economic transformation. While we are content with this industrialisation path, we propose that the role of intermediate inputs in the resource-based industrialisation process should be given equal attention. While some intermediate inputs may be sourced from within the continent, some may need to be sourced from outside Africa. Africa s trade in the intermediate goods that are required for higher value production has been limited and this reflects the continent s lack of industrial transformation and growth over time. In fact, Africa s imports of intermediate goods from within Africa have remained low when comparing 2000 (at per cent share of total imports of intermediate goods from Africa) and 20 (2 per cent) (see Table 3). A majority (more than 80 per cent for both periods) of the intermediate inputs for Africa are imported from outside Africa. These figures reflect the reality that some of the intermediate inputs crucial for Africa s industrialization may not necessarily be available from within the continent, and must therefore be sourced from outside Africa. Table 3 Africa's Intermediate Goods Import (2000 and 20), USD (000) Africa % Share Africa % Share Africa 2,083, ,060, Rest of the World 6,8, ,06, World 8,20, ,67, Source: Author's estimation based on WITS Database, 203. To examine the need for intermediate inputs (imported) at the country level, we take the case of Kenya. In the earlier section, using revealed comparative advantage index, we identified that Kenya has the potential to further industrialise in BEC 2, 3, 5 and 7. Hence, using an Specialisation and clustering however is expected at the middle to higher end of the value chain to avoid specialisation in primary commodities (implying no progress towards industrialisation). 3 Natural resources included.

12 input output table on production for Kenya based on GTAP 8 dataset, we to analyse the use of imported intermediate inputs for industries production processes 4 (see Table 4). Table 4 Kenya Production Inputs, 2007, (USD millions). Activities (incl.cgds) Sam entry Agri Food NRGM Manuf Services Commodities total Agri Imports Food Imports NRGM Imports Manuf Imports Services Imports Agri Domestic Food Domestic NRGM Domestic Manuf Domestic Services Domestic Factors -total Land UnskLab SkLab Capital NatlRes Factors use taxes- total Land UnskLab SkLab Capital NatlRes Sales Tax Total (Gross Value of output) Source: GTAP 8 Note: Sales Tax: Is the sum of private domestic consumption tax and firms domestic purchase tax 4 The industry activity column accounts of the SAM describe the inputs used in industries production processes while the activity rows accounts show the use of inputs. 2

13 Each column in the table shows the expenditure by a particular industry in this case, agriculture, food, energy and mining (NRGM), manufacturing and services on intermediate inputs, factors inputs and taxes. The Kenyan economy (in 2007) utilised the highest inputs for production on services industries (42 per cent of total intermediate input expenditure) followed by food (23 per cent) and manufacturing (5 per cent). Service providers spend around USD 4,823 million on intermediate inputs, followed by food producers with around USD 7,956 million and manufacturers at USD 5,80 million. In terms of industries spending on imported and domestic intermediate inputs, we find that the food sector spends 84 per cent on domestic and 6 per cent on imported intermediate inputs, the agricultural sector spends 73 per cent on domestic intermediate inputs, energy and mining spends 63 per cent on imported and 37 per cent on domestic, manufacturing spends 38 per cent on imported and 62 per cent on domestic, and services industries spend 2 per cent on imported and 79 per cent on domestic. From these percentage shares, we find that imported intermediate inputs are critical in the energy and mining and the manufacturing sectors. In addition, we find that expenditure on imported intermediate inputs from the manufacturing sector is critical to all five major industry categories (57 per cent for food, 79 per cent for agriculture, 5 per cent for energy and mining, 83 per cent for manufacturing and 57 per cent for services). The services industry spends USD4,823 million on production inputs which comprise USD6,60 worth of service inputs (USD478 million imported and USD 6,22 million produced domestically), USD 2942 million of manufacturing inputs (USD 756 million imported and USD 86 million domestically produced), and USD 3999 million on food (USD 225 million imported and USD 3773 million domestic) and USD.3 million of agricultural inputs (USD.3 million imported). It is worth noting that the services industry used more imported manufactured inputs (2 per cent of total inputs to the services industry by value) than domestically produced manufactured inputs (8 per cent) 5. It is also interesting to note that Kenyan service providers used USD,527 million of factor inputs (USD3,406 for unskilled labour, USD2,357 for skilled labour and USD5,763 for capital), while paying a total of USD73 million in taxes on use of factors. However, service providers received USD2. million in subsidies (negative sales tax) to purchase additional intermediate inputs. 5 This ratio of higher imported intermediate inputs in manufacturing compared to domestic is also reflected in the other major categories of food, agriculture, energy and mining and manufacturing. 3

