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The Tripartite Free Trade Area – towards a new African integration paradigm?

The Tripartite Free Trade Area – towards a new African integration paradigm? © Trade Law Centre for Southern Africa, Swedish International Development Cooperation Agency, 2012

i

Preface

This is tralac’s third book focusing on the Tripartite Free Trade Area (T-FTA). The two

previous books are available on the tralac website (www.tralac.org). Following an economic

assessment of the impact of T-FTA, with specific emphasis on agriculture and agri-business

development opportunities in this region, as well as non-tariff barriers that limit

intraregional trade and investment in the first book, the second book presented an analysis

of the draft T-FTA Agreement and annexes that had been developed by technical experts

prior to the launch of the negotiations. What emerges from the negotiations, which were

officially launched at the second Tripartite Summit in June 2011, and which got underway

early in 2012, may well be markedly different from these draft instruments. This third book

aims to encourage enquiry and new thinking about the African paradigm of regional

integration, specifically about the nature, design and architecture of a T-FTA to address the

region’s fundamental development challenges.

The T-FTA is anchored on three pillars, namely the traditional market integration pillar,

infrastructure development, and industrialisation. The explicit inclusion of the second and

third pillars in the ambit of a free trade area provides the potential for the development of a

deeper integration agenda that addresses not only impediments at the borders but more

fundamentally the behind-the-border constraints on industrial development and

competitiveness. Commitment to establish a T-FTA that goes beyond the traditional trade-

in-goods agenda to address the region’s infrastructure deficit and to enhance its industrial

capacity requires new thinking about traditional market integration issues such as tariff

liberalisation and rules of origin, which are among the agenda items of the first phase of the

negotiations. The T-FTA can be a new generation African integration arrangement; these

negotiations will be a test of how serious member states are about a developmental

approach to regional integration.

Trudi Hartzenberg

Executive Director, Trade Law Centre for Southern Africa

April 2012



ii

Contents

Introduction

The Tripartite Free Trade Area – towards a new African integration paradigm? Gerhard Erasmus and Trudi Hartzenberg 1

Chapter 1 Legal and institutional aspects of the Tripartite Free Trade Area:

the need for effective implementation Gerhard Erasmus 8

Chapter 2 Monetary union: the experience of the euro and the lessons to be learned

for African (SADC) monetary union Colin McCarthy 38

Chapter 3 Manufacturing and regional free trade agreements: a computer analysis

of the impacts Ron Sandrey and Hans Grinsted Jensen 70

Chapter 4 Trade facilitation in the COMESA-EAC-SADC Tripartite Free Trade Area Mark Pearson 142

Chapter 5 Integrating services into regional industrial strategies: how backbone services

sectors support development in the Tripartite member states Paul Kruger 180

Chapter 6 Two sides of the same coin: infrastructure development and regulation JB Cronjé 236

Chapter 7 Industrial development in the Tripartite Free Trade Area Sean Woolfrey 261



iii

Chapter 8 On enhancing support to existing manufactures within the Cape to Cairo

Tripartite region Taku Fundira 300

Chapter 9 Review of South Africa’s industrial policy and implications for SACU Ron Sandrey 330

Chapter 10 Trade in environmental goods in southern and eastern Africa Willemien Viljoen 352

Authors’ profiles 390

Introduction


1

Introduction


Gerhard Erasmus and Trudi Hartzenberg

The proposed Tripartite Free Trade Area (T-FTA) will establish a free trade area among the 26

member states of the three existing Regional Economic Communities (RECs) in east and southern

Africa, namely the Common Market for Eastern and Southern Africa (COMESA), the East African

Community (EAC) and the Southern African Development Community (SADC). This offers an

opportunity to take stock of how regional trade has been conducted in the context of the RECs and

to assess their legal and institutional arrangements. What lessons can be learned from the

integration efforts in the RECs of east and southern Africa?

The RECs of east and southern Africa display two general features. First, they follow a linear

approach to regional integration. The arrangements are designed by governments for the purpose of

concluding formal free trade areas and customs unions within specific time frames. In terms of

coverage they feature a strong emphasis on trade in goods. Second, their legal and institutional

frameworks are weak. Member states are not prepared to accept final and binding obligations; in

short, there is lack of serious commitment to comprehensive rules-based arrangements. The legal

and institutional architecture displays, typically, a founding legal instrument such as a treaty which

establishes the REC. A number of protocols dealing with trade in goods and related matters such as

rules of origin, standards, non-tariff barriers and basic arrangements about dispute settlement are

then added. These additional legal instruments will often address poverty reduction, development

and associated matters.

Despite the political commitment to regional integration, the achievement of consolidated free trade

areas and customs unions has largely remained an elusive goal. Brief reference here to the Southern

African Development Community (SADC) experience highlights important themes in the uninspiring

record of regional integration. The SADC FTA is still not a reality in terms of a consolidated trade

arrangement where all the member states have implemented their tariff reduction commitments

and related obligations, and the 2010 deadline for the establishment of a customs union was not

achieved.

Deficiencies in dispute settlement arrangements indicate a lack of commitment to robust rules-based

governance regimes. Recent experiences in SADC are a case in point. The SADC Tribunal came in

operation in 2005 and heard about 16 cases up till 2010. None of these cases dealt with typical trade

Introduction


2

disputes. All the matters decided by the Tribunal were either about disciplinary issues involving

officials of SADC institutions or human rights abuses complained of by citizens of Zimbabwe. The

dispute settlement arrangement is impressive in terms of the jurisdictional powers of the Tribunal

and the locus standi of parties to bring disputes. The biggest flaw is in the enforcement mechanism.

Although the decisions of the Tribunal are final and binding they cannot be enforced through a court

ruling. This is the task of the Summit, and it takes its decisions on the basis of consensus. It is no

surprise that the two decisions against the Government of Zimbabwe were not implemented. The

SADC Summit met in August 2010 to discuss these rulings but then made a decision to revisit the

jurisdictional powers of the Tribunal and to suspend its functioning till a special study had been done

and new proposals could be developed. That process is not yet concluded.

The SADC Trade Protocol also provides for a panel procedure for the resolution of intergovernmental

trade disputes. This annex to the Trade Protocol is not yet complete and there are no rules of

procedure for filing disputes. The implementation of panel decisions will also take place on the basis

of decisions by the SADC Summit, which are taken by consensus. Under SADC practice this means

that all member states, including defendants, can exercise a veto. Effective dispute resolution and

implementation of rulings require an amendment to the traditional consensus rule. The reverse

consensus provision found in the World Trade Organisation (WTO) is an example of what would be

required.

The consequence of generally weak and incomplete legal regimes of the RECs, is that obligations are

not effectively implemented. Article 3 of the SADC Trade Protocol, for example, provides for

derogations in addition to antidumping, countervailing and safeguards measures. The latter must be

based on the WTO disciplines. These trade remedy provisions have never been activated or

implemented. This does not mean that the member states of SADC have diligently adhered to the

obligations – on the contrary. Derogations are often invoked, motivated by specific protectionist

interests and revenue concerns. Collective scrutiny of unilaterally invoked derogations does not

happen.

We would like to argue that the establishment of the T-FTA provides an opportunity to appraise the

experiences of the RECs in east and southern Africa, to take lessons from regional trade

arrangements in other parts of the world, and to determine a new model for African integration. The

experience of South-East Asia, where the private sector is actively involved in shaping a regional

integration agenda that supports competitiveness enhancement and regional supply chain

development, is particularly important to review. Global trends indicate that the benefits from free

trade areas are considerably enhanced by the adoption of a deeper integration agenda. While there

Introduction


3

is undoubtedly still work to be done as regards the liberalisation of trade in goods, a deeper

integration agenda targets the key competitiveness and development challenges for these African

countries.

The private sector in east and southern Africa is not actively involved in regional integration matters.

Regional integration remains state-driven, in some cases with scant attention to the impact of

agreements on enterprises battling to source competitively priced inputs and to find skills to produce

quality products and services for consumers in markets that are difficult and costly to access.

Attempts to liberalise trade in goods are in most RECs marked by exclusions, many sensitive products

and, in some cases, rules of origin that effectively cancel any market-access opportunities and put

paid to opportunities for regional supply-chain development.

The explicit inclusion of industrialisation as the third pillar of the T-FTA is particularly important. The

Communiqué1 from the Second COMESA-EAC-SADC Tripartite Summit held in Johannesburg, South

Africa in June 2011 emphasised that member states had ‘adopted a developmental approach to the

Tripartite Integration process that will be anchored on three pillars namely; market integration based

on the Tripartite Free Trade Area; Infrastructure Development to enhance connectivity and reduce

costs of doing business, as well as Industrial Development to address the productive capacity

constraints’.

The Summit directed that a programme of work be developed for the industrialisation pillar during

the first phase of the negotiations beginning in 2012. The first COMESA-EAC-SADC Tripartite Task

Force meeting on industrial development took place in February 2012. At this meeting, the work

plan on industrial development was agreed to focus on:

• Situational analysis of industrial trends and potential. It was also agreed that a high-

level stakeholder workshop should be held.

• Regional value chain analysis specifically focusing on agro-industry, chemicals and

chemical products, and mineral processing.

This work is urgent. It should inform negotiations during the first phase where, for example, smaller

countries with small industrial sectors can identify opportunities for industrial development. A good

example is the automotive industry. Production and assembly plants are, for example, well

established in South Africa. Are there opportunities for the manufacture of automotive components

1 This Communiqué is available at www.tralac.org (Legal Resources).

Introduction


4

in some of the smaller countries to supply these established firms? What kind of tariff regime and

rules of origin will open these opportunities in the tripartite region?

It was also agreed that, during phase one, a work programme on infrastructure be developed. While

the physical infrastructure deficit undoubtedly circumscribes efficiency and competitiveness in the

region, the development of physical infrastructure has to be complemented by the development of

soft infrastructure or regulation to facilitate effective access to infrastructure services. The

development of a services agenda, encompassing regulatory reform and liberalisation, remains

elusive in this region, despite the fact that the high costs of doing business in the region are often

associated with industries such as transport and telecommunications.

The three pillars of the T-FTA provide a framework for the development of a coherent agenda for

regional integration in east and southern Africa, addressing not only market access issues, but,

crucially, also the supply-side and competitiveness challenges of the region. What are the prospects

for adopting a fresh approach and a realistic treatment of the rules-based requirements for regional

trade arrangements, under the T-FTA? Governments argue that they will lose sovereignty and they

claim that African countries do not have the required technical capacity and expertise to implement

rules-based trade arrangements.

The Tripartite FTA is not an ad hoc plan. It is linked to the implementation of an African programme

on continental integration, while being anchored in specific regional experiences. It is premised on

ideas about ‘developmental integration’, but constrained by unique national needs and agendas.

There are suggestions now to use this COMESA-EAC-SADC FTA as the core building block for

establishing a Continental FTA by 2017 and a common market by 2020.2 Does this sound like a

repetition of the approaches of yesteryear?

This raises questions about the validity of the original assumptions and the nature of the political

arguments which inspired the earlier African integration debates. Can it be assumed that African

governments still support a continental integration plan? Recent international financial and trade

crises, amongst other things, may make them look differently at the consequences when sovereign

control over exchange rates and trade policy is transferred to a supranational institutional level.

There are many reasons to believe that the bigger and very ambitious integration schemes of

yesteryear are now scrutinised in a far more sober spirit. It does appear, for example, that the

2 See the report by Sean Woolfrey in the tralac Newsletter of 2 November 2011 (www.tralac.org). This was

written as a report to the African Union (AU) Retreat on Intra-African Trade held near Addis Ababa at the end of October 2011.

Introduction


5

effective shelving of the SADC customs union reflects a more realistic perspective on this REC’s

integration ambitions.

The establishment of the T-FTA will have to accommodate separate legal and institutional

arrangements (including secretariats and regional courts) as well as national designs for

domesticating and implementing existing legal instruments on regional trade. If new T-FTA

institutions such as a secretariat and tribunal will be established, cooperation structures and

demarcation lines will require careful designs. The T-FTA Negotiating Principles state that the

negotiations shall build ‘on the acquis of the existing REC FTAs in terms of consolidating tariff

liberalisation in each REC FTA’. What exactly this means is not clear. This concept (the acquis) derives

from European Community Law where fundamentally different rules and procedures apply. The

European Commission exercises supranational powers not enjoyed by any African REC, while the

European Court of Justice has developed a jurisprudence way beyond anything imaginable in our part

of the world. It is doubtful whether ’acquis’ of any substance is to be found in local RECs. The term is

not used in any of their legal instruments. The plan is to incorporate the best practices from the

existing structures, but a separate legal arrangement for the 26 states, that will have to comply with

certain WTO rules, will have to be created.

Although the formal negotiations have just begun, there are known factors and conditions which can

be discussed. As the negotiations unfold and produce final legal instruments, the analysis can

become more focused. This first attempt is therefore, by necessity, qualified by the fact that the

actual FTA Agreement and its final annexes are still to be adopted. Detailed draft instruments (an

Agreement to establish the T-FTA and 14 Annexes) have been drafted and will be discussed. They

provide a useful context and indications of what will be on the negotiating agenda of the T-FTA.

What will the ambitious T-FTA achieve? Sound legal and institutional arrangements must be in place

in order to achieve the outcomes associated with good governance for trade. This process needs

time but should start with the right design and context while supported by political will in the

participating governments.

Transparency and respect for the rule of law are vital in order to fight other ills such as corruption. In

systems where the opposite prevails business confidence and stability will suffer. The costs will be

passed on to consumers, will result in bad governance and the waste of resources. The efforts to

alleviate poverty at home and beyond national borders will be directly undermined.

Discussion of the T-FTA has to be put into a broader context: taking into account developments in the

global economy, at the WTO and also with respect to the external preferential trade agreements. As

Introduction


6

members of the WTO, African countries are increasingly locked into the rules-based multilateral

trade system. As a result of the expiry of the Cotonou waiver, African governments have been under

pressure to negotiate Economic Partnership Agreements (EPAs) with the European Union (EU) and to

bring their trade with the EU member states in line with the applicable multilateral rules. The

disciplines of the General Agreement on Tariffs and Trade (GATT) Article XXIV therefore enter the

picture. The controversial EPA negotiations started in 2002 and were concluded in 2007, but no

African EPAs have been agreed. From an African perspective the reasons for this failure are said to be

related to the far-reaching European plans to include additional disciplines in the proposed texts.

This would amount to binding rules which African countries are not prepared to accept. The

European Commission holds that the technical capacity deficit and leadership factors have

complicated matters. New initiatives will be required to revive these negotiations. The latest

indications are that the level of ambition for the EPAs has been toned down. They will now

apparently only aim at establishing traditional FTAs for trade in goods. In the meantime the duty-free

and quota-free advantages granted to imports from African, Caribbean and Pacific countries into

Europe will come to an end by 1 January 2014 unless formal negotiations can be concluded.3

The expectation that the Doha Development Round would have resulted in easier multilateral rules

for regional integration arrangements involving developing countries has also been dashed.4 The

international economy has been affected by international crises and there have been dramatic shifts

in global economic power configurations. China, India and Brazil have become powerful players and

promote new agendas. Preferential Trade Arrangements, in Asia in particular, have gained in

importance and are now important engines of growth and facilitators of transboundary industrial

production.5

At this stage the T-FTA is very much a political construct, but the private sector, civil society and

international investors will take a keen interest in its design and its legal and institutional features.

This includes the question whether it will be a rules-based arrangement. One of the disappointments

3 See the Commission proposal of 30 September 2011, COM (2011) 598 final 2011/0260 (COD); Proposal for a

Regulation of the European Parliament and of the Council amending Annex I to Council Regulation (EC) No

1528/2007 as regards the exclusion of a number of countries from the list of regions or states which have

concluded negotiations. The Commission’s view is “‘that the current situation is not sustainable, as duty-free quota-free market access is still granted to beneficiary countries which are not taking the necessary steps towards ratification of the agreements on which this access is based, thus removing the justification for its advance provisional application. Should the countries removed from Annex I take the necessary steps towards ratification of an EPA, they would continue to benefit from the respective trade preferences and could therefore be re-instated in the Annex as soon as possible in order to provide continuity of their market access’. 4 African countries made several proposals in the context of the rules negotiations in the Doha context to

address, in particular, the substantially all trade and time frame requirements. Present indications are that the WTO Ministerial at the end of 2011 will not be able to adopt any major result. 5 See further the 2011 World Trade Report of the WTO.

Introduction


7

about existing regional trade arrangements in Africa has been the failure to monitor the

implementation of obligations and to enforce the rules. The protection of the rights of private sector

players and the availability of remedies in the case of violations of their rights may turn out to be

vital challenges for the T-FTA. These considerations have direct implications for the success of the

plans now put forward by officials and political leaders.

Gerhard Erasmus

Trudi Hartzenberg

April 2012

Chapter 1 – Legal and institutional aspects of the Tripartite Free Trade Area:

the need for effective implementation


8

Chapter 1

Legal and institutional aspects of the Tripartite Free Trade Area:


Gerhard Erasmus

1. Introduction

This chapter discusses the legal and institutional features of the proposed Tripartite Free

Trade Area (T-FTA). This arrangement will establish a Free Trade Area (FTA) among the 26

member states of the three existing Regional Economic Communities (RECs) in Southern and

Eastern Africa, namely the Common Market for Eastern and Southern Africa (COMESA), the

East African Community (EAC) and the Southern African Development Community (SADC).

On 12 June 2011 the second Tripartite Summit met in Johannesburg and adopted the

Declaration Launching the Negotiations for the Establishment of the Tripartite Free Trade

Area, the Tripartite FTA Negotiating Principles, Processes and Institutional Framework (with

the subtitle of Guidelines for Negotiating the Tripartite free Trade Area among the

Member/Partner States of COMESA, EAC and SADC), as well as a Roadmap for Establishing

the Tripartite FTA. The intention is to conclude the negotiations for the first phase (covering

trade in goods) within three years.1

This is an ambitious plan. These regions have a combined estimated population of

590 million with a gross domestic product of $1 trillion a year. The new T-FTA agreement

focuses on speeding up market integration, industrialisation and infrastructure

development. The latter two aspects are emphasised as particularly important in the light of

contemporary challenges2 but conceptually this endeavour seems to be based on a long-

standing African approach to conclude agreements on market access for goods, while

neglecting the implementation of rules.

1 A roadmap and a matrix of planned activities were adopted on 12 June 2011 during the second Tripartite

Summit in Johannesburg. In December 2011 a three-day COMESA-EAC-SADC meeting convened in Nairobi to discuss plans for establishing rules of procedure that will guide the process of establishing the free trade zone over the next 24– 36 months. Preliminary talks commenced in 2012. 2 See e.g. the interview with Sindiso Ngwenya, Secretary-General of COMESA (Langeni, 2011): ‘IDC must act for

three African regional bodies: Call for SA’s Industrial Development Corporation to be made a “common tripartite institution” to accelerate large-scale industrial projects in 27 African countries’.




9

Regional integration has been a key element in postcolonial efforts to develop African

economies and to integrate them into the global landscape. Most African domestic markets

are small, often landlocked and poorly endowed with natural resources. Colonial legacies

have created a fragmented continent. Since the 1960s there has been a continuous

emphasis on regional integration, political solidarity and self-reliance as the answer to the

continent’s economic woes. In pursuit of these ideals the RECs have adopted detailed

integration programmes and some progress has been made in terms of establishing formal

arrangements and adopting intergovernmental agreements.

The ‘linear’ approach to regional integration (forming treaty-based FTAs which are upgraded

to customs unions, common markets and even monetary unions within predetermined time

frames) is the preferred modus operandi and is deceptively ‘successful’. It generates formal

results such as regional secretariats, detailed legal instruments and officially specified

targets. The achievement of the latter is often announced at summits of heads of state and

government - while the member states are still at different levels of compliance. When

measured in terms of growth in trade, poverty alleviation and the establishment of effective

structures of collective governance the results have, however, been rather modest.3

This top-down approach to regional integration fails to prioritise appropriate solutions for

the causes which, in the first place, prevent intraregional trade from increasing (McCarthy,

2010). The result is wrong policy choices, neglect of institutional and governance aspects;

while domestic capacity remains weak. Services are not treated as an essential part of the

overall package.

Each next step in the linear process brings additional and costly burdens. Moving from an

FTA to a customs union requires joint policies on tariffs, the harmonisation of domestic legal

instruments, collective governance as well as institutions to manage the common external

tariff. This is difficult and costly, especially under conditions where some governments still

rely on customs revenue. It is not surprising that ‘lack of capacity’ and sensitive national

interests are frequently invoked as justifications for derogations from legal obligations.

3 The 2011 World Trade Report of the WTO contains an in-depth discussion of contemporary preferential trade

arrangements and the worldwide trends they represent. Although sympathetic to the African endeavours, it concludes that ’Africa’s regional integration initiatives have achieved limited results, raising doubts about the approach adopted to addressing factors that inhibit regional trade’ (WTO, 2011:152).




10

This does not mean that efforts at regional integration should be abandoned. The reasons

why the successful implementation of FTAs among African countries is held back, need to be

analysed. Appropriate responses should then be designed and implemented. This has to

happen with regard to all the known impediments: supply-side constraints, infrastructural

bottlenecks, technical capacity constraints, implementation of agreements, monitoring,

compliance with standards, and so forth. Trade facilitation (an umbrella term for actions

taken by governments to enable international trade to function smoothly and bring down

the cost of doing business) is vital,4 as is better domestic and regional governance; and the

implementation of legal arrangements should be improved.

Successful regional trade arrangements are, in the words of the 2011 World Trade

Organisation (WTO) World Trade Report, ‘not only about lowering tariffs. Ample evidence

shows that commitments in PTAs [Preferential Trade Agreements] cover a large number of

non-tariff policy areas and have become deeper’ (McCarthy, 2010: 153). The private sector

plays a crucial role in successful regional integration arrangements: as investors,

industrialists and in building cross-border supply chains and networks. Governments can

assist their efforts by facilitating trade through effective border procedures, harmonising

national laws, ensuring transparency and access to reliable information implementing

obligations and providing for legal remedies. Most of these matters fall under the general

rubric of ‘trade facilitation’.

Escape from the cycle of poverty, while utilising regional integration as part of the effort, is

not easy. It requires deliberate efforts by governments to enhance the ‘rules-based’ quality

of trade arrangements. The successes elsewhere show that, in addition to policy reforms,

suitable legal and institutional elements must be built into Regional Trade Arrangements

(RTAs). ’Among the factors relevant to Africa are integration of services markets, trade

facilitation, improved market intelligence, dispute settlement mechanisms, revenue systems

less dependent on trade taxes, funding for cross-border infrastructure, and financing for

regional institutions (Idem.: 152)’.

4 The World Bank (2012) provides ample data on wastage and arguments why trade facilitation needs urgent

attention.




11

When measured against these benchmarks most African RTAs display, in addition to policy

and governance failings, several legal and institutional deficits. This undermines the efforts

to achieve the objectives for which they have been created. Regional agreements are too

ambiguous, institutions lack effective powers, and linkages with domestic laws and national

structures are inadequate. As a general observation it can be said that the ‘rules-based’

dimension of RTAs in Africa is inadequate. The integration effort is bedevilled by technical

complications such as overlapping membership in RTAs (which in itself is a manifestation of a

broader institutional defect) and a failure to consolidate arrangements which exist on paper.

These flaws hamper effective market integration and efforts to attract investment.

Formal trade arrangements are not an end in themselves. They have to serve a particular

purpose and ensure specific outcomes. That is why legal instruments need careful drafting.

The new Free Trade Area must pursue a particular logic: to promote the free and effective

movement of goods and associated services across borders, to facilitate procedures which

accommodate private-sector needs, and to incorporate a comprehensive plan for trade and

development. And the applicable multilateral rules must be complied with while

implementing these measures.

The approach adopted here calls for a proviso. It entails a discussion of several draft legal

instruments, prepared prior to the official launch of the negotiating process. These draft

texts can obviously be altered as official negotiations get underway. However, the debate

has to start with the proposals developed to engage the task at hand. The draft instruments

are about the formation of an FTA to accommodate specific nations and their needs. This

requires solutions for particular problems, such as the blending of three existing RECs into a

new FTA and solving the problem of overlapping membership. At this stage the official view

is that the existing RECs will continue to function and that only the member states will be the

parties to the T-FTA. This factor is of major significance. The T- FTA is not only another

African trading bloc; it also has to improve and adjust existing RECs.

This chapter will, in addition, justify its emphasis on rules and institutions and will refer to

the negotiating process, the linkages with existing regional trade arrangements and the

applicable multilateral rules.




12

There is a broader context too. The T-FTA is not proposed as an ad hoc plan. It is linked to

the implementation of an African programme on continental integration. There are even

suggestions now to utilise this COMESA-EAC-SADC FTA as the core building block for

establishing an African-wide FTA. A brief discussion of the continental context is provided in

order to picture the scale of things, to warn against overambitious plans and to introduce

the expectations about future developments.

2. What does the Tripartite FTA want to achieve and how?

The general objectives of the Tripartite Free Trade Area are to promote the social and

economic development of the region, to create a large single market with free movement of

goods and services and business persons, and eventually to establish a customs union. It also

wants to resolve the challenges of multiple memberships and expedite the regional and

continental integration processes, while promoting close cooperation in all sectors of

economic and social activity among the Tripartite member states. In order to realise these

objectives Tripartite member states shall (Draft Agreement, Article 3):

1. eliminate all tariffs and non-tariff barriers to trade in goods;

2. liberalise trade in services and facilitate cross-border investment and movement of

businesspersons ;

3. harmonise customs procedures and trade facilitation measures;

4. enhance cooperation in infrastructure development;

5. establish and promote cooperation in all trade-related areas among Tripartite member

states;

6. establish and maintain an institutional framework for implementation and administration of

the Tripartite Free Trade Area and eventually a customs union;

7. build competitiveness at the regional, industry and enterprise level in order to promote

beneficial utilisation of regional and global market and investment opportunities and

beneficial participation in globalisation;

8. adopt and implement policies in all sectors of economic and social life that promote and

consolidate an equitable society and social justice; and




13

9. undertake cooperation in other areas to advance the objectives of this agreement (Draft

Agreement, Article 4).

Article 2 of the Draft Agreement provides for the establishment of a Free Trade Area among

the member states of COMESA, EAC SADC. It is, however, not expressly stated that the T-FTA

will have a separate legal status of its own, as is the case with regard to the three RECs. This

aspect should be clarified; the implied intention is that it will be an international

organisation and a subject of international law in its own right. The parties to this Agreement

will be the member states of the three RECs, not the RECs to which they presently belong.

The T-FTA will be a new FTA, not an FTA of existing RTAs. And it will have to be notified to

the WTO, since practically all its member states are WTO members.

The process to establish the T-FTA kicked off when a Tripartite Summit of the heads of state

of COMESA, EAC and SADC held in Kampala in October 2008 recommended the

harmonisation and rationalisation of the activities of the three regional economic

communities and the creation of a Free Trade Area. COMESA is the largest of the three

groupings and comprises 19 countries in Eastern and Southern Africa. SADC brings together

14 member states5 in Southern Africa. The EAC – comprising Uganda, Kenya, Tanzania,

Rwanda and Burundi6 – has seen some important achievements in terms of deeper

integration among its members. However, the three RECs have been moving at different

paces on their integration agendas. The harmonisation of all their legal and institutional

aspects will bring a number of benefits, including a much larger market, the sheer size of

which makes it viable for manufacturers and other producers to be competitive. They will be

able to capitalise on economies of scale and opportunities for cooperation across the bigger

regional market.

The challenges to the growth of intraregional trade are well documented. Dependence on

primary commodity production, limited industrial development and diversification, poor

infrastructure and the lack of effective trade facilitation within the region are part of the

explanation. The private sector can have considerable influence in addressing these

challenges. For example, it can increase investment in new areas to reduce the dependence

5 The membership of Madagascar is presently suspended; after a coup took place there two years ago.

6 It has been reported that South Sudan will also join the EAC.




14

on similar primary products, it can also lobby and advocate for viable infrastructure projects;

it can lobby governments for harmonisation of macroeconomic policies with governments

within the region, and identify specific trade facilitation bottlenecks.

One of the problems facing the member states in their pursuit of deeper integration is that

of multiple and overlapping memberships, where one country belongs to more than one

REC. This is one of the key considerations in seeking to harmonise their policies and

programmes and to establish one FTA. Overlapping membership results in multiple financial

obligations, varying trade regimes, duplication of standards, waste of resources, the

difficulty of belonging to two customs unions, and so forth. Overlapping membership also

has serious implications for the private sector by complicating business transactions and

raising the cost of doing business. For example, the business community has to contend with

different trade regimes, including varying tariff levels, rules of origin and technical standards.

The realisation of the benefits associated with the T-FTA is constrained by a number of

factors. They include (i) disparities in economic development, (ii) the high dependence of

several governments in the three RECs on trade taxes, (iii) challenges associated with rules

of origin, such as how to harmonise the three sets of rules of origin into one, how to simplify

the new rules of origin and make them predictable and open to uniform interpretation, how

to deal with the ‘sufficiently worked’ SADC product-specific rules of origin, which would

need to undergo substantial transformation, the application of the rules on ‘goods of

particular economic importance’ under COMESA since this rule is substantially different from

those applied in the EAC, etc., (iv) institutional challenges, including how to deal with the

current configurations since the three RECs are all legal entities with specific legal regimes;

and (vi) the role of the Southern African Customs Union (SACU) – the oldest trade bloc in the

region – which not only has the strongest economy in Africa (South Africa) but also has taken

a number of significant steps towards deepening its integration agenda. South Africa may be

opposed to measures towards harmonisation of SADC and SACU, let alone with COMESA and

the EAC; (vii) the EPA negotiations with the European Union (EU) which are made more

complicated by the absence of a common trade policy in the region, and (viii) the South

Africa-EU Trade, Development and Cooperation Agreement with the EU. This agreement is

an FTA in its own right and guarantees market access into Europe for South African goods.

This raises the issue of the legal basis in terms of which the other T-FTA countries will trade




15

with the EU. Present indications are that the Economic Partnership Agreements (EPAs) are

making little headway, although they are still on the agenda in the EAC, SADC and the

Eastern and Southern African (ESA) configurations.7

The creation of this FTA is generally viewed as a welcome proposition. The private sector is

an important stakeholder and should support this initiative, by following, engaging and

influencing the negotiations to establish the Tripartite FTA. The task at hand is too important

to leave to technocrats and government officials only.

3. The Tripartite FTA and continental integration

If the legal and institutional aspects of the T-FTA are properly designed and implemented

there could be a major improvement in how and how much African nations trade with each

other. This will require a fresh approach, not a repetition of what is usually done in the RECs.

Will this happen? In the Preamble of the Draft Agreement Establishing the COMESA, EAC

and SADC Tripartite Free Trade Area (hereinafter referred to as the Draft Agreement8) the

establishment of the T-FTA is linked to the larger ideal of ‘continental integration’. The states

involved are committed ’to championing and expediting the continental integration process

under the Treaty establishing the African Economic Community and the Constitutive Act of

the African Union through regional initiatives...’

What is this continental integration process about? How will the T-FTA fit into and advance

this scheme? Does continental integration entail a fixed formula or is there scope for fresh

approaches? Africa purports to have a political template for a continent-wide process of

economic integration. The Treaty Establishing the African Economic Community adopted in

Abuja, Nigeria in 1991 is a detailed document of 106 articles with a strong emphasis on

political ambition but weak on enforceability. It has been in force since 1994 but its final

implementation is still to be achieved.

The basic objective behind the Abuja Treaty is to enhance economic, social and cultural

development and to promote the integration of African economies in order to increase self-

reliance and promote development. This aim requires the ‘strengthening of existing regional

7 It has been reported that all four African partners to the Interim ESA-EPA (Madagascar, Mauritius, Seychelles

and Zimbabwe) ratified their agreement with the EU in February 2012. 8 The text used here is identified as the Revised December 2010 edition. Other drafts were earlier circulated.




16

economic communities and the establishment of other communities where they do not

exist...’ The African Economic Community (AEC) is to be established through a gradual

process consisting of six stages of ‘variable duration’ over a transitional period not exceeding

34 years. At each such stage specific activities are to be undertaken and goals have to be

implemented concurrently (Abuja Treaty, Article 4).

Things did not work out as planned. Article 4 of the Abuja Treaty foresaw a gradual

’conclusion of agreements aimed at harmonizing and coordinating policies among existing

and future sub-regional and regional economic communities’. The applicable obligations had

to be complied with by the states involved as being the parties to this Treaty. This did not

happen, at least not in terms of the formal agreements mentioned in this provision. And no

‘subregional’ RECs were established despite the fact that the Treaty provides as such.9 The

biggest problems are unconsolidated FTAs or customs unions and overlapping membership.

Over time the approach to continental integration started to change. In 2007 the Protocol on

Relations between the African Union and the Regional Economic Communities was adopted.

The parties hereto are not states, but the African Union and the Regional Economic

Communities. It is not quite clear whether all the RECs (such as SADC) have the legal power

to conclude this type of Protocol and execute the obligations provided for.10 The Economic

Community of West African States (ECOWAS), COMESA, the Economic Community of Central

African States (ECCAS), SADC, the Intergovernmental Authority for Development (IGAD),

Arab Maghreb Union (UMA), the Community of Sahelo-Saharan States (CEN-SAD), and the

EAC are, together with the African Union (AU), listed as the parties to this Protocol. RECs

which are not party to this Protocol on the date of its entry into force may accede to it

(Article 33(3)).

The RECs are the AEC building blocks but because they are at different levels of

consolidation and integration they face difficulties in advancing the bigger construct in a

coordinated and meaningful manner. They face unique challenges and are formed by

different historical conditions. As a result they have pursued their own separate agendas for

9 SACU, which was formed in 1910, is now recognised as a subregional REC, but it predates the adoption of the

Abuja Treaty by many decades. 10

In terms of Article 5 of this Protocol, REC must implement the Protocol and align its own policies, programmes and strategies with those of the AU.




17

deeper integration. Some have evolved into more refined arrangements.11 In other instances

deeper integration plans had to be postponed or even shelved.12 In some cases lofty

ambitions have met with practical and political obstacles, as the plans for monetary union

have demonstrated.

The technical aspects regarding the implementation of the Abuja formula require the

transformation of these individual RTAs into a continental rules-based scheme for free trade.

The idea is not to unscramble the omelette; existing structures have to be moulded into a

new and bigger construct. This will amount to a complicated exercise and careful answers to

technical and political issues, while accommodating vested interests. The AEC will also have

to comply with the applicable WTO rules.

The Abuja plan proposes a particular sequence; no ‘jumping the queue’. Article 6(4) notes:

‘The transition from one stage to another shall be determined when the specific objectives

set in this Treaty or pronounced by the Assembly for a particular stage, are implemented

and all commitments fulfilled’. This modus operandi has proved impossible to adhere to.

There is the additional danger of tampering with existing arrangements which might, in

some instances, be working quite well. New and appropriate roles will have to be found for

those regional institutions which have been around for some time. This might not always be

easy since they have developed their own ‘culture’ and style of over time.

There are important differences between a procedure where new members accede to an

existing organisation (which happens, for example, with the expansion of the EU or when

states accede to the WTO) and the method proposed by the Abuja Treaty. The latter involves

the marrying of existing organisations into a new entity. It is not a matter only of 26

countries negotiating new tariff schedules and identifying sensitive products de novo. Legal

arrangements about these aspects have already been worked out in the existing RECs to

which they belong. This factor is multiplied by the number of RECs involved in the blending

exercise.

11

This happened in the EAC, which is formally a customs union and has only five members. South Sudan will apparently join as the sixth

member.

12 SADC had decided to become a customs union by 2010. This decision has been shelved; it is still not a fully

consolidated FTA.




18

The Abuja Treaty proposes an incremental expansion process. Implementation of the actual

plan, once agreed, will involve a phased approach and the monitoring of each such phase.

How and by whom this will be done is not entirely clear. There will be difficulties with regard

to sequencing and coordination but the requirement that all legal obligations have to be

fulfilled on the REC level before the AEC can be established, makes sense. This is essentially

an incremental approach which, if properly adhered to, will promote the consolidation of

the AEC. In some ways this approach could be easier than a single ‘big bang’ event where the

needs of 26 states have to be accommodated in one negotiating exercise. To what extent

this requirement (full compliance with obligations before proceeding to the next phase) will

in fact be honoured as part of the T-FTA exercise, has to be seen. The Abuja process faces an

important institutional deficit; the AU does not have the powers and institutions to enforce

its own formula.

There may be benefits in the gradual enhancement of consolidation. The incremental

approach recognises historical and political realities. The gradual construction could allow

for ‘learning by doing’, and perhaps a tidier and more logical construction of the AEC. Since

regional integration in Africa is fraught with problems of overlapping membership, an

amalgamation of existing RECs may offer an opportunity to deal with a vexing issue. That will

require a clear and specific design and coordinated efforts. The evidence that this is

happening is scant. For two decades now the implementation of the Abuja recipe saw little

concrete implementation.

The world and Africa have also changed. The rules-based approach to trade embodied in the

WTO agreements has become reality, while there have been structural changes in the global

economy – resulting in African economic growth being largely dependent on commodity

exports to the emerging economies. The nonreciprocal trade preferences in EU markets

provided for by the Cotonou Agreement expired in December 2007. WTO-compatible trade

arrangements with the EU have proved to be elusive, causing controversies around the EPA

negotiations. The Doha Round of trade negotiations has come and gone, while the world has

lived through an economic crisis and is facing a financial one.

Issues of sovereignty have surfaced. The Abuja Treaty is an ambitious project. Its subsequent

implications for the sovereignty of states and the costs of implementation were not




19

sufficiently clear at the time it was adopted. The understanding that regional trade

arrangements have to be rules-based came later.

The African integration focus has shifted to the REC level, for reasons of scale and

practicability, but the challenges faced by governments have become clearer. REC members

discovered that compliance with supranational rules on trade can be daunting. To enforce

the same rules on the whole continent is beyond existing capacities and political realism.

This insight became more acute as new problems involving ‘failed states’ started to emerge.

In such cases the writ of the government does not run over the land or at border posts.

The Abuja condition of all commitments being fulfilled before the next stage could be

undertaken remained elusive, necessitating an adjustment to the Abuja process itself. In

light of the factors mentioned above an objective appraisal of the original plan should have

been undertaken. This did not/will not happen in any explicit manner because it may

undermine the legitimacy of the original pan-African credo and homage to solidarity. While

political leaders therefore continue to defer to the Abuja ideal, the reality on the ground

requires caution. The opportunity for rescuing aspects of the Abuja process now seems to

have arrived in the form of the Tripartite FTA, at least insofar as three of the RECs have

launched a plan to form a joint FTA between their members. If it works there will be

progress of a kind.

Recent AU meetings have started to forge political and institutional links between the two

agendas. In early November 2011 the AU convened a Retreat on Intra-African Trade. This

event formed part of a series of activities taking place in preparation for the January 2012

AU Summit of Heads of State and Government which will focus on promoting intra-African

trade. A major purpose of the retreat was to devise a roadmap for fast-tracking the

establishment of a pan-African free trade area as part of a process towards realising the

integration goals of the Abuja Treaty and establishing the AEC (Woolfrey, 2011). 13

It has been proposed that the Tripartite COMESA-EAC-SADC FTA could serve as the core

building block for this process, with a proposed second tripartite FTA (consisting of the other

RECs and to be established by 2015), or simply the other RECs and/or individual countries

13

Sean Woolfrey attended this retreat.




20

themselves concluding negotiations with the COMESA-EAC-SADC FTA by 2016, thereby

paving the way for the establishment of a Continental FTA by 2017 and a common market by

2020.

A number of specific issues were earmarked for special attention in order to complement

trade-boosting efforts under the Continental FTA process: Enhancing cooperation between

RECs, national governments and private sector representatives in terms of the development

of national and regional trade and industrial policies; the reduction of transit times for

moving goods through major trade routes (through, for example, the elimination or

reduction of road blocks and the simplification and harmonisation of customs procedures);

the facilitation of the movement of business persons across borders in the region; the

prioritisation of the implementation of the Accelerated Industrial Development of Africa

strategy; and the prioritisation of the implementation of the Programme for Infrastructure

Development (Woolfrey, 2011).

This level of ambition sounds disturbingly familiar. The Abuja and T-FTA agendas differ in

terms of scope, time frames and technical reach, while the membership configurations are

unique. Different dynamics are involved. At this early stage in the life of the T-FTA it is

unrealistic to forge such detailed links between the two concepts. It may also be unwise to

overburden the T-FTA with lofty aspirations about continental schemes before its final

instruments have been concluded and have entered into force. It is not yet known how

many members of the three RECs will in fact become part of the new T-FTA.

The Abuja Treaty needs a platform in order to stay alive. Once the T-FTA has been

established and starts to function there will be a better understanding about how it could

promote the Abuja agenda in a practical manner.

4. Contemporary developments on regional integration

RTAs have grown in importance as vehicles for promoting trade among nations. The 2011

World Trade Report of the WTO provides a useful analysis of the latest trends as well as how

these arrangements could be complementing the multilateral trade system. Although Asian




21

countries have become the most active in signing new preferential trade agreements14 they

are equally popular in Latin America, Africa and elsewhere.

When 26 African governments decide to form a new FTA which will reach from Cape to Cairo

and will link three existing RECs together, it constitutes a major initiative in which African

and international investors and traders should take a keen interest. Has the most suitable

modus operandi been adopted? What lessons can be learned from experiences elsewhere?

The main findings in the world Trade Report are mentioned here because they sketch a

useful background and serve as a reminder of the need to adopt the right ‘philosophy’. The

role of the private sector in driving the underlying agenda is crucial.

One of the most significant findings in the 2011 World Trade Report is that preferential

agreements are evolving towards deeper integration arrangements that go beyond tariffs;

they increasingly include domestic policies such as regulations on services and investment,

intellectual property and competition policy. The Report calls these arrangements ‘deep

PTAs’. These trends are the result of changes in the world economy such as the growth of

global production networks, in Asia in particular. This development requires better

interstate cooperation, regulation and supervision in a range of areas, including services,

standards and intellectual property. Deeper PTAs provide the means for addressing these

needs.

Preferential trade arrangements always face the complications of rules of origin and how

authorities determine where a product originates, and therefore whether it is eligible for

preferential treatment. The costs that companies face in meeting these requirements can be

higher than the benefit they receive from the lower tariffs. The World Trade Report further

shows that preferential margins (the difference between the basic non-preferential (Most

Favoured Nation) rate and the PTA rate) are generally low. States are entering into

preferential trade agreements in order to reap other benefits in areas such as services,

investment, intellectual property protection, and competition policy. These policy areas

involve domestic regulations and behind-the-border measures.

14 They have been party to almost half the PTAs concluded in the last 10 years. This has contributed to the increased concentration of trade within this region, second only to Europe in 2009.




22

African RTAs have traditionally focused on market access for goods and the T-FTA will start

with the same approach and with promises that services will follow. Services have not

figured prominently in African RECs and this aspect needs serious attention in future T-FTA

negotiations. This is probably the most important aspect to consider now: is the T-FTA scope

about what it wants to produce sufficiently broad and correctly focused? In the words of the

2011 World Trade Report (WTO, 2011):

Expanding market access by lowering the transaction costs of trade is necessary, but will

not guarantee economic growth and development. Enhanced market access without the

capacity to produce goods and services to benefit from those opportunities will fail to

produce higher economic growth. Effective supply-side capacity depends on sound

macroeconomic and microeconomic policies, good governance, well developed institutional

capacities, adequate infrastructure and a sound business environment capable of attracting

investment. Supply-side constraints to efficient production could be partly addressed by a

deep regional integration agenda. No single, ready-made recipe exists for effective deep

regional integration.

One of the other important lessons to be learned from the new generation of PTAs is that

they are ‘bottom-up’ initiatives. Intergovernmental arrangements, governmental policies

and regulations are adopted in order to facilitate the needs of private enterprise and to

promote competitive production networks across borders. The African RECs as well as the T-

FTA are very linear in approach and are state driven. The Johannesburg Declaration

Launching the Negotiations for the Establishment of the Tripartite Free Trade Area adopts a

‘developmental integration approach built on three pillars of industrial development,

infrastructure development and market integration’, but which will apparently be state

driven. It notes that ‘the negotiations shall be Regional Economic Community and/or

Member and Partner State driven and shall be in two phases’. The private sector is not

expressly mentioned, at least not in terms of the launching documents adopted in June

2011.

There are insufficient indications that the T-FTA constitutes a fresh approach. Hopefully the

unfolding negotiating process will generate new insights.




23

5. The multilateral rules for FTAs

The surge in RTAs has continued unabated since the early 1990s. According to WTO website

sources, as of 15 November 2011, some 505 RTAs, counting goods and services notifications

separately, have been notified to the General Agreement on Tariffs and Trade (GATT)/WTO.

Of these, 367 RTAs were notified under Article XXIV of the GATT 1947 or GATT 1994; 36

under the Enabling Clause; and 102 under Article V of the General Agreement on Trade in

Services (GATS). At that same date, 313 agreements were in force. Of these RTAs, Free Trade

Agreements and partial scope agreements account for 90%, while customs unions account

for 10%.

Regionalism is described in the Dictionary of Trade Policy Terms as ‘actions by governments

to liberalize or facilitate trade on a regional basis, sometimes through free-trade areas or

customs unions’. In the WTO context, RTAs have a more specific meaning. WTO provisions

relate specifically to conditions of preferential trade liberalisation with which RTAs have to

be comply.

When a WTO member enters into a regional integration arrangement through which it

grants more favourable conditions to its trade with other parties to that arrangement than

to other WTO members’ trade, it departs from the MFN rule, the guiding principle of non-

discrimination defined in Article I of GATT, Article II of GATS, and elsewhere in the WTO

agreements. WTO members are, however, permitted to enter into such arrangements under

specific conditions which are spelled out in three sets of rules: Paragraphs 4 to 10 of Article

XXIV of GATT (as clarified in the Understanding on the Interpretation of Article XXIV of the

GATT 1994) provide for the formation and operation of customs unions and free trade areas

covering trade in goods; the Enabling Clause (the 1979 Decision on Differential and More

Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries) refers to

preferential trade arrangements in trade in goods between developing country members.

Article V of GATS governs the conclusion of RTAs in the area of trade in services, for both

developed and developing countries. Other non-generalised preferential schemes, for

example nonreciprocal preferential agreements involving developing and developed




24

countries, require members to seek a waiver from WTO rules. Such waivers require the

approval of three-quarters of WTO members.15

Regional trade arrangements and interim agreements to conclude them have to be notified

to the WTO. Notifications are now reviewed under the transparency mechanism for regional

trade agreements but WTO members do not agree on the procedures and the duties of

developing countries. This matter is currently under discussion.

The WTO website notes that on 4 February 2011 the Negotiating Group on Rules started its

review of the WTO transparency mechanism for regional trade agreements by considering

two proposals: one from the United States for the consideration of all RTAs in a single WTO

Committee, and one from Ecuador for procedural adjustments to the mechanism. The

United States cited the problem of disagreement between some members over the forum in

which some RTAs should be considered under the transparency mechanism and instances of

‘dual notifications’. To resolve this problem, it called for the implementation of the

transparency mechanism to be entrusted to the Committee on Regional Trade Agreements,

without prejudice to members' rights. Under the provisional transparency mechanism, the

Committee on Regional Trade Agreements reviews RTAs falling under Article XXIV of GATT

and Article V of GATS. The Committee on Trade and Development reviews RTAs falling under

the Enabling Clause (trade arrangements between developing countries).

Ecuador proposed a number of procedural adjustments; communications to the WTO about

an RTA should take the form of joint notes signed by all parties to that RTA. Egypt, Argentina,

China, Bolivia and Brazil stated that the role of the Committee on Trade and Development

would be undermined if the consideration of RTAs between developing countries would be

moved to the Committee on RTAs. Regarding systemic issues related to RTAs, Bolivia tabled

a proposal to amend the main RTA provision of GATT 1994 Article XXIV, to include wording

on special and differential treatment for developing countries contained in Article V of GATS.

It states that in RTAs involving developed and developing countries, the principle of less-

than-full-reciprocity and longer implementation periods should be accorded to developing

countries.

15

This background information derives from the WTO website: www.wto.org.




25

Another challenge, and one which is of specific concern to African nations, derives from the

failure of the Doha Development Round. African governments had high hopes that pro-

development results would have been agreed. Present indications are that this will not

happen. These governments inter alia proposed more flexible rules for regional trade

arrangements but none materialised.

The Doha Declaration mandated negotiations aimed at, amongst other things, ’clarifying and

improving disciplines and procedures under the existing WTO provisions applying to regional

trade agreements. The negotiations shall take into account the developmental aspects of

regional trade agreements’. The original deadline of 1 January 2005 was missed.

Arrangements such as the T-FTA will therefore have to comply with the existing WTO rules

on RTAs, both in terms of substantive compliance and notification. No decision has yet been

taken as to whether T-FTA notification will be under the Enabling Clause or under GATT

Article XXIV. Some of the RECs (e.g. SADC) have been notified under GATT Article XXIV.

6. Negotiating the Tripartite FTA: process and parties

The Abuja Treaty entered into force in 1991 but it took several years before regional political

and economic conditions made it possible to convene what became known as the first

Tripartite Summit, involving only COMESA, the EAC and SADC. Cooperation between existing

RECs had not always been easy. Francis Mangeni (2011) has written up this history and

mentions the COMESA Summit of 2001 as a turning point. At that occasion a decision was

taken that, since sufficient collaboration between COMESA and SADC had been achieved, a

joint Task Force could be established (at secretariat level) to prepare a framework for formal

cooperation between them. When the EAC became a customs union 2005 it joined this

effort (Ibid.: 26).

On 22 October 2008 the first Summit on the T-FTA met in Kampala, Uganda. It was then

decided to commission a study on the process and the format of the new arrangement. The

outcome of the study was found to be lacking in certain parts. The ad hoc Tripartite Task

Force of the three Secretariats then instructed some of their own officials to prepare new

draft instruments and an explanatory report (Ibid.).




26

On 12 June 2011 the Heads of States and Governments of COMESA, the EAC and SADC met

in Johannesburg and adopted a formal Declaration Launching the Negotiations for the

Establishment of the Tripartite Free Trade Area and the Tripartite Principles, Processes and

Institutional Framework. This Summit established a formal mandate for moving the

negotiating process forward and, in the words of the declaration, ’to expeditiously establish

a Tripartite Free Trade Area... in order to ensure integration…into a larger integrated

market...’

The Declaration contains the following decisions:

1. Adopt a developmental integration approach built on three pillars of industrial

development, infrastructure development and market integration;

2. Direct that a programme of work be prepared on the industrial development pillar;

3. Note progress made, and encourage further work, on the programmes on the

infrastructure pillar;

4. Launch negotiations for the establishment for a Tripartite Free Trade Area open to

participation by all Regional Economic Communities and/or Member and Partner States

on the market integration pillar;

5. Note that the negotiations shall be Regional Economic Community and/or Member and

Partner State driven and shall be in two phases.

a. The first phase will be for negotiations on trade in goods. Movement of business

persons will also be negotiated during the first phase through a separate tract in a

committee to be established by the Tripartite Sectoral Ministerial Committee.

b. The second phase will cover the built-in agenda on services and trade related areas.

6. Agree on the principles for negotiations; a road map providing the timelines for key

activities relating to the negotiations and their conclusion; and the implementation of

the outcomes as well as the institutional framework for the negotiations.




27

The Summit also adopted Annex I, an important set of Negotiating Principles, Processes and

Institutional Frameworks, indicating how negotiations will be conducted, what rules will

apply and what outcomes are expected:

1. Introduction

1.1.1 The first Tripartite Summit, held on 22 October, 2008 in Kampala, Uganda, approved the

expeditious establishment of a Free Trade Area (FTA), encompassing the

Member/Partner states of the three Regional Economic Communities (RECs).

1.1.2 It is envisaged that the 26 countries will engage in the negotiations for the

establishment of a Tripartite FTA, recognizing that substantial progress on trade

liberalization has been achieved within the three RECs. The establishment of the

Tripartite FTA will build upon and consolidate the RECs acquis.

2. Scope of the Negotiations

The negotiations shall be in two phases as follows:

(i) The first phase will cover negotiations on the following areas: tariff liberalization, rules of

origin, dispute resolution, customs procedures and simplification of custom

documentation, transit procedures, non-tariff barriers, trade remedies, technical

barriers to trade and sanitary and phyto-sanitary measures;

(ii) Movement of business persons will be dealt with during the first phase of negotiations as

a parallel and separate track;

(iii) The second phase will cover negotiations on the following areas: trade in services,

intellectual property rights, competition policy, and trade development and

competitiveness.

3. Negotiating Principles

The Tripartite FTA negotiations process shall be REC and/or Member driven and be guided by

the following overarching principles:

(i) The negotiations shall be REC and/or Member/Partner State driven.

(ii) Variable geometry;16

(iii) Flexibility and Special and Differential Treatment;

16

Which is defined, in Article 1, as ‘the principle of flexibility which allows for progression in cooperation amongst members in a larger integration scheme in a variety of areas and at different speeds’.




28

(iv) Transparency including the disclosure of information with respect to the application of

the tariff arrangements in each REC;

(v) Building on the acquis of the existing REC FTAs in terms of consolidating tariff

liberalization in each REC FTA;

(vi) A single undertaking covering Phase I on trade in goods;

(vii) Substantial liberalisation;

(viii) MFN Treatment;

(ix) National Treatment;

(x) Reciprocity; and

(xi) Decisions shall be taken by consensus.

