Preliminary results on the implications of the Tripartite FTA

1. Preliminary results on the implications of the Tripartite FTA Stephen N. Karingi Chief of Trade and International Negotiations UN Economic Commission for Africa Addis Ababa, Ethiopia

2. Outline of the Presentation Background Why is Africa integration different? Basic economic structure State of play in Eastern and Southern Africa Methodology Results Concluding remarks 2

3. 1. Background • Economic and political justifications often cited for regional and multilateral integration. • Europe: Peace and stability • Africa: Ideal of Pan-Africanism • UNECA (2006) identified the main driving forces in regional integration in Africa: • Geographical proximity and contiguity • Political cooperation • Continental and global institutions (e.g. NEPAD and WTO) • The Abuja Treaty recognized five regions: • North Africa • West Africa • Central Africa • East Africa and • Southern Africa 3

4. 2. Why Africa Integration is Different? • Currently, there are 14 RECs on the Africa continent. • Of 53 Africa countries: • 27 belongs to two RECs; • 18 belongs to three RECs; • One country belongs to at least four; • Only 7 Africa countries hold membership to 1 RECs. • The multiple membership: • Constraint to economic efficiency; • Endanger collective vision of Africa Economic Community; • Fragmented economic spaces and approaches to RI; • Increased cost of membership in RECs; • Contradictory obligations/loyalties for member countries; • Inconsistent objectives & conflicting operational mandates. 4

5. 2. Why Africa Integration is Different? (Cont’d) • Membership in more than one Custom Union is technically impossible. • In addition to overlapping problem, the following points are identified as a problem in regional integration: • Lack of complementarities; • Limited market size; • Inadequate infrastructure; • Absence of a system composition for losers; • Structural constraints; • Lack of political commitments; • Lack of effective supra-national institutions. • Does this mean lack of political will? 5

6. 2. Why Africa Integration is Different? (Cont’d) • The potential gains of rationalization includes: • Efficient allocation of resources; • Increased trade between member countries and countries outside the region; • Gain in the economies of scales; • Strong negotiating positions; • Welfare gains; • Improved productivity; • Higher wage; • Policy credibility; • More efficient provision of public goods; • Fewer regional conflicts. 6

7. 3. State of Play in COMESA, EAC and SADC • COMESA has 19 member states: • 14 member states participate in COMESA FTA • 4 are members of EAC • 8 are members of SADC • Annual intra-COMESA trade grew by 20% (2000-06) • Already a customs union • EAC has 5 member states: • It’s is already a common market. • Privilege Uganda and Tanzania to get access in the Kenya market beginning to 2010 • 4 are members of COMESA • One member is part of SADC • Intra-EAC trade increased by 42% (2004 to 2007). 7

8. 3. State of Play in COMESA, EAC and SADC (cont’d…) • SADC has 15 member states: • 8 belongs to COMESA; 1 is member of EAC and 5 are members of SACU • Intra-SADC trade accounts 20% of total SADC trade. • South Africa accounts for majority of the trade flow. • This paper assumes eliminating overlapping membership will significantly improve the effectiveness and efficiency of the RECs. 8

9. 3. State of Play in COMESA, EAC and SADC (cont’d…)

10. 4. Basic Economic Structure of the three RECs • COMESA, EAC and SADC comprises nearly half of African States • Population: more than half billion (535.32 Million in 2006) • GDP per capita for COMESA-EAC-SADC: 1522 USD (2006 estimate) • Highest ($): Libya (7067) and Seychelles (7005). • Lowest ($): D.R.C. (91), Burundi (101) and Malawi (144). • On Average, between 2000-2006, (as a bloc): • COMESA GDP increased by 3.02% • EAC GDP increased by 4.61% • SADC GDP increased by 3.93% • Best performance: Angola (10.6%), Sudan (7.5%), Mozambique (7.4%)

11. 4. Basic Economic Structure of the three RECs (Cont’d…) • Agriculture contributed 23% of COMESA-EAC-SADC GDP (2001-2006) • Highly agriculture dependent economies: D.R.C., Comoros and Ethiopia (> 45 per cent) • Less dependent: Botswana, Seychelles, South Africa, and Djibouti (< 4%) • On average, industry contributed 26 per cent of COMESA-EAC-SADC GDP (2001-2006) • Highly dependent: Angola (68%) and Botswana (55%) • Least industrialized: Comoros (12%) and Ethiopia (14%) • Service contributed to 47% of GDP and grow by 4% (2000 – 2006). 11

12. 5. Methodology • Data and model • The scenarios • Descriptive results of the base year 12

13. 5.1. Data and Model • GTAP model is used to investigate the cost-benefits of establishing a Grand COMESA-EAC-SADC (CES) and Grand CES-EU FTA. • GTAP Africa database employed • A special version of GTAP 6 benchmarked to 2001 • Include 57 sectors • Cover 39 regions • Of which 30 of them Africa countries/regions • Significantly improve the coverage of Africa countries/states • Constructed by giving sufficient emphasis on RECs in Africa, which facilitated our analysis. 13

14. 5.1. Data and Model (Cont’d…) 14

15. 5.2. Scenarios • Two scenarios are constructed to simulate the possible impact of Grand CES and CES-FTA. • Scenario I: Grand CES in which all tariffs among the EAC, COMESA and SADC are removed for all traded commodities and standard GTAP closure is assumed. • Scenario II: Scenarios I but with unemployment closure. • Scenario III: Grand CES – EU FTA (unemployment closures). Under this scenario, all tariffs are removed with the exception of agricultural commodities in CES. 15

16. 6. Results – Income changes Percentage Change in GDP 16

17. 6. Results – Welfare results • Substantial welfare change is observed under the three scenarios. • For EAC: • CES-FTA 2: EV increases by 90 Million USD • CES-EU FTA: EV increases by 116 Million USD • As expected, the main gain comes from allocative efficiency and endowment effects • There is also an improvement in TOT under CES-FTA 2 • For SADC: • CES-FTA 2: EV increases by 966 Million USD • CES-EU FTA: EV increases by 2401 Million USD • Positive gain in allocative efficiency, endowment effects and TOT.

18. 6. Results – Welfare results contd… • For COMESA: • CES-FTA 2: EV decreases by 47 Million USD • CES-EU FTA: EV increases by 532 Million USD • Results indicate a likely decline in allocative efficiency under CES-FTA 2 • TOT deteriorates under CES-FTA 2 and CES-EU FTA • Positive gain allocative efficiency under CES-EU FTA. • Positive gain in endowment effect in CES-FTA 2 and CES-EU FTA • EU improves consumer welfare. 18

19. 6. Results – Sectoral VA in EAC 19

20. 6. Results – Sectoral VA in COMESA 20

21. 6. Results – Sectoral VA in SADC 21

22. 6. Results – Export view 22

23. 6. Results – Import view 23

24. 7. Concluding remarks • Overall, for the group of 26 countries, the formation of Grand CES FTA might have substantial benefits. • However, the benefit might not benefits the groups equally. • SADC appears to drive most of the benefits followed by EAC and then COMESA. • This might be partly due to the initial conditions SADC has (e.g. relatively least protected) • This imbalance suggests that as the three RECs moves towards the creation of Grand CES, they should also initiate cooperation in other areas. 24

25. 7. Concluding remarks • In other words, the CES Tripartite Framework should not only focus on the realisation of a harmonized trade regime, but should work towards measures that would address supply side constraints in each of the RECs, e.g. through joint infrastructure projects among other measures. 25