14 Moving one step further, we compute an input-output coefficient table (based on Table 4) for Kenya to evaluate the ratio 6 of the respective quantities of intermediate inputs and factor inputs per unit of output. In other words, the input-output coefficient table allows us to explain the intermediate input intensity of a production activity. A sector is considered intensive (using more input intermediate or factor than output) when the coefficient is the highest (see Table 5). Table 5 Hence, the Kenyan agricultural sector is intensive in imported manufacturing inputs (0.096). The food sector is intensive in domestic intermediate inputs (0.32), while the energy sector is intensive in imported intermediate inputs (0.400). The manufacturing sector is intensive in imported manufacturing inputs (0.25) relative to domestic inputs (0.76), while the services sector is intensive in domestic services inputs (0.232) compared to imported services inputs (0.08). Kenya Input-Output Coefficients, 2007, (USD millions). Activities Agri Food NRGM Manuf Services Intermediate Inputs Agric. Imports Food Imports NRGM Imports Manuf Imports Services Imports Agric. Domestic Food Domestic NRGM Domestic Manuf Domestic Services Domestic Factors Inputs Land Unskilled Labour Skilled Labour Capital Natural Resources Source: Author's estimation based on GTAP v.8.0, 203. Overall, the discussion so far has shown that Africa imports more than 80 per cent of its intermediate goods crucial for value creation in the manufacturing sector from outside Africa. Furthermore, using the input-output table to analyse the use of imported (and domestic) production inputs in Kenya (identified to be a country with potential revealed comparative advantage (world) in BEC 2, 3, 5 and 7), we find that imported intermediate 6 Calculated by dividing each spending value by total input. 4

15 inputs comprise a substantial share of the inputs used in the energy and mining sector (63 per cent imported) and manufacturing (38 per cent imported). Industrialisation and Intermediate Inputs for all countries and territories in Africa As mentioned earlier in the paper, structural adjustment encompasses that African countries move to become manufacture-based economies. Thus, in order to further validate the importance of intermediate inputs for the industrialization process and for higher value production, we expand the analysis provided for Kenya to five African regions: North, West, Central, East and South Africa (see Table 6 for results and Annex 2 for details on the countries included in the regions). The regional analyses results show that across all five African regions (including data on 6 countries and territories), services is the largest sector, utilising the highest share of imported intermediate inputs for production (52 per cent of total imported intermediate input expenditure). The services providers spend around USD 96,977 million on imported intermediate inputs. For North Africa and South Africa, manufacturing follows as the second largest sector. For the remaining three regions, energy and mining (NRGM) constitute the second largest sector in terms of utilising imported intermediate inputs. Table 6 Five African Regions, Production Inputs, 2007, (USD millions). SAM Entry Activities North Africa Agri Food NRGM Manuf Services Commodities total Agric. Imports Food. Imports NRGM. Imports Manuf. Imports Services. Imports West Africa Agri Food NRGM Manuf Services Commodities total Agri. Imports Food. Imports NRGM. Imports Manuf. Imports Services. Imports Central Africa Agri Food NRGM Manuf Services 5

16 Commodities total Agri. Imports Food. Imports NRGM. Imports Manuf. Imports Services. Imports East Africa Agri Food NRGM Manuf Services Commodities total Agri. Imports Food. Imports NRGM. Imports Manuf. Imports Services. Imports South Africa Agri Food NRGM Manuf Services Commodities total Agri. Imports Food. Imports NRGM. Imports Manuf. Imports Services. Imports Total Source: GTAP 8 and 8. (203) Furthermore, across all regions, manufacturing imported intermediate inputs constitutes the largest share (60 per cent) of total imported intermediate inputs, USD 226,87 million. For the three regions North, South and West Africa energy and mining follows as the second largest commodity group. In Central and East Africa services make out the second largest group of imported intermediate inputs. The results from the regional data suggest that imported intermediate inputs are critical in the manufacturing and energy and mining sectors. Moreover, manufacture and energy and mining imported intermediate inputs together make out 76 per cent of total imported intermediate inputs. Trade Facilitation In light of the preliminary findings that imported intermediate inputs are crucial for manufacturing production, the timely and cost-effective sourcing of intermediate inputs 6