4. Negotiating Institutional Framework

4.1 The Tripartite FTA will be negotiated within the context of the following institutional

framework:

(i) Tripartite Summit of the Heads of State and Government;

(ii) Tripartite Council of Ministers;

(iii) Tripartite Sectoral Ministerial Committees;

(iv) Tripartite Committee of Senior Officials;

(v) Tripartite Trade Negotiation Forum (TTNF)

4.2 The Tripartite Task Force, comprising Heads of Secretariats of the three RECS, will

coordinate and provide technical and administrative support to the negotiating process.

5. Monitoring of the Negotiating Process

5.1 The Tripartite Sectoral Ministerial Committee shall be responsible for the overall

monitoring of the negotiating process to ensure that a credible and development-

orientated agreement is concluded expeditiously.

5.2 The Tripartite Sectoral Ministerial Committee will supervise and provide leadership to

the negotiating process including resolving contentious issues that may arise. The

Committee will ensure that the negotiating committees of senior officials and the TTNF

adhere to the negotiation time frames as provided in Tripartite FTA Roadmap.




29

5.3 Progress will be monitored through quarterly reports by the Chairperson of the TTNF

and six-monthly formal reviews by the Tripartite Sectoral Ministerial Committee

responsible for trade. The outcome of the monitoring and evaluation will inform the

pace of negotiations.

This set of ‘Negotiating Principles’ will determine how the official negotiations will be

conducted. The participating states will be directly involved and national interests will guide

them. The aims in the Abuja Treaty are not sufficiently concrete to expect that these

negotiations will not be about national interests and regional gains already made in some

RECs. The Preamble to the Draft Agreement mentions the intention to champion and

expedite the continental integration process in the AEC, but through regional initiatives. The

Preamble also refers to several other considerations which put the emphasis on the more

immediate needs of the RECs involved in the T-FTA negotiations. They want to ‘build upon

the success and best practices achieved in trade liberalisation within the three RECs;

...creating jobs and incomes for the majority of the population in the Tripartite Member

States; the development of trade and investment is essential to the economic integration of

the region to improving the competitiveness of Tripartite Member States;... the progress

made by the regional economic communities in establishing the communities as single

investment areas, and building on this progress’.

The official negotiations will have to generate compromises on difficult matters such as the

rules of origin for the T-FTA. This may turn out to be a long haul. COMESA and the EAC have

relatively simple rules of origin, while those of SADC are detailed and complicated

(Naumann, 2011). In those instances where member states already belong to customs

unions the integrity of the common external tariff will have to be protected. Multilateral

rules on substantially all trade coverage in FTAs must also be adhered to when concluding

new tariff liberalisation schedules.

Negotiating decisions will be taken by ‘consensus’, but the final agreement has to constitute

a ‘single undertaking’. Consensus is not defined and there is no indication as to how

consensus will actually be reached should a deadlock situation arise. The Tripartite Sectoral

Ministerial Committee will supervise and provide leadership to the negotiating process,




30

including resolving contentious issues that may arise. This body is composed of national

ministers.

These are not de novo negotiations. The Negotiating Principles provide that the acquis of the

RECs has to be ‘built upon and be consolidated’. This constitutes a binding bottom line, but

what does this mean in terms of a measurable benchmark? The term ’acquis’ is not defined.

Neither is it used in the Draft Agreement. It should, apparently, be given the generally

accepted meaning borrowed from European Community Law, where it is interpreted as the

equivalent of the ‘total body of European Union law’ (New Oxford Companion to Law, 2008:

9).17 The extent of the acquis of the three RECs could be very wide but it is doubtful whether

this concept has been sufficiently developed through the jurisprudence of their Community

Courts and Tribunals to be sufficiently clear. COMESA, the EAC and SADC have not had

enough opportunity and far less supranationality to develop a comprehensive acquis

communautaire doctrine. Even if this were possible it would still be necessary to integrate

the jurisprudence and doctrines of three different organisations at different stages of

integration.

The evident intention is for the negotiations to build on the existing ‘community law’ of the

three RECs. Perhaps this fact should have been stated in plain language.

This raises another question. What is the status of the Negotiating Principles, Processes and

Institutional Frameworks? They have been drafted in the format of Annex I, entitled

Tripartite Negotiating Principles, Processes and Institutional Framework. Is this a binding

document? This Annex was not signed at the Johannesburg Summit, at least not the copy

available to this writer. (The Annexes to the Draft Agreement are strictly speaking still to be

adopted.) The Declaration was signed by the Heads of State and Government and

constitutes a binding instrument. Its Paragraph 6 provides that the parties have agreed ‘on

the principles for negotiations; a Road Map providing the timelines for key activities relating

to the negotiations and their conclusion; and the implementation of the outcomes as well as

the institutional framework for the negotiations’.

17

This very same concept has also been used in the context of the EPA negotiations; to refer to the Cotonou

acquis.




31

The article on entry into force in the Draft Agreement may cause additional complications. It

provides (Article 50(3)): ’This Agreement shall enter into force upon ratification by two-

thirds of the Tripartite Member States that are party to this Agreement and Tripartite

Member States undertake to do so timely’. The effect of this provision is that ratification by

18 of the 26 member states will result in a binding agreement for those states which have

given their consent to be bound. How this provision tallies with the single undertaking

requirement is not entirely clear. The parties to the T-FTA will have to accept the complete

package – whatever that includes. Those countries which do not become parties to the new

arrangement will remain members of the three RECs, but if this means substantially different

sets of rules, the overlapping membership complication will remain or even increase. Such a

result will not advance the Abuja ideal of bigger continental integration.

It is not clear whether reservations to this Agreement would be permissible. If the

Agreement constitutes a single undertaking that should not be possible. The Draft Tripartite

Agreement does not provide for a single undertaking; that principle comes from the

Negotiating Principles adopted by the Second Tripartite Summit. An earlier draft of the T-FTA

Agreement expressly prohibited any reservations. That provision has now been deleted. In

terms of Article 19 of the Vienna Convention on the Law of Treaties a state may, when

signing, ratifying, accepting, approving or acceding to a treaty, formulate a reservation

unless:

(a) the reservation is prohibited by the treaty;

(b) the treaty provides that only specified reservations, which do not include the

reservation in question, may be made; or

(c) cases do not fall under subparagraphs (a) and (b), when the reservation is

incompatible with the object and purpose of the treaty.

This matter should be clarified by stating expressly in the T-FTA Agreement that it

constitutes a single undertaking and that no reservations will be permissible.

The Annexes do not all contain provisions on their entry into force. In the case of Annex 12,

on services, the obligations of members will come about through a decision (on the basis of

consensus?) by the Tripartite Council. Annex 12 provides that the services schedules ’shall be




32

adopted by the Tripartite Council. The schedules, once adopted by Council, shall enter into

force and shall constitute rights and obligations. Member States shall take measures to

implement commitments under the Regulations and notify the Secretariat. The Committee

on Trade in Services shall periodically review the implementation of commitments under the

Regulations’.

The final T-FTA legal regime will consist of the Agreement which will be adopted and all its

annexes. The latter will contain the detail for specific disciplines and form an integral part of

the overall legal regime, and thereof of the single undertaking too. This principle (that the

annexes form an integral part of the Agreement) should be stated unequivocally. Article 46

of the draft Agreement deals with future annexes and notes that they shall form an integral

part of the Agreement. However, this is a reference to such future annexes as are necessary

for the implementation of the Agreement. Such annexes shall be adopted by the Tripartite

Council (Draft Agreement, Article 46(1)). This provision contains no reference to the annexes

already drafted and to be agreed on as part of the single package of legal instruments now

being developed. It should be expressly stated that the annexes already drafted also form an

integral part of the Agreement once adopted.

The Annex on the Dispute Settlement Mechanism Resolution should accordingly be

improved. At present it reads, in Article 3 of Annex 14: ‘This Annex [on dispute settlement]

shall apply to Member States in the implementation of the provisions of the Agreement’.

This is an incomplete jurisdictional clause for a dispute settlement system for a

comprehensive regional trade arrangement. This particular annex should contain a provision

clarifying the principle that the dispute settlement mechanism will decide disputes about the

application or interpretation of any of the applicable T-FTA legal instruments. Since the T-

FTA purports to build on the best practices and acquis of the relevant RECs, the applicable

provision in one of those judicial organs can be cited as an example of a comprehensive

jurisdictional clause. Article 14 of the Protocol on the SADC Tribunal provides:




33

The Tribunal shall have jurisdiction over all disputes and all applications referred to it in

accordance with the Treaty and this Protocol which relate to:

(a) the interpretation and application of the Treaty;

(b) the interpretation, application or validity of the Protocols, all subsidiary instruments

adopted within the framework of the Community, and acts of the institutions of the

Community;

(c) all matters specifically provided for in any other agreements that States may conclude

among themselves or within the community and which confer jurisdiction on the

Tribunal.18

Annex 12 to the Draft Agreement contains the negotiating principles for trade in services, to

be negotiated during the second phase. Note, however, that the movement of business

persons (which involves services issues19) will be negotiated during the first phase. This

sequencing may result in binding decisions being taken during the first phase which may

impact on service-related aspects which are to be negotiated later. Annex 12 mentions the

following priority sectors: ‘All Member States shall undertake commitments in the following

priority sectors: a) Business; b) Communication; c) Transport; d) Financial; e) Tourism and

travel related; f) Energy; and g) Construction and Related Engineering’.

The draft instruments are neither complete nor inherently consistent but constitute a vast

and valuable set of preparatory work. The negotiating process will involve a different

dynamic and should result in a complete and consistent legal regime. One of the pertinent

challenges will be to give effect to the ‘single undertaking’ requirement. For a single

undertaking to be achieved it would mean, for the negotiations, that nothing is concluded till

everything is concluded. The staged approach foreseen by the negotiating process and the

different entry into force provisions for the annexes will have to be revisited and be aligned

to this requirement.

18

The Protocol on the SADC Tribunal is presently under investigation on the basis of a SADC Summit Decision adopted in August 2010 after rulings against Zimbabwe. The Tribunal has not been abolished but no new cases can be heard pending the outcome of the investigation and a technical study. That SADC Summit decision in fact suspended a basic provision and a right of the parties in a manner (ignoring the amendment clause in the SADC Treaty) which raises doubts about its validity. 19

Article 1, Annex 12 defines a ’business person’ to include a natural person engaged in trade in goods, the provision of services or conducting investment activities.




34

Mangeni (2011: 10) also notes that a number of issues have already been identified as

potentially controversial. They are: ‘Ownership by the RECs and the countries rather than

being driven by the Secretariats, flexibility in terms of allowing the designation of sensitive

products on certain terms and conditions to be agreed, and taking decisions by consensus.

The single undertaking principle came as a surprise of the last minute, and was probably not

given the serious attention it could have deserved’.

7. Concluding observations: Why rules and institutions matter

What will change once the T-FTA is up and running? The simple answer is that a much larger

free trade area of African states will exist which could, if correctly designed and

implemented, bring major advantages in terms of market access and trade opportunities. It

should increase and facilitate intra-Africa trade. Will this happen? The success of the overall

endeavour depends on several factors but starts with the political commitment of the

participating governments. They should muster the collective effort required to ensure that

unambiguous legal instruments are negotiated, ratified and implemented. And they should

not invoke the protection of their ‘sovereignty’ when it comes to respecting their

obligations. It is an act of sovereignty to conclude international agreements. Agreements

about trade arrangements are based on the simple logic that nations cannot prosper in

isolation.

The gist of the argument presented here is that the overall arrangement should be based on

enforceable legal instruments, effective institutions to monitor implementation, and

efficient linkages with laws and structures within the member states. These legal and

institutional aspects constitute an essential and enabling governance framework to allow the

private sector to engage in those commercial endeavours which will encourage trade and

investment and promote economic development.

Those who design the T-FTA and conclude its legal instruments have to ensure that certain

essential outcomes are achieved. Will the new arrangement be different compared to

existing RECs? What does the general design in the drafts for the T-FTA suggest? How will its

legal instruments be implemented and will there be institutions to monitor compliance? Will

remedies be available to private traders and investors, granted by an independent dispute

settlement mechanism; or will political bodies have the final say, especially when




35

governments are the perpetrators of infringements? Will the problems of overlapping

membership be addressed?

Some may consider these questions (and the suggestion that the answers to them constitute

benchmarks for African integration endeavours) as unfair, since ‘capacity constraints’

prevent African governments from implementing rules-based trade arrangements. Lack of

technical capacity is too easily invoked; it is not always the major problem. When

laboratories are needed in order to comply with Technical Barriers to Trade (TBT) and

Sanitary and Phytosanitary Measures (SPS) requirements or when technical investigations

are required in order to evaluate patent applications, the technical capacity needed is of a

sophisticated nature and may not always be available. However, when the task at hand is

about enforcing standard customs regulations, implementing tariffs or issuing permits it is

less clear what technical capacity is lacking. Capacity is built by allowing officials to perform

the tasks for which they have been appointed and trained and by adopting staff

management policies which will foster career development. When these elements are

lacking it points to management and governance failures, not lack of capacity. With respect

to most issues discussed here the essential challenge is about governance. The capacity

argument is not a convincing defence when it comes to the failure to respect basic rules

about trade, to apply the rule of law at home, and to ensure transparency, access to justice

and freedom from corruption. There are encouraging signs of many local solutions to

technical capacity challenges.20 We need more of them.

Rules-based trade is about a particular standard of governance for commerce across

borders. If traders, consumers and investors cannot rely on certainty, predictability and

transparency the T-FTA will not bring about major improvements. The high level of ambition

and the technical challenges involved in blending three existing RECs into one new construct

may in fact make matters more complicated. The three RECs are not fully consolidated.21

The fact that the T-FTA has to build on existing regional trade arrangements which suffer

20

In Namibia several abattoirs have been built which allow farmers to export their beef to the EU. Tanzania has overcome problems with fish exports to the same market by establishing, with donor assistance, the laboratories to carry out the required testing. Donors are often prepared to fund such endeavours. 21

In SADC the tariff phase-down process is still not complete. In the EAC some members still impose additional duties on goods traded amongst them for domestic ‘industrial’ reasons.




36

from institutional blemishes, poses a particular challenge. Negotiations for the

establishment of this T-FTA do not take place on a clean slate.

That is another reason why the answers to the questions posed above do matter. The

success of the T-FTA will depend on political will and leadership, as well as on dedicated

efforts to develop and implement sound rules, establish the right structures, respect

obligations and monitor compliance. In many ways these are basic governance tasks; they do

not require sophisticated technical skills or copious resources.

From experiences in national economies we know how important it is for business people to

be able to enforce contractual obligations, to obtain and to be able to rely on official

information about the applicable rules, procedures and standards. In national and regional

rules-based systems legitimacy, transparency and compliance become systemic and stronger

over time. Officials, whether in customs or other areas of trade regulation, should treat all as

equal before the law. They must apply and respect the applicable rules and procedures in a

fair and transparent manner. If this does not happen, victims should be able to invoke the

protection of the law. And they must believe that the ‘system’ will indeed protect them. The

latter is often the critical absent factor in anticorruption campaigns. In this regard the most

serious failure is a corrupt judiciary.

Regional trade governance consists of the rules and institutions by which authority is

exercised. This includes regional institutions to speak on behalf of the collective in those

areas where compliance and implementation are vital. It also means that there must be the

will and capacity to effectively formulate and implement sound policies, to link domestic and

regional implementation arrangements and to ensure that governments will respect the

obligations they have entered into. An honest effort to address these issues as part of the

establishment of the T-FTA will make a healthy contribution to rules-based trade, better

integration results, growth and development. It will even enhance the implementation of

the goals of the Abuja Treaty.




37

References

COMESA-EAC-SADC. 2010. Draft Agreement establishing the COMESA, EAC and SADC Tripartite Free

Trade Area. (Revised December 2010).

COMESA-EAC-SADC. 2011. Declaration launching the negotiations for the establishment of the

Tripartite Free Trade Area. Johannesburg: COMESA-EAC-SADC. 12 June.

ECA. 1991. Treaty establishing the African Economic Community. Abuja, Nigeria: Economic

Commission for Africa. (‘Abuja Treaty’).

Goode, W. 2007. Dictionary of Trade Policy Terms. Fifth Edition. Cambridge: Cambridge University

Press.

Langeni, L. 2011. IDC ‘must act for three African regional bodies’. Business Day. 6 December.

Mangeni, F. 2011. The COMESA-EAC-SADC Tripartite arrangement: why the tripartite and where we

have reached so far. Discussion document submitted to the trapca Tripartite Forum, Arusha,

5 – 6 September 2011.

McCarthy, C. 2010. Reconsidering regional integration in Sub-Saharan Africa. In Hartzenberg, T. (ed.),

Supporting Regional Integration in East and Southern Africa. Stellenbosch: tralac and Danida.

[Online]. Available: http://www.tralac.org/2010/05/18/supporting-regional-integration-in-east-and-

southern-africa-review-of-select-issues/.

Naumann, E. 2011. Making the Tripartite Free Trade Area work. In Hartzenberg, T. et al. Cape to

Cairo. Stellenbosch: tralac.

New Oxford Companion to Law. 2008. Oxford: Oxford University Press.

Woolfrey, S. 2011. AU plans to boost intra-African trade and fast-track the establishment of a pan-

African FTA. tralac Newsletter. 2 November. [Online]. Available:

http://www.tralac.org/2011/11/02/hot-seat-comment-au-plans-to-boost-intra-african-trade-and-

fast-track-the-establishment-of-a-pan-african-fta/.

World Bank. 2012. De-Fragmenting Africa: Deepening Regional Trade Integration in Goods and

Services. Washington: World Bank.

WTO. 2011. World Trade Report 2011. Geneva: World Trade Organisation.

Chapter 2 – Monetary union: the experience of the euro and the lessons to be learned for African (SADC) monetary union


38

Chapter 2

Monetary union: the experience of the euro and the lessons to be learned for

African (SADC) monetary union

Colin McCarthy

1. Introduction

In June 2004 the writer presented a paper at a conference On the euro outside the euro-

zone: the South African perspective.1 The paper addressed the lessons that southern Africa

could learn from European Union (EU) monetary integration and specifically whether the

region can take its cue from the euro. The backdrop to the paper was the apparent success

at the time of the European Monetary Union (EMU), on the one hand, and on the other, the

declared intention of the African Union (AU) and other regional integration arrangements

such as the Southern African Development Community (SADC) to evolve into monetary

unions in the final stages of linear regional integration. In the latter regard the eurozone was

widely considered to be a role model of monetary integration and an exercise that could and

should be replicated in Africa.

Thus, while the current focus of the Tripartite Free Trade Agreement (T-FTA) comprising the

Common Market for Eastern and Southern Africa (COMESA), the East African Community

(EAC) and SADC is on constructing a free trade area, Africa’s historical fixation with a linear

model of regional integration, and recent suggestions by the AU that the T-FTA should be a

stepping stone toward African economic union, suggest that the issue of monetary union

within the T-FTA region may well be raised in the not-too-distant future.

The sceptical views expressed in the paper referred to above (which later also featured in a

series of tralac Hot Seat Comments) were not based on inherent weaknesses of the euro as

regional currency. The euro was accepted to be a stellar phenomenon in European

integration. The argument was that conditions in southern Africa and Africa as a continent

did not meet the requisite conditions for successful monetary integration such as

macroeconomic convergence, which was a fundamental building block of the eurozone, and

1 See McCarthy (2004).



39

furthermore, that in regions of disparate economies exposed to diverse external shocks a

loss of policy space in exchange and interest rate determination would be inappropriate.

Recent developments in the EUM, however, have revealed that the euro construct has

fundamental weaknesses which strengthen the argument that monetary union is a step in

the process of regional integration that calls for extreme caution. Hence, this chapter

extends the argument in support of caution in deciding on monetary union by emphasising

certain conditions that the euro crisis has revealed as crucial for monetary union to work. 2

The role model, which started out with acclaim, has in its operation exposed certain

structural weaknesses in design. These weaknesses and the conditions for successful union

that they imply add more stumbling blocks in the way of achieving monetary union in an

African setting.

The conclusion of the chapter is that it is unlikely that African countries will meet these

conditions. In working toward this conclusion Section 2 briefly defines monetary union

within the context of the linear model of regional integration, which places it in a particular

sequence of deeper integration. Subsequently, in Section 3, attention is given to two

monetary integration arrangements in Africa – the Common Monetary Area (CMA) in

southern Africa and the CFA (Communauté Financière Africaine) franc of francophone Africa

– that have their roots in colonial history. It will be argued that these two arrangements

cannot be offered as evidence that monetary union can work in Africa. Before discussing the

recent euro experience and the lessons that this experience has to offer African policy

makers in Sections 5 and 6, the benefits and costs and the conditions of success (the optimal

currency area) are briefly reviewed in Section 4. A conclusion is presented in Section 6.

2. Monetary union and the linear model of regional integration

The establishment of a monetary union is one of the final stages in the linear model of

regional integration. To make this point abundantly clear a brief consideration of the model

will be helpful in understanding where monetary integration fits into the overall scheme.3

2 The author wishes to acknowledge the valuable comments of Prof. Stan du Plessis of the Department of

Economics, University of Stellenbosch, on a draft of the paper. 3 The overview that follows draws on McCarthy (2011).



40

Goods and non-factor services are traded internationally. The global economy also

increasingly experiences international factor flows of both capital and labour. Regional

economic integration essentially represents efforts to remove barriers to the cross-border

flow of goods and factor and non-factor services between the member states of an

integration arrangement. It is expected that this geographically restricted liberalisation will

contribute to welfare creation associated with an increase in trade while it will also facilitate

growth and development through increased investment and competition.

Integration can take different forms. Conventionally it starts with the removal of border

barriers to trade in goods within a defined region. In the system of multilateral trade

management by the World Trade Organisation (WTO) the principle of non-discrimination,

embodied in the most-favoured-nation (MFN) clause,4 is a key canon. However, the General

Agreement on Tariffs and Trade (GATT) allows exceptions to the MFN clause, one of which is

contained in Article XXIV of the GATT. This allows the establishment of free trade areas and

customs unions within which trade in goods is free while tariff barriers are maintained

against non-member states. In the case of a customs union the member states share free

trade in goods and a common external tariff vis-à-vis non-members.

Regional economic integration can be extended by including trade in services, both non-

factor services such as financial, commercial, transport and professional services and

unrestrained capital and labour flows. Trade in services is typically constrained by national

regulations which need to be amended and harmonised to facilitate cross-border activity,

should this be the intention of the integration arrangement. At the multilateral level, trade

in non-factor services falls under the WTO’s General Agreement on Trade in Services (GATS),

which in Article V accommodates economic integration in allowing member states to enter

into an agreement to liberalise trade in services, subject to certain conditions being met.

The conventional model of linear integration ignores trade in non-factor services up to the

stage of customs union formation, but in building on the customs union by adding the free

flow of labour and capital a common market is created as a next step in deeper integration.

4 The MFN clause determines that with respect to duties on trade ’any advantage, favour, privilege or immunity

granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties’ (GATT 1947: Article 1).



41

Integration reaches its pinnacle when monetary and fiscal integration is added to a common

market, thus creating an economic union.

African integration planning and the European experience have been based on this linear

model of a step-wise movement through consecutive stages in the integration of goods,

labour and capital markets, and finally monetary and fiscal integration. The different

sequential steps, in summary, are: first, the formation of a free trade area characterised by

intra-regional free trade but with each member state having separate tariffs on imports from

the rest of the world and trade controlled by a set of rules of origin to prevent trade

deflection (duty-free imports from the rest of the world through the member state with the

lowest tariff);5 second, adding a common external tariff to create a customs union, which

effectively removes the problem of trade deflection to which a free trade area is exposed;

third, adding the intra-regional free flow of factors of production in what is known as a

common market; and finally, an economic union which adds the integration of monetary and

fiscal affairs. The convention is that neighbourhood regional integration arrangements are

established.6

African regional integration arrangements are characterised by the ambitious goals they

have adopted in planning integration. Of 14 regional economic communities that existed in

2001, nine have a full economic union as the specified objective; one (COMESA) aims to

become a common market; another, the Southern African Customs union (SACU), is an

established customs union and is to remain that; while the remaining three aim for intra-

regional free trade or regional cooperation, with the EAC aiming to become a political union

(ECA 2004: 29). These agendas are seen as being in line with the desire of the African

Economic Community to transform the African economic landscape and to achieve over

three decades ‘a strong united block of nations’ (ECA 2004: 28). An important phase is the

strengthening of the constituent building blocks of regional economic communities,

5 It is also possible to identify a lower level of integration in the form of preferential trading arrangements,

often of a bilateral nature. This would allow free trade in selected lines of goods, which for these goods might also be restricted through tariff quotas, that is, duty free entry up to a defined volume or value of goods, after which the tariff will apply. 6 Many free trade agreements, as preferential trading arrangements, exist between countries that are not

neighbours.



42

communities that ‘should evolve into free trade areas and customs unions, eventually

consolidating and culminating in a common market covering the continent’ (ECA 2004: 28).7

The AU and the majority of African regional integration arrangements are very explicit in

aiming for monetary union as part of a final integration destination. For the continent as a

whole, the Abuja Treaty of 1991 called for the establishment of the African Economic

Community by 2027. The treaty envisaged an African central bank, a common currency,

complete mobility of factors of production and free trade in goods and services in this

community.8 In the case of SADC, which was established as a trade integration arrangement

in 1992, a road map exists that envisages a comprehensive monetary union, incorporating a

single currency and a regional central bank, to come about in 2018.

At this point we return to the discussion of monetary union as the main theme of this

chapter. A useful point of departure in categorising the monetary integration of sovereign

states is to identify the two essential features of monetary integration (Robson 1998). The

first is that exchange rates of currencies within a region must be permanently fixed with

respect to each other but jointly variable to other currencies. The second characteristic is

that full convertibility of currencies must exist. This implies that no exchange controls will

exist on either current or capital transactions in the area.

To ensure the immutability of these two characteristics, monetary arrangements will have to

meet two other requirements. First, the fixed nature of the exchange rates will require

monetary policies to be consistent with this objective, which in turn will require that the

instruments of monetary policy assigned to the region must be exercised solely by its

monetary authority. This implies a loss of autonomy for member states in this field and thus

a serious restriction of their policy space. Second, since the exchange rate of the region’s

currencies must vary jointly against external currencies, responsibility for exchange rate

policy must also be assigned to the region. The same applies to the management of the

7 It is informative that to date none of the regional integration arrangements has actually progressed to a fully

fledged customs union with completely free trade behind a common external tariff between member states. SACU, dating back to 1910 and hence the oldest operating customs union in the world, has a historical legacy that dates back to colonial times and is an exception to the rule. 8 In 2001 the political momentum of regional integration increased when the Constitutive Act of the African

Union entered into force. The AU was formally launched in April 2002 at a summit meeting in Durban, South Africa.



43

region’s balance of payments with the rest of the world and to the pool of foreign exchange

reserves.

When these requirements are met, according to Robson (Robson 1998: 191), ‘the resulting

arrangement can be described as one of complete monetary integration, or of monetary

union. In effect there would then be a single currency, although nominally differentiated

currencies might continue to coexist…’

3. The Common Monetary Area and the CFA franc zone

Variation in the degree of the regional integration of markets in goods and services is a well-

known phenomenon. Although less extensively recorded in the literature, the degree and

nature of monetary integration can also vary, albeit within a narrower range of possibilities

compared to the integration of goods and services markets. The focus of this chapter is on

monetary union in the sense of a single currency being adopted in a region with a regional

central bank accepting responsibility for the issue and management of the region’s currency.

By definition this implies a single regional (short term) interest rate and exchange rate for

the currency. However, in Africa there are two monetary integration arrangements of long

standing that do not meet the requirements of full and comprehensive monetary union,

namely the Common Monetary Area (CMA) which integrates the money and capital markets

of Lesotho, Namibia and Swaziland (LNS) into that of South Africa, and the CFA franc zone

which has the CFA franc linked to the euro, subsequent to its earlier and historical link to the

French franc.9

The CMA has the South African rand as its anchor currency. Historically it evolved from what

was known as the Rand Monetary Area (RMA). The CMA operates in terms of the

Multilateral Monetary Agreement (MMA) and three supporting bilateral agreements

between South Africa as the one party to each agreement and respectively Lesotho, Namibia

and Swaziland (LNS) as the other party. The main characteristics of the CMA are as follows

(McCarthy 2009):

9 An interesting case of monetary integration in Africa, which falls outside the scope of this paper, is the de

facto dollarization of the Zimbabwean monetary system, with the US dollar having replaced as circulating currency the Zimbabwean dollar that was rendered worthless by devastating hyper inflation.



44

• LNS issue their own national currencies which are legal tender only within their

respective domains. The MMA determines that the coin and note issues in each

country must be clearly distinguishable in appearance from the currency issued by

other member states. The LNS currencies are pegged at par against the rand. The

South African rand is legal tender throughout the CMA. Within LNS, the respective

national currencies and rand are convertible through authorised dealers. In practice,

all traders keep a mix of both currencies in their cash tills and are willing to provide

change in either the national currency or rand. Although the national currencies are

not legal tender in South Africa there is a growing tendency among South African

traders in the border areas to accept the currency of the smaller countries.

• The bilateral agreements of South Africa with Lesotho and Namibia require the central

banks of the latter two countries to keep foreign reserves at least equal to the national

currency in circulation. Rand balances held in a Special Rand Deposit Account with the

South African Reserve Bank (SARB) form part of Lesotho and Namibian foreign

reserves. The provision of foreign reserves as a cover for national currency in

circulation is not contained in the Swaziland bilateral agreement but experience has

been that the Central Bank of Swaziland maintains foreign reserves in excess of

currency in circulation (Wang et al. 2007: 10 n7).

• Since the rand is legal tender in LNS they are compensated for seigniorage foregone.

The formula that applies is a payment equal to two-thirds of the annual yield on the

most recently issued long-term South African government bonds multiplied by the

estimated volume of rand circulating in the particular country.

• Article 3 of the MMA provides for the free flow of funds, whether for current or capital

transactions, within the CMA. The exception to this rule is prescribed investments

which local financial institutions are compelled to maintain. These are seen as a means

of mobilising domestic savings for development purposes.



45

• The CMA Agreements effectively require LNS to maintain foreign exchange control

measures that in all material aspects are similar to those that apply in South Africa.

However, they are responsible for authorising foreign transactions of local origin.10

• Residents of LNS have access to the South African money and capital markets through

provisions that allow LNS public securities to be held as part of the prescribed

investments of South African financial institutions, in accordance with the prudential

regulations that apply in LNS. To support the orderly management of financial markets

the LNS governments must reach agreement with the South African authorities on the

conditions, timing and other relevant terms in respect of the issue or conversion of

public securities. South Africa may not withhold agreement without reasonable cause.

• Although the central banks of LNS, since the introduction of their own currencies, have

been responsible for their own monetary policies, the smaller member countries have

lost their ability to implement these policies independently of the monetary policy

adopted by the South African Reserve Bank. The SARB is not represented on the

boards of the LNS central banks (and neither are LNS central banks represented on the

Board of the SARB and its Monetary Policy Committee); and although no formal

arrangements for common interest rates in the CMA exist, interest rate movements in

LNS are synchronised with changes in the Reserve Bank’s repurchase rate (bank rate),

which means that de facto a single monetary policy set by the SARB applies throughout

the CMA.

• The implementation of the CMA is facilitated by a Common Monetary Area

Commission in which each member state has a representative supported by advisors.

The commission meets regularly to discuss and reconcile interests with regard to

monetary and exchange rate policy issues. Disputes that might arise can be dealt with

by a tribunal provided for in Article 9 of the MMA. Given the anchor role that the SARB

10

Under current foreign exchange control measures, residents must surrender their foreign exchange receipts to authorised dealers who, apart from working balances, are required to sell the foreign exchange to the national central bank. There are restrictions on current transactions of residents and none, both current and capital, on non-residents. The restrictions on the transaction of residents are to ensure that capital flows are not disguised as current payments. Consequently, limits are placed on the value of current transactions such as travel allowances for tourists and business people, and gifts to non-residents. The South African Reserve Bank is in the process of liberalising foreign exchange control.



46

plays in determining the monetary policy of South Africa – effectively the monetary

policy of the CMA – an important arrangement is the meeting of senior researchers

from the central banks of the four member states to exchange economic information

before the periodic meetings of the SARB Monetary Policy Committee (Van Zyl 2003).

It is clear that the CMA is a unique hybrid of monetary integration. It evolved in a colonial

regime that brought political independence to a number of territories that shared an

integrated economy, which is dominated by South Africa. Trade integration was from early

on accommodated through SACU, which is also an excise union.11 Four member states of

SACU – South Africa, Lesotho, Namibia and Swaziland – serve as an example of variable

geometry and an exception to the convention of strictly adhering to the linear model of

integration by adding a particular and unique form of monetary integration to a customs and

excise union.

Botswana, the fifth member of SACU, is not part of the CMA. Botswana used to belong to

the RMA but in 1974 it announced its intention to withdraw from the RMA. The pula was

introduced as sole legal tender in Botswana in August 1976. The current practice of pula

exchange rate determination, adopted in May 2005, is that of a crawling peg. Small

adjustments are continuously made to the exchange rate against a basket of currencies to

allow the pula to move in line with expected future inflation rate differentials. Because of

the large share of imports from South Africa, the basket is heavily weighted in favour of the

rand which has meant that the rand/pula exchange rate, compared to the rand/US dollar

rate, has been very stable.

Another well-known African monetary integration arrangement with roots that can be

traced to colonial times is the CFA franc zone. The CFA was created in December 1945 when

France ratified the Bretton Woods Agreement. At the time the abbreviation CFA stood for

Colonies Françaises d’Afrique (French colonies of Africa) but currently it stands for

Communauté Financière Africaine (African Financial Community). Fundamental differences 11

SACU is an excise union as well as a customs union essentially because of the porous borders between the member states and consequently the difficulties in managing separate excise regimes. However, the fact remains that this adds an element of fiscal integration to the customs union, which is not in line with strict adherence to the linear model of integration. It must be emphasised that SACU has not been the outcome of pro-active plans to integrate independent neighbouring states, but is a historical legacy that evolved as a means to deal with separate political entities within an economically integrated region. SACU does not represent a model of integration that can be replicated elsewhere in Africa.



47

between the CFA franc zone and the CMA are found in the fact that the franc zone is not a

single area sharing a single currency, and in the fact that the currency peg is not to a

currency of the region as is the case with the rand being the anchor currency of the CMA.

The CFA franc zone is in fact two separate regions, each with its own currency and central

bank, which share the common bond of having had France as a colonial power. In West

Africa there is the CFA franc issued by the central bank (Banque Centrale des États de

l’Afrique de l’Ouest) of the eight-member West African Economic and Monetary Union

(UEMOA) and in central Africa there is the CFA franc issued by the central bank (Banque des

États de l’Afrique Centrale) of the six-member Economic and Monetary Community of

Central Africa (CEMAC). The two currencies are effectively pegged at par via each being

pegged to the euro at 655.957 CFA francs = 1 euro. The euro peg was calculated at the

European monetary union from the fixed exchange rate of 100 CFA francs = 1 French (new)

franc = 0.152449 euro. Neither of the two regions’ currency is legal tender in the other or in

France.

Reserves for the two regions of the CFA franc zone are pooled at their respective central

banks and attributed to each of the constituent member states, as is the monetary

circulation. Having a fixed peg limits the ability of the two central banks to have an

independent monetary policy. Monetary management is guided by a reserve cover ratio of

foreign exchange reserves (of which 65% is to be held with the French Treasury in an

operations account) to the short-term liabilities of the central bank. When the reserve ratio

falls below 20% for three consecutive months, the central bank takes emergency measures

to protect the parity by increasing official interest rates and reducing refinancing ceilings.

The central banks are not responsible for the supervision of the regions’ banking systems.

Each region has its own supervisory institution. Banks in each of the two regions need

banking permits which allow them to open branches in any country within the particular

region, although in practice banks do not operate across national borders.

The CFA zone has always been more than a monetary integration arrangement. The

influence of France in the economic and noneconomic spheres of the francophone countries

has been pervasive, although it can be argued that this influence is waning.



48

The two African monetary integration arrangements, characterised by links to anchor

currencies, are unique examples of monetary integration which evolved as historical legacies

of colonial times. They cannot be compared to the arrangements that are envisioned when

the African Union and regional arrangements such as SADC and the EAC hold monetary

union out as a destination in the integration process. Monetary union and the adoption of a

common regional currency, issued and managed by a regional central bank, is the goal and in

proactively planning these steps little can be gained from considering the experience of

special monetary integration arrangements that trace their origins to unique historical, pre-

independence developments.

How realistic and appropriate is the goal of monetary union and are there lessons to be

learned from the current euro crisis? Before the euro experience is reviewed, consideration

is first given to the benefits and cost of monetary union and the conditions for success.

4. Benefits and costs of monetary union and conditions for success

Benefits

The linear model of regional integration, as has been noted earlier, portrays deeper regional

integration as a linear process of consecutive steps in which the establishment of a

monetary union superimposes monetary integration on integrated product and factor

markets. The benefits expected from integration are greater effectiveness of market

integration in realising the positive welfare effects of trade creation and the dynamic

benefits of growth and increased competitiveness, as well as greater efficiency in allocating

factors of production in a larger, regional economy.

Monetary union with its single currency in a common market has a special contribution to

make in improving the effectiveness of integration. This is done by reducing the transaction

costs of trade and investment. The common market becomes absolute: no constraints exist

on cross-border trade and investment in a region where a single unit of account and means

of payment will have a substantial positive impact on facilitating comparisons of market

prices, planning and making transactions, and on the conclusion of commercial and

investment-related contracts. Not only are the cost and cumbersomeness of currency

conversions removed but a major source of uncertainty, namely possible unforeseen



49

variations in the exchange rate, is eliminated. The benefits to trade are obvious, but so is the

benefit to be expected for cross-border investment, as well as foreign direct investment

(FDI) from outside the region. Investment, both FDI and by firms within the region, will not

only benefit from greater market opportunities that integration offers but also from the

macroeconomic stability that monetary union is expected to bring about across the region.

From the perspective of macroeconomic management, monetary union and its limitation on

policy discretion (see next section) has the benefit of a smaller risk premium for those

countries that enter the union with comparatively higher rates of interest. In the EMU,

Greece and Italy, for example, eliminated the bond market consequences reflected in higher

interest rates because of poorer macroeconomic management by becoming part of the

EMU.

Costs

The potential cost for a country that joins a monetary union is embodied in the loss of policy

space. The deepening regional integration is characterised by an escalating loss of policy

sovereignty. Adopting the common external tariff of a customs union means that individual

member states lose the ability to use the tariff as an instrument of trade and industrial

policy. Freedom of intraregional factor flows in the establishment of a common market

means that national independence in having national labour market policies is largely

sacrificed while free regional capital flows will constrain the national ability to regulate

capital markets as part of national economic development policy.

Should a country join a monetary union it sacrifices the ability to use monetary policy as a

means of stabilising the economy. Specifically, the country’s central bank transfers its ability

to use the nominal exchange rate and short-term interest rate as instruments of

macroeconomic stabilisation to the regional central bank, which operates as a supranational

institution. The burden of national macroeconomic stabilisation will now fall on fiscal policy

exclusively, which in the real world of policy design and implementation tends to be less

flexible as well as socially and politically more difficult than using monetary policy. This much

will become clear when the euro experience is brought into the picture.



50

If the desire for national sovereignty per se is ignored, sacrificing policy sovereignty is not

necessarily a cost, a cost that will be realised at all times and under all conditions. However,

it becomes a cost once we cross the threshold into the integration of disparate economies

exposed to asymmetrical and diverse external economic shocks. For example, in a monetary

union of member states with wide variations in the composition of import and export trade,

the burden will fall on national fiscal policies to adjust to major and diverse changes in the

terms of trade, fairly rapid changes in regional capital and labour movements, and on

changes in competitiveness to stabilise a member state that has been exposed to an external

shock.

Imagine a monetary union of X (a major copper producer and exporter), Y (an oil exporting

country), and Z (a country with a fairly diversified output and trade structure). Major

international developments leaves the oil price largely unaffected but the copper price falls

by 40% with a dramatic impact on X’s terms of trade. Country X is worse off in terms of what

it can buy with a basket of export goods. Prior to monetary union the standard demand

management response to such a situation would be a currency devaluation accompanied by

an increase in interest rates. Under a regional single currency regime these options do not

exist, requiring the government of X to reduce government spending (for example, on social

services) in an effort to bring aggregate demand in line with supply. If X represents one of

the many commodity exporting developing countries with a narrow tax base, the copper

industry will be a major source of tax revenue. The fall in the price of copper will dampen

this source of revenue, thus aggravating the burden that expenditure cuts will have to bear.

This is not a complete picture of the consequences of not being able to depend on the

exchange and interest rates as adjustment mechanisms in the event of external shocks. The

asymmetry of conditions can be sharper. For example, the oil price might have increased

because of supply problems in the Middle East, while X, in the wake of previously high

copper prices might have irresponsibly consumed the mineral rent by granting a growing

number of civil servants large salary increases, while also increasing expenditure on social

services. However, the example will suffice to make the point that it is difficult to cope with

asymmetrical external shocks if the menu of policy instruments available to a national

government has been reduced severely. This can be regarded as a cost or downside of

monetary union.



51

Conditions for success

At this point the narrative requires consideration of the conditions required to achieve

successful monetary union. These conditions, which are derived from the theory of the

optimum currency area,12 determine the requirements needed to accommodate or counter

the possible costs associated with monetary union.

In considering the optimality of a monetary union, in other words, the conditions that need

to be met in order to have a sustainable and effective monetary union, three questions have

to be answered:

• First, what types of forces are member states exposed to that can disturb their

macroeconomic equilibrium, specifically current account imbalances?

• Second, how closely are member states’ factor markets integrated?

• Third, how closely are their fiscal systems integrated?

A fourth question concerning macroeconomic conditions prior to joining or forming a

monetary union is crucial: to what extent do the member states converge in terms of

fundamental macroeconomic variables such as the size of government deficits (expressed as

a percentage of Gross Domestic Product – GDP), current account balances and inflation? It

stands to reason that economies with substantial differences in these variables could hardly

form the basis for a viable monetary union. However, assuming that the prior conditions of

convergence are met, the successful operation of the union will depend on the answers to

the three questions posed above.

If the member states are exposed to asymmetrical external disturbances, the development

of current account imbalances is likely, in which case cross-border labour and capital flows

as well as fiscal transfers will be required to stabilise the regional economy. The latter flows

and transfers, which have to bear the brunt of stabilisation in the absence of the exchange

rate as policy variable, will require substantial factor market and fiscal integration to be

effective. However, labour flows are not without cost: it is costly for workers once

retrenched to change jobs and even more costly to move to another country. In developing

12

Robert Mundell (1961: 657-665) published a pioneering article on optimum currency areas.



52

and also in developed countries, the focus of public opinion and media attention often falls

on labour migration, creating the impression of the smooth and virtually costless relocation

of workers, ignoring the cost of this migration.

But fiscal integration also brings to the fore an important condition, which, depending on the

national psyche, could be regarded as a cost or downside of monetary union. In order to

have intra-union fiscal discipline and transfers, fiscal integration to the point of substantial

fiscal union is required, which means that fiscal union complements monetary union in the

establishment of an economic union. But can a country that has sacrificed its sovereignty

with respect to the exchange rate, the interest rate and finally its ability to decide on taxes

and government spending at the highest tier of government still be regarded as

independent? Clearly not, and this explains why economic union with its fiscal integration is

only possible if it is accompanied by political integration. An economic union of countries

requires at least the formation of a federal state such as the United States of America, or

what is hoped for by some, the United States of Europe.

5. The euro crisis

European monetary integration and the establishment of the eurozone, managed by the

European Central Bank (ECB), represented a spectacular step towards deeper integration

within the EU. This created a two-part EU: the eurozone member states, which in time came

to include 17 EU countries and the remaining 10 EU member states that included some

countries, such as the United Kingdom, Sweden and Denmark, that qualify for membership

but have decided to remain outside the zone.

As noted earlier the introduction of the euro has been seen as a role model in Africa, a

development that could and should be replicated in the process of African economic

integration. However, the euro has in recent times experienced a serious dent in its

reputation. Toward the end of 2011 the currency union found itself in a deep crisis, which

some observers believe could bring about the end of the zone, at least in its current form.

The current and widely held perception is that the crisis serves to illustrate shortcomings in

the architecture of the zone, with an impact that is not restricted to member states only but



53

is now a source of contagion that could create serious problems for the world economy.13

How does one explain this situation and what lessons can be learned for monetary

integration elsewhere in the world, notably in Africa?

It is beyond the scope of this chapter to review the eurozone crisis in any detail. What is

required is the identification of crucial developments and factors that could be relevant as

guidelines in assessing the appropriateness of proceeding to monetary union in the Africa.

The root cause of the euro’s problems is that the zone covers a group of disparate

economies and simply does not meet the conditions of an optimum currency area. A

Financial Times columnist recently aptly described the situation: ‘...today’s crisis is

structural, stemming from the euro’s flawed design and particularly the misguided notion

that a common monetary policy could work without integration of other policies – and not

just fiscal policy... lashing 17 disparate economies together monetarily and expecting them

to march in step was ludicrous’ (Rattner 2011). President Sarkozy of France in an address to

party supporters implicitly raised similar thoughts: ‘There can be no common currency

without economic convergence without which the euro will too strong for some, too weak

for others, and the eurozone will break up’ (‘Sarkozy and Merkel demand,’ 2011: 59).

The EU countries that initially formed or later joined the European Monetary Union had to

meet important convergence criteria with respect to inflation, interest rates, budget deficits,

national debt and exchange rates14 and were subsequently subject to a uniform monetary

policy under a regime of a short-term central bank rate set by the ECB and a single market-

determined exchange rate. However, eurozone participation brought together countries

with substantial differences in competitiveness which did not converge. The operational

13

It is unlikely that African banks and financial institutions will be directly affected by the euro crisis since their balance sheets will not significantly be exposed to holdings of euro country government bonds or depend on European banks for access to liquid reserves. However, should the euro crisis cause a sharp downturn in EU economic activity this will have a negative impact on the demand for African exports. Although the share of Sub-Saharan Africa’s exports destined for Europe has declined from 33.8% in 2000 to 27.9 per cent in 2008, Europe remains an important destination (http://comtrade.un.org/pb/). For many African economies this share could be significantly higher. An additional negative outcome of poor economic conditions in Europe will be a decline in aid destined for African countries. In some cases, European governments are committed to a fixed percentage of national income allocated to foreign aid. The British commitment to foreign aid equal to 0.7 percent of national income is an example of this. A decline in national income will bring about a fall in the value of the share of income devoted to foreign aid, which will add to the discretionary falls in aid allocations by governments that find themselves in fiscal problems. 14

For the purposes of this paper the contention that the Greek government compiled and provided data which did not accurately reflect the true extent of the government deficit is ignored.



54

rules of the eurozone provided for macroeconomic convergence but not for economic

convergence. The end result has been a divergence between member states with stable and

competitive economies experiencing current account surpluses and fiscal discipline,

exemplified by Germany, and economies that were not competitive, with large government

and current account deficits, exemplified by Greece.

Deficits and the replacement of maturing bonds have to be funded in the capital market by

issuing euro-denominated government bonds. While all euro states are subject to the same

ECB rate, essentially a short-term rate, interest rates in the capital market are determined by

market forces, which meant that the disparities between member states came to be

reflected in growing divergences in sovereign debt rates. The interest rates that investors

came to expect on the bonds of the weaker economies grew to levels that far exceeded

those on the bonds of the stronger economies. It was not unusual for the spread between

the rates of German and Greek bonds (the premium on Greek bonds) to exceed more than

20 percentage points. Since new bond issues can only be placed in the capital market at

current market rates, the high interest rates demanded of the weaker euro economies result

in an unsustainable fiscal liability. Interest on public debt must be paid from tax revenue

which means that high and increasing interest rates represent a severe fiscal strain on

economies that are expected to lower their fiscal deficits. Since the fiscal strain cannot be

absorbed, external assistance from various sources such as the International Monetary Fund

(IMF) and European Stabilisation Fund is required to support the deficit economies.

The euro’s exposure to the views that exist and to positions taken in capital markets has also

served to illustrate the powerful force and danger of contagion. Since prices in the capital

market are determined by the forces of supply and demand, a weakening in demand can be

driven by market perceptions of the likelihood of future capital losses should interest rates

increase. Market fears are contagious and are reflected in lower prices paid for government

bonds of countries expected to face difficult times. In the eurozone, Ireland and Greece were

given external bail-out assistance but when Italy came into the firing line of negative

expectations through contagion a precarious situation developed. The rate on Italian debt at

one stage increased to above seven percent in capital markets, which is generally regarded

as an unsustainable fiscal burden. Compared to Ireland and Greece, Italy is a large European

economy with financial needs and a stock of debt that cannot be accommodated through



55

external assistance and intervention. Furthermore, the size of the economy and its debt

would leave European banks, which hold government bonds as a large part of bank capital,

with huge losses on their balance sheets should there be a debt default or if banks are

forced to accept so-called ‘haircuts’ (cutting the value of bonds) on their bond holdings. The

banking system in Europe and further afield would be severely exposed to possible failure,

which would create extreme strains in the economies of Europe and in the wider world

economy. The only short-term solution to this problem of a lack of confidence is for the ECB

to intervene as lender of last resort for Europe’s banks by accepting the lower-quality bonds

as collateral for loans to the banks to provide liquidity in the banking system.

The discourse on eurozone developments has brought to the fore an interesting interplay of

views on the role of the central bank. Among the leading members of the zone, France has

become a vocal protagonist of ECB intervention through purchases of the government bonds

of member states that find themselves in need of support. Effectively, this means that the

debt is monetised with the central bank acting as lender of last resort to governments.

However, the ECB is a regional central bank and has to deal with the strong opposition of

Germany to such a move. The devastating hyperinflation of the 1920s and its consequences

have embedded a strong fear of money creation and associated inflation in the German

psyche and have provided the support for a constitutional guarantee of the independence of

the Bundesbank, its monetary discipline, and the subsequent strength and superior

reputation of the Deutsche mark as a sound currency. For Germany, sound money is the

begin-all of macroeconomic policy and consequently the monetary union and the euro were

accepted on the firm condition that these elements would be the building blocks of the ECB.

Mario Draghi, the new chairman of the ECB, has in the midst of the euro crisis, confirmed

that the central bank will act as lender of last resort for Europe’s banks but not for

governments.

The German view is that structural reform is required in the eurozone, reform that would

build fiscal discipline into the system, and not ECB intervention accompanied by the

collectivising of eurozone debt by issuing eurozone bonds (‘stability bonds’, also referred to

as eurobonds), a proposal put on the table by the European Commission and strongly

favoured by France. These bonds would have the 17 euro members sharing debt risks, which

will lower the interest cost for countries such as Greece but raise the cost for Germany.



56

Independence of a regional central bank

The independence and accountability of a regional central bank is a facet that might be of

considerable importance when a regional central bank is considered for an African region

such as SADC. In a single country, which could be a federation, the independence of a central

bank can be constitutionally enshrined or it can be determined through a law that

establishes the central bank as a statutory, independent body. But independence is not an

absolute prerogative; in the final instance a central bank can only maintain its independence

if the public wishes it to be independent and no cleverly designed charter or treaty can solve

the problem of defining ‘public’ when independent countries sacrifice their monetary

sovereignty to a regional central bank. In the case of a regional central bank being

established the only solution would be for the independence of the central bank to be

enshrined in an intergovernmental agreement (a treaty) that can only be changed through a

unanimous decision of member states.

But what, more precisely, is meant by structural reform? Such reform could be seen to

contain many elements but essentially what Angela Merkel, the German chancellor, means

by this is reopening the Lisbon Treaty by adding elements of fiscal union to the monetary

union. Apparently, a fully fledged fiscal union is not currently being considered; the German

preference is for limited treaty changes that will impose fiscal discipline on eurozone

member states with scrutiny over eurozone national budgets and the provision of sanctions

if countries do not comply. The EU bond proposal of the EC also contains treaty changes that

would provide for serious new EU powers that will allow the overriding of national budgets

and for non-compliant countries to be taken into ‘administration’.

However, these measures will not address the fundamental problem of the large differences

in competitiveness between euro states and consequently the current account imbalances

that exist. Much of the widespread scepticism that the eurozone will survive in its current

form and membership intact is based on the belief that the substantial differences in

competitiveness and severe current account imbalances cannot be solved in a sustainable

way without a significant adjustment of currencies. This can only occur if a weak economy



57

leaves the eurozone. Fiscal transfers and external assistance will only paper over the

problem of built-in instability of a currency union of widely disparate economies.

A summit of the heads of government of the EU on 8 and 9 December 2011 did not produce

an agreement by all 27 member states on reopening the Lisbon Treaty to negotiate changes

that will allow the 17 eurozone countries to adopt new rules on fiscal integration and the

stabilisation of the euro. The United Kingdom, in defence of the City of London as an

important world financial centre, controversially exercised its veto, which means that the

Lisbon Treaty cannot be changed, leaving as the only viable route an intergovernmental

agreement of potentially 26 EU states.15 This introduces a legal quagmire: can the EU

institutions that represent all 27 member states (the European Commission with its

surveillance and enforcement powers and the European Court of Justice) be used by a group

of countries acting outside the EU treaties in implementing the decisions and outcome of a

an intergovernmental agreement concluded by a lesser number?

The agreement concluded by the 26 member states does not envisage full fiscal union. Three

elements can be identified in the agreement on eurozone management. The first is a ‘fiscal

compact’ providing for the enforcement of the principle of balanced budgets and an annual

‘structural’ deficit of no more than 0.5 percent of GDP and automatic fines for eurozone

countries that breach a three percent deficit limit.16 The second is to enhance the scope of

intervention (strengthening the so-called firewall protecting the euro) to stabilise the euro

through an enlarged European Financial Stability Facility (EFSF) and the new European

Stability Mechanism (ESM) that will be replacing the EFSF in 2013, as well as an extra €200bn

to be lent by eurozone and other EU states to the IMF to increase the fund’s ability to assist

euro countries in need of such support. Third, the ESM will not require the involvement of

private bondholders in any future rescue operations.

It is far from clear what the future holds in implementing this agreement and how each of

the signatory states will respond once the agreement has been scrutinised and digested.

One conclusion seems clear: eurozone countries will end up with less fiscal sovereignty. The

15

Not all the 26 heads of government signed the agreement unconditionally. Sweden, an important EU member that is not a eurozone country, will be taking the agreement to its parliament for consideration and a final decision. 16

A ‘structural’ deficit is of a long-run, non-cyclical nature, arising from a fundamental imbalance in government revenue and spending.



58

process might not start out as a fully fledged fiscal union but every eurozone country will

have to comply with externally determined and monitored fiscal rules that create limits to

the policy space within which a country can operate. The final outcome cannot be foreseen

with certainty but considering the dynamic forces of regional politics at play and a serious

commitment of some member states to deeper integration, it is equally difficult not to see

comprehensive fiscal union as outcome in the long run.17 But as noted earlier, adding fiscal

union to monetary union, and thus the establishment of fully fledged economic union, will

also require political union. One thing is certain: the EU will undergo fundamental change,

but not always on the basis of considered and proactive planning of the member states and

the EU’s governing structures; external forces (read ‘market forces’) are likely to enforce

change through crisis management.

Financial markets, both in their capacity as primary and as secondary markets, are crucial in

funding private and public sector spending. What the euro crisis has vividly demonstrated is

the importance of certainty as a force that drives market movements. As custodians of the

public’s savings, capital market institutions are forced to look ahead and form a judgement

on what the future holds with respect to asset prices. The euro crisis has created a world of

uncertainty for the markets, a world in which they immediately respond to any development

or announcement that could affect their degree of anticipated risk. The consequence has

been extreme market volatility and efforts to seek safe havens to provide protection in times

of growing uncertainty, be these German bunds, gold or any other asset that is seen to be

relatively safe. Since the eurozone and its difficulties are a major source of uncertainty,

moves to address these difficulties will be critically assessed by the financial markets looking

for clear signals on what the future holds.18 What this amounts to is that changes to the

architecture of the eurozone will have to pass the litmus test of market views on the

sustainability and effectiveness of the changes. The collective wisdom of financial markets

17

The position taken by the UK government on the re-opening of the Lisbon Treaty and on other EU issues is largely based on a desire, apparently supported by the majority of the British public, not to be involved in closer integration in Europe. A substantial number of British citizens and organisations resent the loss of sovereignty brought about by the past transfer of powers to Brussels. 18

Jacques Delors, who was president of the European Commission from 1985 to 1995 and is widely considered to be the farther of the euro, recently had this to say on markets and uncertainty: ’Markets are markets. They are now bedevilled by uncertainty. If you put yourself in the position of investment funds, insurance companies and pension funds, you will understand that they are looking for a clear signal’ (‘Euro doomed’ 2011).



59

will judge every move that EU leaders make, starting with the agreement reached by the 26

member states.

The question remains: what lessons can we learn from the eurozone experience that can

guide integration in Africa?

6. Monetary union in Africa reconsidered

As noted earlier, monetary union is on the agenda of most African regional integration

arrangements, including the overarching African Union, and furthermore it is a development

that is expected within a relative short period of time. For SADC, monetary union after 26

years is ambitious, considering that the EU was more than five decades into its process of

economic integration before it ventured to the point of monetary union and this after a

gradual process of integrating monetary affairs in an established and operating common

market.

Currently, the SADC free trade area that came about in 2008 is not fully operational for all

member states and the customs union that was to have been established in 2010 has been

postponed. It is safe to assume that 2018, noted in the SADC roadmap as the target date for

monetary union, is an idle hope. However, the time taken to establish a monetary union in a

linear process of integration is not the pertinent issue; if it is hypothesised that at some

point in the future a monetary union could be a fait accompli, the main question is: will it be

an appropriate development in itself that will give rise to the benefits noted earlier?

Furthermore, what does recent euro experience, once regarded as the model of monetary

integration, tell us in this regard?

First, monetary union requires more than ex ante macroeconomic convergence with respect

to selected indicators such as inflation and government deficits; member states must also

converge in their competitiveness. Furthermore, after forming or joining a monetary union,

economic and macroeconomic convergence must be maintained.19 Should imbalances arise,

the second feature to note is the inevitable reliance on fiscal constraints to adjust the

economy by removing the imbalances. When countries such as Greece, Portugal, Ireland and

19

Economic convergence refers to the phenomenon of catch-up growth, that is, poorer countries catching up with richer countries in terms of indicators like per capita income. Essentially this is indicative of convergence in competitiveness.



60

Spain found themselves in situations of serious imbalances with unsustainable and growing

fiscal deficits, they could not rely on the interest rate and on exchange rate depreciations to

improve competitiveness and bring about equilibrating changes in their economies. In the

absence of central bank intervention they have to rely on fiscal austerity and external

assistance. Improving government finance in weak economies in the short term could not

come from increasing revenue by raising taxes but only from severe cutbacks in government

spending. The social impact of this was immediate, with large numbers taking to the streets

in protest against cuts in spending on social benefits, services and the public sector wage bill.

Fiscal policy, unlike monetary policy with its indirect impact on relative prices, has a direct

and immediate impact with repercussions in the political domain. In democracies, cabinet

decisions on fiscal restraint have to be approved by a body representing citizens and there is

no way that these representatives can ‘hide’ the painful decisions from their constituents.

The electorate will also be aware not only of the consequences of required fiscal efforts to

restore balance but will also hold collective views on the causes of the imbalances, which

typically will be attributed to weak governance in the past. As the experience in all these

countries has shown, the outcome is a change in government with new governments having

to impose the unpopular fiscal measures required to restore a modicum of equilibrium.

Changing the jockey of an underperforming horse does not remove the inherent weaknesses

of the horse; neither does it allow the new jockey to avoid the only techniques available to

get the horse to run faster. The analogy holds for changes in government. Fiscal restraints

have painful consequences and unless the underlying causes of a lack of competitiveness are

removed they are bound to create a fertile ground for persistent political instability. It must

be emphasised that the impact of monetary adjustment is not less painful; it is merely

contended that fiscal austerity has a more direct impact with severe political repercussions.

Two avenues of escape from this dilemma exist. The first is to get those competitive

economies with positive balances, with the additional support from international agencies

such as the IMF and the World Bank and from surplus economies that do not belong to the

monetary union, to fund the deficits of the weaker economies. This can be done through

loans or the purchase of the public debt of the deficit countries as a means of allowing them

access to capital market funding at affordable rates of interest.



61

A second escape route is intervention by the central bank of the region. When the central

bank buys the bonds of the ailing economies their debt is monetised, a development which

may not to be acceptable to the surplus member states. If the central bank is independent

and committed to the typical central bank goal of protecting the value of the currency –

which means that containing inflation is seen as its principal objective – the bank itself may

be reluctant to intervene.

The scenario sketched so far allows a number of tentative conclusions when viewed from an

African, and specifically SADC, perspective.

Relying on fiscal austerity to restore balance has a direct political impact. In the eurozone

the currency crisis and reliance on fiscal constraint have had political consequences with

democratic changes in the political guard. In Africa, not many, and in SADC only a small

minority of states, have a history of a democratic change of government in the post-colonial

era. If, in this setting, imbalances are to be addressed by fiscal constraint only, peaceful and

democratic change in government is not likely in many cases; persistent political unrest, with

masses protesting against declines in service delivery and more autocratic styles of

government, is more probable.

Most African economies also have poorly developed financial systems without active

primary and secondary bond markets. Captive bond markets can be created by legally

compelling financial institutions to invest in the debt of the government at low rates that do

not reflect market realities. However, the pool of public savings held by financial institutions

tends to be relatively small and incapable of absorbing large amounts of government debt.

Many African countries rely on international aid transfers to cover deficits and in particular

circumstances this could be a source of assistance. It is possible to envisage unconditional

foreign aid to cover deficits of an African least developed country (LDC) in cases where, for

example, these arise because of an unforeseen deterioration in the terms of trade following

a sharp fall in the prices of export commodities. However, should the deficits be the

outcome of profligate government consumption expenditure on items such as a growing

wage bill, continuous access to unconditional foreign aid is unlikely.



62

An important question raised by the eurozone experience, which illustrates that fiscal union

is a necessary complement of monetary union, remains: will African states accept

arrangements that restrict their fiscal sovereignty? The answer to this question can at best

be speculative but if the experience of African states’ poor commitment to regional

arrangements and the loss of policy space this requires are anything to go by, it is difficult to

be optimistic.

The slow progress in meeting the targets of deeper integration set out by integration

arrangements is a conspicuous feature of African regional integration, notably that of SADC.

Many reasons have been given for this but one that is relevant to this chapter is the loss of

policy sovereignty integration brings about. An important step in the linear process adopted

by African integration arrangements is to establish a customs union, which requires member

states to sacrifice national independence in setting import tariffs. Two perspectives or

positions can be identified in this regard. For some countries, such as South Africa, the

import tariff has always been seen primarily as an instrument of industrial policy, a way of

protecting selected domestic industries against foreign competition.

However, for many less developed African economies import tariffs are important, if not the

most important, sources of government revenue. This effectively places import tariffs within

the domain of fiscal policy. Sacrificing tariff decisions (both levels and the distribution of

customs revenue) to a supranational regional body implies a loss of sovereignty over an

important source of revenue and, in this sense, represents a loss of fiscal sovereignty. This

loss of policy space could partly explain the reluctance to progress more rapidly to deeper

regional integration by countries that have a much shorter experience of independence than

the European economies. To move toward some form of fiscal union would not only expand

the loss of national control over revenue but also include external sanction over spending

decisions. As developing countries – LDCs in many instances – African economies rightly

attach substantial weight to the role of government spending (patterns and levels) as an

instrument of development. Fiscal union would be taking the process of integration a step

too far to be acceptable to African economies.

The desire for fiscal sovereignty also counts against a popular argument in favour of

monetary union, namely that a regional central bank could act as an agency of restraint, thus



63

improving the credibility of macroeconomic policy. It has been argued that the pure

economic arguments in favour of African monetary integration initiatives are few but they

may ‘on political economy grounds, be a second-best solution for African countries that are

seeking to make a credible commitment to pursue sound monetary policies’ (Guillaume and

Stasavage 2000: 1391). If, however, it is accepted that effective monetary union requires

strong elements of fiscal union, the agency-of-restraint contention loses some of its force as

an argument of why countries would agree to monetary union.

A fundamental source of monetary union instability, clearly revealed by the experience of

the eurozone, can be the disparate nature of the economies included in the union. In Africa,

this primarily manifests not so much as differences in competitiveness but in exposure to

diverse asymmetrical shocks because of differences in the composition of production and

trade, which are characterised by dependence on one or two primary commodities as

drivers of economic activity and trade. As far as the product composition of trade is

concerned, favourable commodity markets during 2000–2008 have added to concentration

in trade by contributing to a fall in the share of sub-Saharan Africa manufactured exports in

total merchandise exports. Following the custom of defining goods listed in the Standard

International Trade Classification (SITC) 5 – 8 (Revision 3)20 as manufactured products, the

share of manufactured exports in total SSA merchandise exports declined from 16% in 2000

to 10% in 2008, with a commensurate increase in the share of primary commodity exports.

For SADC, the differences in the exposure to external conditions are revealed in divergent

movements in the net barter terms of trade.21 These differences are shown for SADC

member states in Table 1.

SADC countries have open economies, as revealed by their respective merchandise trade to

GDP ratios, and to the extent that different movements in the net barter terms of trade are

indicative of differences in exposure to external forces that the disparate changes in the

terms of trade during a ten-year period (2000–2010) are conspicuous. On the improvement

20

SITC 5 entails chemicals, 6 entails manufactured goods classified by material, 7 entails machinery and transport equipment and 8 entails miscellaneous manufactured articles. The trade data on which the calculations are based were obtained from Comtrade (2009). 21

The net barter terms of trade is defined as the percentage ratio of export unit value indexes to the import unit value indexes, measured relative to a base year. In short, therefore, it is the export price index divided by the import price index and multiplied by 100.



64

side of the scale there are countries at the top end, such as Angola and Zambia, which

benefited from increases in the price of oil and copper respectively, whereas diamond-

producing Botswana experienced deterioration in its terms of trade because of the negative

impact that the worldwide economic contraction has had on the price of diamonds.

Susceptibility to asymmetric external shocks is one reason to question whether it is

appropriate to expect these economies to sacrifice the exchange rate and interest rate as

policy variables. Such an expectation may be less than prudent. In fact, external shocks and

the differences in economic structures and the challenges the countries face may require

some divergence in these variables as instruments of adjustment. However, Table 1 raises

the question whether the experience of Lesotho does not contradict this argument. As

explained earlier, Lesotho is a member of the CMA and its currency, the loti, is linked to the

South African rand at par. Since 2000, Lesotho has experienced a substantial deterioration in

its terms of trade, but linked to the appreciating rand (the South African terms of trade also

improved significantly) the loti also appreciated, which is contradictory to what one would

expect as appropriate given the deterioration in the terms of trade. However, a reasonable

level of economic stability could be maintained because of Lesotho’s SACU membership,

which through the revenue distribution mechanism contributed an average of 59% of total

government revenue during the fiscal years 2006/7 and 2007/8, allowing an average budget

surplus of 12% of GDP.22 This means that Lesotho, like Swaziland and Botswana, whose

currency, the pula, closely follows the rand, could endure a currency linked to an

appreciating rand because of the special dispensation that exists in the form of its SACU

membership with its commensurate revenue dispensation.

22

See the following: Lesotho, Ministry of Finance and Development Planning, Background to the 2009/10 Budget: A Review of Economic Performance, 20003 – 2008; Economic Prospects, 2008 – 2012; and Medium Term Fiscal Framework, 2009/10 – 2011/12, Table 1.6.



65

Table 1: Net Barter Terms of Trade (NBTT) of SADC member states (2000 = 100)

Source: World Bank (2010)

The eurozone experience demonstrates the important role of capital markets and of market

perceptions in adjusting to intraregional imbalances. Earlier, it was noted that African

economies in many instances do not have developed capital markets that trade in public

debt. However, this phenomenon will add to the disparate nature of countries in a regional

integration arrangement. In SADC, South Africa, which has sophisticated financial markets

that are on par with those of developed economies, is anticipated to form part of monetary

union with countries like Malawi, Mozambique and Zambia where developed financial

markets do not exist. Monetary union will require, and in the linear model of integration

presupposes, the integration of financial markets. This could prove to be a conundrum of the

first order with real issues arising in member states’ willingness to accept a regional

regulatory system and the likely dominance of South African institutions.

A further important lesson from the euro experience is the importance of political

collaboration and cohesion between member states. Regional integration arrangements

such as the EU and those found in Latin America and Africa are first and foremost motivated

Merchandise

Trade/GDP %

2008

2009

NBTT

2010

NBTT

Angola 102.9 171.7 213.4

Botswana 76.2 88.0 88.1

Congo DR 69.0 111.5 133.7

Lesotho 180.6 80.5 69.2

Malawi 58.3 97.9 89.9

Mauritius 75.1 81.0 73.2

Mozambique 68.1 96.3 108.1

Namibia 84.6 126.6 120.5

Seychelles ... 74.3 76.1

South Africa 65.2 139.2 140.7

Swaziland 140.6 110.2 107.1

Tanzania 47.9 118.3 124.9

Zambia 71.0 159.7 192.6

Zimbabwe ... 108.3 111.1



66

by political objectives but are constructed primarily by using economic building blocks.

Politicians as policy makers have to deal with the loss of policy space, whether economic,

social or political, that integration efforts bring about, and in Europe there is wide

agreement that the current problems of the eurozone will have to be solved in the political

domain, which is dominated by different national perspectives. It must be left to students of

politics and African politics in particular, to form a firm view on whether Africa’s political

leaders will find it easier to cope with the challenges of monetary union and what this

requires in terms of fiscal integration, than the eurozone leaders have.

Considerations of national sovereignty become important and in this respect the

observation by Robert Mundell (1961: 661) is apt: ‘In the real world, of course, currencies

are mainly an expression of national sovereignty, so that actual currency reorganization

would be feasible only if it were accompanied by profound political changes’. In view of the

poor progress made with African regional integration,23 it is hard to believe that African

countries in general will be willing to accept the profound political changes required by

monetary union. Also, considering the relative youth of the independent nation states in

Africa and the efforts made to build national identities, many countries might be reluctant to

sacrifice an important symbol of sovereignty, namely their own currencies.

7. Conclusion

The eurozone used to serve as a model arrangement to be replicated in Africa. However,

recent experience has revealed serious shortcomings in the structure and operation of the

zone, notably the need to complement monetary union with fiscal integration, the problems

that arise if disparate economies are members of a common currency area, and the need for

wise and strong political leadership to manage integration and deal with crises that could

develop. These factors must be added as further complications to the downside of countries

– exposed to asymmetrical external shocks – that have to sacrifice sovereignty in monetary

policy, including exchange and short-term interest rates, to a regional central bank. In view

of these considerations monetary union, especially within the timeframe envisaged in

23

There is, to quote Geda and Kebret (2008: 357), ’consensus that regional integration efforts in Africa registered disappointing results’.



67

African integration arrangements, is a step that should be considered with great caution, if

at all.

Supporters of the goal of monetary union in African regional integration arrangements may

be tempted to refer to the CMA and CFA franc zone, instances of monetary integration

arrangements noted for their longevity, in support of the argument that monetary union can

work in Africa. This would be false reasoning. Neither of these arrangements are examples of

monetary union of the form featured in this chapter and anticipated by arrangements such

as SADC, but instead are unique monetary integration exercises based on the principle of

linked currencies, each firmly rooted in pre-independence history, and are hardly replicable.

Scepticism about the wisdom of monetary union in the sense of having a regional central

bank and a common currency in African integration arrangements does not imply scepticism

about the benefits that are to be derived from increasing trade in services, including

financial services. A critique of the linear model of integration adopted in the African context

has been provided elsewhere;24 suffice it to note that a crucial point of criticism is that strict

adherence to this model ignores in early pre-common market stages of integration the

importance of intraregional trade in services in facilitating regional growth and

development. Opening markets in the region to trade in financial services can contribute to

enhancing economic efficiency by facilitating trade in goods and investment.

24

See footnote 2.



68

References

Comtrade. 2009. World exports by provenance and destination. [Online]: Available:

http://comtrade.un.org/pb/.

Delors, J. 2011. Euro doomed from the start. The Daily Telegraph, 2 December.

ECA. 2004.

Geda, A. and Kebret, H. 2008. Regional Economic Integration in Africa: A Review of Problems and

Prospects with a Case Study of COMESA. Journal of African Economies, 17, 357.

Guillaume, D.M. and Stasavage, D. 1999. Improving Policy Credibility: Is There a Case for African

Monetary Unions? World Development, Vol. 28(8), 1391.

Wang, J.Y., Masha, I., Shirono, K. and Harris, L. 2007. The Common Monetary Area in Southern Africa:

Shocks, Adjustment, and Policy Challenges. IMF Working Paper, WP/07/158. p. 10 note 7.

Lesotho. Ministry of Finance and Development Planning. Background to the 2009/10 Budget: A

Review of Economic Performance, 2003 – 2008; Economic Prospects, 2008 – 2012; and Medium Term

Fiscal Framework, 2009/10 – 2011/12, Table 1.6.

McCarthy, C. 2011. African Regional Economic Integration: Is the paradigm relevant and

appropriate?”. In Herrmann, C. and Terhechte, J.P. (eds.), European Yearbook of International

Economic Law. Berlin: Springer-Verlag.

McCarthy, C. 2004. Lessons that Southern Africa can learn from EU Monetary Integration – can our

region go the euro path? Conference arranged by the European Union mission to South Africa on the

Euro outside the Euro Zone: The South African perspective, 7 and 9 June 2004, Cape Town and

Johannesburg.

McCarthy, C. 2009. The Common Monetary Area in Southern Africa – a comparative assessment of its

nature, development and experience. Unpublished report prepared for the Dubai Economic Council.

Mundell, R. 1961. A Theory of Optimum Currency Areas. The American Economic Review, Vol. 51(4),

657 -665.

Rattner, S. 2011. Look to America for lessons in sharing a currency. Financial Times, 21 October.

Robson, P. 1998. The Economics of International Integration. Fourth Edition. London: Routledge.



69

Sarkozy and Merkel demand relaunch of European ideal with ‘treaty of solidarity’. The Times,

2 December, p. 59.

Van Zyl, L. 2003. South Africa’s experience of regional currency areas and the use of foreign

currencies. BIS Papers No 17. [Online]: Available: http://www.finforum.co.za/regional/bispap17o.pdf.

World Bank. 2010. World Development Indicators 10. Washington D.C.: World Bank. [Online]:

Available: http://data.worldbank.org/indicator/TT.PRI.MRCH.XD.WD.

WTO. 1999.. The Legal Texts of the Uruguay Round of Multilateral Trade Negotiations. GATT 1947,

Article 1. p. 423 (424).

Chapter 3 – Manufacturing and regional free trade agreements: a computer analysis of the impacts


70

Chapter 3

Manufacturing and regional free trade agreements: a computer analysis of the impacts

Ron Sandrey and Hans Grinsted Jensen

1. Introduction and the model

Sandrey et al. (2011) simulated a full free trade area (FTA) between the Common Market for

East and Southern Africa (COMESA), the East African Community (EAC) and the Southern

African Development Community (SADC) after each of these three regions itself has made

the necessary steps to full subregional integration. The interest in that study was in the

Tripartite FTA only, and that research assumed that the necessary starting point for the

Tripartite FTA was the fully functioning operation of the three sub-FTAs in the Tripartite

region. A major point of departure for this chapter is that the three initial FTA full steps for

SADC, EAC and COMESA are analysed sequentially before the full Tripartite FTA is

operational. This enables the separate benefits from each ‘partner’ FTA to be examined prior

to the final Tripartite COMESA-EAC-SADC FTA (T-FTA).

We note that in order to reach the final T-FTA there needs to be a resolution about the

overlapping memberships in the region, and unfortunately this problem is somewhat

exaggerated by the Global Trade Analysis Project (GTAP) country/regional aggregation. For

example, Kenya is aggregated into a regional group that includes, among other countries,

Sudan1. Annex 1 shows a table outlining the problem of overlapping membership and how

this complicates not only the politics but also our modelling results. How we treat the

overlapping membership problem and the associated issue of the sequencing of the FTAs

needs to be explained. In this report we run four sequential FTA scenarios: 1) SADC, 2) EAC,

3) COMESA and 4) T-FTA. Each one is deemed to be fully operational before the next

simulation in the sequence is run. We deliberately model the SADC FTA first, not because we

believe it is likely to be the first region to reach comprehensive FTA status but because our

analysis also concentrates on South Africa. Basically, if a country like Mauritius belongs to

both SADC and COMESA, and Kenya belongs to both EAC and COMESA, there will be no gains

to Mauritius for sugar exports to Kenya from the Tripartite FTA as it already has that access

1 We note that in early 2011 Southern Sudan voted to break from Sudan and form an independent country. We have not factored this into the analysis.



71

due to both countries belonging to COMESA. Thus, as Sandrey et al. (2011) discuss, it is

hardly surprising that as both the powerhouse of Africa and one of the few countries not

claiming multiple memberships, South Africa gains the most from a final Tripartite FTA.

The objective of this chapter is therefore to simulate and report on not only the Tripartite

FTA but also the three FTA pathways to that agreement. We believe that such an analysis

provides a step-by-step pointer to the potential gains. Importantly, the theme of this chapter

is to concentrate upon the manufacturing sector as distinct from the earlier analysis that

concentrated upon the agricultural sectors. A final note needs to be made that although the

same model and associated database used in this report were also used by Sandrey et al.

(2011) there may be minor differences in the reported results for the final Tripartite FTA.

This is because different product aggregations are used in the model and this can make a

slight difference to the final figures.

In summary, the sequentially additive macroeconomic results of the four FTAs are as follows

(differentiating the numbers as done in the full study indicates the impacts of each FTA):

Scenario 1: SADC FTA only

As a result of this initial SADC FTA the real exchange rate in South Africa increases by 1.33%

due to the increased demand for South African exports to the region. This increased activity

increases national income by 2.18% while prices increase by a lesser 1.04% resulting in an

increase in national welfare of US$4 755 million when measured as the Equivalent Variation

(EV) in income with fixed prices.

Scenario 2: SADC and EAC FTAs

Here the real exchange rate increases by 1.33% due to the increased demand for South

African exports. The increased activity in the South African economy increases national

income by 2.18% while prices only increase by 1.04%. This results in an increase in national

welfare of US$4 738 million when measured as the EV in income with fixed prices.



72

Scenario 3: SADC, EAC and COMESA FTAs

Here the real exchange rate increases by 1.33% due to the increased demand for South

African exports. The increased activity in the South African economy then increases national

income by 2.18% while prices again increase by 1.04%. The net result is an increase in

national welfare of US$4 733 million.

Scenario 4: SADC, EAC, COMESA and Tripartite FTAs

Finally, the real exchange rate increases by 1.70% due to the increased demand for South

African exports. The increased activity in the South African economy increases national

income by 2.79% while prices only increase by 1.33% resulting in an increase in national

welfare of US$6 045 million.

1.1 The GTAP database/model

GTAP is supported by a fully documented, publicly available global database, as well as

underlying software for data manipulation and for implementing the model. The framework

is a system of multi-sector economy-wide input/output tables linked at the sector level

through trade flows between commodities used both for final consumption and

intermediate use in production. The latest GTAP pre-release Version 8 database divides the

global economy into 112 countries/regions with 57 commodities specified in the database.

The database represents global trade in the year 2007 measured in millions of (2007)

US dollars (US$).

The standard GTAP model is a comparative, static, general equilibrium model, which means

that while it examines all aspects of an economy via its general equilibrium feature (as

distinct from a partial equilibrium approach that examines only the sector under

consideration), it is static in the sense that it does not specifically incorporate dynamics such

as improved technology and economies of scale over time unless these are specifically built

in. The economic agents of consumers, producers and government are modeled according to

neoclassical economic theory, with both producers and consumers maximising their profits

and welfare respectively with markets assumed to be perfectly competitive and all regions

and activities linked. Results are measured as a change in welfare arising principally from the



73

reallocation of resources within an economy and the resulting changes in allocative

efficiency, terms of trade effects2, capital accumulation and changes in unskilled labour force

employment. This change in welfare is based upon a representative household, so unless

this is modified it is not possible to examine the distributional aspects other than through

the skilled/unskilled labour market closures. The standard GTAP model also does not address

the time path of benefits and capital flows over time. These changes are important as they

allow consumers to borrow, which in turn allows consumption patterns to vary over time.

1.2 The interpretation of GTAP results

The GTAP model expresses the welfare implications of a modeled change in a country’s

policy as the Equivalent Variation in income. The EV in income measures annual change in a

country’s income (gains or losses) from having implemented, for example, an FTA. The EV

in income is simply defined as the difference between the initial pre-FTA income and the

post-FTA income after implementation of the FTA, with all prices set as fixed at current

(pre-FTA) levels.

EV in income = post-FTA income – pre-FTA income

If a country’s EV in income increases due to a policy change, the country can increase its

consumption of goods equal to the increase in income and thereby improve the national

welfare in the country. The EV is a doubly effective measure for measuring the global

economic impacts of an FTA agreement between groups of countries. Firstly, the EV

provides a monetary valuation of effects induced by FTA policy changes globally and at the

country or regional level, so as to illuminate winners and losers. And secondly, the EV also

facilitates comparisons of different policy scenarios, given that income changes are

measured in initial base prices.

2 Where terms of trade are the relative changes in import and export prices following a change. Improved allocative efficiency within a country comes about as it moves resources into more internationally competitive activities following a reduction in its own border protection. Paradoxically, it is this allocative efficiency that provides most of the benefits to the ‘home’ country from reducing its own protection rather than the exporter gaining better market access as the partner country reduces tariffs. This is an example of where a general equilibrium model is often able to counter the common mercantilist argument that a country needs protection to develop its own industrial sector.



74

These total welfare gains/losses can be decomposed into contributions from improvements

in allocative efficiency, capital accumulation, changes in the employment rate of the labour

force, and in terms of trade.

Gains from allocative efficiency arise from improved reallocation of productive resources

(such as labour, capital and land) from less to more productive uses. For instance, when

import tariffs are abolished, resources shift from previously protected industries towards

other sectors, which are more in line with the country’s comparative advantage, producing

an increase in real Gross Domestic Product (GDP) and economic welfare.

Terms of trade effects are the consequence of changing export and import prices facing a

country. So, when a country experiences an increase in its export price relative to its import

price (e.g. due to improved market access), it may finance a larger quantity of imports with

the same quantity of exports, thus expanding the supply of products available to the

country’s consumers. Whereas allocative efficiency contributes to increases in global welfare

gains, changes in terms of trade affect the distribution of global welfare gains across

countries; essentially, one country’s terms of trade gain is another country’s terms of trade

loss. The global total must therefore add to zero, and if a large proportion of the benefits to

South Africa from an FTA is derived from terms of trade effects, this implies transfers to

South Africa from the rest of the world.

Capital accumulation summarises the long-run welfare consequences of changes in the

stock of capital due to changes in net investment. A policy shock affects the global supply of

savings for investment as well as the regional distribution of investments. If a trade

agreement has a positive effect on income through improvements in efficiency and/or terms

of trade, a part of that extra income will be saved by households, making possible an

expansion in the capital stock. At the same time, rising income will increase demand for

produced goods, pushing up factor returns and thus attracting more investments. Generally,

economies with the highest growth will be prepared to pay the largest rate of return to

capital, and will obtain most of the new investments. Therefore we will tend to see that the

long-run welfare gains from capital accumulation reinforce the short-term welfare gains

deriving from allocative efficiency and terms of trade.



75

The welfare effects of changed employment rates are consequences of changes in the

extent of the unskilled labour force employed due to changes in the real wage. In a situation

where the demand for labour and thereby the real wage increases, the amount of labour

employed increases, reducing the relative rise in the real wage and thereby increasing the

competitiveness of the country’s industries (increasing EV in income).

1.3 The GTAP simulation

The analysis undertaken in this chapter is based upon a variant of the GTAP model to

simulate the impact of possible multilateral market access reforms resulting from a Tripartite

FTA. The database is the Version 8 pre-release GTAP database (Badri & Walmsley 2008) with

the base year 2007,3 where the 2004 tariff data originating from the Market Access Maps

(MAcMap) database has been used with some verification and minor modifications. The

main unskilled labour market closure of the model has been changed so that the supply of

unskilled labour is endogenously determined by the labour supply elasticity.

As with any applied economic model, this model is, of course, based on assumptions, both in

terms of theoretical structure and the specific parameters and data used. Regional

production is generated by a constant return to scale technology in a perfectly competitive

environment, and the private demand system is represented by a non-homothetic demand

system (Constant Difference Elasticity function).4 The foreign trade structure is characterised

by the Armington assumption implying imperfect substitutability between domestic and

foreign goods.

The macroeconomic closure is a neoclassical closure where investments are endogenous and

adjust to accommodate any changes in savings. This approach is adopted at the global level,

and investments are then allocated across regions so that all expected regional rates of

return change by the same percentage. Although global investments and savings must be

equal, this does not apply at the regional level, where the trade balance is endogenously

determined as the difference between regional savings and regional investments. This is

3The documentation of the Version 7 database can be found on the website https://www.gtap.agecon.purdue.edu/databases/v7/v7_doco.asp. Documentation of the Version 8 database is not available at this point in time (October 2011). 4 Hence, the present analysis abstracts from features such as imperfect competition and increasing return to scale, which may be important in certain sectors. We are therefore using what can be thought of as a base GTAP structure.



76

valid as the regional savings enter the regional utility function. The quantity of endowments

(land, skilled labour and natural resources) in each region is fixed exogenously within the

model, while the extent to which unskilled labour is employed is endogenously determined.

The capital closure adopted in the model is based on the theory according to which changes

in investment levels in each country/region appear on-line instantly, updating the capital

stocks endogenously in the model simulation.5 Finally, the numeraire used in the model is a

price index of the global primary factor index.

The applied ad valorem equivalent (AVE) tariff data found in the GTAP Version 8 database

originates from the MAcMap database, contributed by the Centre d’Etudes Prospectives et

d’Information Internationales (CEPII). The MAcMaps database is compiled from United

Nations Conference on Trade and Development (UNCTAD) TRAINS data, country

notifications to the World Trade Organisation (WTO), the Agricultural Marketing Access

Database (AMAD), and from national customs information (Bouet et al., 2005). The MAcMap

database contains bilateral applied tariff rates (both specific and ad valorem) at the 6-digit

Harmonised Systems (HS6) level. These are then aggregated to GTAP concordance using

trade weights.6

1.4 Baseline projections 2007–2020

Before simulating the trade policy (FTA) scenario, we construct a baseline scenario to serve

as an updated basis for analysis. The baseline scenario updates the standard database with a

projection of the world economy from 2007 to 2020, applying suitable shocks to GDP,

population, labour and capital, as well as incorporating the most important developments,

realised or planned, since 2007. We have identified and updated the database with the

developments such as the implementation of the Trade, Development and Cooperation

Agreement (TDCA), and, most significantly, we have assumed that the Economic Partnership

Agreements (EPAs) between all African countries except South Africa and the European

Union (EU) will be implemented. For the EPA we have assumed that (a) EU27 tariffs are

reduced to zero for all EPA countries except for sugar and beef where reductions of 50%

5 This capital closure adopted in the model is the so-called Baldwin closure as documented in GTAP Technical Paper no. 7. 6 Although the base year is 2007 for macro data and trade data, the tariff data (AVE) is from 2004. This should make little difference to the result as tariff changes over the 2004 to 2007 period were minimal.



77

were made rather than to zero, (b) for South Africa the EU reduces their tariffs by 20% in an

agreement associated with the EPA, and (c) all EPA countries reduce their tariffs by a blanket

40% on EU imports.7

For the country/regional aggregation we have used the countries and aggregations as shown

in Table 1.

Table 1: GTAP countries/regions used and their associated GTAP codes

The Tripartite countries

zaf South Africa

bwa Botswana

xsc Rest of SACU (Lesotho, Namibia and Swaziland)

xac Rest of southern Africa (Angola and DRC)

egy Egypt,

xnf Rest of North Africa (Libya and non-Tripartite Algeria)

eth Ethiopia

mdg Madagascar

mwi Malawi

mus Mauritius

moz Mozambique

tza Tanzania

uga Uganda

zmb Zambia

zwe Zimbabwe

xec Rest of East Africa (including Kenya and Sudan)

Rest of Africa – all non-Tripartite countries/regions in Africa

chn China

eu EU27

us United States of America

ind India

bra Brazil

rus Russian Federation

row Rest of the world

Source: GTAP database

7 We appreciate that this may not be an exact representation of the EPA outcomes but it seems to us a realistic one.



78

Notes:

• The three available groupings for SACU are of South Africa and Botswana as countries

in their own right and the only option of the ‘Rest of SACU’ comprises Lesotho,

Namibia and Swaziland. This is of course not ideal as the three economies are very

different, but there is no alternative.

• There are another 13 Tripartite countries/regions, although note that xnf, the Rest of

North Africa, includes Algeria with Libya.

• All other African countries/groupings outside of the Tripartite FTA are in one group.

• The remaining groupings comprise China, the EU, The United States of America (US),

India, Brazil, the Russian Federation and the rest of the world (row).

For the GTAP sectors we have used the full set of 16 manufacturing sectors that are available

but we often only report on the main ones of interest. Agriculture is merged into (a) primary

agriculture and (b) secondary agriculture, while natural resources and services are merged

into their respective aggregated sectors as the focus of this report is on manufacturing.

As always, we apply shocks to GDP, population, labour force, and capital to project the

world’s economy to the baseline year of 2020 – a year in which we assume that an FTA could

be fully implemented. The projection of the world economy uses the exogenous

assumptions listed in Table 2, and is important in shaping the baseline scenario. The general

sources for the assumptions in Table 2 are given in a footnote to the table, and these

assumptions represent the best estimates of the possible future path of the data.

The GTAP model then determines changes in output through both an expansionary and a

substitution effect in each country/region of the model. The expansionary effect represents

the effects of growth in domestic and foreign demand shaped by income and population

growth and the assumed income elasticities. The substitution effect reflects the changes in

competitiveness in each country/region shaped by changes in relative total factor

productivity, cost of production as well as any policy changes. The GTAP model uses this set

of macroeconomic projections to generate the ‘best estimate’ of global production and

trade data for 2020. The relative growth rates of each country/region for GDP, population,

labour, capital and total factor productivity play an important role in determining the



79

relative growth in output of the commodities when projecting the world economy from 2007

to 2020, and we can now take the resulting data set from this baseline simulation as the new

base for our FTA scenario. A simulation scenario measures the difference between our

baseline model’s output in 2020 in the absence of, for example, the FTA, against the likely

output if an FTA were concluded. The model results shown in this chapter present the

isolated effect of a possible FTA or other simulated scenario in the year 2020.

Table 2: Macroeconomic projections expressed as average annual growth rates, 2007–2020

Quantity

Real

GDP

Total

Population

Total

Labour

Force

Unskilled

Labour

Skilled

Labour Capital

Total Factor

Productivity

zaf 3.8 0.4 1.3 1.2 1.7 3.8 0.5

bwa 3.4 0.5 0.8 0.7 4.2 3.4 0.5

xsc 3.6 1.0 0.9 0.8 1.8 3.6 0.5

egy 4.9 1.4 1.7 1.7 2.2 4.9 0.8

rafrica 4.7 1.8 2.8 2.8 3.5 4.7 0.6

xnf 3.3 1.4 2.2 2.0 3.6 3.3 0.4

xac 11.7 2.8 1.8 1.8 3.3 11.7 2.0

eth 8.2 2.0 2.7 2.7 3.2 8.2 2.0

mdg 5.2 2.3 2.9 2.9 3.4 5.2 0.8

mwi 5.6 1.7 2.6 2.6 4.1 5.6 1.0

mus 3.4 0.9 3.5 3.4 5.6 3.4 -0.1

moz 6.7 1.0 2.7 2.7 4.1 6.7 1.2

tza 6.6 1.6 2.7 2.7 -0.8 6.6 1.4

uga 6.0 2.7 3.1 3.1 5.9 6.0 1.3

zmb 5.3 1.1 2.8 2.8 4.3 5.3 0.7

zwe 0.0 0.7 1.6 1.6 3.2 0.0 -0.3

xec 5.2 1.7 2.3 2.3 3.2 5.2 0.9

chn 8.6 0.6 0.8 0.8 3.9 8.6 1.0

eu 0.9 -0.1 0.0 0.1 -0.1 0.9 0.2

usa 1.9 0.7 1.2 1.6 0.8 1.9 0.3

ind 6.7 1.1 1.7 1.5 3.9 6.7 1.3

bra 3.2 1.0 1.1 0.9 3.0 3.2 0.4

rus 3.5 -0.6 0.0 -0.1 0.4 3.5 0.8

row 1.6 1.1 1.7 1.6 2.2 1.6 0.0

Source: World Bank forecasts, Walmsley (2006) and own assumptions

Note: The annual growth rate in total factor productivity (TFP) is determined endogenously by the exogenous variables (GDP, unskilled/skilled labour force and capital), the model and the associated database.



80

1.5 The FTA scenarios

The four FTA scenarios considered in this chapter entail the results of the removal of trade

barriers sequentially between 1) SADC, 2) EAC, 3) COMESA and finally 4) the full Tripartite

FTA as measured in the year 2020 in a world shaped by the baseline scenario. This implies

that:

• all ad valorem tariffs and ad valorem equivalents of specific tariffs between COMESA,

the EAC and SADC, and finally all Tripartite FTA countries are sequentially abolished;

• an assumed two percent blanket tariff equivalent to represent non-tariff barriers

(NTBs) has been built in to proxy a reduction in these barriers from each FTA. We note

that there is no empirical justification for that two percent level other than an intuitive

feel that NTBs are often of that level or even considerably more;

• A similar two percent NTB has also been applied to services to proxy some gains from

an FTA where services trade has been factored in.

When all ad valorem tariffs and ad valorem equivalents of specific tariffs between members

are abolished, the differences between the so-called baseline scenario and then each

sequential FTA scenario as measured by the gains at 2020 in 2007 real dollar terms are

therefore the result of the implementation of each of the simulated FTAs. Importantly, as

distinct from Sandrey et al. (2011), this approach highlights the interim benefits for the three

regional groupings of activating their own FTAs – although we reiterate that the sequencing

of the FTAs may make a difference to countries with multiple memberships.



81

2. The big picture: GTAP results

We start the results review with Table 3 that shows the changes in welfare from the four

FTAs as discussed earlier plus the overall final total. The data is expressed in US dollars

(millions) as one-off increases in annual welfare at the assessed end point of 2020. The

results for South Africa for the SADC and Tripartite FTAs in particular are impressive: for the

SADC FTA welfare increases by some US$4 755 million and for the Tripartite FTA welfare

increases by a further US$1 312 million. South Africa is virtually unaffected by FTAs of EAC

and COMESA to the north with minor losses in both instances. To put these SADC and

Tripartite welfare gains in perspective: they each are significantly higher than the welfare

gains found from tralac research using an earlier version of GTAP (Sandrey et al., 2010) to

assess the gains from FTAs with the Mercado Comun del Sur (Mercosur) (US$236m) and

China (US$295m). Clearly, the current policy thrust of concentrating upon firstly SADC and

then Tripartite integration is the best pathway for South Africa.



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Table 3: Change in welfare (EV of income) from sequential FTAs (US$ millions)

Country /region SADC Step 1 EAC Step 2

COMESA

Step 3

Tripartite

Step 4 Total Benefit

SADC

zaf 4 755 -16 -6 1 312 6 045

bwa -38 0 -1 -18 -57

xsc 323 -1 84 17 423

xac -1 892 -9 -166 -28 -2 096

mdg 56 0 -1 -2 53

mwi 17 0 7 -4 19

mus 97 0 5 -5 97

moz 561 0 -1 94 653

tza 531 58 -7 25 608

zmb 233 -2 12 -12 232

zwe 71 0 1 -8 64

EAC

xec 476 212 241 -250 680

uga -22 113 217 -4 304

COMESA

egy -18 -6 422 184 582

eth -4 -1 211 3 209

xnf 23 -2 16 3 40

Non-Tripartite

r afr -394 -13 -37 -52 -495

chn -930 -120 -313 -196 -1 559

eu -827 -133 -418 -419 -1 797

usa -259 -44 -114 -105 -521

ind -359 -44 -83 -116 -603

bra -152 -17 -54 -38 -260

rus 94 -29 -63 -31 -29

row -302 -140 -410 -259 -1 111

World 2 041 -193 -459 91 1 480

Source: GTAP results



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The other features from Table 3 are:

• The GTAP welfare result for South Africa’s fellow SACU members from the FTA shows a

different picture. Botswana demonstrates a welfare loss of US$38 million from SADC

integration and a further loss from the Tripartite FTA. The Rest of SACU as an

aggregation of Lesotho, Namibia and Swaziland shows significant gains of

US$323 million from SADC and a further gain of US$84 million from COMESA –

Swaziland is a member of COMESA and our hypothesis8 at this stage would be that

Swazi sugar enters Kenya with better access conditions.

• The aggregation of Angola and the Democratic Republic of Congo (DRC) loses heavily

from SADC integration in particular (the reasons for this will be explored later).

• Both Mozambique and Tanzania show welfare gains of half a billion dollars from SADC

integration, while Zambia gains US$233 million and the other SADC members gain

between US$17 million for Malawi and US$97 million for Mauritius from SADC.

• South Africa and Mozambique, two countries that belong exclusively to SADC, are the

only SADC countries to show significant welfare gains from the Tripartite FTA, while

only Tanzania gains from EAC, but, as outlined above, the Rest of SACU (Swaziland)

gains and Angola/DRC loses from COMESA.

• With the EAC countries, the Rest of East Africa (read mostly Kenya) gains significantly

from each of the three ‘first step’ FTAs but loses some of these gains in the final

Tripartite FTA step, while Uganda makes solid gains from COMESA and EAC FTAs.

• Within the exclusive COMESA countries, Egypt gains US$422 million from COMESA and

another US$184 from the Tripartite FTA, Ethiopia’s gains are almost exclusively from

COMESA while the Rest of North Africa (Libya) gains moderately but really only from

SADC and COMESA.

• As expected, all ‘outside’ parties (except Russia in the case of SADC) lose significantly

and sequentially across the FTAs as their trade is replaced by FTA partner members.

• Overall, the SADC FTA is globally welfare enhancing and the Tripartite FTA moderately

so, but COMESA in particular is not.

8 This is actually confirmed in detailed agricultural results from Sandrey et al. (2011).



84

The negative results for many member countries from the Tripartite FTA can be explained by

the time path taken to reach the adoption of this Tripartite FTA. Here we sequentially

modelled all three regional FTAs to be fully activated sequentially, and we have taken the

current memberships at their face value. This means, for example, that Tanzania is a

member of both EAC and SADC, with zero tariffs operating between other members of each

group. For these countries with multiple memberships there is therefore (a) a limited upside

from a Tripartite FTA as they already have most of the gains through being allied with an

extensive grouping and (b), consequently, when South Africa, the dominant economic

powerhouse in the region and a country without multiple memberships enters the full

Tripartite FTA, these countries with multiple memberships face new competition. This

suggests that provided the FTAs were to be sequenced reasonably quickly in ‘the real world’,

multiple membership is not such a big an issue (aside from logistical problems such as rules

of origin, etc). This is, however, a big proviso.

3. The SADC FTA

This section will consider the SADC FTA in detail, with special emphasis on the results for

South Africa. We start by presenting Table 4, which shows the welfare results for the SADC

FTA as detailed in the second column of Table 3 (also the second column of Table 4). The

results for South Africa are impressive: welfare increases by some US$4 755 million. These

gains to South Africa result from the contributing factors of increased investment expanding

the capital stock (US$2 067m) and allocative efficiency gains of US$1 148 million as

resources are better employed in the economy. These are enhanced by solid gains from

increased labour employment (US$505m) and by the terms of trade improvement of

US$1 035 million resulting from a favourable change in relative prices between South African

exports and imports. The big loss for Angola/DRC is also spread across the various

contributing factors, while the overall global gain is weighted towards better global capital

allocation (and within South Africa in particular).



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Table 4: Change in welfare (EV of income) from SADC FTA only (US$ millions)

SADC FTA only Allocative

Terms of

trade Total Efficiency Labour Capital

zaf 4 755 1 148 505 2 067 1 035

bwa -38 1 6 -16 -30

xsc 323 40 45 148 90

xac -1 892 -369 -132 -837 -554

mdg 56 6 2 23 25

mwi 17 4 0 63 -50

mus 97 27 4 71 -4

moz 561 106 37 480 -63

tza 531 97 14 406 15

zmb 233 52 9 193 -22

zwe 71 60 2 100 -91

xec 476 101 42 292 41

uga -22 -2 -3 -9 -7

egy -18 -3 -1 -9 -5

eth -4 -1 0 -2 -1

xnf 23 2 0 0 20

rafr -394 -126 -14 -229 -26

chn -930 -46 -57 -718 -109

eu -827 -237 -29 -300 -261

usa -259 -44 -16 -76 -123

ind -359 -84 -11 -184 -80

bra -152 -48 -15 -60 -29

rus 94 13 0 5 77

row -302 -148 -45 -250 140

Total 2 041 549 345 1 160 -12




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Table 5 expands on the welfare gains for selected T-FTA economies to show on the left-hand

side what the actual percentage changes are in terms of trade, real GDP and factor income.

The right-hand side of the table provides some insights into where the contributions to

changes in factor income derive from, and the individual contributions that add to the total

factor income.

Column 3 (real GDP) shows that South Africa gains by 0.95%, while Botswana’s loss is 0.05%

and the Rest of SACU’s gain is 1.15%. GTAP output tells us that South Africa’s income

increases by 2.19%, while prices only increase by 1.043%. This is in turn equivalent to an

increase of US$4 755 million in South Africa’s income when prices are fixed. Mozambique

shows a big GDP gain of 3.55% as the country becomes fully integrated into the SADC region,

while Zimbabwe’s gain is an even more impressive 8.0%. Recall from above that Angola/DRC

loses heavily from the SADC FTA, but Table 5 shows that this loss is ‘only’ 0.42% of real GDP

as of 2020. This is a direct result of the enhanced size of the aggregated Angolan/DRC

economies at 2020, as Table 2 shows that the best projections are for stratospheric GDP

growth rates of 11.5% from 2007 through to that time

Table 5: Percentage changes in terms of trade, real GDP and factor income, 2020

Terms

of trade

Real

GDP

Total

Factor

Income

With contributions from

Land

Unskilled

labour

Skilled

labour Capital

Natural

resources

zaf 0.79 0.95 2.25 0.10 0.78 0.42 1.00 -0.04

bwa -0.32 -0.05 0.32 0.01 0.19 0.07 0.13 -0.08

xsc 0.90 1.15 3.05 0.20 1.14 0.53 1.27 -0.10

egy -0.01 -0.01 -0.02 0.00 -0.01 0.00 -0.01 0.00

xac -0.06 -0.42 -1.14 -0.12 -0.35 -0.16 -0.57 0.06

eth -0.01 0.00 -0.01 0.00 -0.01 0.00 0.00 0.00

mus -0.07 1.23 1.82 0.03 0.69 0.23 0.85 0.02

moz -0.69 3.55 4.96 0.19 1.76 0.47 2.72 -0.18

tza 0.26 1.31 3.02 0.67 1.03 0.12 1.13 0.07

zmb -0.60 1.34 1.56 0.03 0.41 0.14 0.55 0.43

zwe -2.04 8.00 13.25 2.82 3.11 0.91 3.98 2.43

xec 0.14 0.23 0.47 0.03 0.17 0.06 0.19 0.02




87

On the right-hand side of Table 5, the relative contributions to total factor income9 are

shown. These must equate with the total factor income percentages shown. Thus, for South

Africa’s 2.25% increase in total factor income, the majority (1.0%) comes from capital, skilled

labour (0.42%) and unskilled labour (0.78%), land (0.1%) and a small contraction from

natural resources. Note that for land, skilled labour and natural resources, the quantities are

fixed in the GTAP model, so the small changes derive from price changes as their values are

bid up or down, while for both unskilled labour and capital, where the quantities are not

fixed, there is both a price and a quantity effect. Mozambique’s gains derive from unskilled

labour and capital, while Zimbabwe gains strongly across the board.

Changes in trade flows

Table 6 introduces the aggregate overall changes to trade flows for the different

countries/regions in 2020, expressed as percentage changes in both exports and imports,

and then in US$ million for the trade balance. The trade balance is fixed in the model to

savings minus investments, so the FTA increases investments more than savings in South

Africa – thus reducing the trade balance by US$758 million as these investments are sourced

from abroad. The Rest of SACU sees both exports and imports increase, while there is little

difference to Botswana. Angola/DRC sees a large increase in its trade balance as measured

here, while most of the other SADC countries see a similar pattern to that observed in South

Africa of increasing trade but negative balances. For non-SACU countries (both within Africa

and outside of the continent) the changes in trade flows as a percentage are only really

noticeable in the Rest of East Africa.

9 In this chapter the percentage change in factor income is defined as the percentage change in returns to

primary factors employed in the economy (i.e. the returns to land, labour, capital and natural resources). These changes in returns to primary factors employed occur due to reallocation of resources in the economy (allocative efficiency), changes in employment and changes in investment/capital stock which are all driven by price changes due to the modelled FTA tariff reductions. These changes in factor income occur with no changes in the production technology employed in the economy (no changes in Total Factor Productivity) as we have not modelled technological spillovers through trade in the FTA scenarios.



88

Table 6: Percentage changes in quantity of total imports, total exports and trade balance, 2020

% change in Change in trade

Exports Imports balance US$m

South Africa 2.51 3.15 -758

Botswana 0.10 -0.22 11

Rest of SACU 2.79 3.70 -26

Egypt, -0.02 -0.02 9

Libya/Algeria 0.00 0.02 8

Angola/DRC 1.02 -0.71 1 019

Ethiopia -0.02 -0.03 1

Madagascar 3.15 4.50 -13

Malawi 7.66 5.39 -25

Mauritius 3.52 3.87 -21

Mozambique 11.85 10.36 -155

Tanzania 10.50 8.22 -139

Uganda -0.15 -0.27 1

Zambia 6.50 7.91 -42

Zimbabwe 17.47 15.39 -38

Rest East Africa 1.85 1.34 -148

Rest of Africa

176

China -0.02 -0.04 -207

EU27 -0.01 -0.01 124

United States 0.00 -0.01 98

India -0.03 -0.07 -1

Brazil -0.04 -0.05 27

Russia 0.00 0.01 19

Rest of the world -0.01 -0.01 81


3.1 The individual GTAP sectors in South Africa

This section presents the production, trade and relative price changes in the main GTAP

sectors for South Africa. Table 7 shows the changes from the sectors used: primary

agriculture, secondary (processed) agriculture, natural resources, the 16 manufacturing

sectors and services. Column 1 shows GTAP sectors, with Column 2 showing the output

increase in US dollar (million) values, and Column 3 indicating that output change in

percentage terms. The next two columns show firstly the percentage changes in exports,

then imports, and finally the right-hand column shows the change in real producer output

prices.