17 between African countries (and also African countries with the rest of the world) are of utmost importance. Trade facilitation is therefore important and relevant in this context. Trade facilitation is understood as the simplification of the trade relationship between partners. 7 In the WTO, it has a more elaborate scope which focuses on the simplification and harmonisation of international trade procedures 8 (ECA et al., 200). Table 7 illustrates the key components. Table 7 Trade Facilitation (with Financing) Compliance to government rules by traders; authorities enforcement of these rules (including taxes); exchange of information; financing; insurance; ICT and legal services; transport; handling; measurement and storage. Broad Scope of Coverage Trade Facilitation Doha Negotiating Text (without Financing) Article : Publication And Availability Of Information, Article 2: Prior Publication And Consultation, Article 3: Advance Rulings, Article 4: Appeal Procedures, Article 5: Other Measures To Enhance Impartiality, Non-Discrimination And Transparency, Article 6: Fees And Charges Connected With Importation And Exportation, Article 7: Release And Clearance Of Goods, Article 8: Consularization, Article 9: Border Agency Cooperation, Article 0: Formalities Connected With Importation And Exportation, Article : Freedom Of Transit, Article 2: Transitional Provisions For Developing Country Members And Least Developed Country Members, Article 3: [Customs] Cooperation [Mechanism For [Trade Facilitation And] [[Customs][Trade]] Compliance], Article 4: Institutional Arrangements, Article 5: National Committee On Trade Facilitation, Article 6: Preamble/Cross-Cutting Matters. Responsibility REC s based/continental based. Individual Member Funding of Trade Facilitation Measures Mostly REC s based/continental based/donor Mostly individual Members based Source: Extracted from ECA et al., (200) and World Trade Organization (2009) While the main objectives of both trade facilitation pathways are to simplify trading between partners, the means to achieving the specific activities differs. In particular, there is no specific reference in the Trade Facilitation negotiating text of the WTO to financial assistance towards members taking up these new additional commitments. This is probably one reason 7 This includes compliance to government rules by traders, authorities enforcement of these rules (including taxes), the exchanges of information, financing, insurance, ICT and legal services, transport, handling, measurement and storage (ECA et al., 200). 8 This includes activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade. 7

18 why some developing countries (including African WTO members) are less supportive of the current negotiating text since any new trade facilitation commitments will imply disproportional financial costs to most African economies. Recognising the importance of trade facilitation towards Africa s access to intermediate inputs for production in higher value commodities, it is worthy to note that trade facilitation measures are costly. Hence, domestic (and international) resource mobilization is therefore important towards funding trade facilitation measures in Africa. One of the untapped domestic resources that Africa is yet to harness is international financial loss due to illicit financial flows (IFF). Mevel et al., (203) estimated that Africa lost a cumulated total of USD409 billion through illicit financial flows from trade mispricing in the period 200 to 200. About 92.5 per cent of this cumulative total IFF was due to export under-invoicing while 7.5 per cent was import- over-invoicing. The study showed that while IFF has increased over the decade studied, the last five years witnessed a significant increase in IFF totalling USD280 billion between 2006 to 200 compared to USD29 billion between 200 and 2005, attributable to the recent global increase in the values of primary commodities of which Africa exports the most and in which Africa has revealed comparative advantage 9. To put this amount of loss due to IFF (USD409 billion) into perspective, we compare this amount against the amounts on Official Development Aid (ODA) and Foreign Direct Investment (FDI) to Africa during this period (see Figure 3). Comparing years with available data ( ) on IFF, ODA and FDI flows, two key issues stands out. First, the estimated value for combined IFF, ODA and FDI flows in Africa is around USD,5.8 billion between Although the value of ODA commitment over the period dominated with 38 per cent of total, IFF followed second with 32 per cent and FDI flows at 30 per cent. Second, in the later years (2007, 2008 and 2009), the share of IFF is higher compared to ODA and FDI flows respectively. Therefore, two policy implications emerge from these trends. First, Africa needs to put in place practical policy measures to curb IFF, in order to tap into this substantial domestic financial resource loss. Second, the amount of IFF loss is so substantial, that if it was curbed, it could potentially replace ODA or FDI respectively, which is required for the transformational growth of Africa. 9 Please refer to Mevel, Ofa & Karingi (203) for details on methodology on estimating IFF and sectoral results. 8

19 Figure 3 00 Africa: IFF, ODA and FDI Flows, IFF ODA Commitment FDI Inflows (Author's estimation based on OECD, UNCTADstat, UN COMTRADE & CEPII-BACI, 203) To sum up this section, based on the continental trade in intermediate goods and the case of Kenya and other countries and territories in Africa, we find that imported intermediate inputs are crucial for manufacturing production. Therefore, the access of African countries to imported intermediate inputs is crucial and the trade facilitation measures have an important role to play to ensure timely and cost-effective access. However, trade facilitation measures are costly in the context of Africa and therefore requires concerted efforts (domestic and international) to ensure ample financial resources is available. One potential source of funding if appropriate policy measures are implemented to curb it is financial resource losses from Africa due to illicit financial flows, which is estimated to a cumulative total of USD409 billion between 200 and The role of Regional Economic Communities (RECs) in fostering a transformative regional integration and trade in Africa The RECs 20 play a crucial role in Africa s regional integration effort, despite challenges. The challenges to Africa s regional integration are well documented (see ECA et al., 200 & 202). These challenges range from energy access to security, and from infrastructure to multiple memberships in RECs. These challenges are best tackled by strengthening coordination among the RECs individual countries cannot overcome these challenges alone 20 Refers to the eight RECs recognised by the Africa Union; CEN-SAD, COMESA, EAC, ECCAS, ECOWAS, IGAD, SADC and UMA. Please refer to ECA et al., (202) for composition of membership. 9