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Table 7: Changes to South Africa’s production, trade and output prices

GTAP

code

Change in output % Change in quantity

Change in

price

US$

million % Exports Imports

primary agriculture P_agr 825 0.8 -1.1 7.5 2.2

secondary agriculture S_agr 2 687 3.5 26.0 4.3 1.3

natural resources nat -7 -0.2 -0.8 2.2 0.2

textiles tex 144 1.0 25.3 4.6 1.1

apparel wap 180 0.7 33.4 5.9 1.2

leather (footwear) lea 62 0.6 14.0 4.0 1.1

lumber lum 153 2.2 9.4 3.8 0.9

paper products, publishing ppp 417 1.6 7.5 3.9 1.0

petroleum, coal p_c 423 2.5 8.8 1.1 -0.1

chemicals, rubber, plastics crp 1 169 1.6 9.2 3.6 0.9

other mineral products nmm 266 2.0 19.3 3.7 1.1

iron & steel i_s 83 -0.6 -2.9 4.1 1.0

metals, etc. nfm -976 -5.1 -4.9 -1.4 0.6

vehicles mvh 625 0.9 3.0 2.5 0.7

metal products fmp 488 2.7 21.0 4.1 1.1

other transport otn 17 0.4 3.3 2.4 1.0

electrical goods ele 182 4.4 34.5 2.7 1.0

other machinery ome 683 1.1 8.9 3.4 1.0

other manufacturing omf 313 1.0 3.8 4.5 0.9

services serv 12 472 1.1 -4.0 3.6 1.2

Total 20 207


The outcome from Table 7 shows significant gains for primary, but more especially,

secondary agriculture but virtually no changes in natural resources. The focus of this report

is on manufacturing and the results show big increases in the output of chemicals, rubber

and plastics, vehicles and other machinery in particular, but a heavy decline in the ‘other

metals’ sector as resources are diverted away from this sector. Increased production and

exports of the crucial textile, clothing and footwear sectors in response to price increases of

just over 1.0% are very pleasing. Except for petroleum and coal products all manufacturing

sectors see an output price of around 1.0%, and generally but not invariably the increase in

exports is higher than the comparable change in imports. Services exports decline and

imports increase as attention is focused on substantial growth internally because of the

growing economy.



90

The examination now turns to trade, and Tables 8a and 8b show the increased imports from

South Africa into the respective countries. In Table 8b the importers are aggregated as

follows: non-SACU T-FTA members are in non-SACU, other African are in ‘othAfri’, and all

countries outside Africa are in ‘nonAfri’. In Table 8a the data in the cells refers to the

increased in imports from South Africa as a result of the SADC FTA. This highlights the

changes in imports from South Africa into Angola/DRC (xac) in secondary agriculture in

particular and the increases into Mozambique (moz) across all sectors. Note that imports

into Botswana decline as South African products become marginally more expensive and

there is no compensating tariff decline.

Table 8a: Changes in imports from South Africa with SADC FTA, 2007 US$ million at 2020

Sector bwa xsc xac mdg mwi mus moz

primary agriculture -3 16 140 1 15 9 138

secondary agriculture -3 23 1 043 16 38 253 272

resources -1 1 16 1 1 7 105

textiles 0 -1 50 1 19 2 33

apparel -3 3 73 0 2 10 20

leather -1 2 15 0 7 7 13

lumber -4 6 48 0 11 5 39

paper products -1 3 48 3 18 6 30

petrol, coal -1 9 150 0 11 1 18

chemicals, rub, plastic -3 11 283 3 38 53 142

other mineral products -3 7 61 1 12 7 18

iron & steel -1 3 30 2 8 10 42

metals, etc. -1 -1 1 0 1 1 11

vehicles -3 31 107 6 28 6 44

metal products -3 3 155 8 26 28 45

other transport -1 -1 27 1 1 1 6

electrical goods -4 -3 76 0 10 3 51

other machinery -14 8 200 12 28 33 150

other manufacturing -1 1 28 0 9 20 32

services -1 0 1 0 0 0 10

Total -50 121 2 552 57 283 461 1 222

Source: GTAP output

Table 8b continues with the changes in imports from South Africa, and this also includes the

total change on the right-hand side. Note that in ‘GTAP language’ these imports are virtually

the same as South African exports as the trade must balance, in contrast to the ‘real world’

where reconciliation between exports and imports is problematic. Almost half of the total



91

change in South African imports is in secondary agriculture, with significant contributions

from chemicals, plastics and rubber and other machinery. Other metal products decline

significantly, while natural resources, iron and steel and services also decline as the relative

prices facing imports change as a result of (a) SADC tariff changes where these changes are

applicable and (b) slightly higher output prices for South African merchandise on the world

market as shown in Table 7. Imports decline into both ‘other Africa’ and non-Africa except

for the petroleum and coal sector where they increase imperceptibly. Note also from the

two (continued) tables that the politically sensitive textile, apparel and leather (footwear)

sectors all see encouraging increases into SADC countries.

Table 8b: Changes imports from South Africa with SADC FTA, 2007 US$ million (continued)

Sector Tanzania Zambia Zimbabwe nonSACU othAfri nonAfri total

primary agriculture 14 16 90 -4 -10 -356 65

secondary agriculture 86 105 72 24 -17 -136 1 777

resources 7 33 0 -1 -2 -294 -128

textiles 12 20 28 1 -2 -19 144

apparel 6 12 7 1 0 -4 128

leather 4 11 5 0 0 -12 51

lumber 19 23 10 1 -1 -35 122

paper products 24 20 32 2 -8 -37 139

petrol coal 8 22 40 1 1 2 262

chemicals, rubber, plastics 53 119 119 7 -19 -148 658

other mineral products 13 31 21 2 -1 -10 160

iron & steel 12 20 17 -5 -7 -287 -156

metals, etc 10 4 7 -4 -5 -927 -903

vehicles 18 80 127 5 -11 -152 284

metal products 30 60 43 2 -11 -28 360

other transport 1 3 13 -2 -1 -24 24

electrical goods 24 35 27 3 -4 -10 209

other machinery 71 205 163 -1 -29 -195 631

other manufacturing 6 10 3 1 -1 -52 56

services 1 0 1 -2 -3 -210 -204

Total 420 829 826 32 -133 -2,933 3 679

Source: GTAP output

Continuing with the trade theme we examine the changes to South African imports with the

SADC FTA. Most of the imports from SADC into South Africa were at two percent, the figure

used to proxy the trade facilitating benefits of an FTA, but not all, as the tariff base was at



92

2004 levels with 2007 trade flows. There may be a slight overestimate of the increased

imports from SACU into South Africa in that case. However, these imports are mostly minor,

as an examination of the tariff data shows that only in the cases of textiles and clothing

would this make a difference as the GTAP database has not quite kept tariffs and trade in

lockstep here. All other significant changes to imports from SADC are based on zero tariffs

and therefore it is the two percent non-tariff trade facilitation that is making a difference.

Overall, some 16% of the effective increase in imports of agricultural products, 19% in

manufacturing, 14% in services and 26% in total, derived from SADC countries. The

exception was in natural resources, where 112% of the increase (with the negative or

declines in some sources challenging the simple maths here) was from SADC.

Table 9 shows that the main increases from SADC were:

• in agriculture from Malawi and Zambia;

• natural resources from Angola/DRC and Zambia;

• textiles and apparel from Madagascar and Mozambique and outside Africa;

• other metals from Tanzania, Zambia and Zimbabwe; and

• services from Mozambique.

There are few trade gains to SADC as measured by exports to South Africa from the FTA, but

SADC countries already have effectively duty-free access to that market.



93

Table 9: Changes in South African imports with the SADC FTA, 2007 US$ million

Sector xsc xac mdg mwi mus moz tza zmb zwe othAfri nonAfr total

primary agriculture -7 0 0 14 0 12 7 14 10 3 124 178

secondary agriculture -4 0 1 5 1 6 2 2 4 3 233 253

resources -16 230 1 1 3 6 0 138 52 -8 -35 371

textiles 0 0 32 1 15 21 8 0 4 0 54 134

apparel 0 0 35 13 38 10 7 0 7 0 36 146

leather 0 0 0 0 0 0 1 1 2 0 54 58

lumber -1 0 5 1 0 2 0 0 5 2 42 57

paper products -1 0 0 0 0 0 0 0 0 0 91 92

petrol, coal 0 0 0 0 0 0 0 0 0 0 9 9

chemicals, rubber, plastics 0 0 0 2 1 9 2 0 0 2 453 470

other mineral products 0 0 0 0 0 1 0 0 1 0 72 74

iron & steel 0 0 0 0 0 18 0 1 5 0 49 72

metals, etc. -8 0 0 0 0 4 102 61 79 -193 -129 -92

vehicles 0 0 0 3 0 3 1 1 3 1 433 444

metal products 0 0 0 0 0 2 1 0 1 1 104 109

other transport -2 0 0 0 2 4 0 3 0 1 47 54

electrical goods 0 0 0 0 0 1 0 0 0 1 267 268

other machinery 0 0 0 0 0 10 2 22 4 3 866 908

other manufacturing 0 0 1 0 1 1 0 0 1 1 80 86

services 0 0 0 0 1 55 0 2 0 8 345 413

Total -39 231 76 40 63 165 135 245 179 -176 3 194 4 105

Source: GTAP output

3.2 Decomposition of the welfare changes

Output from the GTAP model allows us to examine the relative contribution to welfare

changes to each country/region in the model from both (a) every other Tripartite

country/region, including own liberalisation as shown in Table 9, and (b) the commodity

sectors as shown in Table 10.



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Table 10: Welfare decomposition by SADC countries, 2007 US$ million

Contributions from reducing AVE tariffs and NTB to EV by region (2007 US$m)

zaf xsc xac mus moz tza zmb xec nonSADC nonAfr total

zaf 73 2 66 23 55 94 48 14 -163 -348 -76

bwa -4 0 0 0 0 1 1 0 0 -4 -2

xsc -5 0 7 0 4 1 1 0 0 -21 -11

xac 1 922 311 -1 884 1 -7 12 -12 12 24 2 058 2 487

mdg 41 7 -2 8 0 0 0 -1 -2 -72 -26

mwi 187 -1 -3 0 11 42 -4 -14 -4 -265 -56

mus 316 -1 -5 -5 -2 2 -2 -4 -14 -321 -46

moz 776 4 -33 0 372 25 -7 -9 -53 -1 036 47

tza 338 2 -22 1 1 115 23 612 -106 -1 232 -287

zmb 557 3 -6 -1 -4 9 202 -49 -35 -621 40

zwe 509 -5 -10 -1 130 -9 -16 -10 -68 -472 41

Total 4 755 323 -1 892 97 561 531 233 476 -394 -2 734 2 041

Source: GTAP output. See Table 1 for the country codes used, and note that omissions mean the data shown in the cells may not reconcile with totals.

Reading the table for the welfare contributions by country we find that for South Africa (zaf)

the overwhelming contribution is from tariff reductions into xac (Angola/DRC, US$1 922m),

with additional contributions from liberalisation in Mozambique, Zambia, Zimbabwe,

Tanzania and Mauritius in particular. The big losers are (a) Angola/DRC from losses within its

own economy and (b) non-Africa with major losses in all SADC countries except Angola/DRC

as South Africa moves into the SADC markets under the new preferences. Overall gains to

the Rest of SACU are driven by gains from better access into Angola/DRC, while the Rest of

East Africa (read Kenya) gains from an expanded economy in Tanzania. Most countries

except for Angola/DRC gain from own liberalisation, and this is the usual pattern in a country

that generally gains from own liberalisation.

For South Africa (Column 2), Table 11 can be read in conjunction with Table 7 which shows

the changes in output, trade and prices in South Africa (that level of detail for the other

SADC economies has not been provided). The largest sector contribution to South Africa’s

gains is from the aggregated secondary agriculture (US$1 408 million), and this is followed

by ‘other manufacturing’ and the individual chemicals, rubber and plastics sector (both



95

around US$600 million each). Vehicles and metal products also make substantive

contributions to South Africa’s gains.

Gains to the Rest of SACU also derive from secondary agriculture (which includes sugar),

while Angola/DRC lose from import competition to their secondary or processed agricultural

sectors. Non-Africa and the world also gain from better allocation in the secondary

agricultural sector. A ‘mirror’ pattern of losses to non-African countries against gains to

South Africa can be seen in the manufacturing sectors as South Africa displaces these

producers/exports, and this is especially so in the vehicle sector. Services are effectively

neutral, but there are some individual gains and overall losses from natural resources as

production and trade patterns readjust.

Table 11: Welfare decomposition by commodity, 2007 US$ million

zaf xsc xac moz tza zmb xec nonSADC nonAfr total

primary agriculture 183 4 20 8 11 -3 4 -10 -281 -63

secondary agriculture 1 408 132 -915 -43 -28 -18 46 -29 638 1 185

resources 58 22 83 73 36 22 24 -64 -255 18

textiles 89 5 -49 -1 76 -4 -14 7 -260 -125

apparel 45 3 -85 1 16 -5 -26 4 -5 -6

leather 44 2 -20 -3 -9 -5 60 -5 -122 -57

lumber 92 20 -34 8 32 -2 -14 -5 -57 54

paper products 133 0 -91 19 20 -7 28 -6 2 93

petrol, coal 26 0 -24 18 1 2 2 9 -126 -79

chemicals, rubber, plastics 616 19 -271 43 74 35 101 -26 -435 138

other mineral products 132 45 -132 11 3 -4 29 -6 103 179

iron & steel 165 -1 -8 172 50 8 57 -25 -449 -24

metals, etc 194 0 -2 14 127 38 49 -195 -94 137

vehicles 300 30 -108 53 43 78 40 -5 -209 292

metal products 278 1 -61 31 5 -1 13 -8 -170 80

other transport 39 2 2 3 1 2 3 -1 -57 -4

electrical goods 185 7 -45 22 10 8 5 -7 -168 17

other machine 662 11 -78 90 46 93 39 -20 -703 160

other manufacturing 100 18 -68 12 16 -4 28 0 -43 53

services 5 0 -5 31 1 1 2 1 -42 -7

Total 4 755 323 -1 892 561 531 233 476 -394 -2 734 2 041

Source: GTAP output



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3.4 Labour market changes

In this model, the labour market closure is one whereby skilled labour is fixed, but unskilled

labour is a function of the unemployment rate. In a developed country with generally (but

not always) low unemployment rates we would expect that the benefits to unskilled labour

flow through in the form of higher real wages. In a country that has a high unemployment

rate (South Africa’s is an official 25.5% but the higher unofficial rate is possibly the world’s

highest among countries at a similar level of development) we would hope that the changes

are reflected in increased employment. Table 12 shows the outcome for employment, with

the closure used in this chapter shown in the middle in bold. With this closure used the

employment and real wage outcomes are both positive for South Africa: employment

increases by 0.54% and real wages by a greater 1.80%. At the same time, the Consumer Price

Index (CPI) increases by 1.03%, meaning that unskilled workers would be able to buy more

with their wages. Finding employment for the unskilled is a real priority for South Africa, and

Table 12 provides more confirmation that the SADC FTA supports this objective. Note shown

is that the results are also for Botswana (employment up by 0.13% and real wages by 0.60%)

and for the Rest of SACU where employment is up by 0.68% and real wages by 2.66%.

Essentially, South Africa becomes more efficient with better capital utilisation in response to

enhanced exports to mostly SADC countries in both manufacturing and agriculture. This

increased demand for South African exports leads to an appreciation of the real exchange

rate in South Africa, resulting in a terms of trade gain. In the SADC FTA scenario South

African income increases by 2.187% while prices only increase by 1.043% – which is

equivalent to an increase of US$4 755 million in South Africa’s income (EV) when measured

in fixed prices.



97

Table 12: GDP, CPI and employment changes with different closures for SADC FTA

South Africa with SADC FTA

EV Real GDP CPI

US$ million % %

% change in

3 587 0.668 1.08 fixed Employment 0.000

Real wage 2.071

4 755 0.955 1.03 U Employment 0.538

(1-U) Real wage 1.798

12 737 2.91 0.72

Employment 4.229

fixed Real wage 0.000

Source: GTAP output

As emphasised above, the unskilled labour market closure used in our version of the model

is a function of a labour supply elasticity which is calculated from initial unemployment

rates. There are, of course, two extreme alternatives to this. The first is the third (bottom)

option above which makes wages fixed and forces adjustments in the labour market to come

through changes to the employment rate. In this instance, the results are that the welfare

gains to South Africa more than double to US$12 737 million or 2.9% of GDP as a result of an

increase of 4.2% in the workforce. The other alternative is to fix the number of persons

employed – this could be thought of as a trade union position, as any adjustments come

through as changes to their wage rates (the first option above). Here the result of

US$3 587 million following the big increase of 2.1% in the real wage rate is more or less a

20% decline in welfare relative to the scenario used. Hence, the policy of promoting

employment rather than increasing the wages of those already in employment is clearly a

superior option for South Africa to pursue and a SADC FTA would make a significant

contribution to this objective.

At this stage we will move ahead to the employment outcomes for South Africa from the

other three FTA scenarios, that of COMESA, the EAC, and the full Tripartite FTA. The

macroeconomic and employment data for this complete ‘end point’ is shown below. Almost

all of the extra gains derive from the Tripartite FTA, as can be seen from the very small GDP

gains to South Africa from the EAC and COMESA FTAs as shown in Table 3 above where slight



98

negatives are registered for South Africa from both COMESA and EAC. The same pattern as

for the SADC FTA can be seen, where fixing real wages and directing all the employment

benefits into getting more people into work are apparent. The data shown in the middle

case as the labour market closures modelled for the FTAs in this chapter is almost identical

with the same data shown in Sandrey et al. (2011) where the Tripartite FTA is modelled once

the other three FTAs are in place. The minute difference is due to different sector

aggregations used. Table 13 reinforces Table 3 in that the large gains to South Africa are

from the SADC FTA once it is fully operational. The EAC and COMESA FTAs are of interest

only as political-economic steps necessary to reach the full Tripartite FTA. Essentially, the

effort must be directed at operationalising the SADC FTA and every consideration must be

given to finding employment for more people rather than to increasing the wages of those in

jobs and so widening the income gaps.

Table 13: GDP, CPI and employment changes with different closures for SADC FTA FTA

South Africa – additional changes with EAC, COMESA and Tripartite FTAs

EV Real GDP CPI

US$ million % %

% change in

986 0.178 0.295 fixed Employment 0.000

Real wage 0.548

1 290 0.253 0.283 U Employment 0.139

(1-U) Real wage 0.476

3 407 0.771 0.199

Employment 1.128

fixed Real wage 0.000

Source: GTAP output

3.5 Tariff reductions and the implications for the SACU revenue pool

Sandrey (2007) explores the implications of SACU trade agreements with respect to changes

in tariff revenues, and highlights that there are large welfare transfers to the BLNS countries

(Botswana, Lesotho, Namibia and Swaziland) which arise from these countries obtaining

revenues over and above what they would have collected at their own borders if they were

not part of SACU. This has been reinforced by the recent study by the Centre for



99

International Economics (CIE) (2010), as these revenue transfers represent a direct aid

support payment from South Africa to BLNS.10 The objective of this subsection is to explore

the implications for BLNS countries in particular of the tariff revenue changes that would

result from the series of FTAs.

There are two ways in which tariff revenues would be reduced through an FTA. The first is

the obvious one in that with an FTA the vast majority of merchandise goods from the FTA

partner(s) would now enter SACU duty-free, and in reality almost all imports from SADC

were already entering SACU duty-free. The second relates to trade diversion. This takes

place when trade is deflected away from previous sources that were paying duty to the

sources which now benefit from duty-free access under the FTA. The overall tariff revenue

effect of an FTA has a much larger impact on BLNS than the direct production and trade

impacts, and of interest is what happens in South Africa rather than what happens in the

individual BLNS countries. The way in which the revenue is distributed is an important and

sensitive issue in SACU. Revenues are effectively collected by South Africa and then

distributed to the BLNS according to a formula that bears no resemblance to the way in

which the revenues are collected. Therefore, given the welfare transfer effects, South

Africa's welfare will be slightly lower than that given in this chapter and the BLNS countries’

welfare will be slightly higher.

Table 14 shows this data, expressed in US dollars (million) and not in rands. The second

column shows the changes in SACU tariff revenue following the first FTA, that of the SADC

community. The third and fourth columns show the addition impacts sequentially of the EAC

and COMESA FTAs respectively, while Column 5 shows the addition changes from the final

Tripartite FTA. The final outcome once all four FTAs are in place is shown in the right-hand

column, and tariff revenue into the pool actually increases marginally as South African

manufacturing imports in particular increase.

10 The levels of these grants are confirmed by the data in IMF (2009: Table SA20), which reports official grants to Lesotho of 37.5 and 32.0% of GDP for 2007 and 2008 respectively. The comparable data for Swaziland was 20.8 and 20.5% respectively, while that for South Africa’s was -1.0 and -1.1% for the two years.



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Table 14: Revenue changes following Tripartite FTAs (US$ million, 2007)

Change in tariff revenue, 2007 US$ million

SACU EAC COMESA Tripartite Final

Primary agriculture 1 0 0 -4 -3

Secondary agriculture 15 0 0 2 17

Resources 0 0 0 0 0

Manufacturing 163 -1 2 30 194

Total 179 -1 2 28 208


This result is in contrast to the substantive tariff revenue losses from a SACU-Mercosur and

SACU-China FTA as outlined in Sandrey et al. (2010).

4. The EAC and COMESA FTAs

This section will examine the sequential impacts of firstly the EAC FTA and then the COMESA

FTA, with special emphasis on the implications for South Africa. We caution that this section

is not as exact a representation of the FTAs as the previous SADC FTA came into existence

for a variety of reasons. The first is the overlapping membership problem. This is exemplified

by Tanzania (where Tanzania was included in the SADC FTA and its economy underwent the

changes outlined in Section 3 from that FTA) and perhaps more importantly by the serious

overlapping with COMESA where the DRC, Madagascar, Malawi, Mauritius, Seychelles,

Swaziland, Zambia, Zimbabwe, Burundi, Kenya, Rwanda and Uganda are all members of

either SADC or EAC. Thus, the sequencing of the FTAs will make a difference. This problem is

accentuated by the GTAP country/region aggregation, as we have put the ‘Rest of East

Africa’ into EAC on the basis that Kenya, Burundi and Rwanda are all in that aggregation. But

so are Comoros, Djibouti, Eritrea, Mayotte, Reunion, Seychelles, Somalia and Sudan, and

most of these countries belong to COMESA. Furthermore, the GDP of Sudan is almost

double that of Kenya’s, and this will overestimate the impacts of the EAC FTA as Sudan gets

placed into this aggregation. Only in the final Tripartite FTA will this problem solve itself.

There is also another aggregation problem in that for the ‘Rest of North Africa’, Libya

belongs to COMESA but Algeria does not, and a decision was made to place this aggregation

into COMESA and the Tripartite FTA albeit with tariffs adjusted to a weighted average to

partially overcome the problem.



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4.1 EAC

The reader is referred to Column 3 in Table 3 where the welfare implications for the

countries and regional aggregations used are shown for the EAC FTA, an FTA that takes place

among the EAC members after the SADC FTA is in place. This data is replicated in Table 15

along with the factors contributing to this welfare change. Only the three EAC

countries/regions of Tanzania (already in SADC FTA), Uganda and the ‘Rest of East Africa’

(the aggregation that contains Kenya, Burundi and Rwanda along with others that include

Sudan) benefit from the FTA. All other countries/regions including South Africa and non-

Africa lose. The EAC is able to use its capital stocks more efficiently, but this is at the expense

of the global capital use, and finally the FTA detracts from overall global welfare.

Table 15: Welfare implications of EAC FTA, US$ million

EAC FTA only EV US$m

Allocative

Efficiency Labour Capital

Terms of

trade

South Africa -16 -4 -2 -8 -2

Tanzania 58 3 2 53 0

Uganda 113 4 20 72 16

Rest of East Africa 212 32 21 122 37

Rest of SADC -13 -7 -2 -15 -5

EAC 383 39 43 247 54

COMESA -8 -1 0 -4 -2

Rest of Africa -14 -3 -1 -7 -2

Non-Africa -526 -110 -21 -351 -45

Total -193 -83 19 -130 0

Source: GTAP output



102

Table 16 expands on the welfare gains for the EAC economies to show on the left-hand side

what the actual percentage changes are in terms of trade, real GDP and factor income. The

right-hand side of the table provides some insights into where the contributions to changes

in factor income come from, and the individual contributions of land, unskilled labour, skilled

labour, capital and resources shown must add to the total factor income as shown in

Column 4. In terms of welfare expressed as a percentage of GDP Uganda is the winner with

an increase of 0.385%.

Table 16: Change in welfare (EV of income) from EAC FTA only (US$ million)

EAC FTA only

Total Contributions from

Factor

Land

Unskilled

labour

Skilled

labour Capital

Natural

resources

TOT QGDP Income

Zaf 0.00 -0.004 -0.01 0.00 0.00 0.00 0.00 0.00

Tza 0.02 0.148 0.37 0.10 0.13 0.02 0.15 -0.02

Uga 0.33 0.385 1.30 0.37 0.51 0.08 0.35 -0.01

Xec 0.09 0.092 0.24 0.01 0.09 0.03 0.10 0.01

Source: GTAP output

Table 17 shows where the gains for the EAC countries come from. The outlined box in the

centre of the table highlights the intra-FTA gains, or, in the case of the Rest of East Africa

(xec), the losses from own liberalisation. Countries from outside Africa lose significantly as

trade diversion replaces more efficient import sources.

Table 17: Contributions from reducing AVE tariffs and NTB to EV by region (2007 US$

million) FTA

zaf tza uga xec rest Africa non Africa total

Tza -2 10 4 132 -22 -197 -76

Uga -9 0 7 153 -13 -240 -101

Xec -5 49 102 -74 1 -88 -16

-16 58 113 212 -35 -526 -193

Source: GTAP output



103

Table 18 continues from Table 17 but this time shows the sector contributions to the

changes. For the Rest of East Africa (in bold) these are spread through the manufacturing

sectors with the chemicals, rubber and plastic sector as the main contributor. There is

minimal contribution in the agricultural, natural resources or service sectors. For Tanzania,

the more limited gains are spread across the economy, while, for Uganda, there are solid

gains in agriculture and iron and steel (i_s). South Africa has minor losses through most

sectors, as does the Rest of Africa which in this case consists of all other African countries

other than the EAC and South Africa.

Table 18: Contributions by GTAP commodity (2007 US$ million)

EAC only

South

Africa Tanzania Uganda

rest East

Africa

rest

Africa non-Africa total

p_agr 0 1 7 -5 0 -1 3

s_agr -3 -2 26 2 -3 -32 -12

nat 1 11 2 3 -5 -6 6

tex -1 9 1 3 0 -34 -22

wap 0 -1 0 5 0 -9 -6

lea 0 -2 5 16 -2 -40 -23

lum -1 5 1 1 -1 -11 -5

ppp -1 3 2 15 -2 -28 -12

p_c 0 0 2 11 -1 -12 0

crp -4 6 12 58 -5 -120 -51

nmm -1 0 7 12 -3 -21 -6

i_s -2 7 27 20 -5 -68 -23

nfm -2 4 8 19 -6 -36 -12

mvh -1 7 5 13 0 -29 -5

fmp -1 0 1 11 -1 -18 -6

otn 0 1 0 1 0 -4 -1

ele 0 1 2 2 0 -7 -2

ome -1 7 4 17 -1 -34 -8

omf 0 1 1 6 0 -14 -6

serv 0 0 0 0 0 -1 0

Total -16 58 113 212 -35 -526 -193

Source: GTAP output. See Table 7 for sector abbreviations



104

The minimal impact on South Africa is confirmed by the data shown in Table 19 where the

changes in output for each sector by both dollar value and percentage are shown first,

followed by the changes to exports and imports, and finally output prices. These latter

output prices as shown in the right-hand column do not even register. Note also that the

largest impact in South Africa is on services as output shrinks marginally in response to the

minimal GDP loss.

Table 19: Changes to South Africa’s production and trade, US$ million and % change

EAC RSA changes

Change in output % Change in quantity

% Change in

price

US$

million % Exports Imports

primary agriculture 0.14 0.002 0.01 -0.02 0.00

secondary agriculture -4.03 -0.004 -0.02 -0.01 0.00

resources -0.97 0.000 0.00 0.00 0.00

textiles -0.18 0.000 -0.01 -0.01 0.00

apparel -0.42 -0.001 0.00 -0.01 0.00

leather -0.59 -0.013 -0.13 -0.01 0.00

lumber -0.49 -0.007 -0.02 -0.01 0.00

paper products -1.96 -0.009 -0.06 -0.01 0.00

petrol, coal -0.86 -0.003 0.00 0.00 0.00

chemicals, rubber, plastic -4.76 -0.007 -0.04 -0.01 0.00

other mineral products -1.13 -0.010 -0.09 -0.01 0.00

iron & steel -4.41 -0.017 -0.04 -0.01 0.00

metals, etc. -0.59 0.001 0.00 0.00 0.00

vehicles -1.80 -0.002 0.00 -0.01 0.00

metal products -1.50 -0.008 -0.04 -0.01 0.00

other transport 0.21 0.019 0.03 -0.01 0.00

electrical goods 0.30 0.012 0.06 -0.01 0.00

other machinery 0.06 0.004 0.02 -0.01 0.00

other manufacturing -1.02 -0.003 0.00 -0.01 0.00

services -39.94 -0.004 0.01 -0.01 0.00

Total -63.94

Source: GTAP output



105

Overall we can conclude that this EAC has a modest impact upon Tanzania, Uganda and the

Rest of East Africa aggregation but almost no effect upon South Africa. Recall, however, that

Tanzania already belongs to the SADC FTA, so this somewhat limits the bilateral impacts

between South Africa and Tanzania. Overall, the FTA is not globally welfare enhancing as

regional imports are diverted away from the global low-cost suppliers at the margin.

4.2 The COMESA FTA

The reader is again referred to Column 3 in Table 3 where the welfare implications for the

countries and regional aggregations used are shown for the COMESA FTA, an FTA that takes

place among the COMESA members after the SADC and EAC FTAs are both in place. This

data is replicated in Table 20 along with the factors contributing to this welfare change. This

is the third of the regional FTAs, and the overlapping membership issue continues here.

Those COMESA members in the FTA are indicated in bold, and these are Tanzania and

Uganda along with much of the Rest of East Africa aggregation other than Kenya in the EAC

FTA plus Swaziland in the ‘Rest of SACU’, Madagascar, Malawi, Mauritius, Seychelles, Zambia

and Zimbabwe in SADC. Other than for the Rest of SACU, gains to SADC members are

minimal. For the EAC members Uganda and the ‘Rest of East Africa’ (which also includes

non-EAC but COMESA members) make meaningful gains. Egypt and Ethiopia are the other

significant gainers from the COMESA FTA. Again, and as generally expected, those outside

the FTA lose, and especially the EU, the largest supplier of regional imports and destination

of regional exports. The FTA is not globally welfare enhancing as the negative overall impact

of just over half a billion shows.



106

Table 20: Welfare implications of the COMESA FTA, US$ million

Welfare

Total

US$m

Allocative


Terms of

trade

South Africa -5 -1 0 -5 1

Botswana -1 0 0 -1 -1

Rest SACU 84 8 10 41 25

Egypt, 422 53 25 208 135

Libya/Algeria 16 14 0 7 -4

Angola/DRC -166 -27 -11 -76 -52

Ethiopia 211 65 12 91 43

Madagascar -1 0 0 -6 5

Malawi 7 1 1 3 2

Mauritius 5 1 0 2 2

Mozambique -1 0 0 -1 0

Tanzania -7 -1 0 -4 -2

Uganda 217 19 38 102 57

Zambia 12 3 1 7 1

Zimbabwe 1 0 0 0 0

Rest East Africa 241 67 20 141 12

Rest Africa -37 -9 -2 -18 -8

China -313 -11 -15 -261 -26

EU27 -418 -107 -11 -229 -71

United States -114 -29 -7 -68 -10

India -83 -16 -2 -54 -12

Brazil -54 -16 -3 -28 -6

Russia -63 -9 -1 -45 -8

Rest of the world -410 -106 -21 -200 -83

Total -459 -101 33 -390 -2

Source: GTAP output



107

Table 21 expands on the welfare gains for the EAC economies to show on the left-hand side

what the actual percentage changes are in terms of trade, real GDP and factor income. The

right-hand side of the table provides some insights into where the contributions to changes

in factor income derive from, and the individual contributions shown that must add to the

total factor income. In terms of welfare expressed as a percentage of GDP, Uganda is the big

winner with an increase of 1.12%, followed by Ethiopia’s 0.48%, the Rest of SACU’s 0.24%

and Egypt’s 0.18%.

Table 21: Change in welfare (EV of income) from COMESA FTA only (US$ million)

TOT QGDP

Total Contributions from

Skilled

labour Capital

Natural

resources

Factor

Income Land

Unskilled

labour

zaf 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

bwa -0.01 0.00 -0.01 0.00 0.00 0.00 0.00 0.00

xsc 0.24 0.30 0.71 0.04 0.27 0.13 0.31 -0.04

egy 0.18 0.14 0.40 0.00 0.13 0.05 0.20 0.02

xnf -0.01 0.01 0.00 0.00 0.00 0.00 0.00 0.00

xac -0.02 -0.04 -0.10 -0.01 -0.03 -0.01 -0.05 0.00

eth 0.48 0.30 1.11 0.31 0.42 0.05 0.28 0.05

mdg 0.15 -0.06 0.12 -0.01 -0.01 0.00 0.01 0.13

mwi 0.10 0.06 0.18 0.03 0.07 0.01 0.05 0.01

mus 0.03 0.04 0.08 0.00 0.03 0.01 0.03 0.02

moz 0.00 0.00 -0.01 0.00 0.00 0.00 0.00 0.00

tza -0.02 -0.01 -0.03 -0.01 -0.01 0.00 -0.01 0.00

uga 1.12 0.63 2.58 0.76 1.01 0.16 0.66 -0.01

zmb 0.02 0.06 0.11 0.01 0.05 0.01 0.05 0.00

zwe 0.00 0.03 0.05 0.02 0.01 0.01 0.01 0.00

xec 0.05 0.12 0.24 0.01 0.08 0.03 0.09 0.02

Source: GTAP output



108

Table 22 shows where the gains for the COMESA countries are derived from. Both South

Africa and the ‘Rest of SACU’ along with Ethiopia gain from better access into the ‘Rest of

West Africa’; Egypt makes big gains in fellow COMESA countries; the Angolan/DRC

aggregation loses rather heavily while Uganda, the Rest of East Africa and the countries

outside of Africa gain there; and the Rest of East Africa gains in COMESA other than from its

own liberalisation. As expected, countries from outside Africa lose significantly as trade

diversion replaces more efficient import sources and this in turn leads to a global welfare

loss.

Table 22: Contributions from reducing AVE tariffs and NTBs to EV by region (2007 US$ million)

zaf xsc egy xnf xac eth uga xec nonAfr total

egy 2 0 -30 24 0 44 29 32 -129 -23

xnf -5 0 170 -14 -8 1 10 73 -464 -249

xac -10 -5 4 4 -145 3 162 98 42 161

eth -8 5 170 -5 -11 -27 -1 193 -499 -205

zmb -5 0 2 0 0 0 0 17 -30 -17

xec 25 76 89 5 -1 186 17 -176 -323 -101

Total -5 84 422 16 -166 211 217 241 -1 456 -459

Source: GTAP output. Note that some minor changes are not presented.



109

Table 23 continues from Table 21 but this time shows the sector contributions to the

changes. For the Rest of SACU these are from secondary agriculture, sectors where Egypt,

Ethiopia and Uganda gain but Angola/DRC and the Rest of East Africa lose. Egypt’s big

manufacturing gain derives from the other mineral products (nmm) sector. Most other

changes, be they gains or losses, are spread relatively evenly across the table.

Table 23: Contributions by GTAP commodity (2007 US$ million)

xsc egy xnf xac eth uga xec nonAfr orld

p_agr 0 -4 1 3 9 10 1 -19 1

s_agr 55 76 -8 -89 44 80 -38 -70 56

Nat 0 0 10 2 17 3 15 -30 10

Tex 12 19 -1 -3 -2 2 -3 -54 -28

Wap 0 2 1 -7 21 5 -11 -25 -14

Lea 0 0 0 -4 7 0 12 -26 -12

Lum 0 17 -6 -1 28 1 -18 -30 -12

Ppp 1 7 0 -2 0 0 3 -18 -9

p_c 0 1 -1 -2 9 0 31 -42 -7

Crp 13 38 17 -7 1 6 74 -251 -114

Nmm 0 147 1 -6 -22 8 -16 -210 -114

i_s 0 8 2 1 4 15 13 -61 -20

Nfm 0 6 -1 -2 37 28 21 -130 -39

Mvh 0 5 -1 -4 26 5 18 -75 -23

Fmp 0 41 -1 -13 2 7 49 -137 -58

Otn 0 7 -1 1 2 5 21 -52 -19

Ele 0 1 0 -2 2 2 3 -12 -5

Ome 3 40 4 -9 25 16 52 -181 -53

Omf 1 4 -3 -18 0 22 10 -20 1

Serv 0 5 2 -5 1 0 5 -13 -3

Total 84 422 16 -166 211 217 241 -1 456 -459

Source: GTAP output



110

The very minimal impact on South Africa is confirmed by the data shown in Table 24 where

the changes in output for each sector by both dollar value and percentage are shown firstly

followed by the changes to exports and imports and finally followed by output prices. These

latter output prices as shown in the right-hand column barely register.

Table 24: Changes to South Africa’s production and trade, US$ million and percentage change

South Africa

Change in output % Change in quantity % Change in

price US$ million % Exports Imports

primary agriculture 6 0.009 0.041 -0.090 0.013

secondary agriculture -7 -0.016 -0.120 -0.005 0.004

Resources -3 -0.001 -0.003 0.007 -0.006

Textiles 1 0.010 0.125 0.011 0.001

Apparel 1 0.010 0.322 0.001 0.000

leather 0 0.014 0.179 0.009 0.000

lumber -1 -0.014 -0.055 -0.006 -0.001

paper products 1 0.005 0.062 -0.001 -0.001

petrol coal 1 0.012 0.069 0.002 -0.004

chemicals, rubber, plastics 0 0.000 0.017 0.007 0.000

other mineral products 1 0.008 0.134 0.005 0.000

iron & steel -3 -0.012 -0.025 0.000 0.000

metals, etc. -3 -0.012 -0.012 -0.008 0.000

vehicles 3 0.009 0.056 0.005 -0.001

metal products -2 -0.017 -0.102 0.005 0.000

other transport 0 0.001 -0.027 -0.011 0.001

electrical goods 0 0.002 0.062 0.000 0.000

other machinery 1 0.005 0.053 0.003 0.000

other manufacturing 0 -0.002 0.004 0.007 0.000

services -11 -0.002 -0.007 0.001 0.000

Total -13

Source: GTAP output



111

We can conclude that this COMESA FTA has a solid impact upon most of the COMESA

countries but virtually no effect upon South Africa. In general there are few welfare gains for

those SADC members who are overlapping COMESA members except for the Rest of the

SACU aggregation. There are some resource changes in secondary agriculture in particular,

while the manufacturing changes are generally spread across the different sectors. The FTA

is not welfare enhancing for the world as regional imports are diverted away from the global

low-cost suppliers. The impacts on South Africa are virtually zero.

5. The Tripartite FTA

In this final section we model the impacts of bringing the three regional trade blocs into one

comprehensive FTA. This means that now all problems of overlapping membership become

irrelevant in our assumed world of no complications such as rules of origin, and in general

the GTAP country/region aggregations are no longer an issue. The focus of interest is now:

what are the gains from further integration and where will those gains come from?

Again, we refer the reader back to Table 3 where the welfare gains from the three regional

FTAs are shown along with the ‘final step’ FTA of Cape to Cairo integration as shown in the

Tripartite FTA. These are reproduced in the second column of Table 25, and for the Tripartite

FTA the welfare gains to the world of only US$91 million were at least positive in contrast to

the EAC and COMESA FTAs, but paled into insignificance when compared with the SADC FTA.

However, this was not the situation for South Africa, as the welfare gains of US$1.3 billion

for the Tripartite FTA, while not as large as the US$4.7 billion from the SADC FTA, are still

very impressive. Unfortunately for the region, only Egypt and Mozambique come close to

matching these gains, while the Rest of East Africa loses, as do all non-Tripartite

countries/regions. The individual contributions to welfare are shown in Columns 3 to 6

inclusive for allocative efficiency, labour related gains, capital related gains and terms of

trade respectively.



112

Table 25: Welfare gains from the Tripartite FTA, US$ million

Tripartite FTA Total

Allocative


Terms of

trade

South Africa 1 311 312 133 561 306

Botswana -18 0 0 -6 -11

Rest of SACU 17 7 5 6 -1

Egypt, 184 27 10 91 56

Libya/Algeria 2 1 0 1 1

Angola/DRC -28 1 -1 -12 -17

Ethiopia 3 1 -1 15 -12

Madagascar -2 0 0 0 -2

Malawi -4 -1 0 -3 -1

Mauritius -5 -1 0 -2 -2

Mozambique 93 18 15 9 51

Tanzania 25 3 0 30 -8

Uganda -4 -3 -3 11 -8

Zambia -12 -1 0 -6 -4

Zimbabwe -8 -2 0 -3 -3

Rest of East Africa -250 28 -45 -38 -195

Rest of Africa -52 -14 -3 -31 -4

China -196 -8 -7 -184 3

EU27 -419 -100 -9 -231 -79

United States -104 -23 -3 -62 -17

India -116 -23 -3 -69 -21

Brazil -38 -11 -2 -22 -4

Russia -31 -3 0 -28 1

Rest of the world -259 -63 -11 -153 -32

Total 91 144 74 -123 -4

Source: GTAP output



113

Table 26 expands on the welfare gains for selected Tripartite economies to show on the left-

hand side what the actual percentage changes are in terms of trade, real GDP and factor

income. The right-hand side of the table provides some insights into where the contributions

to changes in factor income derive from, and the individual contributions shown that must

add to the total factor income. South Africa’s real GDP increases by 0.26%, marginally above

the GDP of Zimbabwe and Mozambique. Note that the big gains to Mozambique and South

Africa are due in part to the overlapping membership situation of regional blocs that results

in only these two countries having an exclusive membership of only one FTA, as even

Angola/DRC are linked to COMESA through the DRC’s membership. For many other

Tripartite FTA countries the welfare results are disappointingly low, and for some they are

negative as South Africa with its industrial power joins the earlier more exclusive party.

Table 26: Percentage changes in terms of trade, real GDP and factor income, 2020,

Tripartite FTA

TOT

Real

GDP

Total

Factor

Income

Contributions from

Land

Labour

Capital

Natural

resources Unskilled Skilled

zaf 0.24 0.26 0.62 0.04 0.21 0.11 0.27 -0.01

bwa -0.15 -0.03 -0.02 0.01 -0.01 -0.01 -0.01 -0.01

xsc -0.02 0.08 0.26 -0.02 0.14 0.05 0.11 -0.02

egy 0.08 0.06 0.16 0.00 0.05 0.02 0.09 0.01

xnf 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

xac -0.01 0.00 -0.01 0.00 0.00 0.00 0.00 0.00

eth -0.09 0.03 -0.06 -0.01 -0.03 0.00 -0.01 0.00

mdg -0.05 0.00 -0.06 -0.01 -0.02 0.00 -0.01 -0.02

mwi -0.03 -0.05 0.00 0.03 -0.01 0.00 -0.02 0.00

mus -0.03 -0.03 -0.06 0.00 -0.02 -0.01 -0.02 0.00

moz 0.62 0.22 1.62 0.53 0.71 0.12 0.28 -0.02

tza -0.04 0.09 0.06 0.01 0.01 0.00 0.03 0.01

uga -0.15 0.02 -0.18 -0.08 -0.08 -0.01 -0.03 0.01

zmb -0.05 -0.04 -0.02 0.02 -0.01 -0.01 -0.02 0.00

zwe -0.09 -0.22 -0.27 0.00 -0.09 -0.03 -0.13 -0.02

xec -0.44 -0.03 -0.46 -0.06 -0.19 -0.05 -0.14 -0.02

Source: GTAP output



114

Table 27 shows how the welfare gains are derived by country. For South Africa, they are

strongly concentrated on the ‘Rest of East Africa’, with minor contributions from Uganda,

Egypt and Ethiopia. Note that Mozambique also gains in the Rest of East Africa, a region

which loses significantly from regionalisation of the group’s economies.

Table 27: Decomposition of the welfare results by country/region, US$ million

zaf bwa xsc egy xac moz tza xec othTri nonTri nonAfr Total

zaf -28 1 1 114 -5 0 -1 86 15 -5 -365 -186

bwa -3 0 0 6 0 0 0 2 0 0 -15 -9

xsc -4 0 0 4 0 0 0 5 1 0 -16 -9

egy 58 0 0 -12 -1 3 2 -1 -1 -1 -31 16

xac -18 0 -3 23 -7 0 0 51 6 -2 -92 -39

eth 56 -1 0 -2 -1 -1 4 -2 1 -2 -35 17

moz -13 0 0 6 -1 0 -1 44 0 -1 -70 -36

tza -1 0 0 82 -3 0 20 -6 0 -7 -142 -55

uga 75 -1 -2 -1 -1 0 -1 -25 9 -2 -35 18

xec 1 176 -17 21 -38 -12 91 2 -406 -60 -32 -345 381

Total 1 311 -18 17 184 -28 93 25 -250 -29 -52 -1 164 91

Source: GTAP output. Note that some countries are omitted and the grand total will not reconcile.



115

In Table 28 the decomposition of the changes are given by sector for the countries/regions

that are most affected. For South Africa, the gains are focused on secondary agriculture with

solid results for chemicals, rubber and plastics, iron and steel, and vehicles in the

manufacturing sectors. Secondary agriculture in the Rest of East Africa loses to the tune of

one-third of a billion dollars as a result of these economies opening up to South African

imports.

Table 28: Decomposition of the welfare results by GTAP sector, US$ million

zaf bwa xsc egy xac moz tza xec othTri nonTri nonAfr world

p_agr 43 -1 -2 1 8 -2 0 17 1 -3 -65 -3

s_agr 593 -8 -16 -18 -7 102 -5 -335 -45 -18 135 378

nat 17 0 0 0 6 -1 1 16 4 -2 -72 -30

tex 4 0 1 40 -2 0 2 -1 -2 -2 -95 -55

wap -9 0 0 47 -6 0 0 5 5 -2 -113 -71

lea 4 0 0 0 -1 0 -1 13 0 -1 -26 -13

lum 13 0 0 8 -1 0 0 -2 -1 -2 -19 -3

ppp 66 -1 -1 0 0 -1 0 -26 0 -2 -22 13

p_c 2 0 0 0 0 0 0 -1 1 1 -8 -6

crp 135 -2 -3 2 -6 0 9 7 -2 -6 -185 -50

nmm 7 0 0 18 -1 0 0 -4 0 -1 -33 -14

i_s 112 -2 -1 -2 -2 -1 1 11 -8 -4 -132 -28

nfm 43 -1 0 1 -2 0 1 8 -1 1 -61 -11

mvh 100 -1 -1 2 -1 -1 -1 22 7 -3 -103 19

fmp 40 -1 0 3 -1 0 0 -2 -1 -1 -48 -11

otn 27 0 43 -1 1 0 0 14 3 0 -58 27

ele 17 0 0 0 -1 0 0 1 1 -1 -22 -5

ome 76 -1 -1 62 -4 0 19 14 2 -6 -201 -39

omf 20 0 0 0 -2 0 0 -6 2 0 -13 2

serv 1 0 0 20 -10 0 0 0 4 0 -24 -8

Total 1 311 -18 17 184 -28 93 25 -250 -29 -52 -1 164 91

Source: GTAP output



116

Following from the previous set of tables the consequential changes to production and trade

are given in Table 29. As expected from these previous results the big increases in

production by value are in secondary agriculture and services, with the former (secondary

agriculture) significantly increasing exports while the converse happens in services where

exports decline and imports increase by around one percent each as more attention is

focused on services within South Africa’s expanded economy. Output prices in

manufacturing (and services) all increase by either 0.2% or 0.3% in response to the changes,

while the prices rises in agriculture are 0.7% in secondary agriculture and 0.4% in primary

agriculture. The impacts on resources are minimal.

Table 29: Output, trade and price changes in South Africa from the Tripartite FTA



primary agriculture 280 0.3 -0.5 3.1 0.7

secondary agriculture 1 051 1.5 11.6 1.4 0.4

resources 11 0.0 -0.2 0.3 0.1

textiles 0 -0.3 0.8 1.2 0.3

apparel 19 -0.1 1.8 1.8 0.3

leather 2 -0.2 -0.1 1.1 0.3

lumber 18 0.1 1.0 1.1 0.2

paper products 168 0.8 4.8 1.2 0.3

petrol, coal 58 0.3 0.4 0.4 0.0

chemicals, rubber, plastics 243 0.3 1.7 1.0 0.3


iron & steel 97 0.2 0.5 0.8 0.3

metals, etc. -256 -1.4 -1.4 -0.6 0.2

vehicles 206 0.3 1.3 0.7 0.2

metal products 68 0.2 2.0 1.4 0.3

other transport 6 0.2 1.3 0.7 0.3

elect goods 3 -0.2 1.5 0.7 0.3

other machinery 13 -0.2 -0.1 0.9 0.3

other manufacturing 78 0.2 0.4 1.2 0.3

services 3 401 0.3 -1.1 0.9 0.3

Total 5 501

Source: GTAP output



117

Table 30 details the changes in trade and the final balance of payments for countries in the

region. The trade balance is fixed in the model to savings investments in GTAP. When the

FTA increases investments more than savings in South Africa, these investments have to be

financed from abroad. This in turn reduces the South African balance by US$956 million. The

converse takes place in Angola/DRC as exports expand more than imports and the balance of

payments improve.

Table 30: The trade and balance of payments summary from the Tripartite FTA

Imports % Exports % Balance US$m


Botswana -0.4 0.1 9

Rest SACU 5.0 3.9 -34

Egypt, 0.8 0.7 -229

Libya/Algeria 0.2 0.1 -8

Angola/DRC -0.8 1.1 1 125

Ethiopia 3.2 5.3 -51

Madagascar 4.5 3.1 -10

Malawi 5.4 7.7 -25

Mauritius 3.8 3.5 -21

Mozambique 11.8 12.9 -164

Tanzania 9.6 12.3 -161

Uganda 5.1 4.2 -39

Zambia 8.0 6.6 -42

Zimbabwe 15.0 17.2 -37

Rest of East Africa 3.9 6.8 -222

Non-Africa

659

Source: GTAP output



118

The changes in trade flows as measured by imports from South Africa into the countries of

most significance are shown by the GTAP sector in Table 31. Again, the flow of secondary

agriculture into the Rest of East Africa is highlighted, and research from Sandrey et al. (2011)

on the agricultural sector results from the Tripartite FTA shows that sugar is a major

contributor to this result. Agricultural imports into Egypt increase, while vehicles are a major

gainer from the FTA with better access into COMESA. In general, imports are diverted away

from SADC destinations to the new opportunities further north, but other than chemicals,

plastics and rubber, and vehicles, the gains to manufacturing are not very significant overall

once the trade diversion effects are factored in. In fact, the ‘metals, etc.’ sector representing

the general metal processing sector sees a significant fall in its global trade as the

reallocation impacts work through the economy.

Table 31: Changes in the imports from South African, US$ million

egy xnf eth uga xec SADC nonAfrica Total

primary agriculture 26 3 5 4 85 4 -112 19

secondary agriculture 14 0 4 31 823 -35 -38 765

resources 1 0 2 0 120 3 -159 -31

textiles 1 0 2 3 11 -5 -5 2

apparel 2 0 0 1 14 -7 -1 2

leather 1 0 0 1 8 -6 -3 -5

lumber 2 0 3 2 19 -3 -9 11

paper products 5 0 5 4 87 -4 -10 83

petrol, coal 0 0 0 3 11 1 -1 15

chemicals, rubber, plastics 5 0 12 13 161 -23 -39 107

other mineral products 1 0 0 1 10 -3 -3 4

iron & steel 5 0 0 9 142 -16 -78 47

metals, etc. 1 1 0 5 37 -4 -284 -249

vehicles 7 21 36 15 78 0 -40 117

metal products 1 2 1 6 53 -17 -7 22

other transport 0 0 0 3 14 -2 -6 6

elect goods 1 0 1 2 20 -9 -2 3

other machinery 12 0 14 7 82 -42 -52 -22

other manufacturing 2 0 0 3 20 -3 -14 6

services 2 0 0 0 1 -1 -56 -56

Total 90 27 87 114 1 797 -173 -920 849

Source: GTAP output



119

6. The ‘full Monty’

This is an end note on a complete Tripartite FTA ignoring the intermediate steps. Again,

Table 3, in the right-hand column, shows the welfare gains to all participants of such an FTA.

Recall that these and other gains can be accumulated across the three intermediate FTAs

and added to the Tripartite FTA. The aggregate results are duplicated in Table 32, along with

the welfare results shown as a percentage of GDP, and on the right-hand four columns show

the contribution of the different factors to these welfare changes. For South Africa, these

gains are just over six billion US dollars in real terms, and this figure completely dominates

the global results. Other significant gainers of around the half billion mark are the Rest of

SACU, Mozambique, Tanzania, the Rest of East Africa and Egypt. All countries outside of the

region lose, but not heavily enough to result in a global loss, as the final global gain is around

one and a half billion dollars. Internally, the big loser is the Angola/DRC aggregation, while

Botswana loses marginally. Expressed as a percentage of GDP the big gainers are the Rest of

SACU, Malawi, Mauritius, Mozambique, Tanzania, Uganda, Zambia and Zimbabwe along with

South Africa. These countries are all members of SADC except for Uganda.



120

Table 32: Welfare results for the complete regional integration, US$ million and % of GDP

Country / region Total % Real GDP

Allocative

Terms of

trade Efficiency Labour Capital

zaf 6 045 1.21 1 455 637 2 615 1 339

bwa -57 -0.09 1 6 -23 -42

xsc 423 1.53 54 61 195 114

egy 582 0.19 76 33 288 185

mar -24 -0.02 -6 -2 -9 -7

tun -18 -0.03 -6 -1 -7 -4

xnf 40 0.01 16 0 7 16

nga -25 -0.01 -9 -3 -25 11

sen -15 -0.08 -4 0 -8 -3

xwf -396 -0.31 -120 -12 -228 -36

xcf -18 -0.02 -8 -1 -8 -1

xac -2 096 -0.46 -397 -144 -929 -625

eth 209 0.32 64 11 104 29

mdg 53 0.22 6 2 17 28

mwi 19 1.04 4 0 63 -49

mus 97 1.24 27 4 71 -5

moz 653 3.76 124 52 489 -12

tza 608 1.53 102 16 485 5

uga 304 0.98 18 52 176 59

zmb 231 1.35 53 10 194 -25

zwe 64 7.81 59 2 97 -94

xec 680 0.41 228 39 518 -105

chn -1 559 -0.02 -69 -85 -1 266 -139

EU -1 797 -0.01 -481 -53 -844 -419

usa -521 0.00 -107 -29 -233 -152

ind -602 -0.02 -132 -17 -335 -119

bra -260 -0.01 -79 -21 -119 -41

lam -68 0.00 -57 -7 -64 60

rus -29 -0.01 -3 -2 -89 66

row -1 043 -0.01 -300 -77 -614 -52

Total 1 480 509 471 517 -18

Source: GTAP output



121

The real price of outputs in South Africa generally increases by close to 1.5%. The exceptions

to this include (a) natural resources and (b) petroleum and coal products. This is so because

in general there are no tariffs on these products and both are effectively traded on an

international market, therefore limiting South Africa’s abilities to alter prices. The other

exceptions are (c) secondary agriculture where prices rise by a slightly higher 1.7% and more

significantly (d) in secondary agriculture where the prices rise by 2.9% as South Africa gains a

significant advantage in a regionally and indeed globally distorted market.

Table 33: The full results for production in South Africa



primary agriculture 280 0.3 -0.5 3.1 0.7

secondary agriculture 1 051 1.5 11.6 1.4 0.4

resources 11 0.0 -0.2 0.3 0.1

textiles 0 -0.3 0.8 1.2 0.3

apparel 19 -0.1 1.8 1.8 0.3

leather 2 -0.2 -0.1 1.1 0.3

lumber 18 0.1 1.0 1.1 0.2

paper products 168 0.8 4.8 1.2 0.3

petrol, coal 58 0.3 0.4 0.4 0.0

Chemicals, rubber, plastics 243 0.3 1.7 1.0 0.3


Iron/ steel 97 0.2 0.5 0.8 0.3

metals, etc. -256 -1.4 -1.4 -0.6 0.2

vehicles 206 0.3 1.3 0.7 0.2

metal products 68 0.2 2.0 1.4 0.3

other transport 6 0.2 1.3 0.7 0.3

electrical goods 3 -0.2 1.5 0.7 0.3

other machinery 13 -0.2 -0.1 0.9 0.3

other manufacturing 78 0.2 0.4 1.2 0.3

services 3 401 0.3 -1.1 0.9 0.3

Total 5 501

Source: GTAP output



122

Finally, we present the full set of changes for South African exports as proxied by imports

into partner countries. This is displayed in two tables, with SADC partners shown first in

Table 34a. The largest increase is in secondary agriculture to Angola/DRC in particular. Next

are exports in other machinery, chemicals, rubber and plastics, and vehicles. The

destinations of these exports are spread through many of the cells in the table, although

note that in all cases Botswana records slightly lower imports as South African prices rise in

response to the better opportunities elsewhere and there are no compensatory tariff

reductions.

Table 34a: Increases in imports from South Africa as recorded by SADC partners, US$ million

bwa xsc xac mdg mwi mus moz tza uga zmb zwe SADC

primary agriculture -3 16 113 1 15 6 177 13 3 15 88 443

secondary agriculture -5 30 1 010 16 36 249 280 84 27 100 71 1 898

resources -2 1 14 1 1 7 110 5 0 32 0 170

textiles -1 -1 48 1 18 2 33 11 3 20 28 162

apparel -5 2 71 0 2 10 20 6 1 12 7 126

leather -1 3 14 0 7 7 8 3 1 11 5 58

lumber -4 5 47 0 10 5 39 18 2 23 9 155

paper products -1 4 46 2 17 5 30 22 3 19 32 181

petrol, coal -1 11 149 0 11 1 18 8 3 22 39 262

chemicals, etc. -4 15 273 2 36 52 137 50 10 116 118 805

other mineral products -3 9 60 1 12 6 17 12 1 31 21 167

iron & steel -1 4 28 2 7 10 31 10 9 18 17 135

metals, etc. -1 -1 1 0 1 1 8 8 3 3 7 30

vehicles -4 38 104 6 27 6 44 18 14 80 126 459

metal products -4 4 145 8 26 27 43 29 6 58 43 384

other transport -1 0 25 1 1 1 6 1 3 3 13 51

elect goods -5 -4 73 0 10 3 50 23 2 34 27 213

other machinery -18 12 186 12 27 32 144 64 6 198 158 820

other manufacturing -1 1 27 0 9 20 32 5 2 10 3 107

services -1 0 1 0 0 0 10 0 0 0 1 11

Total -67 150 2 433 54 273 450 1 240 391 100 803 812 6 639

Source: GTAP output



123

In the second table (34b) the same data for the other countries/regions is shown. Note that

Brazil and Russia have been included in the Rest of the world (row) in order to simplify the

table as these changes were minor. Firstly, Columns 2 and 3 report on the EAC changes

(recall that Tanzania is included in SADC), and the big increases into the Rest of East Africa

are notable. Columns 4 to 6 inclusive report the changes into the ‘wholly COMESA’

countries, and these are relatively minor. There are declines of US$169 million in exports to

African countries outside the Tripartite group, and all exports to the world outside of Africa

decline.

Table 34b: Increases in imports from South Africa as recorded by other partners, US$ million

EAC COMESA non-

tri11

Outside Africa

Total uga xec egy xnf eth chn EU usa ind row

primary agriculture 3 84 25 2 5 -13 -104 -168 -19 -20 -157 79

secondary agriculture 27 851 13 0 4 -21 -6 -85 -13 -2 -67 2 574

resources 0 120 1 0 2 -4 -213 -118 -10 -27 -83 -163

textiles 3 12 1 0 2 -2 -2 -11 -2 -1 -8 151

apparel 1 15 2 0 0 0 0 -2 0 0 -2 143

leather 1 8 1 0 0 0 -1 -7 -3 0 -4 55

lumber 2 20 2 0 3 -1 0 -21 -2 0 -21 143

paper products 3 89 5 0 4 -11 -2 -22 -2 -3 -18 227

petrol, coal 3 12 0 0 0 0 0 0 0 0 0 282

chemicals, etc. 10 171 5 0 12 -24 -15 -59 -37 -15 -61 791

other mineral products 1 12 1 0 0 -2 0 -9 -1 0 -3 176

iron & steel 9 136 4 0 0 -9 -73 -104 -33 -6 -148 -90

metals, etc. 3 34 1 1 0 -6 -91 -232 -251 -192 -443 -1 139

vehicles 14 90 7 17 35 -14 -1 -78 -26 0 -87 416

metal products 6 56 1 1 1 -14 -1 -22 -2 0 -11 410

other transport 3 12 0 0 0 -1 0 -15 -2 0 -13 45

elect goods 2 24 1 0 1 -6 0 -8 0 0 -3 239

other machinery 6 83 11 0 14 -37 -4 -168 -21 -1 -53 676

other manufacturing 2 22 2 0 0 -1 -16 -17 -26 0 -6 81

services 0 1 1 -1 0 -4 -13 -125 -37 -3 -87 -241

Total 100 1 850 84 20 84 -169 -544 -1 270 -485 -272 -1 275 4 855

Source: GTAP output

11 Where ‘non-tri’ refers to those African countries outside the Tripartite FTA.



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In the body of the report we have not discussed increased imports into South Africa, mainly

because SADC imports are largely duty-free12 in any case, so there is not as much interest in

the imports as a result of the SADC FTA in particular. Imports from both the EAC and

COMESA would be mainly in response to tariff changes while those from outside the

Tripartite region are in response to changing production patterns and increased wealth in

South Africa. It can be seen that most of the increased imports of nearly five billion dollars

are from sources outside Africa as those in the grouping ‘other Africa’ decline by US$201

million. We have shown both China and the EU as separate from our new ‘Rest of the world’

as imports increase by around one and a half billion from each of these sources. By sector,

the big increases are in the other machinery sector, equally from China, EU and the Rest of

the world, and in chemicals, rubber and plastics, vehicles and services from EU and the Rest

of the world. Not shown is that the increase in resources from SADC are mostly from

Angola/DRC and Zambia; apparel derives somewhat equally from Madagascar and Mauritius;

and the non-ferrous metals are from Zambia and Zimbabwe (and West Africa for ‘other

Africa’). It is the imports from outside the Tripartite region that are actually increasing tariff

revenue for the SACU pool as discussed, and these results confirm that there is a slight

downside to South Africa from trade diversion.

12 The exception here is that while this situation currently holds as of the time when the tariffs were set for GTAP there have been adjustments to zero on these tariffs. Accordingly, the data given for imports into South Africa from SADC will be an overstatement of what actually may occur. However, in general these imports are not that high and the main import of resources was facing zero tariffs in any case.



125

Table 35: Increases in imports into South Africa, US$ million

SADC EAC COMESA othAfri chn EU row Total

primary agriculture 48 26 4 0 2 42 110 233

secondary agriculture 15 9 6 2 5 112 163 311

resources 367 4 8 -3 0 -2 -10 363

textiles 74 3 26 0 29 9 19 160

apparel 104 7 32 0 30 2 6 182

leather 3 2 0 0 32 15 17 70

lumber 11 4 6 1 16 15 12 65

paper products 0 2 0 0 10 59 38 109

petrol, coal 1 0 1 0 1 3 7 12

chemicals, etc. 14 18 2 1 85 226 214 560

other mineral products 2 1 6 0 25 28 22 84

iron & steel 20 1 0 0 8 19 32 80

metals, etc. 222 0 0 -209 -29 -31 -76 -123

vehicles 11 11 4 0 59 206 255 545

metal products 4 16 2 0 42 36 35 135

other transport 6 3 0 0 7 20 31 68

elect goods 1 1 0 0 200 66 60 328

other machinery 37 6 8 0 313 382 349 1 096

other manufactures 4 1 1 0 49 20 27 103

services 54 3 10 4 31 181 237 520

Total 998 116 117 -201 915 1 408 1 549 4 902

Source: GTAP output



126

7. Implications for the BLNS countries (Botswana, Lesotho, Namibia and Swaziland)

The SADC FTA

Changes in trade flows

The welfare results for the BLNS are shown in Table 3 above, enabling us to go directly into

the specific trade results for the BLNS. Also, the tariff revenue implications for the SACU pool

have been discussed above, and this is a very important part of any regional FTA involving

SACU. It will not be reintroduced here, but rather we will concentrate upon trade and

production in the BLNS. Table 36 introduces the aggregate overall changes to trade flows for

the SACU members in 2020, expressed as percentage changes in both exports and imports,

and then in US dollars (million) for the trade balance. The trade balance is fixed in the model

to savings minus investments. This means that the FTA increases investments more than

savings in South Africa, thus reducing the trade balance by US$758 million as these

investments are sourced from abroad. The Rest of SACU sees both exports and imports

increase, while there is little difference to Botswana.

Table 36: Percentage changes in quantity of total import/export & trade balance, 2020

% change in Change in trade

Exports Imports Balance US$m


Botswana 0.10 -0.22 11

Rest of SACU 2.79 3.70 -26


The individual GTAP sectors in BLNS

This section presents the production, trade and relative price changes in the main GTAP

sectors for BLNS. Table 37 shows the changes from the sectors used, namely of primary

agriculture, secondary (processed) agriculture, natural resources, and the 16 manufacturing

sectors and services for Botswana. Column 1 shows GTAP sectors, with Column 2 showing

the output increase in US dollars (million) values and Column 3 that output change in

percentage terms. The next two columns show firstly the percentage changes in exports,



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then imports, and finally the right-hand column shows the change in real producer output

prices. The left-hand side of the table shows the changes for the SADC FTA, while the right-

hand side shows the complete changes for the full Tripartite FTA which include the EAC and

COMESA FTAs. Therefore, the minor difference that the EAC, COMESA and Tripartite FTAs

make to Botswana can be seen by subtracting the SADC FTA on the left from the final total

on the right. Following the SADC FTA the remaining changes are of little interest to

Botswana. The only important changes to output are in non-ferrous metals and services with

increases of US$25 million and US$43 million respectively.

Table 37: Changes to Botswana’s production, trade and output prices

SADC FTA only Full Tripartite FTA

Change

production % change in

Change

production % change in

US$m % exports imports prices US$m % exports imports prices

p_agr 9 0.1 6.7 -2.0 0.7 13 0.2 7.3 -2.7 0.9

s_agr 2 -0.6 -1.9 -0.9 0.6 4 -0.6 -2.1 -1.4 0.7

nat -1 -0.1 -0.1 -0.1 0.1 -3 -0.2 -0.2 -0.2 0.1

tex 4 4.0 4.1 0.5 0.5 4 4.1 4.3 0.3 0.6

wap -1 -1.1 -1.5 -0.6 0.5 -1 -1.4 -1.5 -0.5 0.6

lea 1 14.2 43.9 -0.3 0.6 1 14.7 44.9 -0.5 0.6

lum 1 0.2 24.0 0.2 0.5 1 0.3 24.7 -0.1 0.6

ppp 4 2.5 16.9 -0.2 0.6 4 2.7 17.5 -0.4 0.7

crp 6 2.4 8.7 -0.2 0.6 7 2.9 9.8 -0.3 0.7

nmm 1 0.0 12.2 -0.2 0.5 1 0.1 12.8 -0.4 0.6

nfm 25 7.8 7.8 0.7 0.6 25 7.7 7.7 0.8 0.5

mvh 5 17.7 18.9 -0.3 0.5 6 19.1 20.4 -0.4 0.6

fmp 5 0.7 6.1 -0.4 0.5 6 1.0 6.2 -0.7 0.6

otn 1 8.4 19.9 -0.1 0.5 1 8.4 19.9 -0.2 0.6

ele 1 18.8 32.7 -0.2 0.5 1 19.1 33.1 -0.3 0.6

ome 2 3.7 5.2 -0.2 0.6 2 4.2 5.8 -0.3 0.6

omf 1 -0.4 -3.7 0.9 0.6 1 -0.5 -4.1 0.9 0.7

serv 43 -0.3 -1.6 0.6 0.5 34 -0.3 -1.7 0.6 0.5

Total 110 108

Source: GTAP output



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Table 38 shows the same data for the Rest of SACU aggregation (Lesotho, Namibia and

Swaziland). Here there is a bigger change from the SADC FTA gains of US$1 494 million in

output through to the final increase of US$1 971 million. Much of this increase is in

agriculture and secondary agriculture in particular, although services are the big gainers (by

US$760 million from SADC and US$1 010 million from the full Tripartite FTA). Note that

there are significant increases in the price of outputs from the full Tripartite FTA in

particular, as these increases are around two percent in most sectors. Most of the increases

from the SADC FTA through to the full Tripartite FTA actually accrue from the COMESA FTA,

as there are increases on US$103 million in secondary agriculture and US$192 million in

services from COMESA due to Swaziland’s membership of COMESA.

Table 38: Changes to Rest of SACU’s production, trade and output prices

SADC FTA only Full Tripartite FTA

Change

product % change in Change product % change in

US$m % exp imp prices US$m % exp imp prices

p_agr 93 0.8 3 4 3.1 108 0.8 1 5 3.7

s_agr 209 1.5 2 3 1.9 282 2.1 4 4 2.5

nat 9 -0.3 -1 5 0.5 4 -0.5 -1 5 0.6

tex 7 0.3 5 4 1.7 36 7.7 35 6 2.2

wap 16 1.7 58 3 1.6 16 1.2 52 5 2.2

lea 6 2.8 33 3 1.7 6 2.0 28 4 2.3

lum 58 19.6 66 7 1.4 55 18.0 62 8 1.9

ppp 15 0.5 -1 4 1.6 19 0.5 -1 5 2.1

crp 53 1.1 3 4 1.5 72 1.5 5 5 2.0

nmm 94 20.7 196 4 1.6 93 19.9 189 5 2.1

i_s 17 1.9 0 4 1.6 22 2.3 -3 6 2.2

nfm -52 -11.1 -11 -1 1.5 -68 -14.5 -15 -2 2.0

mvh 105 7.0 46 4 1.3 107 6.7 44 5 1.8

fmp 15 1.7 36 4 1.7 16 1.2 31 5 2.3

otn -4 -4.2 -4 2 1.5 94 67.9 92 9 2.0

ele 15 9.1 103 3 1.6 13 7.4 95 4 2.1

ome 40 1.8 26 4 1.6 45 1.7 26 5 2.2

omf 37 3.7 33 5 1.5 40 3.6 30 7 2.0

serv 760 1.2 -6 5 1.7 1 010 1.5 -8 6 2.4

Total 1 494 1 971




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Table 39 reports on the changes to imports into other countries from Botswana following

the SADC FTA. These extra imports (Botswana’s exports) total US$59 million, with most

being recorded as increased imports into Zimbabwe (natural resources and non-ferrous

metals) and Zambia (natural resources). The concept of trade diversion can clearly be seen,

as imports into non-African countries decline as they are diverted to SADC destinations. The

overall gainers are natural resources (US$24 million) and non-ferrous metals (US$26 million).

The changes in Botswana’s exports from subsequent FTAs are minimal, as they actually

decline by US$3 million in total from the SADC FTA following the Tripartite FTA.

Table 39: Changes in imports from Botswana with SADC FTA, 2007 US$ million at 2020

zaf xac zmb zwe chn EU row total

p_agr 0 0 0 0 0 0 0 1

s_agr 1 0 5 1 0 -18 0 -11

nat -2 0 27 74 -24 -42 -9 24

tex -1 0 0 7 0 -2 0 5

wap -1 0 0 0 0 0 0 -1

lea 0 0 0 1 0 0 0 1

lum 0 0 1 0 0 0 0 1

ppp 0 0 1 2 0 0 0 4

crp 0 0 1 4 0 0 0 5

nfm -8 0 0 40 0 0 -6 26

mvh 0 0 0 5 0 0 0 6

fmp 0 0 0 0 0 0 0 1

otn 0 1 0 0 0 0 0 1

ele 0 0 0 1 0 0 0 1

ome 0 0 1 0 0 0 0 1

omf 0 0 0 0 0 0 0 -1

serv 0 0 0 0 0 -3 -2 -5

Total -9 2 37 137 -25 -65 -18 59

Source: GTAP output (totals may not reconcile with cells as some minor data is omitted)



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Table 40 shows the changes in imports from SADC partners following that FTA for the Rest of

SACU. These changes are more significant, with an overall increase of US$430 million. Most

of this is the big increase of US$861 million to Angola/DRC (secondary agriculture, natural

resources and non-ferrous metals in particular) but with offsets to the Rest of the world for

natural resources in particular. The concept of trade diversion and trade creation is clearly

shown in Table 8. The former means that imports of natural resources from Rest of SACU

into xac (Angola/DRC) increase by US$144 million, but the overall increase is a mere US$1

million as trade of US$148 million is diverted away from the Rest of the world. On the other

hand, imports into Angola/DRC in non-ferrous metals increase by US$107 million and that is

precisely the overall increase which shows this to be 100% trade creation.

Table 40: Changes imports from rest SACU with SADC FTA, 2007 US$ million at 2020

zaf xac mdg mus moz tza zmb row tot

p_agr -7 39 0 1 0 0 0 -7 27

s_agr -4 300 14 5 30 1 8 -205 150

nat -16 144 0 3 6 0 13 -148 1

tex 0 10 2 0 0 0 0 -6 7

wap 0 9 0 0 0 0 1 -1 8

lea 0 5 0 0 0 0 0 -1 4

lum -1 53 0 0 0 0 0 0 52

ppp -1 4 0 0 0 0 0 -4 -1

p_c 0 0 0 0 0 0 0 0 0

crp 0 32 1 0 3 12 -1 -28 19

nmm 0 107 0 0 0 0 0 -1 107

i_s 0 2 0 0 0 0 0 -1 0

nfm -8 2 0 0 0 0 0 -56 -61

mvh 0 71 0 0 1 0 1 -1 72

fmp 0 9 0 0 0 0 0 0 9

otn -2 5 0 0 0 0 0 -4 -1

ele 0 16 0 0 0 0 0 0 16

ome 0 24 0 1 0 1 7 -6 27

omf 0 29 0 0 0 0 0 -7 22

serv 0 0 0 0 0 0 0 -28 -28

total -39 861 18 10 41 15 31 -506 430

Source: GTAP output - totals may not reconcile with cells as some minor data is omitted



131

Table 41 extends the trade analysis as measured by imports from the Rest of SACU following

the Tripartite FTA, with the data shown as the changes from the base of the SADC FTA. The

big increase is to Rest of East Africa (Kenya probably) in secondary agriculture, ‘other

transport’ and textiles, with these three being the only real overall winners. Imports into

Angola/DRC, China and the EU decline while those into Rest of North Africa, Uganda and

Ethiopia increase. Note in particular the large declines in secondary agriculture into the EU

and the Rest of the world as defined by non-Africa, except for EU and China in this instance.

Egypt is not shown as the differences there were minor.

Table 41: Changes imports from Rest of SACU with Tripartite FTA, 2007 US$ million at 2020

xnf xac eth uga xec EU row total

p_agr 0.0 -6.1 0.0 0.0 0.4 -0.8 -1.1 -7

s_agr 0.0 -13.8 0.1 14.2 116.1 -50.3 -53.6 58

nat 7.8 -9.4 0.1 0.0 4.4 -3.7 -12.1 -10

tex 0.0 -1.0 0.4 0.0 32.5 -0.1 -1.7 30

wap 0.0 -0.5 0.0 0.0 0.1 0.0 -0.3 -1

lea 0.0 -0.3 0.0 0.0 0.1 -0.2 -0.3 -1

lum 0.0 -2.7 0.1 0.0 0.2 0.0 0.0 -3

ppp 0.0 -0.3 0.0 0.0 1.9 -0.1 -0.9 0

p_c 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0

crp 0.0 -2.3 8.5 0.5 11.6 -1.6 -6.5 9

nmm 0.0 -3.1 0.0 0.0 0.1 0.0 -0.1 -3

i_s 0.0 -0.2 0.0 0.0 0.0 0.0 -0.2 -1

nfm 0.0 -0.5 0.2 0.0 0.0 -9.4 -13.9 -16

mvh 0.0 -4.3 0.0 0.0 1.5 -0.1 -0.2 -3

fmp 0.0 -1.2 0.2 0.0 0.0 0.0 -0.1 -1

otn 0.0 -0.5 0.0 0.0 98.1 -1.1 -1.2 96

ele 0.0 -1.2 0.0 0.0 0.1 0.0 -0.1 -1

ome 0.0 -2.8 1.6 0.0 3.8 -0.1 -1.1 1

omf 0.0 -1.7 0.0 0.0 1.9 -0.1 -1.4 -1

serv 0.0 -0.1 0.0 0.0 0.1 -4.2 -8.0 -8

total 7.9 -52.1 11.3 14.9 273.0 -72.0 -102.7 138.8

Source: GTAP output - totals may not reconcile with cells as some minor data is omitted



132

Continuing with the trade theme we examine the changes to the BLNS countries’ own

imports with the SADC FTA. Most of the tariffs on imports from SADC into the BLNS were at

two percent, the figure used to proxy the trade facilitating benefits of an FTA, but not all as

the tariff base was at 2004 levels with 2007 trade flows. There may therefore be a slight

overestimate of the increased imports from SACU into BLNS in that case. These imports,

however, are mostly minor, as an examination of the tariff data shows that this would make

a difference only in the cases of textiles and clothing since the GTAP database has not quite

kept tariffs and trade in lockstep here. Changes to imports into Botswana were minor. There

were increases from Zimbabwe within SACU and non-African countries but a decline from

South Africa of US$50 million for an overall increase of US$22 million (recall that Botswana

actually suffers a small loss in welfare and therefore becomes marginally poorer and less

able to afford imports while, conversely, the price of South African merchandise increases).

Completing the full FTA suite with the Tripartite FTA makes little difference to this result.

Imports from South Africa marginally decline again while those from other sources increase

with no overall difference to the total imports.

In contrast, the Rest of SACU becomes wealthier and their increases in imports following the

SADC FTA are shown in Table 42. Increases of US$121 million are reported from South Africa,

US$99 million from the EU and US$51 million from China; and these are the main

contributors to the overall increase of US$416 million. These increases are spread through

most of the GTAP sectors, and effectively no significant trade diversion losses are reported.

Extending the analysis to the full Tripartite FTA shows an overall increase of another

US$144 million in total. Some US$29 million comes from South Africa, US$48 million from

the EU and US$20 million from China – and again this is purely trade creation.



133

Table 42: Changes in Rest of SACU imports with SADC FTA, 2007 US$ million

zaf moz zwe chn eu usa row total

p_agr 16 1 3 0 0 4 0 29

s_agr 23 0 9 0 7 1 2 45

tex -1 0 0 5 1 0 0 13

lum 6 0 0 3 1 0 1 12

ppp 3 0 0 0 6 0 0 11

crp 11 0 0 2 5 0 8 34

nmm 7 0 0 3 1 0 0 12

mvh 31 0 0 1 2 2 0 43

fmp 3 1 0 1 11 0 0 18

ele -3 0 0 10 2 0 0 17

ome 8 0 0 16 15 5 2 53

serv 0 7 0 1 40 14 4 87

total 121 11 13 51 99 29 20 416

Source: GTAP output

Decomposition of the welfare changes

Output from the GTAP model allows us to examine the relative contribution of welfare

changes to each country/region in the model from both (a) every other Tripartite

country/region, including own liberalisation as shown in Table 10, and (b) the commodity

sectors as shown in Table 43. Table 43 shows the sequential total changes for the BLNS

countries from the four FTAs. Reading across the table Columns 2, 4, 6 and 8 show the

results for Botswana from SADC only, SADC plus EAC, SADC plus EAC plus COMESA, and

finally the full Tripartite FTA on the right-hand side. From viewing the bottom row, for

example, it is clear that Botswana loses US$38 million from both SADC and EAC, meaning

that EAC has no real impact. Adding COMESA increases the loss to US$40 million while the

final Tripartite FTA increases this again to US$57 million.

Results for the Rest of SACU are more interesting. These are shown in Columns 3, 5, 7 and 9.

SADC and SADC plus EAC have virtually the same results, meaning that EAC has no impact.

However, introducing the COMESA FTA into Column 7 shows the increased welfare coming

from the Rest of East Africa and, to a smaller degree, Uganda. Recall that Tanzania is already

a member of SADC. Taking the final step to a Tripartite FTA increases the overall gains by

US$17 million, with this essentially also deriving from the Rest of East Africa. Note that the



134

gains into Angola/DRC reduce marginally across the table row for the Rest of East Africa, but

not by much.

Table 43: Welfare decomposition for BLNS by SADC countries, 2007 US$ million

SADC only SADC+EAC SAD+EAC+COM Full Tripartite

bwa xsc bwa xsc bwa xsc Bwa xsc

zaf 2 2 2 2 2 2 3 3

bwa 1 0 1 0 1 0 2 0

xsc 0 0 0 0 0 1 0 0

egy

0 0 0 0

xnf

-1 0 -1 1

xac -22 311 -22 311 -21 306 -21 303

eth

-1 5 -1 5

mdg -1 7 -1 7 -1 7 -1 7

mwi -2 -1 -2 -1 -2 -1 -2 -1

mus -5 -1 -5 -1 -5 -1 -5 -1

moz -12 4 -12 4 -12 4 -12 4

tza -5 2 -5 2 -5 2 -5 2

uga

0 6 -1 5

zmb -1 3 -1 3 -1 3 -1 3

zwe 8 -5 8 -5 8 -5 8 -5

xec -1 1 -1 0 -2 77 -18 97

total -38 322 -38 323 -40 406 -57 423

Source: GTAP output

Table 44 for the sector decomposition can be read in conjunction with Tables 5 and 6 which

show the changes in output, trade and prices in Botswana and Rest of SACU respectively.

Changes to both concentrate on secondary agriculture, with Botswana losing from each FTA

and the Rest of SACU gaining strongly. Botswana loses consistently across all other sectors,

while the Rest of SACU makes some solid gains from the manufacturing sectors. Services are

effectively neutral, but there are some gains from natural resources as production and trade

patterns in the region readjust. Here, the aggregation problem means that we cannot really

decompose these changes further into Lesotho, Namibia and Swaziland, but some of these

changes can be inferred from an understanding of the structure of the trade and production

patterns in each country. It is likely but not certain that sugar from Swaziland is a major

factor in the COMESA FTA while much of the manufacturing gains may be concentrated in

Namibia.



135

Table 44: Welfare decomposition for BLNS by commodity, 2007 US$ million

SADC only SADC+EAC SAD+EAC+COM Full Tripartite

bwa xsc bwa xsc bwa Xsc bwa xsc

p_agr -5 4 -5 4 -5 4 -6 2

s_agr -17 132 -17 132 -17 186 -25 170

nat 7 22 7 22 7 23 7 23

tex 0 5 0 5 0 18 0 18

wap -1 3 -1 3 -1 3 -1 3

lea 0 2 0 2 0 2 0 2

lum 0 20 0 20 0 19 0 19

ppp -1 0 -1 0 -1 1 -2 0

p_c 1 0 1 0 0 0 1 0

crp -6 19 -6 19 -6 32 -8 29

nmm -1 45 -1 45 -1 44 -1 44

i_s -2 -1 -2 -1 -2 -1 -3 -2

nfm -1 0 -1 0 -1 0 -1 0

mvh 0 30 0 30 0 31 0 30

fmp -4 1 -4 1 -4 1 -4 1

otn 0 2 0 2 0 2 0 45

ele -2 7 -2 7 -2 7 -2 7

ome -7 11 -7 11 -8 14 -9 13

omf -1 18 -1 18 -1 19 -1 18

serv 0 0 0 0 0 0 0 0

Total -38 322 -38 323 -40 406 -57 423

Source: GTAP output

For the BLNS countries, the results for the SADC FTA show that Botswana’s loss is 0.05% of

GDP while the Rest of SACU gains US$323 million or 1.15% of GDP. Botswana loses across all

sectors of the economy except for natural resources which expand marginally. For the Rest

of SACU, secondary (processed) agriculture is the big gainer from better access into

Angola/DRC, and most manufacturing sectors gain.

We can conclude overall that the next step of EAC regional integration has virtually no

impact upon the BLNS countries. However, there are solid gains to the Rest of SACU from

the third step of the COMESA FTA. These come about because Swaziland is a member of

COMESA and consequently granted better access for sugar into the Rest of the East African



136

aggregation in particular. There are virtually no other changes, however, but these gains

effectively carry through to the final Tripartite FTA. Conversely, there are no impacts on

Botswana from either COMESA or the full Tripartite FTAs.

In summary, Botswana loses marginally from the SADC FTA and that situation does not

change with the other steps to full regional integration, whereas the Rest of SACU gains from

(a) the SADC FTA and then again (b) from the COMESA FTA by virtue of its linkage to

COMESA through Swaziland’s membership. Importantly, following each of the sequential

FTAs, total revenue for the SACU tariff revenue pool actually increases by a final end result

of an extra US$179 million following the full Tripartite FTA. This is as a result of South Africa

manufacturing imports from non-SADC countries increasing in response to a more buoyant

South African economy.

8. Overall Summary and conclusions

The SADC FTA

The results for this FTA show that there are significant gains for South Africa in particular,

and this is mainly because SADC members virtually have duty-free access into South Africa

although the privilege is not reciprocated. Therefore South Africa, with its agricultural and

industrial capacity dominating the region, is the big winner as its welfare increases by some

US$4 755 million or 0.95% of real GDP. These welfare gains are significantly more than the

gains from either an FTA with China or with Mercosur as inferred from earlier tralac

research. Botswana’s loss is 0.05% of GDP while the Rest of SACU gains US$323 million or

1.15% of GDP. Other significant gainers are Mozambique, Tanzania and the Rest of East

Africa although the latter is outside SADC. The big losers are Angola/DRC and the countries

outside SADC except the Rest of East Africa, an aggregation centred on Kenya.

For agriculture, the SADC FTA benefits the South African secondary (processed) agricultural

sector, while it provides a solid stimulus to primary agriculture as well. In manufacturing, the

big gainer is the chemicals, rubber and plastics sector, and ‘other machinery’, vehicles,

petroleum and coal products, and metal products all do well. Services are a big gainer, but

from an expanded South African economy rather than from trade. Both exports and imports

increase in most sectors, and output prices generally rise by around one percent. The largest



137

increase in exports is in secondary agriculture, followed by chemicals, rubber and plastics

and ‘other machinery’, while iron and steel exports decline. The exports are primarily

directed to Angola/DRC, Mozambique, Zambia, Zimbabwe and Tanzania at the expense of

reduced exports to non-African destinations.

Revenue for the SACU tariff revenue pool actually increases by US$179 million as a result of

South Africa manufacturing imports from non-SADC countries to replace increased exports

to the SADC countries. Therefore the 2002 formula from the SACU Agreement is at least not

working against the BLNS countries and tariff revenue loss is not an issue here. This is in

complete contrast to the SACU tariff revenue losses from the SACU-Mercosur and SACU-

China FTAs.

Employment and real wage outcomes are both positive for South Africa: employment of

unskilled workers increases by 0.54% and real wages by a greater 2.1%. The unskilled labour

market closure used in our version of the model is a function of a labour supply elasticity

which is calculated from initial unemployment rates. We model two extreme alternatives to

this. The first is an option which has wages fixed and forces adjustments to the labour

market through changes to the employment rate. This time the welfare gains to South Africa

increase by around two and a half times to US$12 737 million or 2.9% of GDP as a result of

an increase in unskilled labour of 4.2% in the workforce. The second alternative is to fix the

number of persons employed with adjustments as changes to wage rates. Here the result is

a 20% decline in welfare relative to our standard closure of US$3 587 million following an

increase of 2.1 in the real wage rate. Hence, the policy of promoting employment rather

than increasing wages is clearly a superior option for South Africa to pursue and a

comprehensive SADC FTA would make a significant contribution to this objective.

Finally, it is notable that the overall services output in South Africa increases by

US$12.5 billion, with this mainly being driven by increased demand for services as the

production of capital goods and other industries expand the South African economy. Trade

in services sees South African exports decline by 4.0% and imports increase by 3.6% in order

to provide for these increased services.



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Policy implications from the SADC FTA

The SADC FTA is beneficial for the South Africa, with gains from manufacturing and

secondary agriculture in particular. Given our labour market closure assumption, the FTA

leads to an increase in employment and wages for unskilled workers. It also produces an

increase in the SACU tariff revenue pool monies as there are tariffs to pay on increased

manufacturing imports since most imports are from outside Africa. The policy implications

for South Africa are clear: there are no downsides to this FTA such as the decimation of

South Africa’s manufacturing sectors that would result from an FTA with China or the

challenges that a full FTA with Mercosur would present to agriculture. Every effort must be

made to facilitate this regional initiative.

The EAC, COMESA and Tripartite FTAs

Overall we can conclude that this EAC regional integration has a modest impact upon

Tanzania, Uganda and the Rest of East Africa aggregation but almost no effect upon South

Africa. As Tanzania is already a member of the SADC FTA the bilateral impacts between

South Africa and Tanzania are very limited. The FTA is not globally welfare enhancing as

regional imports are diverted away from the global low-cost suppliers at the margin.

The COMESA FTA has a solid impact upon most of the COMESA countries but virtually no

effect upon South Africa. In general there are few welfare gains for those SADC members

who are overlapping COMESA members, except for the Rest of the SACU aggregation. There

are some resource changes in secondary agriculture in particular, while the manufacturing

changes are generally spread across the different sectors. The FTA is not welfare enhancing

for the world as regional imports are diverted away from the global low-cost suppliers at the

margin and global capital is not optimally reallocated. The impacts on South Africa are

virtually zero.

The Tripartite FTA is almost as beneficial for South Africa as the SADC FTA, in part because

South Africa is virtually the only regional economy that does not have a direct linkage into

more than one FTA through overlapping memberships, and, perhaps more importantly,

South Africa has significant industrial power and a well developed secondary agricultural

industry to capitalise on these new opportunities. And it is this secondary agricultural sector

that benefits the most from a Tripartite FTA, and, in particular, from better access into the



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GTAP aggregation entitled ‘the Rest of East Africa’ including Kenya, Rwanda, Burundi and

Sudan. Gains for South Africa are generally spread across the manufacturing sectors, with

the vehicles and the chemicals, rubber and plastics aggregated sectors doing well but the

metal processors losing somewhat as resources are readjusted within the economy.

Full integration – the summary, conclusions and policy implications

The Tripartite FTA is advantageous for South Africa. As a country belonging exclusively to

SADC, South Africa has much to gain from finally obtaining better linkages into the countries

further to the north. Finally, the overlapping membership controversy that afflicts the region

is made redundant as all members of the three regional groupings become one. We also add

that this overlapping question is made more difficult in this GTAP modelling exercise in so far

as the regional aggregation used also contributes to the overlapping despite some mitigation

through trade weighting of the tariff eliminations. South Africa is accentuated in as much as

it is the only real economic powerhouse in Africa with significant industrial capacity and a

secondary agricultural sector that has real presence worldwide.

The step by step initiation of the three FTAs before the final Tripartite FTA is brought to

fruition clearly highlights where South Africa’s priorities lie. The main objective must be to

fully operationalise the SADC FTA, as currently the concessions made by SACU for what

effectively boils down to duty-free access to its markets are not reciprocated by other

members of SADC. Thus, the trade opportunities are biased towards South Africa in this FTA.

In the final Tripartite FTA South Africa gains almost as much as it does from the full SADC FTA

as its secondary agriculture in particular is able to benefit from better access into COMESA

and EAC, access that some of its SADC competitors such as Swaziland’s sugar sector are able

to access before South Africa by virtue of overlapping regional memberships. Our analysis

clearly also highlights that the EAC and COMESA FTAs are of very little direct interest to

South Africa in the strict economic sense, although it needs to be kept firmly in mind that

the full regional integration would not take place without these intermediate steps. We

have, of course, ignored the political realities that would have to be overcome in order to

achieve each of these intermediary steps, but add that perhaps the greatest of these hurdles

lies closer to home with the SADC FTA.

The gains from the four FTAs discussed here are additive, and the full values to South Africa

from integration can be seen from the welfare and trade results presented in the chapter.



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These comprehensive results are significant, and fully support the political ambitions of

operationalising the SADC FTA and then integrating the rest of eastern Africa into a cohesive

region. This study as seen in conjunction with other tralac research examining ‘South Africa’s

way ahead’ in trade policy clearly confirms that the regional and African emphasis is

economically sound for the region.

References

Badri, N.G. and Walmsley, T.L. (eds.). 2008. Global Trade, Assistance, and Production: The GTAP 7

Data Base. West Lafayette: Center for Global Trade Analysis, Purdue University.

Bouët, A. et al. 2005. A consistent, ad-valorem equivalent measure of applied protection across the

world: The MAcMap-HS6 database. CEPII Working Paper No. 2004, 22 December (updated

September 2005). [Online]. Available: http://www.cepii.fr/anglaisgraph/workpap/pdf/2004/wp04-

22.pdf.

CIE. 2010. Study on the Review of the Revenue Sharing Arrangement for SACU. Paper prepared for

the SACU Secretariat. Sydney and Canberra: Centre for International Economics.

IMF. 2009. Regional Economic Outlook: Sub-Saharan Africa. Washington: International Monetary

Fund.

Nielsen, C. and Anderson, K. 2000. GMOs, Trade Policy, and Welfare in Rich and Poor Countries.

Paper presented at the World Bank Workshop on Standards, Regulation and Trade, Washington,

D.C., 27 April 2000.

Sandrey, R. 2007. Living in the shadow of the mountain. In Bösl, A. et al. (eds.), Monitoring Regional

Integration in Southern Africa Yearbook Volume 7. Stellenbosch: tralac. [Online]. Available:

http://www.tralac.org/2010/01/11/monitoring-regional-integration-in-southern-africa-yearbook-

2007/.

Sandrey, R. et al. 2011. Cape to Cairo – An Assessment of the Tripartite Free Trade Area. Stellenbosch:

tralac. [Online]. Available: http://www.tralac.org/2011/06/15/cape-to-cairo-an-assessment-of-the-

tripartite-free-trade-area/.

Walmsley, T.L. 2006. A Baseline Scenario for Dynamic GTAP Model. Revised March 2006 for GTAP 6

Database. West Lafayette: Center for Global Trade Analysis, Purdue University.



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Annex 1

Membership of the Regional Blocs

Country SADC EAC COMESA

Angola X

Botswana X

DRC X X

Lesotho X

Madagascar X X

Malawi X X

Mauritius X X

Mozambique X

Namibia X

Seychelles X X

South Africa X

Swaziland X X

Tanzania X X

Zambia X X

Zimbabwe X X

Burundi X X

Kenya X X

Rwanda X X

Uganda X X

Comoros X

Djibouti X

Egypt X

Eritria X

Ethiopia X

Libya X

Sudan (now two countries)

X

Chapter 4 – Trade facilitation in the COMESA-EAC-SADC Tripartite Free Trade Area


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Chapter 4

Trade facilitation in the COMESA-EAC-SADC Tripartite Free Trade Area

Mark Pearson

1. Background and introduction

1. Africa accounts for less than 2.5% of world trade, and non-oil exports have accounted

for about 1% since 1992 – half of their 1980 value. The level of intra-African trade is also low:

10% compared to about 40% in North America and about 60% in Western Europe. In

addition, Africa has the highest export product concentration of any continent, coupled with

a high export market concentration. This reflects continued reliance on primary commodity

exports mainly to the European Union, United States of America and China.

2. Africa also ranks low on trade policy and facilitation performance, with seven African

countries listed in the bottom ten most restrictive trade regimes. In general, and compared

to other countries, African countries have performed poorly in terms of logistics. Markets

remain fragmented and borders are difficult to cross, which prevents the emergence of

regionally integrated industries and supply chains.

3. In the COMESA-EAC-SADC Tripartite region the costs of transport, in particular road

transport (which accounts for about 95% of the volume of cargo transported in the region),

is directly related to the time taken for the journey. The typical charge for a stationary truck

is between US$200 to US$400 a day. Therefore, if a truck takes three days to clear a border

(which is not excessive in the COMESA-EAC-SADC region) the transporter will pass on an

additional cost of between US$600 to US$1 200 for the cost of the truck sitting idle at the

border to the importer. This, in turn, will be passed on to the importer’s client and ultimately

to the consumer.

4. Similarly, it costs US$5 000 to US$8 000 to ship a 20ft container from Durban to Lusaka,

compared to the costs of US$1 500 to ship the same container from Japan to Durban. This

means that a producer that relies on imported components for his manufacturing business

that is based in Lusaka would need to absorb this extra transport cost compared to his



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competitor near the port. It is often more economical to export a raw material, or a semi-

processed raw material (such as copper concentrate as opposed to copper wire, or sugar as

opposed to confectionery) than to import the materials needed to process the material and

to then export the processed good.

5. Until the underlying causes of these high costs of transport are addressed African

countries will remain high-cost producers, with no major direct investments in non-mineral

sectors, restricted economic growth opportunities and slow progress in poverty alleviation.

In an effort to address these challenges and to improve market access for producers and

traders in the eastern and southern African region the member states of the three regional

economic organisations of the Common Market for Eastern and Southern Africa (COMESA),

the East African Community (EAC) and the Southern African Development Community

(SADC) launched the COMESA-EAC-SADC Tripartite Free Trade Area on 12 June 2011. The

Tripartite Free Trade Area (T-FTA) aims to reduce tariffs imposed on goods originating and

traded in the region. However, in addition to tariff barriers, the region’s producers and

traders also face a number of non-tariff barriers (NTBs) and high cross-border trade and

transport costs. An integral part of the Tripartite Free Trade Area is the design and

implementation of a programme that is aimed at improving trade and transport measures

and reducing NTBs to trade. The aim of this chapter is to describe the main components of

the T-FTA trade facilitation and NTB programmes and put these programmes into a regional

and a multilateral context.

2. Brief description of the COMESA-EAC-SADC Tripartite

6. The COMESA-EAC-SADC Tripartite was created in 2006 to assist in the process of

harmonising programmes and policies within and between the three regional economic

communities (RECs) of COMESA, EAC and SADC and to advance the establishment of the

African Economic Community.

7. The Tripartite structures comprise the Summit of Heads of State and Government, the

Council of Ministers (supported by sectoral ministerial committees), senior officials and the

Tripartite Task Force (TTF). Day-to-day management of Tripartite activities is done by the TTF

which is made up of the Secretary Generals of COMESA and EAC and the Executive Secretary

of SADC, supported by a subcommittee on trade and a subcommittee on infrastructure.



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8. The three main pillars of the Tripartite strategy, as contained in the Vision and Strategy

document that was endorsed at the second Tripartite Summit in June 2011 are:

i) Market Integration – Market integration concerns the removal of tariff and non-tariff

barriers and the implementation of trade facilitation measures, all of which are

essential for the establishment of a well-functioning Tripartite FTA by the 26 member

states (which will increase to 27 when South Sudan becomes a member).

ii) Infrastructure Development – Infrastructure development concentrates on improving

the region’s infrastructure so as to improve the efficiency of the internal trade and

transport network (road, rail, water and air and including information and

communication technologies (ICT) and energy).

iii) Industrial Development – The intention is to develop industrial development and

supply side programmes that can take advantage of improvements in market

integration and infrastructure development.

9. The two main components of the market integration pillar are:

i) The design, negotiation and implementation of the Tripartite FTA. The decision to

develop a Tripartite FTA Roadmap and to roll out this Tripartite FTA was endorsed by

Heads of State and Government at their first Tripartite Summit held in Kampala in

October 2008. Since this decision was taken, the Tripartite, led by the Trade

Subcommittee, has prepared a Draft FTA Roadmap and a Draft Agreement establishing

the Tripartite FTA. The second Tripartite Summit launched the negotiations for the

Tripartite FTA on 12 June 2011.

ii) The removal of non-tariff barriers and improving trade facilitation programmes to

reduce the costs of cross-border trade so as to improve the competitiveness of the

region.

10. This chapter provides a description and discussion of the activities and results of the

Tripartite programmes aimed at the removal of non-tariff barriers and improving the

effectiveness of trade facilitation measures.



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3. Comprehensive Tripartite Trade and Transport Facilitation Programme

11. The economic integration agenda being implemented at the level of the three regional

economic communities of COMESA, EAC and SADC has prioritised programmes addressing

trade and transport facilitation challenges with the aim of lowering costs of doing business

and improving the competitiveness of products from the eastern and southern African

region. Such programmes encompass regulatory and policy reforms encouraging the

adoption of international instruments and best practices, national and regional capacity

building programmes to facilitate cross-border movements, and enhancement of

infrastructure facilities at border posts to improve efficiency of cross-border movements.

12. While COMESA, EAC and SADC have had some successes in facilitating trade through

such programmes, there have been challenges of limited implementation at national level

and the requirements to implement different programmes and different instruments in

countries that belong to more than one regional economic community. There is also a

multiplicity of international cooperating partners active in the field of transport and trade

facilitation. There is a need for the Tripartite Task Force to provide guidance and leadership

so as to ensure harmonisation of the programmes of regional economic communities and

international cooperation partners so that they complement each other rather than

compete against each other.

13. To address these challenges the COMESA-EAC-SADC Tripartite has launched the

Comprehensive Trade and Transport Facilitation Programme (CTTTFP) which is a series of

initiatives from different regional economic communities that have been brought together

into one large integrated trade facilitation programme that includes:

i) The NTB Monitoring, Reporting and Removal System

ii) Border and customs procedures (one-stop border posts, integrated border

management, regional customs bond, transit management);

iii) Immigration procedures;

iv) Transport procedures (regional third party insurance, vehicle standards and regulation,

self-regulation of transporters, overload control, harmonised road user charges,

regional corridor management systems; and



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v) The establishment of the Joint Competition Authority linked to air transport

liberalisation.

14. The objectives to be addressed through the CTTTFP are to:

i) Increase trade and promote economic growth in eastern and southern africa by

supporting improvements in policies and in the regional regulatory and economic

environment;

ii) Reduce high costs of trading in the region and help the national administrations,

working through the RECs, to address barriers to trade and growth;

iii) Reduce transit times and transaction costs along the principal corridors in eastern and

southern Africa through better infrastructure, faster border crossings and harmonised

trade and transit regulations; and

iv) Improve aid effectiveness by coordinating donor funding for priority aid-for-trade

programmes.

3.1 NTB Monitoring, Reporting and Removal System (NTB Mechanism)

15. It has been empirically demonstrated that the removal of tariff and non-tariff barriers

between countries can lead to trade expansion. Intra-Tripartite export trade grew by over

250% between 2000 and 2008, arguably as a result of liberalisation of trade within each

regional economic community. The removal of existing non-tariff barriers (NTBs) will lead to

increased levels of regional trade and, as such, identification, removal and monitoring of

NTBs is a priority area for policy harmonisation and coordination under the COMESA-EAC-

SADC T-FTA framework.

16. Legal instruments of the three regional economic communities, namely Articles 49 and

50 of the COMESA Treaty, Articles 75(5) of the EAC Treaty and Article 6 of the SADC Protocol

on Trade, provide for the elimination of non-tariff barriers and further prohibit the

introduction of new ones. Article 10(1) of the Tripartite Agreement calls on Tripartite

member states to eliminate all existing NTBs to trade with other member states and not to

impose any new ones. Nevertheless, although the COMESA, EAC and SADC free trade areas



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have removed duties on substantially all goods traded within their territories, trade remains

restricted by the existence of non-tariff barriers.

17. There are obvious challenges faced in removing NTBs within the regional trading

arrangements that relate to gaps in the regional legal framework and in regional policy

implementation at the national level, as member states weigh the costs of implementation

against immediate gains and delay putting in place legislation necessary to facilitate

implementation of regional commitments to address NTBs.

18. The main objective of the NTB monitoring, reporting and removal programme is to

remove all NTBs, or at least the main NTBs1, that are restricting trade. They are:

i) Customs documentation and administrative procedures – these include non-

standardised systems for imports declaration and payment of applicable duty rates,

non-acceptance of certificates and trade documentation, incorrect tariff classification,

limited and uncoordinated customs working hours, different interpretation of the rules

of origin (RoO) and non-acceptance of certificates of origin, application of

discriminatory taxes and other charges on imports originating from member states,

and cumbersome procedures for verifying containerised imports.

ii) Immigration procedures – including non-standardised visa fees and cumbersome and

duplicated immigration procedures.

iii) Quality inspection procedures – delays in inspection of commercial vehicles,

cumbersome and costly quality inspection procedures, unnecessary quality inspections

(including of products certified by internationally accredited laboratories), non-

standardised quality inspection and testing procedures, and varying procedures for

issuing certification marks.

iv) Transiting procedures – non-harmonised transport policies, laws, regulations and

standards including road user charges, third party (cross-border) motor insurance

schemes, vehicle overland controls systems, vehicle dimensions and standards, cross-

border road permits and prohibitive transit charges.

1 Most NTBs faced in the Tripartite region fall within the import measures subcategories A,E,F,I,L,M and O of

the UNCTAD/World Bank categorisation



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v) Roadblocks – stopping of commercial vehicles at various inter-country road blocks

even where there is no proof that goods being transported are of a suspicious nature,

such as smuggled goods or drugs.

19. COMESA, EAC and SADC have, in the past, developed different mechanisms to identify

report and monitor elimination of NTBs and resolve disputes. These mechanisms have, to a

great extent, identified all the common NTBs encountered in the region and the frequency at

which they occur, and attempted to facilitate resolution of the same through resolution at

the Council of Ministers level and other consultative processes. The existing mechanisms

that are in place were the starting points for the design of the online

(www.tradebarriers.org) Tripartite NTB Monitoring, Removal and Reporting Mechanism

(NTB Mechanism) and the process for elimination is also based on existing mechanisms.

20. The NTB Mechanism establishes a common framework for the systematic elimination

of NTBs within the Tripartite FTA arrangements. It is a repository of all reported NTBs (in

English, French and Portuguese), allowing information disseminating to all stakeholders

(researchers, traders, exporters, importers, policy makers/administrators, etc.) and more

importantly, an interactive process for monitoring resolution of barriers by Tripartite

member states. It enhances transparency and easy follow-up of reported and identified

NTBs. The mechanism is accessible to economic operators, government functionaries,

secretariat experts, academic researchers and other interested parties and is administered

by TradeMark Southern Africa, COMESA, and SADC NTB Units and national NTB focal points

that have been allocated access passwords providing different levels of access into the

system according to their responsibilities.

21. At national level, National Monitoring Committees (NMCs) have been established with

public and private sector participation that are tasked with defining the process of

elimination, defining mandates and responsibilities at the national level, outlining the time

periods for the various stages of elimination and removal of NTBs, and resolving reported

NTBs.



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Box 1 - The Tripartite NTB Mechanism in action

The following are some of the NTBs addressed by the NTB system and which are reported on the NTB website at www.tradebarriers.org:

- In December 2010 a Zambian transporter carrying goods worth US$570 000 was subjected to a four-day delay at a faulty electronic weighbridge at the Victoria Falls weighbridge on the Zimbabwe side as well as receiving a heavy penalty for being overloaded. Interventions by the NTB national focal points from Zimbabwe and Zambia facilitated recalibration of the weighbridge in March 2011 by the relevant Ministry (NMC member) and since then no complaints have been received.