20 (ECA et al., 202). While the African Union is coordinating progress among the RECs, the actual implementation remains the responsibility of each REC. The regional integration process is anchored on initiatives (Minimum Integration Programme MIP) that the RECs have selected 2. The key sectors that RECs have accepted as priority sectors include free movement of persons, goods, services and capital; peace and security; infrastructure and energy; agriculture; trade; industry; investment; and statistics. Nevertheless, a key challenge in relation to the implementation of the MIP is one of access to finance and funding of these initiatives by each individual REC and its respective members. In the area of investment and capital, there are specific regional agreements on investment including the COMESA Common Investment agreement (CCIA) and the SADC Investment and Finance Protocol (SIFP), while ECOWAS has no explicit agreement except for investment in energy. At the country level, several governments (8 African countries in 2009), introduced national investment-specific policy measures to attract foreign investment in air transport or banking. The progress has been hampered by countries lack of compliance with their commitments due to duplication of agreements (from multiple members). Weakness in compliance also stems partly from RECs failure to fully integrate investment provisions, treating them as add-ons (ECA et al., 202). In the area of free movement of people, significant progress has been made by several RECs, in particular the adoption of protocols on the free movement of people, labour, services, right to establishment and right to residence. Yet the process of transition to full mobility of workers among African countries remains one of the most contentious issues among African countries for reasons including security and unemployment (ECA et al., 202). For example, the freedom of movement in ECOWAS region is more advanced than in any other sub-region 22. Many other African countries still demand visas from neighbours. For example, members of COMESA and SADC impose visa requirements. One of the key challenges for free movement of labour is the fact that unemployment rates in Africa are generally high ranging from 2 to 45 per cent and in some cases as high as 70 per cent (ECA et al., 202). Therefore, some African countries are reluctant to allow in temporary unskilled labour, particularly if their own nationals are uncompetitive against temporary unskilled labourers from another country. 2 See ECA et al., (202) for detail of the initiatives for the MIP first phase ( ). 22 But only the first of three phases of the relevant protocol (visa free entry for up to 90 days) have been completely implemented in all ECOWAS countries (ECA et al., 202). 20

21 In terms of trade in goods and services, infrastructure is the main challenge towards facilitating intra-african trade. The AUC Heads of States and Government in Kampala launched the Programme for Infrastructure Development in Africa (PIDA) in July 200, which focuses on infrastructure projects in the areas of energy, transport, and ICT. The PIDA strategic framework was adopted by the Heads of States and Governments in Addis Ababa in January 202 outlining a priority action plan. 23 All RECs have infrastructure policy frameworks and in some cases these are implemented jointly with other RECs. For example, the COMESA, EAC and SADC are jointly implementing the North-South Corridor, which is a transport infrastructure and trade-facilitation initiative with the objective of harmonising regulations and transport service among the three RECs members. The major challenge for infrastructure projects of this nature is that it cuts across several countries with different rules and requirements. Also, multiple memberships create duplication in projects delaying implementation. In addition, some of these infrastructure projects require huge financial funding that most African countries and communities do not have. To sum up this section, concerted efforts have been implemented by the RECs towards a transformative regional integration and trade in Africa. However, there are challenges that hamper RECs ability to effectively play their important role in regional integration. These challenges include lack of access to finance for infrastructure projects, high costs of implementing new agreements due to multiple membership, different levels of labour skills and qualifications across the continent, thereby discouraging free movement of labourers. These challenges therefore need to be addressed thereby allowing the RECs to be effective. 6. Conclusions In this paper, we have argued that Africa s regional integration agenda needs to be transformative in order to gain buy-in and support for fast-tracking implementation at all levels. In particular, transformative regional integration should address the concerns regarding employment creation and also, promote and support resource-based industrialisation for African countries with the potential comparative advantage in each industry sector. Further, we argued that resource-based industrialisation requires both primary inputs with which Africa is naturally endowed and also intermediate inputs. However, Africa 23 Refer to ECA et al., (202) for list of priority infrastructure projects