- Exports of plastics from Kenya to Tanzania have been stopped because Tanzania imposes a 25% duty on these goods as Tanzania does not accept that these imports originate in Kenya. At their NTB online system sensitisation workshop held on 30 August 2011 the private sector reported that this as a NTB and which has cost Kenya an estimated Ksh60m in annual duty payments since 2009. The report, logged onto the online system on 30 August, triggered action from NTB national focal points in that they are organising a verification mission.

- The Zambezi River Authority and the Ministry of Transport (Zimbabwe) imposed a 3 ton gross vehicle mass limit on vehicles crossing the Kariba dam wall. This forced cross-border buses, and so small-scale cross-border traders between Zambia and Zimbabwe, to use the more expensive Chirundu border crossing. NMC consultations facilitated a meeting between the Zambezi River Authority and other concerned parties which revealed that the engineer’s specifications for the dam wall accommodated an 11 ton gross vehicle mass. Based on these findings the maxim gross vehicle mass was adjusted and buses of up to 11 tons are now allowed to cross the dam wall, thus resolving the NTB.

- In February 2010 transporters complained that Kenya weighbridges were not accurately calibrated and this resulted in transporters being subject to demands for informal payments before they could proceed on their journeys. This was reported as a NTB and at the NMC meeting held in Nairobi on 29th August 2011 Kenya reported that the weighbridges had been automated so that axle loads are now recorded online.

22. The mechanism takes into account the regional dynamics at play with regard to various

instruments put in place by COMESA, EAC and SADC to address the NTBs in the region. A

structured consultative process involving, when necessary, country missions by the Tripartite

Secretariat (NTBs Unit) and/or appointed facilitator to resolve outstanding NTBs in a timely

manner is an integral part of the mechanism.



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3.2 Border and customs procedures

3.2.1 One-stop border posts

23. A number of Tripartite countries have fully embraced the one-stop border post (OSBP)

concept and aim to convert most, if not all, of their border posts to OSBPs2.

24. An OSBP implies that goods and passenger vehicles only stop once at the border and

exit from one country and enter another country at the same time. This results in a

reduction in time and costs involved in border crossings.

25. The rationale for the establishment of OSBPs is clear in terms of both enforcement and

economic benefits. The main benefits of a OSBP are derived from the fact that border

authorities from two countries perform joint controls with resulting benefits such as:

i) Better resource utilisation through a reduction in the duplication caused by dealing

with two identical sets of agencies by having juxtaposed (straddling) common facilities

for authorities on either side, with each facility handling traffic going in only one

direction on either side of the border;

ii) Improved enforcement efficiencies through cooperation; and

iii) Sharing of intelligence, improved communication and sharing of ideas, information and

experiences that can result in more effectively combating fraud.

26. There are four core elements involved in implementation of an OSBP:

i) Legal framework (done nationally although EAC is working on a regional framework);

ii) Design of procedures and traffic flows for the whole common control zone;

iii) Information and communication technologies; and

iv) Design of physical facilities as a common integrated facility by the two countries

concerned.

2 Given that conversion of a border post into a OSBP needs significant financial output to make infrastructure

adjustments, requires changes in border procedures (and so changes management strategies) and assumes that the appropriate legislation and ICT infrastructure is in place, the implementation of an OSBP is not the optimal economic or financial solution at all border posts, especially for borders with low traffic volumes.



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27. It is essential that the implementation of a one-stop border post involves all four of the

above key elements and that the four elements are integrated. The legal framework

provides border officers with the jurisdiction to apply their national laws within the territory

of the adjoining state. The legal framework also establishes the agreement between

countries on the operational practices of the OSBP. ICT is essential to the operation of an

OSBP as all agencies need consistent connections to other agencies in the Common Control

Zone as well as to their national headquarters. Physical facilities need to be designed

according to the planned procedures to allow for a logical and smooth movement of

vehicles, persons and documents at the border post.

28. The benefits for border agencies and traders in establishing one-stop border posts can

be further enhanced by combining such arrangements with other international coordinated

border management arrangements. These include the exchange of data and intelligence and

the mutual recognition of authorised economic operators (AEOs).



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Box 2 – Chirundu One Stop Border Post

Chirundu, the main border between Zambia and Zimbabwe, was officially opened as a one-stop border post in December 2009. Some of the major success factors of the Chirundu OSBP include:

- Very strong political support from the two governments;

- Private sector support (importers, agents and transporters);

- The establishment of four result oriented Subcommittees (procedures subccommittee, legal subcommittee, ICT subcommittee and facilities subcommittee);

- An approved programme of work by the joint steering committee;

- The completion and signing of the Bilateral Agreement and the Legal Framework;

- The adoption of clear and agreed procedures; and

- A successfully implemented change management programme.

The results achieved to date have been:

- The granting of extra territorial authority to government agencies which is exercised in both territories within the Common Control Zone

- Infrastructure upgrading and modifications to make the OSBP operational;

- Negotiated OSBP procedures acceptable to both government agencies and the private sector;

- Both passengers and commercial traffic stops only once to complete border formalities for both countries in one facility;

- Waiting times for commercial traffic have been reduced from 3-5 days to same-day clearances and often to a few hours; and

- Clearance times for passengers on buses (76-seater) have been reduced from about six hours to less than two hours

Owing to the fact that clearance times are now faster more truck drivers are using Chirundu as their preferred point of entry into, and point of exit out of, Zambia. Despite this increase in traffic volumes the border agencies are still able to clear all trucks arriving at the border in the same day.

29. The Tripartite Task Force, the agencies it works with and the Tripartite countries have

gained a large amount of experience3 when it comes to the design and implementation of

OSBPs. Lessons learned at a regional level include:

3 The EAC has recently produced the OSBP Source Book, with support from the Japan International Cooperation

Agency (JICA), which addresses the concept and critical issues of OSBPs and uses case studies to illustrate these issues.



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i) It is a much simpler exercise to operate an OSBP if it was designed as such from the

onset instead of having to modify physical infrastructure after it has been built and to

adjust procedures to take account of the limitations of the physical infrastructure. This

has implications for the coordination of the process of designing an OSBP. In Chirundu

subcommittees dealing with ICT, facilities, procedures and law were established but

these should be established even before the design work on an OSBP starts. In

Chirundu a coordination committee with members from both sides of the border

continues to meet regularly to administer the OSBP.

ii) The work of the subcommittees needs to be guided by a work programme with a

realistic budget from the setup of the subcommittees. This budget can be financed by

the countries concerned, the relevant regional organisations, donors or a combination

of these. But it is essential that the budget is available to the subcommittees in a

timely and non-bureaucratic manner to allow them to meet at regular intervals.

iii) Strong political drivers at the highest levels are essential and there must be an agreed

memorandum of understanding or agreement of some sort on the proposed OSBP.

This must be accompanied by a legal framework allowing extraterritorial authority for

purposes of implementing an OSBP system.

iv) Consultative meetings at national level are required before convening a stakeholder

meeting involving both countries. The national steering committee meetings enable

the public sector and the private sector in each country to deal with their internal

issues and bridge their gap before engaging each other at a bilateral level.

v) The process of introducing a one-stop border post should also be accompanied by a

change management process, and failure to adequately address this issue with the

seriousness it deserves could lead to poor or non-implementation of the border as a

one-stop border post.

vi) The steering committee responsible for the implementation of the one-stop border

post needs to sign off on the procedures, preferably by putting these in a

memorandum of understanding that has allowed the establishment of the OSBP, and

to comply with these procedures. Failure to comply with agreed procedures will delay

implementation and necessitate multiple design and works contracts to be awarded.



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vii) It is important to involve the private sector in the design of the OSBP and in the

subcommittees from the very start of the process.

viii) The importance of having effective and efficient ICT in the implementation of an OSBP

(and in all trade and transport facilitation measures) cannot be overemphasised. ICT is

important for a multitude of modern customs operations including customs

automation, cargo tracking, pre-arrival clearance, risk analysis, the electronic

submission of documents, information management, terminal operations, and

electronic single windows. ICT is equally important in the functions of other border

agencies, such as immigration. Not only do efficient ICT systems enable faster

processing times, increased revenue collection, reduced red tape and increased

capacity and efficiency but it also allows new and innovative systems to be introduced

that are not possible without efficient ICT systems.

30. There are a number of challenges to be overcome when establishing a one-stop border

post including managing change at the border itself as well as handling the expectations of

all stakeholders. Implementing an OSBP involves a radical change in the operations of

especially customs and immigration. Customs and immigration officers need to physically

relocate to the other side of the border and so work in a different country. The officials

usually see no reason to make these changes as clearing goods and passengers more quickly

has no direct benefits for them.



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Box 3 – Kasumbalesa border post

Kasumbalesa border post is a very busy border post between Zambia and DR Congo. The Zambians concessioned the infrastructure for the border post to an Israeli-controlled company (ZipBCC) in 2010 and in 2011 the border post physically moved to operate from the new concessioned site. The new infrastructure includes a new building from which the Zambian border agencies operate and a new parking hard-stand where trucks and other vehicles park while the process of clearing the border is transacted. The new buildings have significantly improved the working conditions for border agency officials.

In order for the concessionaire to recoup his capital outlay and to pay for maintenance he charges each vehicle a fee to enter and exit the border facility and all vehicles crossing the border are obliged to pay this fee. The charge for trucks is US$19 per axle (meaning that a 7-axle interlink will pay US$133 on entering DR Congo and on exiting DR Congo at Kasumbalesa).

The same concessionaire has recently (2011) been awarded the concession for the infrastructure on the DR Congo side of the Kasumbalesa border post and construction of the new buildings is nearing completion.

If both border posts had been awarded to the concessionaire at the same time it may have been practical to have established a one-stop border post at Kasumbalesa. But this has not happened and the concessionaire will administer the two borders separately and charge for vehicles crossing the border twice.

31. One of the major challenges faced in implementing one-stop border posts, at least in

the southern African sub-region of the Tripartite, is the propensity of Tripartite countries to

concession border infrastructure as private concessions on a build-operate-transfer basis

over a 20-25 year period. Concessioning of infrastructure at border posts is taking place in

Zambia (with Kasumbalesa and Nakonde already concessioned and plans for the

concessioning of four more border posts being finalised), Zimbabwe (with the infrastructure

on the Zimbabwean side of Beitbridge concessioned) and Tanzania (with plans for the

concessioning of Tunduma at an advanced stage). This has the effect of allowing

infrastructure to be improved at the border post and this is in itself a major advantage.

However, to date, the design and construction of this concessioned infrastructure has not

been done as part of a plan to implement a one-stop border post. The process that has been

followed is a national one, so it is not possible to arrive at a one-stop border post solution

following this methodology as at least two of the four core elements involved in

implementation of an OSBP (these being the design of procedures and traffic flows for the



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whole common control zone which straddles two countries and the design of physical

facilities as a common integrated facility by the two countries concerned) are not being

addressed.

32. Therefore, despite countries in the region committing themselves to a policy of

implementing one-stop border posts to reduce the costs of cross-border transactions, this

policy is often not being implemented in practice. The concessioning of infrastructure at

borders has no doubt improved the work environment for border officials and users alike

but these improvements have not necessarily improved the efficiencies of the borders in

terms of crossing times. These infrastructure improvements will also not automatically result

in a reduction of border transaction costs.4 The implications are that although infrastructure

has been improved, because these improvements have not been done in conjunction with

improvements in border processes, this improved infrastructure will be of limited value to

the countries concerned in terms of improving the business environment and reducing the

costs of doing business. Concessioning borders in the way it is being done at present in the

Tripartite region will have limited trade facilitation benefits and an alternative model should

be explored.

3.2.2 Integrated border management (IBM) systems.

33. In the Tripartite region most customs agencies are part of revenue authorities, which

reflects the fact that trade taxes collected by customs agencies are an important source of

revenue for the national governments and also for the region. Although all governments in

the region have reduced the levels of duties over the last 10 to 15 years, both as part of a

regional efforts to get national trade taxes in line with proposed common external tariffs5 of

COMESA and EAC (SADC has not set a common external tariff) and as through unilateral

efforts, there are a number of governments in the Tripartite region that still derive around

4 The concessionaire at Kasumbalesa charges US$133 for a 7-axle truck to enter the border facility. Effectively

the same concessionaire will operate on the DRC side of Kasumbalesa and at Tunduma and Nakonde. One assumes that he will levy similar fees at all these borders, meaning that a trucker will pay US$1 064 in border fees alone on a return journey from Dar es Salaam to Lubumbashi. It could be argued that what is paid in border fees will be saved in time taken waiting at borders, which can be as high as US$200 to US$400 per day. However, as has been shown, improving infrastructure without addressing border processes will not necessarily allow any savings in time to be made. 5 The COMESA and EAC common external tariffs are similar at 0% for raw materials and capital goods, 10% for

intermediate goods and 25% for finished goods.



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one quarter of their total tax revenue from trade taxes. It is therefore clear that trade tax

revenue is an important source of revenue to the region which means that Tripartite

customs systems need to be efficient in ensuring maximum compliance with the minimum

amount of trade disruption.

34. All Tripartite member states at least endorse the aims and objectives of the World

Customs Organisation’s Revised Kyoto Convention of 1999, which aims to provide customs

administrations with a modern set of uniform principles for simple, effective and predictable

customs procedures that also achieve effective customs control.6 The Revised Kyoto

Convention, coupled with the Istanbul Convention (governing temporary admission of

goods), the Arusha Declaration (a non-binding instrument which provides basic principles to

promote integrity and combat corruption within customs administrations), the Nairobi and

Johannesburg Conventions (enabling customs administrations to afford each other mutual

assistance on a reciprocal basis, with a view to preventing, investigating, and repressing

customs offences) and the SAFE Framework of Standards (a non-binding instrument that

contains supply chain security and facilitation standards for goods being traded

internationally)7 address the requirements of both the trade and customs administrations.

35. The texts of these conventions and frameworks incorporate modern methodologies to

provide a balance between the customs functions of control and revenue collection with

that of trade facilitation, to ensure that customs are able to carry out their responsibilities

more efficiently and effectively, and are able to facilitate the international movement of

goods while ensuring full compliance with national laws.

36. Tripartite countries that have signed the Revised Kyoto Convention are Botswana,

Lesotho, Mauritius, Namibia, South Africa, Uganda, Zambia and Zimbabwe. It is not clear

why other countries in the Tripartite have not acceded to the convention as, by and large, all

of these countries subscribe to the principles and guidelines of the World Customs

6 The revision of the Kyoto Convention was considered necessary as a result of the radical changes in trade,

transport and administrative techniques since it had originally been adopted in 1974. An additional reason was that it had not significantly resulted in the harmonisation and simplification of customs procedures worldwide. 7 The SAFE framework enables integrated supply chain management for all modes of transport, strengthens

networking arrangements between customs administrations to improve their capability to detect high-risk consignments, promotes cooperation between customs and the business community through the authorised economic operator (AEO) concept, and champions the seamless movement of goods through secure international trade supply chains.



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Organisation (WCO) conventions and other instruments. There is, however, an issue as to

how well even the countries that have acceded to the conventions actually implement the

provisions of the conventions or follow the WCO guidelines. In assessing the level of

conformity in implementing the Revised Kyoto Convention, Justin Zake (2011) states that

‘[f]rom the available information and experience of FAD [Fiscal Affairs Department of the

IMF] field missions to some Anglophone African countries, accession by some of the

countries appears to be more of a formality than intent to implement the convention’s

provisions’.

37. In order to assist countries to improve the overall performance of customs

administrations and meet the growing expectations of society, business and governments

the WCO has introduced the Customs Reform and Modernisation (CRM) Programme. The

CRM Programme is a collection of management tools available to customs administrations

to assist them to better understand the requirements of their changing external and internal

environment, and to develop self-assessment abilities and skills to implement a

comprehensive and sustainable organisational improvement and change programme. In the

Tripartite region the CRM Programme has been implemented in Uganda and is currently

under implementation in Mauritius, Namibia and South Africa, and in SADC on a regional

basis.



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Box 4 – Integrated border management (IBM)

State interests at the border include protection of national security, enforcement of immigration requirements, enforcement of import and export restrictions and prohibitions, collection of revenue, recording cross-border statistics, and enforcement of international health regulations.

The responsibility for protecting these interests is vested in several state agencies. They include police, security, customs, immigration, those responsible for sanitary and phyto-sanitary regulations, and the relevant bureau for standards.

Generally, each border management agency carries out its own border management policies and strategies and each agency’s border office minds its own processes although initiatives such as single windows and one-stop border posts have resulted in increased cooperation among border agencies.

Some countries, like those of the European Union and of the western Balkans, have developed a holistic and coordinated approach to border management. This approach, called integrated border management (IBM), focuses on coordination and cooperation between all actors involved in border management, and in improving a number of key management areas (KMAs) which are critical in border management. By improving communication, information exchange and mutual assistance of and between the different border agencies, the state border can be managed more successfully.

There are three pillars in the IBM approach:

i) Intra-agency cooperation;

ii) Inter-agency cooperation; and

iii) International cooperation

For each of the three pillars there are 6 key management areas, these being:

i) Legal and regulatory framework;

ii) Institutional framework;

iii) Procedures for cooperation

iv) Human resources and training

v) Communication and information exchange; and

vi) Infrastructure and equipment

Typically, the border management agencies in the Tripartite region that need to cooperate within an IBM framework include: immigration; customs; bureaux of standards; environment management agencies; health, food safety and international health regulations enforcement agencies; police, border control and security; road transport and safety agencies (RTSA); vehicle examination departments (VED); and drug enforcement commissions (DEC).



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38. In addition to the efforts of the WCO to assist its members to reform and modernise

customs administrations, the Tripartite Task Force has embarked on an IBM programme to

assist countries to improve the efficiency of movement of goods across borders. The IBM

concept, which, in the Tripartite region, is supported by a number of donor-funded

programmes is a multi-agency approach that encompasses the entire transport and supply

chain. The ultimate aim is to do as much of the clearing process ‘behind the border’ as

possible and for all border agencies to work together to minimise the disruption to

movement of goods and people.

39. The treaties and protocols of COMESA, EAC and SADC have a number of provisions that

support trade facilitation and cooperation between government agencies but these do not

provide the strategic vision that is now required to implement IBM. Therefore the Tripartite

Task Force has formed a technical committee to develop a clearly articulated IBM policy and

implementation strategy. In developing this strategy there is a recognised need to clarify

roles and establish mechanisms for coordinating the implementation at the regional and

national levels which may require the COMESA, EAC and SADC Secretariats to make

adjustments to facilitate a collaborative approach in the implementation of the programme

and for member states to designate lead (or coordinating) agencies to interface with the

Tripartite Task Force in this endeavour.



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Box 5 - Integrated border management in the Tripartite region

Kenya is in the process of introducing the National Single Window System whereby registered clearing agents, on behalf of their clients, complete all customs documentation and scan all supporting documentation either on entry at Mombasa port or, if possible, before the goods arrive. The authorised agent sends these electronically to a central processing location in Nairobi. At the central processing location well-trained officers assess the declarations and determine what taxes and duties need to be paid. They then deduct these taxes and duties from the bank account of the authorising agent and concurrently notify the port authorities, transporters and local customs offices of the release of the goods.

South Africa has also recently announced a similar system.

The benefits of this system are:

- The opportunity for fraud and corruption is minimised as there is no contact between the importer and the tax assessor;

- Staffing at the point of entry is minimised so the amount of infrastructure (housing and office accommodation) that is required at the border is reduced; and

- Fewer but better trained staff are required to assess imports.

With the improved communication systems that are being installed in the Tripartite region, especially the rapid expansion of fibre optic cable links, these improved border management systems will no doubt be introduced throughout the region and so improve trade facilitation in the Tripartite region and reduce cross-border transaction costs.

40. The processes to be followed at the regional level in the development and rollout of

IBM strategies would be broadly as follows:

i) Preparation of a policy statement on IBM for consideration by the Tripartite Sectoral

Committee of Ministers of Trade. The policy statement will briefly describe the IBM

concept and its importance in the implementation of regional integration agenda and

total cross-border efficiency.

ii) Developing IBM guidelines to be used by member states. The international best

practice is considered to be the EU guidelines and SADC guidelines which can be used

to promote the concept in the Tripartite region.

iii) Promotion of implementation by member states by running sensitising workshops for

relevant stakeholders on the IBM concept, facilitating the establishment of project

implementation structures and undertaking the initial scoping/gap analyses that would

facilitate the development of national IBM programmes.



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iv) Assisting member states with securing technical assistance to implement IBM and for

capacity building at national level and coordinating this capacity building at the

Tripartite level.

v) Monitoring and issuing periodic reports on progress in the implementation of IBM in

the region.

41. The processes to be followed at the national level in the development and rollout of

IBM strategies would be broadly as follows:

i) Adoption of a policy statement by the government that will briefly describe the

concept of IBM and its importance in enhancing border efficiency, cross-border

facilitation, and national efforts to implement regional and international instruments.

ii) Carrying out a situation or gap analysis to determine the extent of IBM in the country.

iii) Appointment of a national IBM coordinator or coordinating agency with a small

secretariat.

iv) Establishment of a National IBM Steering Committee, a National Strategy

Implementation Committee and specialised working groups as necessary.

v) Development of a national IBM strategy to implement the recommendations of the

situation analysis.

vi) Implementation of the strategy by all border agencies.

Box 6 – Development of a national IBM system

TMSA, with the Tripartite Task Force, has been working with the Government of Zimbabwe to design and implement an improved border management programme. This has involved:

i) An assessment of the status of compliance of Zimbabwe’s legislative and operational systems to the principles of IBM;

ii) Ascertaining and documenting areas that need to be addressed for Zimbabwe’s legislative and operational system to conform to the principles of IBM;

iii) Proposing a broad strategy for the adoption of IBM by Zimbabwe; and

iv) Ascertaining how feasible it is to streamline the number and roles of border agencies at the border posts including simplification of systems, processes and procedures.



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42. Although the IBM system is useful and valid in-country, the challenge for the region is

to rollout such a system regionally. If the Tripartite Free Trade Area is to deliver maximum

benefits in terms of realising sustained levels of high economic growth, the delivery of

efficient business and administrative processes becomes more critical in the pursuit of

economic success. Efficient and transparent documentation, statutory approvals and trade

facilitation are vital to international trade and can be improved with a higher degree of

automation. There are a number of examples that the Tripartite region can use as examples

of implementation of national (or a single customs territory such as the European Union)

IBM systems and single windows8 but there are few, if any, multinational single window

systems in operation. The challenge for the Tripartite is to develop the multinational single

window concept (which is referred to in Chirundu as the Community Platform) and to then

get consensus from the many border agencies in the many countries the multinational single

window would need to operate in and to then rollout this system.9

3.2.3 Regional customs bond

43. A regional customs bond guarantee would eliminate the avoidable administrative and

financial costs that are associated with the current practice of nationally executed customs

bond guarantees for transit traffic. At present transporters in the Tripartite region transiting

through a country to arrive at another country need to take out a customs bond at least

equal to the duty which would be payable on their cargo. When they prove that the cargo

has actually left that customs territory, the bond is released. However, the process of

releasing bonds takes time with the result that large amounts of money are tied up in the

system of national bonds. This, plus the fact that it costs money and takes time to issue a

bond, means that the cost of transport is higher than it needs to be if a system were found

that would replace the national bond system.

44. Both SADC and COMESA have designed and piloted regional customs bond guarantee

systems that allow transporters to take out a single bond covering the entire trip. There are

8 The single window concept enables important stakeholders within the supply chain to access comprehensive

and detailed information that will reduce the time needed to facilitate the trade process. With less time spent on processing a single transaction, more transactions can be managed within the same time. 9 In East Africa, because Kenya uses SIMBA and the four other EAC members use ASYCUDA as their customs

management systems, there is an interface between the customs management systems called the Revenue Authorities Digital Data Exchange (RADDEx) but this is not a single window.



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both slight and fundamental differences between the two systems, and the challenge is to

implement a harmonised system so that the end result is a single regional customs bond

system. If one country along a transport route operates a different bond guarantee system

to that operated by its neighbours, the benefits of the regional system are greatly reduced.

45. There are, however, a number of challenges in implementing a regional customs bond,

one of which is the local employment created by using national bonds. At the border

between Zambia and Tanzania (for example) there are over 250 registered clearing agents,

most of them being ‘briefcase’ companies with no fixed company address. These agents

make a living by assisting mainly transporters of goods in transit from the Tanzanian port of

Dar es Salaam to the DRC to obtain a customs bond through Zambia. A regional customs

bond guarantee system would significantly reduce the demand for the services these

national agents provide but, at the same time, would be beneficial for the regional economy

by assisting in reducing costs of transport and transit.

46. The Tripartite Task Force has launched a study that is assessing the various customs

bond schemes being used in the region with the objective of making a recommendation on a

solution to use the most appropriate customs bond as a region and to discuss this

recommendation at a workshop in October 2011.

3.2.4 Regional transit management system.

47. Within the Tripartite region, and because many of the Tripartite countries are land-

locked, management of goods in transit is an important trade facilitation instrument which,

if not implemented appropriately, results in excessive delays for transporters and losses to

governments as goods in transit are diverted to customers in countries through which the

goods are ostensibly supposed to be transiting.

48. The regional economic organisations each have their own transit management

regimes. They all work in a similar fashion in that all transit goods and means of transport

are presented to the customs office of commencement together with duly completed transit

control documents supported by appropriate bonds as necessary for examination and

affixing of customs seals. The office of commencement decides whether the means of

transport to be used provide enough safeguards to ensure customs security and whether the



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shipment may be made under cover of the relevant transit control documents. The means of

transport, together with the respective transit control documents, are then usually

inspected en route and customs officers satisfy themselves that the seals are intact (and

check the seals affixed by the customs authorities of other states) and may also affix

additional seals of their own. On arrival at the customs office of destination, the transit

control document should be discharged, assuming the seals are intact, and this will allow the

customs bond to be released.

49. Computerised customs management systems have transit modules built into the

system. For example, ASYCUDA++ has a module for the management of transit procedures

(the MODTRS module) that handles three transit documents, namely the T1, the TIR carnet

and the First Identification Procedure (FIP). It is usable for all types of transit as defined in

the Kyoto Convention covering the movements from the border office of entry to an inland

office (import transit); a border office of entry to a border office of exit (through transit); an

inland office to a border office of exit (export transit); and an inland office to another inland

office (internal transit).

50. The MODTRS system (and other transit management modules) is technically designed

to cover the international transit operations (data exchange of messages between countries)

but the system itself, including the legal and regulatory requirements, still needs to be

designed and the necessary communications hardware needs to be in place before a

regional system can be implemented. This is something that the Tripartite is actively working

on.

3.3 Immigration procedures

51. To date, the situation as regards computerised immigration systems in the Tripartite

region greatly varies from country to country. There are some countries that have a partially

computerised system (meaning that the immigration headquarters may have a

computerised system but this may not cover all immigration activities and may not cover

land borders); some countries have more than one system in operation, with these two



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systems not communicating with each other10; and some countries have sophisticated and

integrated computerised systems.

52. The Tripartite is currently working with one country on a computerised immigration

system that could be used as a standard for other countries that will need to upgrade and

modernise their systems.

53. In addition, the community platforms or single window systems being designed will

assist to improve the performance of immigration systems and improve trade facilitation.

3.4 Transport procedures

54. It is often though that the Tripartite region has a liberal transport regime when, in

actual fact, there are very few rules and regulations that specifically address the transport

sector and in particular the road transport sector. The result of this lack of specific transport

rules and regulations is that other government agencies and bodies develop their own rules

and regulations that affect the transport sector. An example of this is in East Africa where

revenue authorities register and license trucks in terms of whether they can carry cross-

border freight or whether they can only operate nationally. This legislation is in place for

customs purposes but affects the operational efficiency and costs of the region’s transport

fleet.

55. The Tripartite is addressing market liberalisation of the transport sector by carrying out

work on carriage of international road freight, introduction of international regulatory

mechanisms, and regional harmonisation of road traffic legislation. The process being

followed to achieve a market liberalisation in the transport sector draws on work being done

in other areas of the Comprehensive Trade and Transport Facilitation Programme and is

being undertaken in five phases:

i) Phase 1: An assessment of current regime of bilateral transport agreements (already

completed).

10

For example, some countries operate a system at their airports (PISCES) which is designed primarily to monitor travellers who may be considered to be a security risk. This system could be considered to be part of the global war on terror and does not link to the headquarters’ database that will contain information on what type of authority the traveller has to enter the country, such as whether s/he is a resident, a tourist, a temporary resident on a work permit, and so forth.



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ii) Phase 2: Development of Harmonisation Proposals: national and regional legal and

institutional arrangements necessary for harmonisation will be defined and described.

The investigation shall include an assessment of the preconditions for granting of a

permit/licence in the territory of one state to the territory of the other state and in

transit across the territory en route to another country. The proposals to be made

should also clarify, as relevant, any institutional management arrangements necessary,

especially at regional level.

iii) Phase 3: Development of Draft Competition Regulations: competition regulations for

cross-border road transport that will ensure equitable cross-border road transport

opportunities while boosting regional development and reducing the cost of road

transport services across the region will be developed. The regulations shall include

but not be limited to the following:

a. harmonised transit charges systems;

b. harmonised arrangements for transportation by road of dangerous and

abnormal goods;

c. harmonised vehicle operation reforms covering regional vehicle standards,

roadworthiness, mass and loading laws, oversize and over-mass vehicles and

road rules;

d. a regional heavy vehicle registration scheme;

e. a regional driver licensing scheme; and

f. a consistent and equitable approach to compliance and enforcement with

road transport laws.

iv) Phase 4: Revision and updating of the SADC Draft Multilateral Agreement developed in

2002 and the EAC Agreement on Road Transport: existing agreements at the regional

economic community level, which are now outdated, will be reviewed with a view to

achieving the following:

a. Allow the unimpeded flow by road of freight and passengers in the region;

b. Liberalise market access progressively in respect of cross-border road freight

transport;



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c. Introduce regulated competition in respect of cross-border passenger road

transport;

d. Reduce operational constraints for the cross-border road transport industry as a

whole; and

e. Enhance and strengthen the capacity of the public sector in support of its

strategic planning, enabling and monitoring functions.

v) Phase 5: Development of an implementation plan: building on the results of the

above steps, develop an implementation plan. That will result in the preparation

and adoption of a Tripartite multilateral road transport agreement and starting

implementation of this agreement by 2013.

3.4.1 Third party vehicle insurance.

56. The Tripartite region has three different third party vehicle liability insurance schemes,

these being:

i) Cash payments at the border: these are country-based and they follow the laws and

regulations of the country where payment is collected. For example, in Mozambique,

payment applies to foreign vehicles only and covers third party vehicle and property

damage.

ii) The fuel levy system: this involves indirect payments for third party insurance, made

whenever there is a purchase of fuel. As foreign vehicles refuel in a foreign country

they are automatically covered. The scheme covers injury to third parties and does not

cover property damage. The fuel levy is operational in the Southern African Customs

Union (SACU) states, namely Botswana, Lesotho, Namibia, South Africa and Swaziland.

iii) The COMESA Yellow Card: in 1985 the Preferential Trade Area (PTA), predecessor of

COMESA, established a motor vehicle third party insurance system, called the Yellow

Card, after noting problems with the cash payment system then in use in its member

countries. A network of national bureaux, one in each country, administers the

scheme. Each national bureau is responsible for issuance of Yellow Cards, handling

settlement claims arising from accidents involving foreign vehicles insured under the

scheme, and reimbursement claims paid on its behalf by other national bureaux.



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57. COMESA and SADC established a Working Group (later re-formed as Task Team in

2002) on the harmonisation of third party vehicle insurance schemes. The Task Team, after a

review of the status of the systems in place, resolved that the Yellow Card scheme would

offer a sound basis for an effective instrument to facilitate cross-border movement of

vehicles, goods and persons and to enhance trade and transport development in the region

and that there would be considerable benefits to the COMESA and SADC regions should the

Yellow Card scheme and the fuel levy system be harmonised. Consequently, the Task Team

has recommended that the two systems be interfaced as follows:

i) Countries using the fuel levy should issue Yellow Cards to motorists travelling to non-

fuel levy countries;

ii) Foreign motorists travelling from non-fuel levy countries to fuel levy countries should

be excluded from the fuel levy system and instead should carry Yellow Cards;

iii) Cash system countries should adopt the Yellow Card scheme; and

iv) The current operations of the Yellow Card system should be reviewed to respond to

the issues raised by the states during the National Workshops.

58. In order to implement these recommendations the Tripartite Task Force has endorsed

a work plan that, once implemented, should produce an interface between the three

systems through the development of:

i) a framework for harmonisation of third party insurance including the legal and

institutional reforms that are necessary for the implementation of regionally

harmonised arrangements for motor vehicle third party liability insurance;

ii) a system for interfacing the existing motor vehicle third party liability insurance system

and the Yellow Card system; and

iii) an implementation plan for a harmonised framework, clearly showing responsibilities

and time frames.

3.4.2 Vehicle standards and regulation

59. The Tripartite Task Force and member states are in the process of developing

harmonised standards for fitness of vehicles. After the initial working group meeting in April



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2011 it has transpired that there are a number of other smaller studies required on, for

example, smoke emissions, vehicle registration standards, training of examiners, bus

overloading, and so forth. The EAC is carrying out studies on vehicle standards and

regulations, and the outcomes of this work will feed into the Tripartite programme.

3.4.3 Self-regulation of transporters

60. Many of the region’s transport delays can be attributed to bureaucratic delays caused

by the need to check on compliance (such as customs inspections, weighing trucks,

document checks at police road blocks, etc.). One way to reduce these delays would be to

introduce a transporter accreditation system in which a transporter undertakes to comply

with a specified package of regulations. In doing so the transporter will be exempt from the

usual compliance checks. There would, however, be a system of spot checks which would

also apply to accredited transporters and if an accredited transporter was caught

contravening the regulations he would face severe penalties and lose his accredited status.

61. Such a system of self-regulation for transporters is being developed and this will be

piloted on the North-South Corridor. The pilot is based on the Road Transport Management

System (RTMS) which is a South African industry-led, voluntary self-regulation scheme that

encourages consignees, consignors and transport operators engaged in the road logistics

value chain to implement a vehicle management system that preserves road infrastructure,

improves road safety and increases the productivity of the logistics value chain.

3.4.4 Overload control

62. Given the high costs of transport in the Tripartite region it is not difficult to

understand the economic attractiveness of overloading vehicles to reduce the unit cost of

transport to an importer. However, vehicle overloading not only significantly accelerates the

rate of deterioration of road pavements but, when coupled with inadequate funding for

road maintenance, it contributes significantly to poor road conditions and high transport

costs.11

11

According to Pinard (2010), the ‘indicative cost of overloading in East and Southern Africa has been estimated at more than US$4 billion per annum. This exceeds the amounts being spent on road rehabilitation.



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63. The cost associated with vehicle overloading can be avoided through effective

control measures. The challenge is to harmonise these control measures throughout the

Tripartite region as, at present, there are different regulations on axle load limits, axle

combinations, gross vehicle mass (GVM) and vehicle dimensions in the Tripartite region and

these adversely affect the costs of regional transport and so also the costs of doing business

in the region.

64. COMESA, EAC and SADC have similar regulations as regards axle loads, gross vehicle

mass and vehicle dimensions but there are some countries in the region that have, in the

recent past, either adjusted their rules and regulations so that they do not conform to the

recommendations of the regional economic organisations or these rules and regulations

have not ever been aligned to regional norms.

65. The economic consequences of arbitrary national decisions on trade facilitation

measures can be very high and can make industries in neighbouring countries

uncompetitive, resulting in the closing down of industry, job losses and higher levels of

poverty. Therefore, if there is to be a change in regulation on axle loads, GVM or axle

combinations, this change should take account of all the scientific, technical and economic

data necessary to show that the economic costs of higher GVMs and various axle

combinations (in terms of road safety and the damage being done to the road pavement)

are higher than the economic costs (in terms of the effects of the higher costs of imported

and exported goods on the regional economy).

66. The Tripartite Task Force commissioned the Centre for Scientific and Industrial

Research (CSIR) in South Africa, a leading research institution in Africa, on pavement design

and loading, to analyse 11 vehicle combinations and five pavement structures using their

‘mePADS’ programme to determine the road wear caused by different vehicle combinations.

This analysis gives details of the payload efficiency of 11 vehicle combinations. The graph

(Figure 1) shows the road wear caused by the various vehicle combinations to transport one

tonne of payload for one kilometre. The values in the graph are in US cents and are the

average per vehicle over the five pavements and for wet and dry climatic conditions. The

Therefore, unless the problem is tackled head on, it will negate the expected benefits from the huge amounts of resources that countries and donors are investing into improved road infrastructure across the continent’.



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graph clearly illustrates that the longer vehicles are more payload effective and also confirm

that it is a misconception that 56-tonne interlinks do more road damage than 56-tonne truck

and trailer combinations.

67. The Tripartite/CSIR study was followed by a study on overload control undertaken by

the EAC, with inputs from the COMESA-EAC-SADC Tripartite. This EAC report was presented

at an EAC/Tripartite meeting of Permanent Secretaries, officials and technical experts held in

Nairobi on 17-19 August 2011. At this meeting the following, inter alia, was agreed:

i) Overload fines, fees and charges should be decriminalised and fees should be set

according to the costs of road damage;

ii) Regional axle load limits should be set at 10t (single), 18t (tandem) and 24t (tridem),

with a tolerance of 5%;

iii) A 56 tonne GVM standard on seven axles with no quadruple axle units allowed and no

tolerance;

iv) Interlinks would be allowed on defined corridors of the Regional Road Network

without extra permits with the length limited to 22m;

v) A bridge formula;

vi) Vehicle dimensions would be discussed further and would be based on the Tripartite

study being carried out;

vii) Mass limits for super-single tyres would be limited to 8.5t for 385/65R22.5 tyres

provided weighbridge software can be programmed to detect different tyre widths;

and

viii) Self-regulation should be promoted.



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Figure 1: Road wear caused by various combinations of vehicles on road pavements

68. The Permanent Secretaries stressed the need for strict enforcement of overload

control measures and directed the respective technical experts to effect these changes. A

rapid process will be undertaken to develop a road map and subsequent steps to assure that

agreements are effected within the conditions highlighted. This issue can now be brought to

the attention of the ministers to harmonise these aspects and make the regional transport

system more efficient.

3.4.5 Harmonised road user charges

69. Efforts are underway to harmonise cross-border road user charges in the eastern and

southern African region. COMESA and EAC are to review the 2007 SADC Road User Charges

study findings and recommendations with a view to examining whether these

recommendations could be extended to cover all Tripartite member states.



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3.4.6 Regional corridor management systems

70. A number of the Tripartite region’s corridors have their own management structures

that are usually established through a memorandum of understanding between the

countries the corridor transits through. However, not all corridors have their own

management structures; the functions and responsibilities of existing management

structures are different; and there are no formal linkages between the corridor management

structures and the secretariats of the regional organisations. The Tripartite will assist to

develop a regional corridor management system that will involve clustering corridors

geographically.

3.5 Joint Competition Authority

71. The need for the Joint Competition Authority for air transport in Africa was first

recognised in the 1990s when African airlines started to face increasing competition from

European airlines. In response African states started to cooperate much more effectively in

the area of air transport rules and regulations. This, in turn led to the development and

adoption of the Yamoussoukro Decision (YD) of 1999 on the liberalisation of air transport

services, which entered into force in 2000 after the requisite ratifications.

72. It is recognised by eastern and southern African states that dual membership by

COMESA, EAC and SADC is an impediment to the effective implementation of the YD and, as

such, the member states of COMESA, EAC and SADC agreed on a common framework for the

joint implementation of YD. This led to the development of the Competition Regulations

which were adopted by the ministers in 2004. The Competition Regulations provide for the

establishment of the Joint Competition Authority (JCA) to oversee the implementation of the

Competition Regulations. Guidelines, provisions and procedures for implementing the

Competition Regulations that were developed and adopted in 2007 by COMESA, EAC and

SADC and the First COMESA-EAC-SADC Tripartite Summit of 2008 launched the JCA and also

decided that the JCA Secretariat would be hosted at the SADC Secretariat and that COMESA

would chair the JCA.

73. The Tripartite Task Force has proposed to operationalise the JCA through the

implementation of a roadmap that involves the review and evaluation of existing relevant



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documents on air transport and air transport liberalisation. This roadmap is being

implemented and involves the development of:

i) the legal and institutional framework to give effect and mandate to the JCA;

ii) the organisational and management structure for the JCA Secretariat;

iii) the business plan and budget;

iv) sustainable mechanisms for funding the JCA ;and

v) an Air Services Agreement (ASA) template for the implementation of the YD in the

Tripartite region.

3.6 Linkages between Tripartite regional trade facilitation and the WTO trade

facilitation programme

74. Negotiations on trade facilitation in the World Trade Organisation (WTO) in Geneva,

Switzerland, started in 2004 and were based on a revision of the General Agreement on

Tariffs and Trade (GATT) Articles V (Freedom of Transit), VIII (Fees and Formalities connected

with Importation and Exportation), and X (Publication and Administration of Trade

Regulations). For a number of reasons, including the fact that developing countries and least

developed countries do not want to make legally binding commitments in trade facilitation

that will open them to incurring penalties for non-compliance, progress in the negotiations

has been difficult.

75. In December 2009, the WTO Negotiating Group on Trade Facilitation (NGTF) issued a

draft consolidated negotiating text. The consolidated text reflected the progress made in the

negotiations since 2004. Although it contained multiple square brackets, which indicate non-

agreed language, it was widely expected that delegations would only have to ‘clean up’ the

text and replace the bracketed text with agreed language. However, this has not happened

and WTO members have begun diverging over various details of the proposed rules, such as

their structure, and negotiations on principles have been reopened. There is also

disagreement on the legal status conferred on the rules in that the language being used is

mainly ‘best endeavour’ language, which means that the rules are considered to be non-

mandatory.



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76. Although developing countries and least developed countries (LDCs) are well aware

of the need to implement trade facilitation measures, they have shown a great deal of

reticence in agreeing to binding rules on trade facilitation in the WTO, partly owing to their

concerns about their capacity to implement the new obligations. When the trade facilitation

negotiations were launched, many developing countries were in full support of the

negotiations in the expectation that their implementation needs would be addressed. This

expectation was partly based on the agreement of the developed countries to assist

developing countries and LDCs to build their capacity in trade facilitation. For example,

Paragraph 6 of Annex E (on Trade Facilitation) of the WTO Ministerial Declaration of Hong

Kong (2005) states:

To bring the negotiations to a successful conclusion, special attention needs to be paid to

support for technical assistance and capacity building that will allow developing counties

and LDCs to participate effectively in the negotiations, and to technical assistance and

capacity building to implement the results of the negotiations that is precise, effective

and operational, and reflects the trade facilitation needs and priorities of developing

countries and LDCs. Recognizing the valuable assistance already being provided in this

area, the Negotiating Group recommends that Members, in particular developed ones,

continue to intensify their support in a comprehensive manner and on a long-term and

sustainable basis, backed by secure funding.

77. WTO members have attempted to draft special and differential treatment (S&DT)

provisions, which use the concept of graduation coupled with access to technical assistance.

This means that if developing countries require capacity building to comply with the

proposed provisions of the trade facilitation text they would be provided with a longer time

period and would have access to adequate technical assistance to undertake necessary

reforms before being subjected to compliance with the rule. However, developing countries

remain unconvinced of this approach and of the lack of guarantees of technical assistance

delivery,12 so they remain insistent on the use of ‘best endeavour’ language as a means to

include flexibility into the draft text.

12

Despite this lack of guarantee UNCTAD reports that technical assistance funds dedicated to trade facilitation increased from US$28.4 million in 2002 to US$239.84 million in 2008, with an increasing proportion assigned to LDCs



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78. Despite the stalling of the negotiations on trade facilitation in the WTO, member

states of the Tripartite remain fully committed to developing and implementing trade

facilitation measures regionally and fully recognise the positive impacts trade facilitation

measures can have on trade and trade-led economic growth.

79. The Tripartite is proactively developing new trade facilitation measures, harmonising

trade facilitation measures across COMESA, EAC and SADC and building capacity in the

region to implement trade facilitation measures. Although the gap between the positions

taken in the WTO negotiations by Tripartite WTO members and the measures being

implemented in the region, is widening, the referencing of Tripartite trade facilitation

measures to the provisions of the WCO, WTO and other international bodies ensures that

there is little danger of developing conflicting trade facilitation measures. This suggests that

regional trade facilitation efforts not only contribute to regional integration, but may also be

conducive to the convergence of trade and customs procedures worldwide.

3.7 Conclusion

80. The economic integration agenda being implemented by the COMESA-EAC-SADC

Tripartite has prioritised programmes addressing trade and transport facilitation challenges

with the aim of lowering costs of doing business and improving the competitiveness of

products from the eastern and southern African region. Significant progress has already

been made in design and implementation of the trade facilitation programmes and the

benefits of these programmes are being realised. The longer-term success of the Tripartite

trade and transport facilitation programmes will depend on the political, administrative and

technical commitment of the Tripartite member states to design and implement the full

Comprehensive Trade and Transport Facilitation Programme, on establishing the

appropriate institutional and coordination structures at regional and national level, and

obtaining the necessary technical and financial support for the design and implementation

of the programme. To date all of these conditions for success are largely in place. There are a

few issues that need to be addressed, such as the method of concessioning infrastructure

facilities at border posts but, by and large, progress in implementing trade and transport

facilitation programmes in the Tripartite region is progressing well.



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81. The benefit (and also challenge) of the WTO trade facilitation negotiated text is that

it implies a precise and obligatory commitment that is legally binding and enforceable.

Although the COMESA-EAC-SADC Tripartite is not able to offer that legally binding regime as

yet, the work being done by the Tripartite and its member states, supported by international

organisations and bilateral donors, is of major importance to the harmonisation,

strengthening, improvement and development of new trade facilitation measures that will

go a long way to making the Tripartite Free Trade Area a more competitive business

environment.

References

CDC. One Stop Border Post Source Book.

Doyle, T. March 2010. Collaborative Border Management. World Customs Journal, Volume 4,

Number 1.

EC. 2007. Guidelines for Integrated Border Management in the Western Balkans.

Kieck, E. Coordinated Border Management: Unlocking Trade Opportunities through One Stop Border

Posts. World Customs Journal, Volume 4, Number 1

Mazorodze I.V. Final Report on Assignment Commissioned by the Task Force of the COMESA-EAC-

SADC Customs and Trade Subcommittee to Develop a Common Trade Facilitation Programme.

Pinard, M.I. 2011. Guidelines on Vehicle Overload Control in Eastern and Southern Africa. SSATP.

Tripartite. 2011. Tripartite Vision and Strategy. July 2011.

UNCTAD. 2010. Review of Maritime Transport. 2010. Geneva: United Nations Conference on Trade

and Development.

UNCTAD. 2011. Technical Notes on Trade Facilitation Measures. Geneva: United Nations Conference

on Trade and Development.

UNCTAD. 2010. Emerging challenges and recent developments affecting transport and trade

facilitation. Geneva: United Nations Conference on Trade and Development. TD/B/C.I/MEM.1/8.

September 2010.



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World Bank. 2010. Trade and Transport Facilitation Assessment. Washington D.C.: World Bank.

Teravaninthorn, S. and Raballand, G. 2009. Transport Prices and Costs in Africa: A Review of the Main

International Corridors. Working Paper 14. Africa Infrastructure Country Diagnostic. Washington

D.C.: World Bank.

WTO. 2011. Negotiating Group on Trade Facilitation – Draft Consolidated Negotiating Text –

TN/TF/W/165/Rev.10. Geneva: World Trade Organisation. 20 July.

Zake, J. 2011. Customs Administration Reform and Modernization in Anglophone Africa – Early 1990s

to Mid-2010. IMF Working Paper (WP/11/184). August.

Websites:

- World Trade Organisation - www.wto.org

- World Customs Organisation - www.wcoomd.org

- TradeMark Southern Africa - www.trademarksa.org

- UNCTAD – www.unctad.org

Unpublished documents from the Tripartite Task Force, the Infrastructure Sub-Committee of the

Tripartite Task Force and TradeMark Southern Africa.

Chapter 5 – Integrating services into regional industrial strategies: how backbone services sectors support development in the Tripartite member states


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Chapter 5

Integrating services into regional industrial strategies:

how backbone services sectors support development in the Tripartite member states

Paul Kruger

Introduction

Many services play a key role in the manufacturing industry – from the electricity being used

in the production process to the branding and marketing of the final product and everything

else in between. Business services, and, in particular, research and development, have the

ability to make firms more competitive while creative advertising can disrupt traditional

buying patterns. Professionals such as accountants, lawyers and engineers are intimately

involved in the operational environment by advancing financial stability, compliance, good

governance, systems integrity and innovation. Efficient supply chain management in the

area of retail and distribution services creates optimal value by coordinating demand and

delivering products regionally or globally. Proper roads and railways, developed ports, good

air connections, and telecommunications infrastructure such as fibre optic lines, undersea

cables and wireless technologies enable closer connectivity between the producers and

markets. Firms also need financial institutions to provide a range of services including

banking, insurance, and advisory functions to support business transactions and expansion.

As firms become more sophisticated and specialised, proper education and training is

necessary for improving the skills and capabilities of the employees. Even health services

play a part in enhancing the quality of human capital which can lead to a more productive

workforce. In the last few decades, technological advances have changed the way businesses

operate, and as a consequence, services are becoming further embedded in other economic

sectors. This chapter considers the extent of these advances and shows how services have

become a fundamental part of product design, the manufacturing process and the final

product. It highlights some of the most innovative firms in the world by exploring the ways in

which they have integrated services into their products. The chapter also takes a look at how

the reach of services continues to evolve and the opportunities this creates for developing

countries.



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Services act as essential inputs into the productivity processes of all firms, something which

becomes increasingly critical as countries move towards more specialised sectors. Today, no

product can be made or distributed without the contribution of services. It is also unlikely

that firms can become internationally competitive by using substandard services, as these

inputs will affect the final product. It is a fact that integration into global and regional

production chains requires efficient and timely delivery, as poor execution at a high price not

only affects the current operations of companies but also discourages potential investment

by lowering profitability (Hodge, 2001). Despite the acknowledgement of the role services

play in an economy, the regional configurations of the Common Market for Eastern and

Southern Africa (COMESA), the East African Community (EAC) and the Southern African

Development Community (SADC) have been slow to reap the benefits services can bring to

their development processes. This chapter highlights some of the challenges these

configurations have encountered during the last few years and offers some insights into the

role services play in the Tripartite member states. It looks critically at the liberalisation

method employed by the regional configurations and discusses the World Trade

Organisation (WTO) framework within which this process takes place to draw attention to

some of these challenges.

Services are inextricably connected to all three development pillars of the Tripartite Free

Trade Agreement (T-FTA). The linkages between infrastructure development and the other

two pillars – namely market access and industrial development – are well recognised by the

Tripartite member states, but it is important that the connection between services and the

development of the three pillars is also acknowledged. This chapter shows the linkages

between services and the pillars and singles out the most crucial services sectors necessary

to drive development in the Tripartite region. It reviews these core sectors to illustrate their

importance and relevance to an overall growth and development strategy. Finally, it

considers both issues of services liberalisation and services development and examines how

these two processes fit into the Tripartite industrial development strategy.

Services are imbedded in industry

Technological advances and the rise of social networks have changed the way firms operate

and new development in these areas will continue to influence business decisions and



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strategies. Firms are constantly innovating in their quest to conquer a greater share of the

market, and adding value through services inputs makes up a large part of this creative

process. Apple Inc. (Apple), for example, is the most valuable company in the world today

and is also considered to be one of most innovative companies of all time. Apple started out

as a manufacturer of personal computers but gradually branched out into other fields. Apple

now manufactures a wide range of electronics including music players, mobile phones and

tablets. Even more remarkable is the services industries that Apple built on top of their

manufactured products. Today Apple is not only the largest music retailer by selling songs

online through iTunes but also the world’s largest software distributor with developers

creating hundreds of thousands of applications – ‘Apps’ – which have been downloaded

billions of times with Apple’s operating systems. In 2011, Apple created a subscription

service where publishers of magazines, newspapers, video and music can charge consumers

for their content. More recently, Apple entered the digital textbook space by creating a

platform for dynamic academic content. This is a good example of how services are

becoming an integral part of the product; without the services of iTunes and the App Store,

Apple would not have reached the same success. Online retailer Amazon is following a

similar strategy with its range of Kindle readers and tablets. It has been reported that

Amazon sells its products at a loss with the hope of turning a profit by selling electronic

content and services to the users of the device. Products are becoming the platforms for

delivering services and the use of this model will increase along with advances in technology.

Indications are that the broadcasting and health care sector is the next in line to be

disrupted by overlaying services (Ha, 2012; Smith, 2012).

Even more futuristic are the plans of real estate developer Gale International and

information technology firm Cisco to build a digital city in South Korea on the island of New

Songdo. Gail International is responsible for the design and construction of the business

district while Cisco is the ‘digital plumber’ in charge of creating the technological

infrastructure for the development. Cisco will be wiring the whole district with synapses –

from trunk lines running beneath the streets to fibre lines connecting every socket and

appliance to the internet. These digital foundations would enable internet monitored and

controlled traffic, water, power, transportation and public safety. Every home and office will

be able to monitor and orchestrate its own heat, air conditioning, lighting, appliance usage



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and energy usage. Each home and office will also have its own TelePresence

videoconferencing system through which all types of urban services including health care,

education, safety, business services and retail can be accessed. This may read like scenes

from a science fiction novel, but New Songdo is currently under construction and the date of

completion is estimated to be 2015. Gail International also unveiled plans to build 20 more

of these cities across China and India using New Songdo as a blueprint, confirming that such

a model is seen as viable by investors (Lindsay, 2010). Cisco conceded that it would not only

be earning revenue from the installation of the basic infrastructure and hardware, but also

from services that are layered on top of the infrastructure. More companies are trying to

move away from the typical approach of selling stand-alone products by figuring out how

they can tie services to their products in order to add overall value and increase profits.

Another important service which is firmly embedded in the process of product design and

manufacturing is research and development. This is usually the first business function in the

value chain and it can be argued that research and development is the basis of for most of

the innovation occurring within firms. In the manufacturing sector, research and

development tends to focus on the creation or invention of new products, or on the

improvement of existing products. An example of the former is the Nissan Leaf, which the

company claims is the only zero-emission electric car on the market. An example of the

latter is the efforts of snack and beverage producer, PepsiCo make its products healthier by

finding ways to cut the fat, sugar and sodium in its products, without changing the taste.

Other companies like Marks and Spencer are even improving the way products are sourced

and distributed, by implementing ethical and environmentally friendly supply chains. It

would not be possible for these and other firms to present markets with innovative products

and logistics without investment in research and development. Companies are increasingly

turning to research and development efforts to give them a competitive edge in the market.

This has led to a rise in the cross-border trading of research and development services with

multinationals outsourcing these functions or setting up research centres in developing

countries with a skilled workforce. Israel and Bangalore in India are popular destinations for

this kind of investment.

At the other end of the value chain is the marketing and sale of the product. E-commerce

started to take off the in mid-1990s with most manufacturers today having some kind of



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strategy to market and sell products on the internet. The late 1990s also saw the rise of

business-to-business market places, in particular that of Alibaba.com, which brings together

exporters and importers from all over the world, mostly from the manufacturing sector. The

Chinese company which claims to have more than 65 million subscribers was instrumental in

connecting low-cost producers in Asian countries such as China, India and Korea with the

rest of the world. Naturally, global internet penetration has a direct impact on the growth of

e-commerce, and with over two billion people now using the internet, growth has been

significant. This has become a global phenomenon as e-commerce is not constrained by

national borders with most online companies delivering their products worldwide. The

global e-commerce market is estimated to be worth US$1.4 trillion by 2015 with most of the

growth originating from the emerging markets. Projected compound annual growth rates for

e-commerce in the emerging markets range from 53% in India, to 22% in China, 20% in

Mexico and 18% in Brazil. These estimates are significantly higher than the estimated 10%

growth for Western Europe and the 9% for the United States. (Forrester, 2011a)

One of the big shifts in the e-commerce market during 2010 was the emergence of social e-

commerce and mobile commerce. In the next stage of e-commerce evolution, new business

models will be made possible by social networks and interactions, consumer insight and

tailored applications. Brands have started to realise that social networks such as Facebook

and Twitter aren't only useful for extending their online visibility, but also as a way to pull in

more revenue. Companies are increasingly using these social networks as a means to easily

connect with customers to promote and sell their products. However, it is the social

dimension of the networks that is disrupting the traditional e-commerce business model.

Groupon was one of the first businesses to exploit the power of social connections by

creating a viral distribution platform to boost sales. The company was responsible for the

group-buying craze that swept through the world in 2010 and led to the emergence of a

whole new industry known as group buying. Groupon initially offered one deal a day at large

discounts; if a certain number of people sign up and buy the offer, then the deal becomes

available for purchase. Sharing the deals with the social networks was one of the reasons for

the rapid rise of this business model. Social commerce has, however, become more defined

in the past year with companies increasingly leveraging the reach of social network to

nurture customer loyalty and boost revenue. E-commerce is being integrated with social



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networks, particularly with Facebook, where social promotions, incentive programmes and

private sales are being implemented in a targeted manner for the user and his or her group

of friends.

With the release of tablet computers and the increasing popularity of smartphones, there

has been a gradual shift towards a more personalised approach in mobile commerce.

Shopping activity on mobile devices exploded during 2011 and analysts believe that this

could potentially be one of the biggest technology trends since the introduction of the

personal computer. According to Forrester’s report, mobile commerce sales are set to

quintuple over the next five years, resulting in US$31 billion worth of sales by 2016

(Forrester, 2011b). This is still small compared to the market size of e-commerce, but the

possibilities of the mobile market are potentially far-reaching. Mobile devices, especially

smartphones are far more personal devices than computers, offering the ability for

unprecedented engagement with the users. This creates opportunities for loyalty

programmes tied to purchase history, targeted selling through Wi-Fi based location services,

mobile coupons and in-store promotions. Most importantly, all of these features can be

integrated into payment systems to provide a seamless buying experience.

Big players like Google Wallet and PayPal have recently entered the mobile payment market,

providing services that enable users to make payments via their mobile phones. Even though

mobile payments are new phenomena in the developed world, Africans have been using

mobile phone money transfers since 2007. A Kenyan company, M-Pesa was one of the first

players on the mobile payment scene by pioneering technology which sends remittances by

mobile phones and makes certain types of payments. M-Pesa, which was developed by

mobile operator Safaricom, can be regarded as the most successful mobile payment system

in the world today. In 2010, M-Pesa evolved into a fully-fledged mobile banking service, with

the launch of the M-Kesho savings account. Money can easily be moved from the M-Pesa

mobile wallet to an interest-bearing savings account. A Visa credit card can also be linked to

the account to withdraw funds from ATMs or to make purchases on the internet. This

market is set to grow even faster with the adoption of near field communications (NFC)

technology, which enables phones to communicate with other NFC enabled devices. This

would make paying for goods and services as easy as swiping a phone in close proximity to a



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NFC terminal, supplementing or even eventually replacing the credit card as form of

payment.

The reach of services is becoming wider and their integration into products is becoming

deeper. Companies are increasingly trying to adopt and embrace new technologies and

services with the goal of pushing them forward in the market and making them more

competitive. In a modern economy, the creation and sale of successful products have

become dependent on the underlying or overlaying services. Services have become a

fundamental part of product design, manufacturing process and final product, even layering

the services on top of the product to increase its value. The services dimension is set to

become an even larger piece of the products as the adoption and pace of technology grow.

For these reasons, the consideration of services industries should play an ever more

important role in conceptualising a development strategy for the Tripartite region.

The share of the services sector

As services are infiltrating more spheres of the economy, so too does the contribution of the

services industry rise in relation to a country’s total output and employment. Economic

literature documents this pattern, where an agriculture base leads to strong expansion in

industrial activity which is later partly displaced by services trade. Sheehan (2008) describes

how the developmental paths of the United Kingdom, Germany, Japan, Korea and the

United States evolved through the last century to become largely services orientated

economies. Most developed countries are in this post-industrialisation phase during which

they are less reliant on industry, with the services sectors absorbing the largest share of

employment. For example, according to 2005 data, nearly 80% of the total employment in

the United Kingdom was in services compared to only 20% in industry (Sheehan, 2008).

When it comes to emerging nations, the pattern of development is not as linear as that of

the traditional developed countries. For developing countries such as China, industry has

been a central contributor to its development, but at the same time, services have also

grown very rapidly. Compare this to India where growth and development have primarily

been driven by services and services exports rather than by the industrial sector (Ibid.). In

the past, there was a clear pattern of industrial and post-industrial development but the

recent advances in technology and the way in which services are integrated into all parts of



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economies are quickly making this model obsolete. As was shown by India, a strong

industrial base is not a prerequisite for rapid services or economic development. The idea

that an efficient services sector can only be developed on the back of a strong industrial base

must be dispelled. This reasoning is evident in the Industrial Policy Action Plan 2 of

South Africa where the government has been quite explicit in its belief that the

manufacturing sector should be the focus of industrial policy and that it creates the

conditions for the services sector to grow (South African Government, 2010). It can be

argued that intense global competition and modern technology have also made the reverse

true – competitive manufacturing industries need to be supported by efficient services

sectors.

One way to look at the structure of the Tripartite member states is to compare the shares of

their main economic sectors to the countries’ total output. The table below sets out the

contribution each of the broad sectors – agriculture, industry and services1 – makes to the

Gross Domestic Product (GDP) of each Tripartite member state. The data for the services

sector includes wholesale and retail trade (including hotels and restaurants), transport, and

government, financial, professional and personal services such as education, health care,

and real estate services; but the composition is not an accurate reflection of the whole

services sector as the industry data includes the subsectors of construction and electricity. It

can be argued that both construction and electricity are predominantly services orientated

sectors, which can contribute to a stronger performance of the industry sector. For that

reason, manufacturing is reported as a separate subgroup, in order to provide additional

information on the structure of the industry sector.

1 Agriculture here refers to crop cultivation, livestock production, forestry, fishing, and hunting. Industry

includes manufacturing, mining, construction, electricity, water, and gas. Services cover all other economic activities, including trade, transport, and communications; government, financial, and business services; and personal, social, and community services.



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Table 1: Contribution to gross domestic product (GDP), %

Countries 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Angola

- Services NA 41 22 27 24 24 25 20 21 26 26 31

- Agriculture NA 18 6 8 8 8 9 8 9 8 7 10

- Industry NA 41 72 65 68 67 66 73 70 67 67 59

- Manufacturing NA 5 3 4 4 4 4 4 4 5 5 6

Botswana

- Services 35 34 45 41 43 48 47 48 44 45 45 57

- Agriculture 15 5 3 2 2 2 2 2 2 2 2 3

- Industry 51 61 53 57 55 50 51 51 54 53 53 40

- Manufacturing 5 5 5 4 4 4 4 4 3 4 4 4

Burundi

- Services 25 25 41 41 41 41 41 45 NA NA NA NA

- Agriculture 62 56 40 40 41 40 40 35 NA NA NA NA

- Industry 13 19 19 19 19 19 19 20 NA NA NA NA

- Manufacturing 7 13 9 9 8 8 8 9 NA NA NA NA

Comoros

- Services 53 50 40 38 38 37 38 38 43 43 42 42

- Agriculture 34 41 49 50 50 51 51 51 45 45 46 46

- Industry 13 8 12 12 12 13 12 11 12 12 12 12

- Manufacturing 4 4 5 5 4 4 4 4 4 4 4 4

DRC

- Services 38 40 30 30 27 27 28 28 27 29 32 33

- Agriculture 27 31 50 60 51 51 47 46 46 42 40 43

- Industry 35 29 20 20 21 21 24 27 28 28 28 24

- Manufacturing 15 11 5 5 5 5 6 7 6 6 6 5

Djibouti

- Services NA 75 81 81 80 80 80 80 80 79 NA NA

- Agriculture NA 3 4 4 4 4 4 4 4 4 NA NA

- Industry NA 22 15 16 16 16 17 17 16 17 NA NA

- Manufacturing NA 4 3 3 3 3 3 3 3 2 NA NA



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Countries 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Egypt

- Services 45 52 50 50 49 48 48 49 48 50 49 48

- Agriculture 18 19 17 17 16 16 15 15 14 14 13 14

- Industry 37 29 33 33 34 35 36 36 38 36 38 37

- Manufacturing 12 18 19 19 19 19 18 18 17 16 16 16

Eritrea

- Services NA NA 62 60 60 66 67 54 55 55 56 63

- Agriculture NA NA 15 18 16 13 12 24 26 25 17 15

- Industry NA NA 23 22 23 21 21 22 19 20 27 22

- Manufacturing NA NA 11 11 11 10 9 7 6 6 7 6

Ethiopia

- Services 29 35 38 39 43 44 42 40 39 40 43 38

- Agriculture 61 54 50 48 44 42 44 47 48 46 44 51

- Industry 11 11 12 13 14 14 14 13 13 13 13 11

- Manufacturing 5 5 6 6 6 6 5 5 5 5 5 4

Kenya

- Services 47 51 51 51 53 53 54 54 55 65 64 62

- Agriculture 33 30 32 31 29 29 28 27 27 20 21 23

- Industry 21 19 17 17 17 18 18 19 18 15 15 15

- Manufacturing 13 12 12 11 11 11 11 12 12 9 9 9

Lesotho

- Services 49 42 56 53 55 56 57 58 53 53 54 60

- Agriculture 25 25 12 13 10 10 10 8 10 8 8 8

- Industry 27 34 32 34 35 34 33 34 37 39 38 32

- Manufacturing 8 15 14 19 23 22 22 20 22 20 19 16

Libya

- Services NA NA NA NA 29 21 28 22 19 21 20 NA

- Agriculture NA NA NA NA 5 4 3 2 2 2 2 NA

- Industry NA NA NA NA 66 75 69 75 79 76 78 NA

- Manufacturing NA NA NA NA 3 6 5 5 5 5 4 NA

Madagascar

- Services 54 59 57 58 54 55 55 56 56 58 59 55

- Agriculture 30 29 29 28 32 29 29 28 27 26 25 29

- Industry 16 13 14 15 14 15 16 16 16 16 16 16




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Countries 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Malawi

- Services 34 27 43 45 45 45 48 50 52 53 54 53

- Agriculture 44 45 40 39 37 36 35 33 31 30 30 31

- Industry 23 29 18 17 18 19 17 17 17 16 16 16

- Manufacturing 14 19 13 12 11 12 10 9 11 10 10 10

Mauritius

- Services 61 54 62 62 63 63 64 65 67 67 66 67

- Agriculture 13 13 7 7 6 6 6 6 6 5 4 4

- Industry 26 33 31 31 31 30 29 28 28 28 29 29

- Manufacturing 16 24 23 23 22 22 21 20 20 20 20 19

Mozambique

- Services 28 44 51 52 49 46 45 48 46 46 46 45

- Agriculture 37 37 24 23 28 28 27 27 28 28 30 31

- Industry 34 18 25 26 23 26 27 25 26 26 24 24


Namibia

- Services 33 50 60 59 57 61 61 59 55 55 53 58

- Agriculture 11 12 12 11 11 11 10 11 10 9 9 9

- Industry 56 38 28 31 32 28 29 29 35 36 38 33

- Manufacturing 9 14 13 13 13 15 14 14 16 17 14 15

Rwanda

- Services 33 43 49 49 51 51 48 48 48 50 53 52

- Agriculture 46 33 37 37 35 37 39 38 38 36 32 34

- Industry 22 25 14 14 14 12 14 14 14 14 15 14

- Manufacturing 15 18 7 7 7 6 7 7 7 6 6 6

Seychelles

- Services 78 79 68 69 67 70 69 76 77 78 78 79

- Agriculture 7 5 3 3 3 3 3 2 2 2 2 2

- Industry 16 16 29 28 30 27 28 22 20 20 20 19

- Manufacturing 7 10 19 18 18 16 17 13 12 12 12 11

South Africa

- Services 45 55 65 64 63 65 66 66 66 65 64 66

- Agriculture 6 5 3 4 4 3 3 3 3 3 3 3

- Industry 48 40 32 32 33 32 31 31 31 31 33 31

- Manufacturing 22 24 19 19 19 19 19 18 17 17 17 15



191

Countries 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sudan

- Services 53 44 37 38 37 39 39 40 41 41 40 44

- Agriculture 33 41 42 43 42 39 35 32 30 28 26 30

- Industry NA 15 22 19 21 22 26 28 29 31 34 26

- Manufacturing 7 9 9 8 8 8 7 7 6 6 6 7

Swaziland

- Services 47 46 43 41 42 42 44 46 44 43 43 43

- Agriculture 23 10 12 11 11 10 9 9 8 7 7 7

- Industry 30 43 45 48 47 48 47 46 49 49 49 50

- Manufacturing 21 37 39 42 41 41 40 40 43 44 44 45

Tanzania

- Services NA 36 47 48 46 45 44 46 47 47 47 47

- Agriculture NA 46 33 33 32 33 33 32 30 30 30 29

- Industry NA 18 19 19 21 23 22 23 23 23 23 24


Uganda

- Services 23 32 48 48 51 50 55 48 50 50 50 50

- Agriculture 72 57 29 30 25 26 23 27 26 24 23 25

- Industry 4 11 23 23 24 24 22 25 24 27 27 26

- Manufacturing 4 6 8 8 8 8 7 7 8 8 8 8

Zambia

- Services 43 28 52 52 52 51 49 45 42 40 40 44

- Agriculture 15 21 22 22 22 23 23 23 22 22 19 22

- Industry 42 51 25 26 26 27 28 32 35 38 41 34

- Manufacturing 18 36 11 11 12 12 12 12 12 11 10 10

Zimbabwe

- Services 55 50 57 60 65 62 53 51 45 42 47 53

- Agriculture 16 16 18 17 14 17 20 19 21 23 20 18

- Industry 29 33 25 22 21 22 27 30 34 35 32 29

- Manufacturing 22 23 16 15 13 14 16 17 18 17 17 17

Source: World Bank (2011a)

Overall, the structural changes for the Tripartite region over a 20-year period (1990 – 2009)

do not follow the traditional development path as described by Sheehan (2008). There was

a gradual drop in the agriculture contribution, but this seems to have been absorbed by an



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increased output in the services sector. Manufacturing and services has basically remained

unchanged during the 20-year period. There have been some small upward and downward

movements, but this can also be attributed to global and macroeconomic conditions.

Table 2: T-FTA sectoral contributions to GDP

Tripartite

region 1990

* 2000

** 2001

** 2002

** 2003^ 2004^ 2005~ 2006~ 2007~ 2008~ 2009~

Services

49.15 49.96 50.24 50.17 51.34 51.70 51.91 49.98 50.09 50.53 50.98

Manufac-

turing 14.58 14.98 14.92 14.86 14.57 14.49 14.45 14.40 14.28 14.17 13.58

Source: World Bank (2011a)

* Excluding Eritrea, Libya, Mozambique

** Excluding Burundi and Libya

^ Excluding Burundi, Libya and Rwanda

~ Excluding Burundi, Comoros, Djibouti, Libya and Rwanda

Over the last ten years (2000 – 2009), few of the Tripartite member states have noticeably

changed their economic structures. In the DRC, Zambia and Zimbabwe, industry has grown

slightly over the 10-year period, mainly driven by an increase in mining activity. What is

unique about the growth of industry in Zambia and Zimbabwe is that the structural changes

have not followed the contemporary development pattern – growth in industry has replaced

the share of the services sector and not the share of the agriculture sector. In both these

countries the share in agriculture has stayed more or less the same. Only Kenya, Malawi and

the Seychelles have gradually increased their share of services over the last ten years by

partly displacing the share of industry and agriculture. In the case of Kenya and Malawi,

services have grown at the expense of the agriculture sector while the agriculture share has

given way to services growth in Seychelles.

The services share in Kenya grew rapidly and faster than any other Tripartite member state –

from 50.71% in 2000 to 66.80% in 2010. Information and communications technology (ICT)

services grew significantly as did tourism. To a lesser extent transport, business and financial

services also contributed to the services growth in Kenya. Most remarkable is the growth of

the ICT sector – during the last decade it has annually expanded by an average 23%, making



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the sector six times larger than it was in the beginning of 2000. Investment and expansion in

the ICT sector during the last ten years was a major contributor to Kenya’s economic growth.

The country has experienced a triple technology transformation in mobile phones, mobile

money and internet; and these are revolutions that can only be driven by robust ICT

development (Poverty Reduction and Economic Management Unit Africa Region, 2010).

Internet usage in Kenya has also grown from 200 000 users in 2000 to over 8 million users in

2010, while mobile penetration has reached 22 million subscribers (Ibid). In the last four

years M-Pesa has grown to over 14 million users and 17 000 agents across Kenya. Users can

deposit and withdraw money from this network of agents which include airtime resellers

and retail outlets acting as banking agents. There is currently a wave of activity around the

ICT and mobile business in Kenya and there is a definite ambition to become one of the top

10 ICT hubs in the world by 2030. The ICT business has been swiftly emerging during the last

ten years; and from the growth in this sector it seems as if the Kenyans are capitalising on

this trend.

Services growth in Seychelles was mainly driven by tourism where the total contribution of

the tourism sector is estimated to be around 57.6% (World Travel and Tourism Council,

2011). As tourism is one of the fastest growing industries worldwide, it is expected that

African countries would show strong growth in this sector. African countries have exhibited

the highest growth rates of all regions in the tourism industry (Kruger, 2009), so one can

argue that it is a sector with promising potential for most Tripartite member states. This is

recognised by COMESA, EAC and SADC as the tourism sector was identified as a priority

sector for liberalisation by all three configurations. However, analysis has shown that the

travel and tourism sector in southern and eastern Africa is already fairly liberalised. In

particular, hotels and restaurant services – a subsector which is by far the most strategic to

investors – are completely liberalised in the majority of the southern and eastern African

states. This comes back to one of the core problems when liberalising trade in services –

markets that are being liberalised in the negotiations are already open while markets that

are not open will likely stay closed due to vested interests. In a liberalised sector like tourism

the emphasis is tilted towards services sector development as most barriers have already

been removed. One feature that sets tourism apart from the other priority sectors identified

by the Tripartite member states is the quality of its linkages to the rest of the economy.



194

Although tourism has certain forward and backward linkages to other economic activities, it

does not share the same reach and integration as the six backbone services sectors;2

therefore development in these backbone sectors will be more beneficial for overall

economic growth.

With the way the world has changed over the past decades and the associated advances in

technology, one would expect the share of the services sector to rise faster in relation to the

sectors of industry and agriculture. This shift is not apparent from the analysis above. One

possible explanation is that the commodities boom during the period under review boosted

mining activities under the industry sector and offset the growth of the services sector. In

most regions of the world, services have developed more rapidly than other economic

sectors, but for many Tripartite member states their economic structures have basically

remained unchanged. One would expect advances in technology and communication to lead

to an increased share in services production; and therefore one conclusion that can be

drawn is that services industries in the region are underdeveloped. Part of the problem can

be attributed to the role of the state in supplying essential and network based services and

its failure to respond to the growing demand for services. Services are poised for explosive

growth in the region, yet this has only really happened for Kenya. Services can be infectious

for economies, with the potential to spread quickly and strengthen other sectors. There has

to be a process of structural transformation involving a decrease in the share of agriculture

and an increase in the share of industry and modern services in output, with a shift between

and within sectors from lower productivity to higher productivity activities (UNCTAD, 2011a).

The role of services in the Tripartite region

The Tripartite member states have recognised the importance of trade in services and the

role they would play in the creation of a regional market, in particular the major influence of

services such as communications, transport, finance, energy and business logistics

(Preamble, Draft Tripartite FTA Agreement). The free movement of services is one of the

general objectives of the T-FTA with the liberalisation of the priority services sectors set to

start in Phase 2 of the negotiations. The Draft Annex identifies the priority sectors to be

2 These are the sectors of communication, transport, finance, energy, and business logistics. For further

information see the section on ‘The role of services in the Tripartite region’ below.



195

negotiated first as the seven sectors of business (including professional services),

communications, construction, finance, transport, energy and tourism services. The first six

sectors are backbone services that link and support development in all economic sectors.

This is so because the productivity and competitiveness of domestic firms increasingly

depend on access to low-cost and high-quality infrastructure or producer services such as

these. These six sectors are important inputs in the production, distribution and sale of

goods and it can be argued that greater efficiency in these areas can have a significant

impact on the overall development of the region. Market access in these six sectors can also

be closely linked to the other two pillars of the Tripartite FTA, those of industrial

development and infrastructure. From the draft texts it seems as if the idea of a liberalised

services market is firmly entrenched in the ideology of the T-FTA.

The debate on services liberalisation in Africa basically originated within the Economic

Partnership Agreements (EPAs) after the European Union (EU) pushed for services

liberalisation as part of the negotiations. Although the inclusion of services is not a requisite

for the EPAs to be WTO compatible, the EU insisted on negotiating binding obligations as

part of the broader development component. African countries were divided on the benefits

and viability of services integration with a developed region such as the EU; this can be

offered as one of the reason why progress on the EPA negotiations has been so slow. All

three regional configurations of COMESA, EAC and SADC had plans to negotiate the free

movement of services; however, during the time of EPA negotiations, none of the

configurations had started negotiating services at the regional level. One argument by the

countries opposing services negotiations with the EU was that services integration at the

regional level must happen before the negotiation of binding commitments with third

countries.

Despite best intentions from the member states, efforts to liberalise the services industries

in COMESA, EAC and SADC have either been slow or burdened by technical difficulties. EAC

member states initially made good progress and negotiated their priority sectors in a very

short time frame. The negotiation process was, however, suspended during 2011 to address

certain concerns around the delinking of movement of workers from the specific

commitments. It is clear from the emerging debate that there are design issues that affect

the implementation of the common market provisions. It now seems as if EAC partner states



196

are going back to the drawing board to decide on a more coherent strategy on the

movement of persons (Kruger, 2011a). But technical difficulties are to be expected if

countries are negotiating substantial services liberalisation for the first time.

In contrast to the fast-paced negotiations by the EAC, SADC member states have not made

much progress. The SADC Protocol on Trade in Services was adopted in 2009 by the

Ministers of Trade but is still awaiting signature by the Heads of State. The protocol calls for

the negotiation of the priority sectors to be completed within three years of signature after

which the remaining sectors will be negotiated. After negotiating the schedules of

commitments, they still have to be ratified and then implemented; providing that SADC

member states do not run into similar technical difficulties as the EAC. During the

implementation phase the real work begins as countries will have to adopt their regulatory

frameworks to reflect the commitments made in the negotiations. It can therefore be many

years before the actual commitments are implemented and only then can the benefits be

realised.

It cannot be assumed, however, that the liberalisation of services markets alone will lead to

stronger or more efficient markets. Cattaneo (2011) argues that there is often a desire to

transfer the alleged benefits of goods trade liberalisation to that of services. She makes two

important points to support this argument. First, the case for liberalisation of trade in goods

as part of a development strategy has itself been subject to extensive theoretical and

empirical critique; and secondly, liberalisation of trade in services is more complex than that

of trade in goods (Cattaneo, 2011). Liberalisation alone will not realise the associated

benefits of an open market without serious efforts to address related issues. A more specific

strategy is needed to build and develop strong services sectors, something that won’t

necessarily happen through liberalising the sectors. As was evident from the EAC process,

the emphasis of services negotiations seems to be solely on the liberalisation of services and

the movement of workers. This is very much in line with the first round of the General

Agreement on Trade in Services (GATS) negotiations at the WTO where the focus was on

negotiating the schedules of commitments. SADC and COMESA services regulations are also

closely based on the GATS provisions and African countries seem set to follow the positive

list and scheduling based approach employed at the multilateral level. There also seems to

be a preference for fast-paced negotiations to complete the schedules of all services sectors



197

within a short time frame. It took the EAC about two years to negotiate all of the sectors,

SADC plans to negotiate its priority sectors within three years, while COMESA services

process is integral to the formation of its Common Market by 2015.

The framework for liberalisation is also very ambitious in all three of the configurations.

SADC member states are not allowed to introduce new or more discriminatory measures

during the negotiations while EAC member states also agree to refrain from introducing new

restrictions on the provision of services. The COMESA regulations state that member states

must strive to achieve progressively higher levels of liberalisation in each successive

negotiating round and the idea is that only minimal limitations are made in the priority

services sector. This is very similar to the objective of the T-FTA negotiations where the draft

text states that ‘to the extent possible’ the priority sectors shall not have any limitations or

restrictions (Draft Annex 12 to the Tripartite FTA). The focus around the negotiations seems

to be on fast and broad liberalisation, and it feels as if the thinking behind the services

liberalisation process is inherited from the trade in goods agenda. Two separate tracks are

involved in the creation of a buoyant services market: services liberalisation and services

sector development. For certain sectors, it is more likely that services sector development,

both at the national and regional level, will boost trade in services and support the creation

of a more integrated services market. The industrialisation pillar and the debate around the

growth of certain industries present the opportunity to contemplate this kind of services

sector development. The benefit of formulating a services strategy as part of the

industrialisation process is that it can be fed into the Tripartite FTA services liberalisation

negotiations. Stronger emphasis can then be placed on the services areas which have the

potential to develop more robustly.

The challenge of regional services negotiations

To a certain extent, GATS rules have put pressure on WTO member states to liberalise

services sectors in a specific manner. It is expected of countries involved in regional or

bilateral negotiations that they comply with the requirements of GATS Article V and

therefore negotiate ‘substantial’ liberalisation commitments in line with certain thresholds.

The provision requires ‘substantial sectoral coverage’ with regard to the number of sectors

included, the modes of supply, and volume of trade affected. The substantial coverage



198

requirement is qualified by a footnote to GATS Article V: 1(a) which specifically states that

‘agreements should not provide for the a priori exclusion of any mode of supply’. Parties are

further required to extend national treatment to services suppliers by eliminating

‘substantially all’ discrimination. This provision calls not only for the elimination of existing

discriminatory measures, but also for the prohibition of new or more discriminatory

measures.3 These requirements aim to prevent the negotiation of an agreement with a very

limited scope. GATS Article V states that these conditions must be met either at the entry

into force of the agreement or within a reasonable and agreed length of time.4 If one

considers the size of the services industry and the large number of sectors and subsectors

negotiators have to deal with, these liberalisation requirements appear rather rigorous. This

is further complicated by the uncertainty surrounding the appropriate application of GATS

Article V - there is no agreement among the WTO members on the interpretation of its

provisions.

Services liberalisation in COMESA, EAC and SADC seems to follow the same format when

plotting the process and progress of the negotiations. According to the services regulations

of all three configurations, the idea is to address the priority sectors first after which the

remaining sectors will be negotiated. These services agreements can, however, only obtain

international legal status once they have been notified to the WTO. None of the

configurations have made plans to notify their services agreements, so it is unclear when this

will happen. The threshold requirements of GATS Article V cannot be met if the coverage is

limited to the priority sectors only, and it is therefore likely that the agreements will only be

notified once the successive rounds have addressed the remaining sectors. In general,

parties have the obligation to act in good faith and are expected to make a genuine effort to

comply with the GATS rules. However, only some services agreements have been notified, a

3 If developing countries are parties to a services agreement, GATS Article V:3(a) states that flexibility must be

provided when considering the degree of substantial sectoral coverage, particularly regarding the elimination and prohibition of discriminatory measures. It does not specify how much flexibility must be provided, but such flexibility should be extended in accordance with the level of development of the countries concerned, both overall and in individual sectors and subsectors. When the services agreement only involves developing countries (South-South arrangements) more favourable treatment may be granted to juridical persons owned or controlled by natural persons of the parties to the agreements (GATS Article V:3(b)). 4 GATS Article V: 7 requires member states party to an agreement liberalising trade in services to promptly

notify any such agreement and any enlargement or any significant modification of that agreement to the Council for Trade in Services. Parties are further obliged to report on the progress of any phase-in if the agreement is implemented on the basis of a time frame. However, only some services agreements have been notified, a few examined and none pronounced upon by the Council for Trade in Services.



199

few examined and none pronounced upon by the Council for Trade in Services of the WTO,

making the precise requirements for compliance rather vague.

Negotiations follow the positive list approach and the schedules of specific commitments as

pioneered by GATS. Tripartite services negotiations are set to follow the same format. The

practical value of such an approach can, however, be questioned. Due to the fixation on the

GATS approach, the focus of the negotiations is currently very narrow. The emphasis is

predominantly on services liberalisation and how to achieve compatibility with the WTO

rules logically follows. In the current negotiating setup, countries are simply reflecting the

status quo by scheduling the domestic regulatory framework as it currently stands. One

problem of the positive list approach is that countries are too selective in picking subsectors

for liberalisation. Countries are, of course, free to choose which sectors to liberalise and

countries only list the liberalisation commitments they are willing to undertake; therefore if

they omit a sector or subsector, that area is not liberalised. EAC and SADC member states

have a standstill clause built in their services regulations, so being given the choice of sectors

to liberalise simply does not make any sense. They are not allowed to introduce new or

more discriminatory measures on the provision of services, which means that the status quo

of the current regulatory frameworks has to be reflected in the schedules. It therefore

makes more sense to address every services sector line by line to give effect to the standstill

clause and present an accurate impression of the current state of affairs. In the EAC

negotiations, member states only committed an average of 56% in the first phase of

liberalisation, despite the existence of the standstill clause (Kruger, 2011b). If countries are

serious about services liberalisation, every sector and subsector has to be addressed, even if

the process takes longer than planned. Countries remain free to schedule restrictions in the

areas they do not want to open up, but with such an approach, at least there will be a

complete and transparent representation of the regulatory frameworks.

Another shortcoming of the current approach is the level of information contained in the

schedules. Little information apart from ‘none’ (open sectors and modes) and ‘unbound’

(closed sectors and modes) are listed in the schedules. EAC member states have scheduled

few specific restrictions making it difficult to determine the limitations that apply in each

sector (Kruger, 2011b). If countries have scheduled a sector or mode as ‘unbound’, or if they

have omitted a sector or subsector, it is impossible to know the applicable conditions in



200

those areas. The only way to make an accurate determination is to review the domestic

legislation to learn the precise parameters for investment and local operations. One

objective of the regional services liberalisation is the promotion of transparent and

predictable legal frameworks, but at the moment it can be argued that the schedules of

liberalisation fall short of this aim.

At the moment the purpose of regional services liberalisation is not clear. What are

countries trying to achieve? Do they have a strategy in any of the services sectors? Will there

be any improvement in the business environment to make it easier for countries trade

services? The current style of services negotiations is not providing the right answers to

these questions. It appears to be a scramble to negotiate to the minimum GATS threshold

without really understanding how the commitments will lead to an improvement of the

services market, or how the obligations will be implemented. The schedules of commitments

currently sketch a theoretical framework of which the real practical value can be questioned.

Does services liberalisation comes first, or should countries develop a services strategy

before liberalising services?

The relationship of services to infrastructure development

Infrastructure development – with an emphasis on transport, energy and ICT – has been

identified by the Tripartite Summit as one of the three key pillars to support sustainable

growth and the process of integration. The reasoning behind the infrastructure development

pillar is to increase interconnectivity and competitiveness with the hopes of boosting

intraregional trade. The linkages between infrastructure development and the other two

pillars of market access and industrial development are well recognised by the Tripartite

member states despite plans to address these pillars in separate tracks.

Development of the physical infrastructure is the first step but this must be supported by a

wide range of services to ensure the proper development and utilisation of the

infrastructure sources. For example, Tripartite member states can lay the best fibre optic

cables to create interregional ICT broadband infrastructure, but that is no guarantee that the

countries can produce enough technicians, specialists, programmers and developers, or

even provide enough facilities such as computers and laptops to fully enable the broadband

infrastructure. Greater speeds and more bandwidth will be of little use if companies and



201

individuals are not able to maintain, utilise and manipulate the infrastructure. Good

infrastructure needs to be in place, but equally important, people must be able to exploit the

power of the infrastructure. This assumption might differ slightly from sector to sector, but

as technology advances the expertise of the services providers becomes increasingly linked

to the performance of the infrastructure. In particular, the sectors of energy and

communications require sophisticated skill sets to build, maintain and operate the

infrastructure projects; but many developing countries lack these vital skills. There seems to

have been a decline in technical skills over the past decade in Africa; however, it can be

argued that is not the supply of the skills that is decreasing, but rather the sharp rise in

demand that is leading to the shortage.

In the context of services liberalisation, the idea of the Tripartite member states is for the

priority sectors to have few or preferably no restrictions (Article 18 of the Draft Annex 12 on

Guidelines for the Negotiation of Trade in Services). Here the emphasis is on full services

liberalisation, but one can question what the effect will be, for example, on the many

network-based monopolies in the Tripartite member states that are dominating the priority

sectors of communications, transport and energy. Many of these monopolies are state

owned and, at the moment, fulfil a very specific economic, political and social role in these

countries. If the idea behind the priority sectors is ‘no limitations or no restrictions’, how will

the state owned enterprises operating in these priority sectors be treated? It is unlikely that

these sectors are simply going to be opened up to competition. There will be strong

resistance from the incumbent operator to retain its market share.

Telkom, Africa's largest telecommunications company, is a case in point. As part of its GATS

commitments, South Africa undertook to open up the telecommunications sector in 2003

and introduce a duopoly. In 1997 Telkom was granted a five-year licence in the fixed-line

segment that would support strengthening the company to remain competitive after

liberalisation. This took longer than expected with a Second National Operator, Neotel, only

being licensed in 2005 to boost competition in the telecommunications sector. The

understanding was that Telkom would retain control over the certain parts of the

infrastructure5 for two years following the licensing of Neotel, after which the unbundling

5 The local loop is the last section of cable that connects the exchanges to consumers.



202

process would proceed. Despite the undertaking, this has not yet happened (as of March

2012). Ideally the unbundling should occur around the same time a market is liberalised in

order to promote competition on an equal footing, until such a time as the provider can

build its own infrastructure. However, in 2007, then South African Minister of

Communications, Ivy Matsepe-Casaburri, afforded Telkom an additional four-year window

period in which to transfer the infrastructure by postponing the unbundling deadline to

November 2011. The Independent Communications Authority of South Africa (ICASA) is now

in the process of implementing the unbundling plan which will reportedly be phased in

during the coming year, although early indications from Telkom raise the possibility of

litigation in order to protect its near-monopoly. If Telkom’s past anti-competitive behaviour

is anything to go by, further postponement of the transfer is more than likely. It remains to

be seen what action the regulator will take to create a more competitive environment. In

fact, in terms of international law, the government is obliged in terms of its international

commitments to maintain ‘appropriate measures ... for the purpose of preventing [major]

suppliers ... from engaging in or continuing anti-competitive practices’ (WTO 1996). The

unfortunate reality is that the behaviour of a monopoly, especially during the formative

years of an emerging industry, will have long-term knock-on effects.

Liberalising network-based services at the national level comes with its own set of

challenges. One key issue is the ownership and maintenance of the infrastructure. If a

network is liberalised, who will be the owner and who will be responsible for maintaining the

infrastructure? If the incumbent retains ownership and remains responsible for the upkeep

of the infrastructure, there may be little incentive to improve or upgrade the infrastructure.

The issue surrounding ownership and maintenance is one example of the relationship

between the three pillars of the Tripartite negotiations. Infrastructure development is about

the coordination of the regional, and in some instances the national infrastructure, and how

to manage it in an optimal fashion for the advancement of regional trade. Infrastructure

development has more of a regional dimension while market access in services will shift the

focus behind the border to liberalise certain sectors for regional competition. A clear link

remains between the two because it is likely that the strength of domestic industries will

lead to the development of a truly regional market. The Tripartite region has to develop

from the bottom up – the development process has to be market driven, led by increased



203

production of goods and services in the individual countries. This can be supported by top-

down policy initiatives like the three Tripartite FTA pillars; but the expectations should not

be that the T-FTA will be a panacea for development. The addition of the industrialisation

pillar has the potential to tie all three pillars together by contemplating development

policies and strategies to expand the production of goods and services.

Developing competitive services sectors

Few Tripartite member states have a focused strategy to develop the export of services, or

clear plans to build a competitive domestic services sector. The process of services

negotiations is really the first step in understanding the greater role of services in their

economies and how it relates to sustainable growth and development. As mentioned in the

previous section, there are challenges with the current approach, including concerns around

the practical implication of the process and commitments. If countries can take the time to

understand each of the core sectors individually, formulate a strategy, and then liberalise

based on the aforementioned understanding and strategy, the chances are that the gains

from the process will be more rewarding. The regional economic communities (RECs)

comprising the Tripartite region have picked several priority sectors to be negotiated first:

the EAC has chosen seven6, SADC six7 and COMESA four8 core sectors for initial liberalisation.

However, if countries want to select the sectors that best support the process of

industrialisation – which sectors would they be?

Although it can be argued that all services sectors have strong linkages to industrialisation,

there are certainly sectors which are more prominent if countries have the objective to

become globally competitive. Penetration of global markets should be the goal of the

Tripartite process as African industrialisation will only be feasible if it succeeds in breaking

into global markets (Collier, 2009). In particular, the network-based sectors of transport,

telecommunications and energy have a close and symbiotic relationship to manufacturing

industries.

6 Business, communication, distribution, educational, financial, tourism, and transport services

7 Communications, construction, financial, tourism, transport, and energy services

8 Communications, finance, transport, and tourism services



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Transport services

Transport, at its most basic level, gets goods to market. Without good transportation

between producers and consumers, primary industries would collapse. It can be argued that

in the Tripartite region, the current challenges are more about the quality and existence of

transport infrastructure rather than about the quality of transport services. Liberalising or

further developing transport services will not have the desired impact if proper transport

infrastructure is not available. One transport area where massive gains can be made with

regard to liberalisation is air transport. This subsector is, however, excluded from services

negotiations as African countries undertook to liberalise air transport services in line with

the Yamoussoukro Decision.9 One objective of the Tripartite FTA infrastructure pillar is the

full implementation of the Yamoussoukro Decision which will hopefully provide some

momentum to the process.

The development of transport is already receiving serious attention from the Tripartite

member states. The infrastructure pillar of the T-FTA focuses predominantly on road

transport and trade facilitation measures. There are plans to harmonise Infrastructure

Master Plans, the development of a Comprehensive Tripartite Trade and Transport

Facilitation Programme, and the further development of several transport corridors. The T-

FTA itself also has three annexes dealing with trade facilitation measures: Annex 2 on

Customs Cooperation; Annex 3 on the Simplification and Harmonisation of Trade

Documentation and Procedures; and Annex 5 on Transit Trade and Transit Facilities.

Improvement in road transport certainly has the potential to increase intraregional trade,

but inevitably it will also make it easier to for third countries to distribute imported goods in

the Tripartite region. One can also argue that it will also facilitate the export of mineral

resources to third countries. As a service, transport is not fundamental in developing the

actual capacity to produce goods and services. It plays a facilitating role by improving a

9 In the 1980s African countries realised they had to consider a move towards a freer and more unrestricted

policy of ‘open skies’. This led to a meeting of the African Trade Ministers responsible for civil aviation to Yamoussoukro, Côte d’Ivoire, where an intra-African air transport policy was adopted. The idea behind the Yamoussoukro Decision is to revamp the African air industry by liberalising air traffic for all intra-Africa air transport. In terms of Article 10 of the treaty, the decision entered into force on 12 August 2000 between the 44 African countries that ratified the Abuja treaty. The Yamoussoukro Decision calls for gradual Africa-wide transition towards the multiple designations of airlines, no regulation of frequency or capacity, and complete liberalisation of nonscheduled and air cargo operations. Member states have however been slow to implement the decision, most likely due to political and policy considerations.



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country’s linkages to its markets, but only in its capacity to deliver. At this stage in Africa’s

development, transport is predominantly an infrastructural issue rather than a services

issue. Transport issues are comprehensively addressed under the infrastructure

development pillar and in the draft Tripartite Agreement itself. The framework for the

development of the transport industry has already been created; if member states

implement these plans and proposals, the transport sector has the potential to develop

sufficiently.

Telecommunication services

Over the last two decades advancements in telecommunications have revolutionised the

way in which people communicate and interact. Telecommunications continue to evolve,

finding application in every industry by improving the ways in which people and

organisations communicate, collaborate and compete. As technology advances,

telecommunications will keep on evolving at a rapid rate further embedding itself in all

facets of the economy. Today, communication has become effortless with people being

connected to each other from wherever they find themselves. Vast amounts of information

are available at one’s fingertips, social networks have removed anonymity from web

interactions, and location-based services can accurately pinpoint the location of people and

places. We have now entered a new era of super-connectivity with regards to our

communications ability.

The telecommunications sector has changed dramatically since the time it was negotiated at

the WTO. Even the WTO Secretariat admits that the distinction between

telecommunications and the other GATS sectors and subsectors is becoming increasingly

blurred as new transmission technologies are introduced (WTO, 2009b). It has become

imbedded in all spheres of the economy leading to greater productivity and innovation. Not

only has it improved the underlying foundations for doing business, but it has also opened

up access to remote markets. Advances in technology have led to the digitisation of several

formats, thereby spurring the emergence of trade in Mode 1 (cross-border supply). The

fragmentation of production chains has also created opportunities for specialisation in

different locations. The full potential of telecommunications, however, cannot be exploited

without proper supply of the service. Having a solid and stable underlying foundation that



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enables businesses to trade goods and services with the rest of the world is critical. Röller

and Waverman (2001) found evidence of a ‘significant positive causal link’ between

telecommunication services and economic growth. They further found that the presence of

telecommunications infrastructure and the derived services allow for ‘productive units to

produce better’ and concluded that telecommunication investment might lead to benefits in

other sectors (Ibid.).

Although this fact is recognised by many Tripartite member states, the levels of deployment

and efficiency of the telecommunications sector differ greatly between the countries. In

creating an optimal telecommunications environment, voice and data services are the most

important components. Traditionally, voice and data services have been delivered via fixed

lines, but these are increasingly being delivered through mobile devices. Internet

penetration for Africa, both through fixed line and mobile connectivity, remains the lowest

in the world (ITU, 2011). On top of that, Sub-Saharan Africa has the highest data prices in the

world. The good news is that during 2010 the greatest price drops in the world occurred in

Africa where fixed broadband prices fell by over 55% and mobile cellular prices by 25%

(Ibid.). Despite these decreases, prices remain relatively high in most African countries. Fixed

line internet access is prohibitively costly and on average, costs as much as three times the

monthly average per capita income (Ibid.). In Africa, fixed line networks have always had

very low penetration levels, and in many cases, the levels have fallen over time. Mobile

networks have provided a ready substitute for the traditional fixed line networks for basic

voice services while offering added mobility, lower costs, and more payment flexibility

(World Bank, 2011b). Looking ahead, competition from mobile operators through their 3G

internet offering has the potential to disrupt the market and force fixed line prices to come

down. It is also expected that major infrastructure investment in underground and

underwater fibre optic cables will boost connectivity and reduce prices further. Mobile

technologies are nevertheless expected to play an increasingly important role in delivering

broadband to customers in Africa (Ibid.).

The telecommunications market is slowly beginning to evolve in Africa and

telecommunications policies must adapt to this new paradigm. Governments which

understand these new complexities will be best placed to create sustainable environments

for companies and individuals to trade more competitively with the rest of the world. The



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usual development strategies will no longer be appropriate. The evolution of the trade

agenda and the advances in technology coupled with the ingenuity and creativity of

individuals and companies all over the world are making traditional development strategies

obsolete. A deeper process of reform is required to transform the telecommunications

sector in a much more profound manner. The reform process, can, to a certain extent, be

guided and supported by the industrial development pillar of the T-FTA. The challenge is

how Tripartite member states can use the industrial development process to make a useful

contribution to the development of the telecommunications sector.

As a starting point, it is important for the Tripartite member states to recognise that the

provision of network services like telecommunications matters for the competitiveness of

other parts of the economy, in particular that of manufacturing. The development of a

robust telecommunications sector to enhance the tradability of goods and services should

be the main objective. A complete development strategy for the telecommunications sector

has two components: 1) trade policies aimed at liberalising the domestic market, something

which will happen in the second phase of the Tripartite negotiations; and 2) industrial

policies aimed at developing the domestic telecommunications providers to be more

competitive in the more liberalised environment (Hodge, 1998). These two components are

closely connected and both have to be considered simultaneously.

To identify the framework within which these policies will function, individual countries have

to undertake regulatory and policy audits to determine the structure and conditions of the

telecommunications sector. The current environment has to be assessed in terms of the

applicable rules and restrictions, the manner in which the sector is regulated, the

competitive strengths of the companies operating in the sector including the influence of

state owned industries and parastatals, and the current strategic policies of government.

This will give countries an accurate idea of the status of liberalisation, the state of

competition and the current plans of government to develop the sector. Even if

industrialisation refers to the adoption of a truly regional policy, it is still necessary for

countries to have a detailed understanding of their domestic frameworks.

For now, the purpose of including telecommunications as part of the industrial development

plans is not to expand the export potential of the services. The idea is rather to develop a



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strong telecommunications base to support and promote the manufacturing industry. It is

nevertheless likely that the Tripartite member states with more advanced

telecommunications sectors such as South Africa, Egypt and perhaps Kenya will inevitably

increase exports of these services to the rest of the region. One concern is that the

intraregional investment in Africa is quite limited, with the bulk of investment originating

from South Africa. According to the 2011 World Investment Report, intraregional Foreign

Direct Investment (FDI) in Africa accounts for only five percent of the total in terms of value.

The pattern indicates that aside from South Africa, which has an exceptional propensity to

invest regionally, intraregional FDI is particularly underdeveloped in Africa (UNCTAD, 2011b).

It can therefore be argued that due to limited intraregional investment capacity, the benefits

of regional trade liberalisation will likely accrue to the more developed member states in the

Tripartite region. To provide competition for the more dominant providers in the region,

member states can consider unilateral liberalisation to complement regional services

negotiations. This will give other more developed countries with advanced technologies and

experience the opportunity to access the regional market. This might not be the most

appropriate strategy for all member states, but it is something that can be considered by

countries if the right conditions exist in the domestic market. If trade liberalisation brings

about economic benefits and governments are convinced of these benefits, market opening

should be pursued regardless of what other countries may do (Krugman, 1997).

The purpose of industrial policy in an environment where trade barriers are being lowered is

1) to enhance the competitiveness of domestic producers, and 2) to promote greater

investment in and development of the sector domestically (Hodge, 1998). In order to

achieve these goals, three areas must be addressed comprehensively: infrastructure, skills

development and entrepreneurship.

Infrastructure

One goal of the Tripartite infrastructure pillar is the implementation of an accelerated,

seamless interregional ICT broadband infrastructure network for the region. With African

countries receiving attention as a potential consumer markets, there has been a surge in

infrastructure investment. In recent years, Africa has seen strong investments in upgrading

Global System for Mobile Communications (GSM) networks, installing 3G networks and fibre



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optic rollouts. This infrastructure expansion has led to falling prices, bringing basic

telecommunications service within reach of the majority of Africans. Greater access to

telecommunications services has been most prominent in the mobile market, where the

number of users is growing rapidly. Africa is currently the second largest mobile market in

the world after Asia, and is the world’s fastest growing mobile phone market. Over the past

five years, Africa’s mobile subscribers have increased by 20% every year and it is estimated

that by the end of 2012 there will be 735 million mobile phone users in Africa (GSM, 2011).

Such explosive growth has made the telecommunication sector attractive to international

investment.

A recent World Bank report estimates that the telecommunications industry in Sub-Saharan

Africa invests US$5 billion per year and that the annual total revenue generated by the

industry is approximately US$39 billion. Between 1998 and 2008 the Tripartite member state

that received the most investment was South Africa with US$18.1 billion, followed by Kenya

with US$2.8 billion, Sudan with US$1.8 billion, Uganda with US$1.6 billion, Tanzania with

US$1.4 billion, DRC with US$1.2 billion and Angola with US$1 billion (World Bank, 2011b). In

recent years most of the investment was directed at upgrading the core networks to fibre

optic technologies. These high capacity networks lie at the heart of any modern

communications system and have developed rapidly in Africa. As of the end of December

2009, the operational terrestrial fibre optic transmission network in Sub-Saharan Africa was

234 000 km long, with a further 41 000 km under construction (Ibid.). There are currently (as

of March 2012) 12 submarine cables in operation with 5 more that are in the process of

being deployed. The map below depicts all 17 undersea cable routes and displays the status

of implementation; cables are either marked as ‘active’ or the anticipated launch date is

indicated. The launch date for the West African Cable System (WACS) undersea cable, which

was scheduled to become operational in the fourth quarter of 2011, was moved back to the

second quarter of 2012.



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Figure I: African Undersea Cables

Source: Song (2011)

According to the creator of the African cable map, Steve Song, every country on the

continent has some sort of terrestrial fibre infrastructure project either underway or

completed to connect to an undersea cable, or to a country with an undersea cable. He

believes that this unprecedented explosion in digital infrastructure investment can only be

attributed to the sense of opportunity that the burgeoning African undersea cables

represent (Song, 2011). Projects are also underway to crisscross countries in southern and

eastern Africa with fibre optics to connect exchanges to the submarine cables (Techcentral,



211

2011). Telecommunications infrastructure has developed robustly over the last decade, and

it can therefore be argued that the primary sources of telecommunications infrastructure in

the Tripartite region are unlikely to be a constraint on development.

The real challenge would be to provide enough secondary sources of infrastructure such as

computers, laptops, tablets and smartphones to fully enable the primary sources of

infrastructure. Users in the Tripartite region will not be able to take full advantage of the

powerful fibre optic backbone and high speed bandwidth if there are not enough devices to

connect to the infrastructure. Increased adoption of these devices, in particular

smartphones and tablets, will open up significant possibilities and business opportunities for

companies competing in the telecommunications sector. One reason for the slow adoption

in Africa is the price of the enabling devices. This is set to change in the coming year as

Chinese mobile manufacturer, Huawei, has introduced a US$100 smartphone in the African

market. The smartphone runs on a Google operating system, has a touchscreen and the

ability to transform into a 3G Wi-Fi hotspot that can connect up to eight devices. The phone

has proven popular in Kenya, quickly becoming the top-selling smartphone in the Kenyan

market. To date, the adoption of tablets has been very limited in Africa, but the introduction

of cheaper tablets in the coming year is certain to change this. Amazon has sparked the price

wars with the launch of its Kindle Fire late last year, with various Chinese and Indian

companies also entering the low-cost tablet market. An African company, VMK, also

launched a locally made tablet at the end of 2011. The tablet is fully designed and

engineered in the Congo, but due to cost considerations had to be manufactured in China.

VMK plans to compete in the low-cost tablet market, and the tablet went on sale for

US$300. That is lower than the Apple iPad, but higher than the Kindle Fire (US$199) or

Chinese and Indian manufactured tablets (US$100 to US$300). Future Mobile Technologies

of South Africa has also introduced an entry-level tablet aimed at the African market which is

priced at around US$270.

A recent Accenture report found that consumers across the world are adapting mobile

technology so rapidly that the mobility trend is in hyperdrive. The report notes that while

consumers still have strong ownership and usage of desktop or laptop computers, purchase

intentions for computers are slowly declining, with the smartphone and tablet ownership

rising steeply. In the past 12 months, the percentage point increase in smartphone and



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tablet purchases almost equalled the purchase decrease of computers and mobile feature

phones (Accenture, 2012). Tripartite member states can take advantage of this trend. The

lack of fixed line infrastructure in Africa and the rapid emergence of mobiles have given the

region an opportunity to leapfrog the rest the world. Simons (2012) argues that technology

and new concepts of living, as well as progressive notions of urbanisation, industrial

capitalism, consumerism, ecotourism, and renewable systems could meld to fashion a new

shared-growth paradigm. Such a paradigm can easily bypass the clunky, wasteful,

inequitable, and socially non-scalable physical infrastructure legacy of the West, propelling

Africa, uniquely among continents, into a true 21st century style of civilization (Simons,

2012).

An important objective to fully enable the primary sources of infrastructure is to speed up

the adoption of smartphones and tablets. The industrial policy of the Tripartite member

states can aim at boosting the production of high-end consumer technology goods by

promoting investment and development of the tablet market. The tablet evolution is in its

infancy and policy interventions from governments and regional institutions at an early stage

have the potential to create lucrative high technology manufacturing and innovation hubs.

Brazil is capitalising on this trend and has announced plans to cut taxes on domestically

manufactured tablets as part of its industrial policy plans. Under the policy, Brazilian tablet

manufacturers are able to produce tablets without paying federal taxes (Simoes and Dantas,

2011). The cuts will reportedly reduce the product’s cost by 9.25% and lower the price of the

tablet to US$301 – which is similar in price to the African produced tablets. The underlying

idea of promoting the production of tablets is that it can enhance growth by acting as an

informal learning centre to acquire modern technical skills and thereby contribute to the

technical infrastructure of the Tripartite region (Pack and Saggi, 2006).

Skills development

It is easy to imagine the benefits mobile learning, and in particular the impact low-cost

tablets, can have on the next generation of learners. Tablets will gradually replace textbooks,

facilitate interactive learning and lead to a more customised educational approach. The idea

of open-source textbooks, where learning materials are freely distributed without copyright

restrictions, is also starting to attract worldwide interest. Free High School Science Texts



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(FHSST), a South African initiative is already developing and disseminating free and open-

source textbooks for use in Maths and Science. Such a model, especially in the African

context where the cost and availability of textbooks are known challenges, has the potential

to revolutionise education. Before this can happen, however, the basic building blocks to

develop the sector have to be in place.

Education reforms in India laid the basis for its current success in the telecommunications

industry. In 1951, India set up the first of seven Indian Institutes of Technology to train

students in the sciences, engineering, medicine and business administration. These institutes

created the knowledge foundation upon which Indian's services economy is built (Friedman,

2007). In China, there are also initiatives in place to create a stronger and more versatile

workforce. In Dalian City, one of the most heavily developed industrial areas in China, there

are 22 universities and colleges with over 200 000 students. More than half of those

students graduated with science or engineering degrees, and those who did not are being

directed to spend a year studying Japanese or English plus computer science, so that they

can be more employable (Ibid.). China knows that the ability to adapt in an increasingly

globalised and technological world is the only way to remain competitive.

Telecommunications has entered the core of almost every business in every economic

sector. The integration of telecommunications into the planning and modelling of business

has become a necessity and relevant education and training should reflect this reality.

Education has to adjust in line with the arrival of complex new technologies. Programmes to

train core professionals like engineers, network technicians, software developers, mobile

developers, and programmers and computer scientists must be seen as a priority. Attention

should also be given to the softer skills such as search engine optimisation, digital design,

online marketing and promotion, online strategy, online publishing and online collaboration

to complement the more technical vocations. These kinds of expertise can help individuals

and businesses to optimise the power of the telecommunications industry.

Skills development in the telecommunications sector is therefore essential to ensure

effective use is made of the infrastructure sources and to leverage the potential of the

sector for economic development. If Tripartite member states are not capable of exploiting

new technologies and reaping their benefits, economic growth and development will remain



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below their potential (ITU, 2011). One component of ITU's ICT Development Index is that of

'skills' which measure the capability of countries to use ICTs effectively. Of the 152 countries

measured, the first Tripartite member state on the list is Mauritius which is placed 82nd

followed by South Africa in 91st place, Egypt in 104th place and Botswana in 105th place. It

has to be noted that indictors included in the skills subindex are general indicators such as

adult literacy rates, gross secondary school enrolment and tertiary school enrolment. These

indicators are proxy indicators used to gauge a country's level of human capacity and its

ability to absorb and take advantage of ICTs because more targeted indicators are not yet

available. It is a fact that general education has to improve in order for a country to grow

and develop into a knowledge-based economy, but there are also specific initiatives

countries can undertake to promote skills development in the telecommunications sector.

Computer access and e-skills curriculum for schools are additional educational tools

governments can promote to familiarise students with technology. The need to integrate ICT

in the school curriculum has been expressed by many African countries, but the

implementation of these initiatives has been lacking.

There is evidence of numerous training and skills development initiatives across the

Tripartite region to improve skills in the telecommunications sector. Some efforts originated

from the needs of expanding multinationals that were unable to find adequately trained

personnel. Shortage of skills is a factor that can inhibit foreign investment, which is another

reason why skills development is crucial for economic growth. This has led to multinationals

partnering with governments in establishing business and technology centres to empower

local businesses and grow crucial ICT skills with the hope of developing a robust ICT

workforce. Various development organisations have also contributed to skills development

by establishing training centres, awarding scholarships, and promoting research projects. It

can be noted that in some instances the output of these advanced students is gradually

evolving into market-ready prototypes, large-scale technology demonstrators or packaged

solutions that can address key priorities of government such as education, health and citizen

interaction (Nokia, 2011). One of the expected outcomes of these skills development

programmes is to build a telecommunications industry that addresses a country's needs in

the public and private sector with the purpose of creating opportunities to attract foreign

investment in the sectors of manufacturing and innovation. This opens up the possibility of



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linking Africa with influential institutions to acquire international best-practice knowledge

and expertise.

Many Tripartite member states acknowledge that development of the relevant expertise and

skills is of paramount importance to strengthen the regional market. There is a general

understanding that this can be achieved through greater budgetary commitments for

training and education, the establishment of centres of excellence, and integrating ICTs

more broadly into the education system (ITU, 2010). At the regional level, COMESA, EAC and

SADC have adopted various regional ICT policies to guide the development of the

telecommunications sector and related issues. The emphasis of these policies seems to be

on the harmonisation of ICT policies, laws and regulations among the member states. The

Tripartite member states have a similar objective with the Joint Programme on ICT under the

infrastructure pillar: the implementation of a harmonised policy and regulatory framework

that will govern ICT and infrastructural development. No mention is currently made in the

Tripartite discussion on the development of ICT skills while plans at the regional levels to

formulate comprehensive human resources development plans are still in progress.

One important function the Tripartite institution responsible for ICT development can fulfil is

to tie together all the existing initiatives and projects in the region. What is the region

striving to achieve in terms of telecommunications development? This would require

contemplation on the part of the Tripartite member states on where they are heading as a

region and innovative thinking on how they can achieve it. Central to the strategy will be the

linkages to the private sector, in particular to multinationals in order to harness existing ICT

skills and knowledge. Technology transfers, training partnerships, access to computing

infrastructure and integration within international networks can support the creation and

expansion of local capacity. Specific initiatives, which focus on niche areas where Africans

might have a competitive advantage, can build unique local businesses. One example is the

recent partnership the South African Department of Science and Technology has established

with Nokia. One focus point of the partnership is the Basic Sciences Education Support

Programme which aims to improve the delivery of educational services through the use of

mobile devices. There are also plans to establish a Mobile Applications Laboratory where

business and technical capabilities of the programming community will be enhanced to

support the development of locally relevant content, solutions and services (Nokia, 2011).



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Regional policies that work together with existing advantages, like African countries have in

the mobile sector, are more likely to be relevant and successful.

Entrepreneurship

Entrepreneurial culture is an integral part of developing an individual, a company, a

community, a sector and a country. One of the first economists to lay out a clear concept of

entrepreneurship was Joseph Schumpeter. He argued that economies don’t grow, they

evolve, and he believed that at the heart of this process was the entrepreneur, who acts as a

disruptive force for change and progress. Schumpeter described this evolution as ‘creative

destruction’ whereby an entrepreneur ‘incessantly revolutionises the economic structure

from within, incessantly destroying the old one, incessantly creating a new one’

(Schumpeter, 1942). Inevitably, the creation of new products and technologies make the

existing products and technologies obsolete – destroying the old, but introducing something

new. Schumpeter regarded entrepreneurs as unsung heroes who are the cause of

continuous progress, improving the standards of living for everyone and driving sustained

economic growth.

The recent wave of entrepreneurship started in the eighties and reflected the

transformation of modern industrial economies brought about by advances in technologies

and communication. The movement gradually gathered momentum and today

entrepreneurs are celebrated as innovators and job creators. Sometimes they are even

revered as icons with visionaries such as Bill Gates, Steve Jobs, Richard Branson and more

recently Mark Zuckerberg – creating global appeal for entrepreneurship as a career. Due to

the success of these and other entrepreneurs, interest in creating and building new

companies, products and services are at an all-time high. Vast amounts of venture capital,

incubators and support are available to nurture and grow the entrepreneurial spirit and their

companies.

In the Tripartite context there needs to be a serious rethink on the role of the private sector

in the development process; too many countries still see the government as the main driver

of growth and the creator of jobs. Governments and regional institutions need to support

the creation and expansion of businesses by establishing enabling environments where they

can grow into influential regional and international companies. At a regulatory level,



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privatisation and liberalisation can be seen as powerful policy tools to grow industries,

particularly in domestic markets where there is limited entrepreneurial skill or capital.

However, a more open environment will not automatically lead to increased investment. A

more comprehensive approach, where services sectors are developed in parallel, is

necessary to create an optimal environment for growth.

Tripartite member states have gradually started to open their telecommunication markets

with most countries introducing some degree of competition into the sector. All Tripartite

member states, except for Comoros and Ethiopia, have opened their mobile markets for

competition, while more than half of the members have allowed competition in the fixed

line and international segments. The provision of internet access has also been liberalised in

most countries (World Bank, 2011b). With the exception of Comoros, Eritrea, and Ethiopia,

all Tripartite member states have allowed foreign investment in their telecommunications

sectors since the end of 2009, and most allow foreigners to own at least 51% of a given

company. Conditions are far from perfect and the liberalisation processes are far from

complete, but the telecommunications environments in Tripartite member states are

increasingly lending themselves to entrepreneurial activities.

Foreign investment will nevertheless be a feature of early-stage development in the

telecommunications sector. Foreign investment is not only about securing capital; it is also

about locally instilling some of the competitive advantages of multinationals, including

technology, organisational skills, managerial skills and entrepreneurial abilities (Kennedy and

Sharma, 2009). If foreign investment can be managed properly, the diffusion of knowledge

and technology into the local economies can lead to increased competitiveness (Ibid.).

Ensuring local participation in the operations of the multinationals can facilitate such

transfers, but in some instances international trade rules can inhibit local content

investment policies. There is however greater scope for implementing local content policies

in the services sectors, as the GATS rules are more flexible than those of the GATT (Kruger,

2012). In the recent Walmart and Massmart merger, one of the conditions imposed on the

deal by the South African Competition Authorities was the creation of a R100 million

suppliers’ fund to develop the capabilities of emerging small and medium businesses to

trade with the merged entity (Ibid.). This obligation has the potential to be mutually

beneficial for both sides: local productivity and expertise are developed while investors



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receive better products and service from their suppliers. Targeted assistance of this kind can

support the process of transferring skills and knowledge to local entrepreneurs.

If foreign investment is not forthcoming, development of the sector has to be encouraged at

the national level. Particularly for the transition economies in the Tripartite region, the

creation of an entrepreneurial environment is a priority, as it can be argued that

entrepreneurs are an important catalyst of structural change. A European Bank for

Reconstruction and Development (2011) study found that new domestic business, in

addition to foreign direct investment, is essential to create industries that did not exist, or to

revitalise those that were stagnant under a more socialist regime. The study also presented

evidence to show the snowball effect of entrepreneurial activity – a larger presence of

entrepreneurs in a specific region would induce more attempts to set up businesses in that

area. It also found that these regional clusters increase the likelihood of success as there is

an enabling environment to support the entrepreneurs (EBRD, 2011). In the Tripartite

context, an ICT cluster is starting to emerge in East Africa, driven by the adoption of

technologies in Kenya. A number of start-up incubators have launched in Nairobi in recent

years with the objective of providing business mentoring, access to funding, office space,

internet bandwidth and other types assistance typically needed by early-stage start-ups. A

number of successful regional technology start-ups have already emerged from Kenya

(Carstens, 2012) and the entrepreneurial wave is beginning to spread through the rest of

East Africa. Another start-up hub in Africa is Cape Town which is increasingly attracting

interest from the developed world as a technical start-up springboard into the rest Africa.

One advantage of telecoms start-ups is that a business can easily scale up to serve the whole

region; as more people become connected the internet, so the adoption and growth rates of

start-ups will excel.

Plans in the T-FTA must support and facilitate the creation of these regional entrepreneurial

eco-systems. Regional policies must aim to boost entrepreneurship and innovation in the

Tripartite region with the purpose of improving regional competitiveness. Ways have to be

found to leverage the entrepreneurial energy of the region to entice more people to become

entrepreneurs, which will lead to a higher start-up success rate, the sharing of knowledge

and experience, accelerated growth, and the creation of quality jobs. At the most basic level,

member states must acknowledge the importance of early-stage entrepreneurship and the



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linkages it has to education and skills development. An agenda for entrepreneurship

education at all school levels, starting at primary school level, is an important consideration

to create the necessary momentum and interest for the next generation of entrepreneurs.

Regional start-up competitions or conferences, already starting at school level, can also be

used as tools to promote entrepreneurship and generate interest from learners.

The next step is to take ideas and turn them into a viable business; but the right kind of

support will be needed to turn these into competitive regional and international businesses.

The promotion of business incubators is a policy tool member states can use to provide

these supporting services. These institutions can provide a wide range of business services

and a support network to successfully develop an idea into a competitive venture. Assistance

can include development of business plans, designing plans to sharpen business operations,

comprehensive small business training, access to funding and venture capitalists, start-up

events and conferences, trend briefings to access future trends in the ICT industry, access to

mentors and marketing support.

Tripartite member states can also consider establishing some kind of regional ‘enquiry point’

or one-stop shop where business can be guided through developing a local business into a

regional business. Regulatory frameworks differ between countries and such an ‘enquiry

point’ can facilitate cross-border business and investment. Current services rules in the three

configurations provide for national enquiry points, but these are set up domestically and not

regionally. Closely related to the sharing of information are the promotion and

dissemination of regional business opportunities, which are important drivers for engaging

and growing cross-border entrepreneurship. SADC and COMESA services regulations provide

for the promotion of trade in services – both frameworks aim to promote an attractive and

stable environment for the supply of services (Draft SADC Protocol on Trade in Services Art.

18 and COMESA Services Regulations Article 13). Parts of such promotion measures include

developing mechanisms for information, identification and dissemination of business

opportunities, as well as developing mechanisms for joint investments in small and medium

enterprises. The institutions responsible for these functions still have to be designated.

The final stage of the entrepreneurial ecosystem to ensure sustainable economic growth is

the transformation of the small businesses into medium and large businesses. The basic



220

premise is to link the small business with seasoned entrepreneurs for support to grow small

companies into bigger companies with more employees. For the entrepreneurial ecosystem

to be comprehensive, there should also be a very specific focus on high-impact

entrepreneurs that have the potential to employ hundreds or even thousands of people. A

company in point is Endeavor.org which helps high impact entrepreneurs unleash their

potential by providing mentorship networks and strategic advice from seasoned business

leaders. It supports the continued growth of selected entrepreneurs to create the

foundation for a new attitude towards entrepreneurship in developing countries. Friedman

(2007) argues that there are too many antipoverty debates and not enough pro-

entrepreneurial debates. The inspirational power of local business success to motivate other

entrepreneurs to establish new ventures is incalculable (Friedman, 2007).

The establishment of a regional entrepreneurial ecosystem to support, advise and inspire

entrepreneurs has the potential to produce a snowball effect of successful new venture

creation. There are already pockets of entrepreneurial activity emerging in several Tripartite

member states, particularly in the area of ICT industries. There are a number of advantages

associated with the creation of ICT start-ups that make them a good match for the African

environment. Most importantly, it is easier to bootstrap these kinds of technology start-ups

than to start a new venture with little capital. Talent, ambition and aptitude are more

applicable skills to ensure success than the amount of capital available. Open-source tools

are readily available to handle the business infrastructure at no cost. After a product or

services have been built, many start-ups will have the ability to scale easily across the

Tripartite region. Most of the markets are similar in nature which means a larger number of

consumers can be reached. Indications are that Generation Y (born after 1980) will be the

most entrepreneurial group the world has ever seen. More youngsters want to start their

own businesses and be in control of their own destiny, a trend which governments must

appreciate, especially in Africa where young people constitute a growing part of the overall

population. The establishment of an enabling environment with appropriate support will be

a key driver of the ICT entrepreneurial wave.



221

Energy services

Energy services are a relatively new field of trade. During the GATS negotiations, energy

services were not negotiated as a separate sector because the vast majority of global energy

services are not covered by the specific GATS commitments. There are three GATS

subsectors that indirectly relate to energy: pipeline transportation of fuels (CPC 7131),

services incidental to energy distribution (CPC 887), and services incidental to mining (CPC

883 + 5115). For that reason, specific GATS commitments made during the Uruguay Round

negotiations were limited and rather sparse (WTO, 2009a). None of the Tripartite member

states made any energy-related commitments under GATS. Energy services have now made

their way into the regional negotiations with the Tripartite member states identifying energy

services as one of the priority sectors for services liberalisation.10 At this stage, the

liberalisation plan for the Tripartite region seems to prohibit limitations in the priority sector.

Article 18 of the Draft Annex 12 on Guidelines for the Negotiation of Trade in Services states:

‘Commitments in the priority sectors shall to the extent possible not have limitations or

restrictions. The Tripartite Committee on Trade in Services may adopt some minimal time-

bound limitations or restrictions that Member States may attach to priority sectors’. This is a

very ambitious proposal, particularly for the sector of energy services, which is still very

monopolistic in nature.

Compared to telecommunications services, the energy industry is still in its infancy. The

current energy regime is characterised by a top-down, centralised form of supply where one

supplier, usually a state-owned entity, is generating and supplying the energy. It is easy to

imagine that the energy industry will be drastically different in the future than what it is

today. It is likely that the future energy regime will have similar characteristics as the

telecommunications regime – it has the potential to be collaborative and distributive with a

side-by-side approach rather than the traditional top-down approach. One can start to

imagine a future where factories, commercial buildings and houses will have the ability to

generate their own energy needs and feed the surplus energy into an energy grid for

distribution. Think of it in the same way as the Personal Computer (PC) revolution – in the

early 70s only a few mainframe computers existed which were very expensive to set up and

10

The priority sectors as identified by the Tripartite member states are: a) business; b) communication; c) transport; d) financial; e) tourism and travel related; f) energy, and g) construction and related engineering.



222

operate. Bill Gates started Microsoft with the vision to put a PC on every desk in every home,

and it can be argued that one day every home will become a micro power plant that

connects to an energy grid to upload and download energy (Rifkin, 2011). In regulatory

terms such a vision is still far in the future as independent producers in most of Tripartite

member states are not allowed to directly distribute energy to the end consumer. The

energy industry remains a government-owned network, mainly run by state monopolies and

governed by strict territorial application.

Africa is well suited to the production of modern energy sources such as hydropower and

biomass energy. For example, the energy requirements of Zambia Sugar are generated

primarily from renewable resources, by utilising bagasse, the fibrous residue remaining after

the juice extraction process, to produce steam for processing requirements and to generate

electricity to power the factory and other operations. Illovo Sugar, which is the holding

company, further plans to be completely self-sufficient in terms of energy generation within

the next three to five years. The Illovo plant in Swaziland has started exporting electricity to

the national grid in Swaziland and reported that the to-date volumes were already more

than the yearly contractual power purchase agreement with the government. This approach

is likely to become a blueprint for modern energy generation in Africa, but currently this kind

of operation is limited by regulatory restrictions.

The greatest challenge for the energy sector in the Tripartite member states is the capacity

to generate sufficient electricity. The combined power generation capacity of the 26

Tripartite member states is 82 743 megawatts (2006 data). Exclude South Africa and Egypt

and the total falls to 21 778 megawatts, roughly equivalent to the installed capacity of

Uruguay.



223

Table 3: Total installed electricity capacity 2004 – 2005 (megawatts)

Countries 2004 2005 2006

Angola 665 830 830

Botswana 132 132 132

Burundi 42 37 33

Comoros 5 5 5

DRC 2 502 2 443 2 443

Djibouti 118 118 118

Egypt 17 058 19 206 20 467

Eritrea 150 150 150

Ethiopia 720 818 814

Kenya 1 186 1 211 1 215

Lesotho 76 76 76

Libya 4 642 5 125 5 438

Madagascar 227 227 227

Malawi 310 310 310

Mauritius 651 655 688

Mozambique 2 340 2 340 2 383

Namibia 264 264 264

Rwanda 38 39 39

Seychelles 95 95 95

South Africa 40 498 40 498 40 498

Sudan 1 038 1 089 1 114

Swaziland 128 128 128

Tanzania 881 881 918

Uganda 303 309 313

Zambia 1 685 1 706 1 700

Zimbabwe 2 099 2 195 2 345

Total 77 853 80 887 82 743

Source: EIA 2007



224

Adding to the challenge is the fact that as much as 25% of the installed capacity is not

operational for various reasons, including aging plants and lack of maintenance. It can

therefore be argued that electricity supply in Africa is notoriously unreliable (Eberhard et al.,

2011). The uneven distribution of resources in the region has forced many countries to

adopt technically inefficient forms of power generation to serve their small domestic power

markets, with few countries in the region having sufficient demand to justify power plants

large enough to exploit economies of scale (Ibid.). Simply based on the economic geography

of the power sector, regional power trade in the Tripartite region has many potential

benefits.

To promote mutually beneficial cross-border trade in electricity, four regional power pools in

Sub-Saharan Africa have already been established. The theory was that enlarging the market

for electric power beyond national borders would stimulate capacity investment in countries

which have a comparative advantage in generation. The pools would also smooth temporary

irregularities in supply and demand in national markets (Ibid.). Equally important was the

economic interchange between entities that is the first step in opening up electricity supply

markets as a means to address temporary irregularities in the supply and demand of the

domestic markets. The trend is to favour freer electricity transactions within regions and

between countries and, in this regard, power system interconnections are vital to the

opening-up of electricity supply markets (UNECA, 2004). Looking ahead, regional power-

sharing arrangements can also contribute to the development of more environmentally-

friendly sources of energy, such as hydropower, as it relies on power interconnection for

delivery to major load centres (Ibid.). The development of these regional energy

interconnectors is also an important feature of the Tripartite infrastructure plans as the

Tripartite Summit directed the regional configurations to coordinate and harmonise their

Regional Energy Priority Investment Plans and the Energy Master Plans.

Despite high hopes for the power pools, power trade among countries in the Tripartite

region remains very limited. Most trade occurs within the Southern African Power Pool

(SAPP), largely between South Africa and Mozambique with South Africa also exporting

some energy to Botswana, Namibia and Swaziland (Ibid.). The Tripartite member states are

simply not generating enough energy to trade with one another. According to SAPP, the

major challenges participating countries face are: i) lack of infrastructure to deliver



225

electricity; ii) lack of maintenance of infrastructure; iii) insufficient generation of electricity;

iv) limited funds to finance new investments; and v) high losses. It is clear that the future of

energy trade in the region depends on the health of the domestic energy sectors, something

which requires serious political and financial investment.

It can be argued that one key issue constraining investment in the energy sector is the

regulatory structure of cross-border and domestic energy trading. Since the early nineties

Tripartite member states have made attempts to reform the energy sector. Adjustment in

the regulatory frameworks for energy has been embraced as ways to attract greater private

sector investment, improve efficiency, and boost overall economic performance. New

electricity acts have been adopted that envisage the reform of state-owned electricity

utilities and permit private sector participation, but to date the involvement of the private

sector has been limited to energy generation (Ibid.). Reforms led to the emergence of a kind

of hybrid market where the state-owned utilities often retain dominant market positions

and the Independent Power Producers (IPPs) are introduced on the fringes of the sector. In

most cases, the markets remain highly regulated with the national utility as the only

mandated buyer of privately produced electricity, while at the same time still maintaining its

own generation plants (Ibid.).

Competition in the energy sector is therefore still very limited and recent years have seen an

increase in calls for further and more drastic liberalisation of the sector. Investment in the

sector is desperately needed and one can argue that one way to draw investors into the

African energy landscape is to put a more liberalised environment in place. South Africa is in

the process of creating such an enabling environment for the more effective participation of

the IPPs. The Integrated Resource Plan for Electricity (IRP) 2010 formulates the need to

increase capacity and shift towards a more diverse mix of energy sources some of which will

be produced by IPPs. To facilitate this, an Independent System and Market Operator (ISMO)

is needed – a separate company that will be responsible for buying the electricity from

Eskom and independent producers and selling it the consumer. The purpose of

implementing such a model is to eliminate any conflict of interest between the buyer and

the seller of electricity in the market. There is a general view that the buying function has to

be separated from the national utility to promote a more competitive market. In this

context, a draft Bill was proposed in May 2011 to establish an ISMO in South Africa, but it is



226

too early to tell what kind of market structure will be adopted. One area of uncertainty

surrounds the ownership of the transmission grid which is currently owned by Eskom. Again

it comes down to the ownership of the infrastructure – who will be the owner and who will

be responsible to maintain the infrastructure?11

One option is to undertake limited unbundling with transmission remaining with the national

utility. The national utility remains vertically integrated, in the sense that the utility owns the

generation, transmission and distribution assets, but control of the key functions relating to

the stimulation of the market is placed in the hands of the ISMO (Meridian Economics,

2010). The other option is that of full vertical unbundling where the national utility

surrenders control of the transmission grid to the ISMO. The South African draft Bill

proposes that the ISMO be initially established as a ring-fenced entity within Eskom, with

plans to gradually separate the function. However, it is still unclear how this process will

unfold. Another area of uncertainty is the finalisation of the electricity tariffs. Without

knowing whether there will be a buyer for the power they produce or how much they would

be paid for that power, it is obviously difficult for the IPPs to make an investment decision

(Lakmidas, 2011).

South Africa has recently put out a tender for private investors in the first major renewable

energy initiative from the government. There was an overwhelming response to the tender

from investors with 270 companies indicating their interest to bid. Despite the fact that a

joint venture partnership of 40% South African ownership is required, in the end 53 final bids

were received. This clearly shows the appetite of private investors for the energy sector in

Africa. However, a restrictive regulatory framework and structure can inhibit competition

and investment in the energy sector. At the moment there is no real competition in the

energy market and the gradual introduction of IPPs is the first signs of relaxing the highly

regulatory environment. For many Tripartite member states, the first step would be to plan

and sequence the liberalisation of the energy sector, devise a plan to introduce a market

operator to avoid conflict of interest, and develop a framework for procuring energy from

the IPPs. It is important to understand that the different services are at different levels of

11

See the section on 'The relationship of services to infrastructure development' above.



227

development; therefore each sector requires a unique and tailor-made approach to regional

integration.

Liberalising network-based services comes with its own set of challenges. Some sectors,

particularly that of energy, are politically more sensitive than others and there is likely to be

more resistance to the liberalisation of the market. Tripartite liberalisation plans treat all

seven priority sectors equally, despite clear differences between their regulatory

frameworks, development requirements and government interests. The liberalisation of the

sectors is a much more intricate and integrated process which cannot be approached

without consideration of the dimensions of infrastructure and sector-specific development.

The industrialisation pillar has the potential to tie all these issues together to formulate a

more targeted approach to the development of the individual services sectors. The benefit

of devising such an inclusive strategy as part of the industrialisation process is that it can

feed into the Tripartite services liberalisation process. This can provide better direction on

the developmental paths of the services sectors and their overall role in the growth of

region.

Conclusion

Technological advances have changed the way in which people communicate, interact,

collaborate and compete with each other. It has also opened up new possibilities for services

to integrate within the manufacturing process and the final products. The services

component of the product is set to become even larger as the adoption and pace of

technology grow. Underlying services have become key inputs in the manufacturing process,

especially where companies want to compete in a regional or international setting. For

countries to create competitive manufacturing and other industries it is crucial that the basic

foundation is in good shape. The further and more rapidly the foundation develops the more

opportunities will arise for innovative companies to embed themselves in global value

chains. The full potential of the manufacturing and other sectors can only be exploited if

these underlying services are sufficiently developed. The inclusion of strategic services

industries should therefore play a part in the formulation of a regional industrial

development strategy.



228

Certain services sectors stand out when trying to develop this basic foundation. This chapter

argues that the three sectors of transport, telecommunications and energy are instrumental

in creating globally competitive industries. Achieving greater competitiveness is crucial as

the objective of the Tripartite industrialisation process must be to penetrate world markets.

To do this, member states have to get the basics right – the development process has to be

market driven and led by increased production of goods and services in the individual

countries. The industrialisation pillar and the debate around the growth of certain industries

present the opportunity to contemplate targeted services sector development. The benefits

of formulating a services strategy as part of the industrialisation process is that it can be fed

into the services liberalisation negotiations, which is set to start in the second phase of the

Tripartite negotiations. The articulation of a carefully planned regional policy that built on

the existing advantages has the potential to give direction to strategic sector liberalisation

and development.

Despite the best intentions of the member states, efforts to liberalise and develop the

services industries in COMESA, EAC and SADC have either been slow or burdened by

technical difficulties. Structurally, the composition of many economies in the Tripartite

region has basically remained unchanged for the last decade, despite the rapid development

of services in the rest of the world. So far, only a few member states have capitalised on the

explosive growth potential of services. Currently, the focus of the regional configurations is

on the liberalisation of services, but this chapter questions if liberalisation alone will realise

the benefits of a more open market. Serious efforts are needed to address related issues to

ensure the development of stronger services sectors. As each of the services sectors are at

different levels of development, unique and tailor-made plans are required for optimal

development.

The chapter identifies the three sectors of transport, telecommunications and energy as

central to the ability of countries to connect to the rest of the world and compete more

effectively in the global and regional markets. It compares the development process of the

three sectors and highlights areas where the most gains can be made. At this stage in

Africa’s development, it can be argued that transport is more of an infrastructure and trade

facilitation issue than a services issue. As a service, transport is not fundamental in

developing the actual capacity to produce goods and services, but rather improves a



229

country’s capacity to deliver. Infrastructure and trade facilitation are comprehensively

addressed under the infrastructure development pillar and in the Draft Tripartite Agreement

itself, and this is where the development of the transport sector should start.

The chapter argues that the sector of telecommunications matters most to the overall

competitiveness of the Tripartite economies. The development of robust

telecommunications sectors to enhance the tradability of goods and services should

therefore be an integral part of any industrial development plan. Three areas must be

addressed to ensure rapid development and greater investment: infrastructure, skills

development and entrepreneurship. The telecommunications backbone infrastructure is

well developed and unlikely to be a constraint on the growth of the sector. The challenge

here would be to provide enough secondary sources of infrastructure such as computers,

laptops, tablets and smart phones to fully enable the primary sources of infrastructure. This

is closely linked to skills development to ensure the exploitation of these new technologies

and the full power of the infrastructure. Most member states have gradually opened up

their telecommunications sectors and introduced some degree of competition to their

markets. The liberalisation processes are far from complete, but the environments are

increasingly lending themselves to entrepreneurial activities. Across the Tripartite region,

entrepreneurial clusters are emerging, mainly driven by the adoption of new technologies.

Regional support for the expansion of these clusters can lead to enabling environments

where early-stage start-ups can grow into influential regional and international companies.

Compared to telecommunications, the energy industry is still in its infancy. The main

challenge is the ability to generate sufficient energy. If the capacity of South Africa and Egypt

is excluded, the combined power generation capacity of the remaining Tripartite member

states is no more than the installed capacity of Uruguay. Part of the problem can be

attributed to the role of the state in supplying energy services and its failure to respond to

the growing demand. Tripartite member states have made attempts to reform the energy

sector and adjust their regulatory frameworks, but competition in the markets remains

limited. In the energy sector, the process to create an enabling environment for the more

effective participation of the private sector is a necessary step to attract investment and

promote competition. There are, however, contentious issues, such as ownership of the



230

infrastructure, that have to be carefully considered before competition can effectively be

introduced.

The addition of the industrialisation pillar has the potential to tie together the issues of

infrastructure, services liberalisation and sector development by contemplating appropriate

policies and strategies to expand the production of goods and services. Infrastructure

development has more of a regional dimension while market access in services will shift the

focus behind the border to open up the sectors for regional competition. A clear link remains

between the two because it is more likely that stronger domestic industries will lead to the

development of a truly regional market. The Tripartite region has to develop from the

bottom up – the process has to be led by the increased production of goods and services in

the individual member states. This can be supported by the top-down policy initiatives of the

three Tripartite pillars; but the expectations should not be that the Tripartite FTA will be a

panacea for development.

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Chapter 6 – Two sides of the same coin: infrastructure development and regulation


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Chapter 6

Two sides of the same coin: infrastructure development and regulation

J.B. Cronjé

Introduction

The Declaration Launching the Negotiations for the Establishment of the Tripartite Free

Trade Area (Tripartite FTA) among the member states of the Common Market for Eastern

and Southern Africa (COMESA), the East African Community (EAC) and the Southern African

Development Community (SADC) provides for a ‘developmental integration’ approach to the

establishment of the free trade area that ‘combines market integration, infrastructure

development and industrial development, as the three key pillars for sustainable

development’. It provides for the development of regional infrastructure programmes to

give effect to the infrastructure pillar. The priority areas identified for the development of

regional infrastructure programmes include energy, information and communications, and

transport. These three services sectors are mostly provided through networks, including

fixed line telephony, electricity transmission and a network of roads, railways, seaports and

airports.

The reasoning behind regional infrastructure development is to increase interconnectivity

and competitiveness. This would create benefits to consumers (e.g. lower prices, better

quality) and the economy as a whole in terms of growth (i.e efficient investment, better

resource allocation, higher productivity). However, this requires market access for new

services suppliers to enter the market and appropriate regulation enabling them to utilise

these market access opportunities on a level playing field. The development of physical

infrastructure and an appropriate regulatory framework are very closely related.

Many infrastructure industries have economies of scale and scope in some or all parts of

their operation and this poses significant policy challenges. The existence of natural

monopolies is a common feature of many infrastructure sectors, but it is important to

unbundle those parts of the supply chain in which competition can be developed. The

optimal supply of network infrastructure services depends on the way the network

infrastructure is managed and its uses regulated (Cronjé, 2011).



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The World Trade Organisation’s (WTO) General Agreement on Trade in Services (GATS)

contains specific disciplines on the monitoring and regulation of monopolies and exclusive

service providers, particularly in those sectors in which countries made commitments. GATS

provides that domestic regulation on, for example, licensing requirements and technical

standards must be based on objective and transparent criteria and must not be more

burdensome than necessary to provide the service and must not in themselves constitute an

impediment to trade. Moreover, the WTO’s Reference Paper created sector-specific

disciplines in the telecommunications sectors and provides a good example of the possible

approach Tripartite FTA members can take on introducing regulatory and competition

elements into a trade framework.

Opening infrastructure sectors for competition must be accompanied by the appropriate

regulatory structure to create a level playing field for competitors to compete. In particular,

it should ensure that competitors have access to essential facilities because the incumbent

monopolist can impede market access to upstream or downstream activities in the absence

of appropriate regulation, despite the liberalising intent of a particular commitment. The

removal of restrictions on competition may also include the restructuring of existing

monopolies to allow private sector participation in infrastructure sectors. Their participation

can be effected through a variety of forms and financing sources and mechanisms.

The liberalisation of infrastructure industries necessitates the allocation of various

regulatory functions. For example, it is necessary to determine which entity is responsible

for the physical management of the network (e.g. maintenance and construction). The

conditions of access to and use of a network must also be described. In addition, conditions

on interconnectivity, public service obligations and rules on conflict resolution between the

different users of a network all require the existence of a proper regulatory framework.

These various regulatory functions could be allocated to different institutions. For example,

independent sector-specific regulatory authorities could be tasked to enforce sector-specific

rules whereas the role of a competition authority would be to guarantee that this is done in

a non-discriminatory way. The purpose of the latter is to ensure or maintain competition,

and that of the former to actively promote effective and sustainable competition (Groebel,

2011).



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2. Objectives of the Tripartite FTA

The First Communiqué of the COMESA-EAC-SADC Tripartite Summit of Heads of State and

Government in October 2008 provides that ‘the Tripartite Summit agreed on a programme

of harmonisation of trading arrangements amongst the three Regional Economic

Communities (RECs), free movement of business persons, joint implementation of inter-

regional infrastructure programmes as well as institutional arrangements on the basis of

which the three RECs would foster cooperation’ (emphasis added).

The objective is to coordinate and harmonise existing regional programmes (e.g. transport

and energy master plans) and to implement them jointly. It also envisages the joint

implementation of a seamless upper airspace and a seamless interregional information and

communications technology (ICT) broadband infrastructure network (First Communiqué,

2008).

The Draft Agreement Establishing the COMESA, EAC and SADC Tripartite Free Trade Area

gives further substance to the objectives in Article 28 of the Communiqué and provides that:

1. Tripartite Member States undertake to cooperate and develop infrastructure

programs to support interconnectivity in the region and promote competitiveness.

2. Tripartite Member States agree that priority areas of regional infrastructure include

energy, information and communications technologies and corridor development.

3. Tripartite Member States recognise the importance of air and marine transport in

promoting regional and international trade and in consolidating regional markets

including for island Member States. Accordingly Tripartite Member States shall

cooperate in the development of ports and harbours, as well as air transport and

civil aviation programmes.

The member states also agreed in Paragraph 16(ii)(c) of the First Communiqué to put in

place ‘a joint programme for implementation of a harmonised policy and regulatory

framework that will govern ICT and infrastructural development in the three RECs’ [own

emphasis]. The rest of the chapter will focus on the various building blocks needed for the

achievement of this objective.



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3. Nature of infrastructure services

The priority areas identified by the Tripartite FTA member states for the development of

regional infrastructure programmes include energy, information and communications, and

transport. These three services sectors are mostly provided through networks, including

fixed line telephony, electricity transmission and a network of roads, rail lines and sea and

airports.

Network industries can be defined as the infrastructure composite of a set of points (nodes)

and interconnecting lines organised in a manner to transmit energy (electricity, heat),

information (sound, data) or material (freight, passengers, water, etc.). Each point can be an

initial node from which the flow is emitted, a terminal node receiving the flow, or a node

playing an intermediary role of transmission, storage, coordination and dispatching

(Crampes, 1997). Most networks are able to send and receive flows to and from any node in

the network. Examples of reciprocal networks are transportation and telephone services.

Other networks, such as water, gas and electricity, are inherently one-way. The connections

among the nodes define the character of commerce. The entire transport industry, be it

railroads, airlines, ships or trucks can be analysed as network industries each with its own set

of nodes. Other network industries include telecommunications, water, electricity and gas

services. The common feature of network industries is their provision of networks that are

often naturally monopolistic and the provision of services over the networks that can

potentially be provided on a competitive basis (Crampes, 1997).

However, network industries consist of more than just physical infrastructure. It also consists

of control and command services which permit access to and use of the infrastructure for

different service operators. This includes services such as air traffic control and slots

allocation for aviation, paths allocation and timetabling for railways, and dispatching for

electricity. These services are usually considered to form part of the network management

function under the responsibility of the network owner. This places the network owner in a

strategic position to control or at least influence access to the network and to reduce the

level of competition (Nahrath et al., 2011).

The main public policy concern relating to network industries is the main source of market

failure, namely the existence of significant economies of scale, with the potential for



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monopoly. Other sources of market failure include information asymmetries and

externalities. Market failure arises where the market does not produce efficient outcomes in

terms of output or price (Dee and Findlay, 2008).

Economies of scale exist where average costs continue to fall as output increases. This can

lead to a situation of natural monopoly where a single producer can produce all the output

the market requires at a lower cost than if two or more producers existed. If competition is

introduced into the market, inefficiencies may occur because the total costs per services unit

are not at their lowest. Equally, in the absence of competition, the incumbent producer will

restrict output and inflate prices above costs. Many network industries have economies of

scale in some or all parts of their operation because some production costs are fixed

independently from usage. For example, the cost of installing and maintaining rail lines or

electricity transmission lines is largely independent of usage or the amount of electricity

transmitted (Dee and Findlay, 2008).

A related concept is economies of scope. Scope economies occur where it is cheaper for one

firm to produce two or more services than it is for two or more firms (Dee and Findlay,

2008). For example, a single firm running both long and local distance call networks may

have lower costs than two or more firms running the networks independently.

A combination of economies of scale and scope can give rise to the policy problem of natural

monopoly where a single firm has the market power to restrict output below and to raise

prices above levels that would prevail under competitive market conditions. The existence of

natural monopoly is a key feature of infrastructure services. These services require the

creation of specialised distribution networks such as roads and rails for land transport and

cables and satellites for telecommunication and energy distribution. They require special

nodes for transmitting or receiving the service such as railway stations, bus terminals,

seaports and airports. One reason for the tendency toward monopoly is the difficulty of

duplicating networks and terminals and the high barriers to entry due to large initial

investments. Natural monopoly is a common feature of infrastructure services in at least one

of its essential parts. However, it is important to distinguish between the parts of an industry

that have natural monopoly characteristics from other elements that may potentially be

competitive. For example, electricity supply consists of a natural monopoly in transmission



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but generation and distribution could be supplied competitively. In any case, if a natural

monopoly exists at any stage of the chain of supply in an industry, it is difficult to imagine

that perfect competition could be achieved without economic regulation of the monopoly

segments (Dee and Findlay, 2008).

There are various other reasons, apart from monopolies, for a government to introduce

regulation. Other reasons for regulation include externalities, information inadequacies and

social objectives such as universal access and distribution.

The problem of asymmetric information occurs mainly in intermediate and professional

services such as those offered by doctors, lawyers and accountants. Generally, it is difficult

for consumers to assess the competency of professionals without adequate information.

However, in order to address this asymmetry, it could be more cost effective to regulate the

suppliers than to educate the consumers to ensure a uniform threshold of competence and

quality of supply.

The problem of externalities arises when market prices do not fully capture associated

external costs, for example, damage, pollution, congestion and accidents costs created by

transport services (Gamberale and Mattoo, 1999). The purpose of regulation in this case can

be to prevent undesirable behaviour or to facilitate and enable desirable actions and

activities. Other purposes of regulation can also be to influence social behaviour and actions

of companies through the use of tax measures, subsidies, and contractual and licensing

requirements.

4. National regulatory dimension

Incumbent operators in infrastructure sectors possess important advantages over new

entrants that give rise to the need for regulatory intervention. They often own essential

facilities such as local loops in telecommunication systems, power distribution systems and

railway signalling that were built by government with taxpayers’ money. New entrants

require access to these facilities because it is often not economically feasible or technically

possible to duplicate these facilities. The policy problem arises when incumbents refuse or

delay access to essential facilities, provide inferior access, or charge excessive prices.

Incumbents may enjoy economies of scale and scope of established networks. The costs of



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duplicating such networks are often prohibitively high for new entrants. Incumbents have

usually vertically integrated upstream and downstream activities and can benefit from cross-

subsidisation, integrated network planning, construction, operations and maintenance.

Incumbents may also historically have had control over the setting of network standards to

which new entrants must comply. They may gain an unfair advantage by changing standards

without warning or on short notice. Finally, incumbent operators can make it very difficult or

costly for customers to switch from provider, thereby reducing competitiveness (UN, 2001).

The national or domestic regulatory process consists mainly of three phases, namely: the

adoption of enabling legislation; the establishment of regulatory administrations and the

creation of rules; and finally, the enforcement of the rules on those companies whose

behaviour needs to be controlled (UN, 2001). However, regulation can be effected in

different ways through the application of different regulatory strategies, kinds of institutions

and enforcement methods.

Some of the different regulatory techniques available to government include competition

policies, incentives and self-regulation. Competition policy provides the framework within

which regulation has to be designed and implemented in infrastructure sectors. The goal of

competition policy is to promote, protect and preserve competition so that suppliers cannot

dictate market terms but must compete on price, quality and innovation with competitors to

stay in business. Competition benefits consumers by encouraging suppliers to constantly

offer a broader range of new and better quality products and services at lower prices. The

strength of competition policy lies in its ability to be applied across all economic sectors to

prevent anti-competitive practices such as predatory pricing by a dominant firm or cross-

subsidisation from monopolistic to competitive activities (UN, 2001).

Regulation can be undertaken by a variety of institutions such as government departments,

tribunals, courts, sector-specific regulatory agencies and self-regulators through professional

bodies. The main benefit of sector-specific regulatory agencies lies in their ability to develop

policy, promulgate and enforce rules, and decide disputes between parties (UN, 2001).

However, the regulatory system will be undermined if the rules are not enforced and

breaches sanctioned. Regulators can seek compliance through formal enforcement and

prosecution, negotiation or persuasion. Sanctions can vary from naming and shaming,



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warnings, fines and even criminal liability. Regulatory responses through the imposition of

fines, taxes or administrative orders are often linked to a certain type of sector standard or

level of performance (UN, 2001).

Yet most developing countries experience regulatory failures due to persistent and common

patterns of over-regulation, under-regulation, poor regulatory design and implementation,

and weak institutional capacities. In many cases, the regulatory system has become little

more that the bureaucratic way of life or a way to generate power or money for special

interests (Investment Climate Advisory Services, 2010). Reasons for regulatory failure can

vary, but many attempts of regulatory reform fail in their concept, design or implementation

phases. Nonetheless, most national regulatory systems adopt a mixture of institutional,

regulatory and enforcement approaches.

5. Multilateral regulatory dimension

There is also a multilateral dimension to the formulation and adoption of regulation. The

rules of the WTO contain some disciplines on natural monopolies and domestic regulation.

Article 1(3)(c) of GATS excludes services supplied in the exercise of government authority

that is neither supplied on a commercial basis nor in competition with one or more service

suppliers. Apart from this wholesale exclusion from GATS coverage, one specific sector,

namely air traffic rights in the air transport services sector, is also excluded.

GATS contains two sorts of provisions. The first are general obligations which apply to all

members and services sectors (e.g. MFN, transparency). The second are specific

commitments which are the negotiated undertakings of GATS members. The existence of

specific commitments triggers further obligations. These obligations will also apply to

infrastructure services sectors, but countries have the option of not scheduling these

services to avoid specific commitments if there are domestic concerns regarding the

potential impact of liberalisation.

Article VIII of the WTO’s General Agreement on Trade in Services places an obligation on

member states to ensure that any monopoly supplier of a service does not, in the supply of

the monopoly service, act in a manner inconsistent with the MFN Treatment principle and



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that member’s specific commitments. In other words, this prohibition would prevent

discriminatory measures against the services and service suppliers of other members in the

specific sectors in which market access commitments are undertaken. This would include a

prohibition on limitations on entry, production levels, value of transactions or assets, foreign

capital and types of legal entity, unless specified otherwise. In terms of the National

Treatment obligation (GATS Article XVII), members are also obliged to avoid discrimination

against foreign services and service suppliers, unless specified otherwise.

Article VIII also provides that a monopoly service supplier may not abuse its monopoly

position, if it competes in the supply of a service outside the scope of its monopoly rights

and which is subject to that member’s specific commitments. Thus, members must ensure

that monopoly suppliers do not abuse their dominant position to the extent that they are

also participants in competitive markets.

One particular infrastructure services sector has received special attention in GATS

negotiations. GATS contains sector-specific conditions for telecommunication services in the

Annex on Telecommunications and the Reference Paper. This is so because companies

controlling access to essential facilities in this network industry can restrict competition in

several market segments. The behaviour of incumbents can therefore have a direct impact

on trade because they can deny access or determine price access on unreasonable terms.

The rapid expansion of the number of services provided over telecommunication networks

can lead to a situation where the incumbent provider ends up by being both player and

gatekeeper in the market.

Article 5(a) of the GATS Annex on Telecommunications obliges members to ensure ‘access to

and use of public telecommunications transport networks and services on reasonable and

non-discriminatory terms and conditions’. Members must therefore ensure that foreign

suppliers have access to and use of a telecommunications transport network or service

offered within or across the border of that member. Members are also not allowed to

impose conditions on access to and use of networks and services other than is necessary to

safeguard public services responsibilities of suppliers, or to protect the integrity of the

networks or services, or to prevent illegal service provision. These obligations are, however,

only applicable to the communication subsectors in which specific commitments were



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undertaken and do not increase liberalisation but rather contribute to the development of a

level playing field in cases where commitments are made.

The Telecoms Reference Paper goes further to provide a set of pro-competitive regulatory

principles for basic telecommunications services. The six regulatory principles include

competitive safeguards; interconnection; universal service; licensing; allocation and use of

scarce resource; and the creation of an independent regulator. This set of principles

provides the basis for the development of a regulatory reform framework that countries

should follow to support the transformation of the telecommunication sector into a

competitive market. It applies to those members that have undertaken specific

commitments in basic telecommunications services and have incorporated the Reference

Paper into their National Schedules as additional commitments in accordance with GATS

Article VXIII. Once adopted, the Reference Paper becomes part of a country’s schedule of

commitments and is legally enforceable under the WTO’s Dispute Settlement

Understanding.

The Reference Paper also introduces concepts and elements of competition and prevents

major suppliers from engaging in anticompetitive practices. Major suppliers are defined as

those with the ‘ability to materially affect the terms of participation (having regard to price

and supply)’ as a result of ‘control over essential facilities or use of its position in the

market’. The conduct of major suppliers has practical implications for new or potential

suppliers because they can apply different measures and practices at their disposal to

circumvent market access and national treatment commitments. Typical measures relate to

denial of network interconnection, or refusal to provide interconnection on commercial

terms and cross-subsidisation. Major suppliers are prevented from engaging in or continuing

such anticompetitive practices. The nonexhaustive list of prohibitive anticompetitive

practices in the Reference Paper include

• engaging in anti-competitive cross-subsidisation;

• using information obtained from competitors with anticompetitive results; and

• not making available to other services suppliers on a timely basis technical

information about essential facilities and commercially relevant information

which are necessary for them to provide services.



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Article 2(2) of the Reference Paper also places an obligation on major suppliers to ensure

interconnection on non-discriminatory terms and conditions and in a timely fashion at cost-

oriented rates.

These disciplines on major suppliers go far beyond GATS Article VIII on monopolies and

exclusive service providers. Unlike GATS Article VIII, the focus of the Reference Paper is not

on the monopoly provider per se but on anticompetitive practices of major suppliers. With

the rapid development of new technologies, the rationale for maintaining a monopolistic

market structure is disappearing. The main concern is therefore less on the existence of a

monopoly but more on the behaviour and dominant position of the incumbent in the

market.

GATS provides for additional disciplines on domestic regulation in those sectors in which

specific commitments were undertaken. In particular, GATS Article VI(1) provides that ‘all

measures of general application affecting trade in services’ must be ‘administered in a

reasonable, objective and impartial manner’. It should be noted that the provision applies

only to the administration of measures and not to their content or substance (Adlung, 2005).

The WTO’s Council for Trade in Services has an obligation to develop any necessary

disciplines to ensure that qualification requirements and procedures, technical standards

and licensing requirements do not constitute barriers to trade in services. GATS Article

VI(4)(a-c) provides that such requirements must be based on objective and transparent

criteria; not be more burdensome than necessary to ensure the quality of the services; and,

in the case of licensing procedures, not in themselves constitute a restriction on the supply

of a service. In accordance with Subarticle 5, members may not apply new licensing and

qualification requirements and technical standards inconsistent with the aforementioned

three criteria or in a way which ‘could not reasonably have been expected of the member at

the time the specific commitments in those sectors were made’.

The significance of the Reference Paper lies in its precedent-setting value by introducing

enforceable competition and regulatory elements into a trade framework. Future

multilateral negotiations on other infrastructure services sectors could follow a similar

approach by providing customised solutions on a sector-by-sector basis. Such an approach



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would be a positive step in the right direction and should also be considered by the Tripartite

FTA members.

6. Developing a regulatory reform framework

The liberalisation (removal of restrictions on competition) of network industries has been an

important part of public policy in many countries. Policy makers and scholars seem to agree

that the creation of regulatory capacity is a precondition for liberalisation and not vice versa

(Kulkarni, 2009). Proper sequencing and coordination is essential but it is also important to

get the design of the regulatory framework right – including the question of when and how

to regulate.

As noted, there are a large number of infrastructure services that can be provided by the

private sector under competitive conditions. Regulation can therefore be used as an

instrument to reach economic and social objectives. The main challenge for government is to

design a proper regulatory reform framework with the necessary incentives to encourage

private participation and simultaneously achieve broader objectives (UN, 2001).

Regulatory reform can refer to a range of measures of deregulation, reregulation, reducing

regulatory costs and institutional capacity building. Reforms in network industries consist

basically, to varying degrees, of the design and implementation of the four main

components of reform (Nahrath et al., 2011):

• Unbundling of the incumbent through formal or functional separation of

operation and infrastructure ownership;

• Opening of the market by allowing third party access to network facilities;

• Creation of independent regulatory authorities to enforce sector-specific rules

and competition in a non-discriminatory manner; and

• Setting universal service obligations and standards

The liberalisation of these industries through unbundling and reregulation creates the need

to redesign policies and reorganise ownership of assets. Ultimately, the way in which

infrastructure is managed and its uses regulated will directly influence the supply of

infrastructure services to consumers (Nahrathet al., 2011). A liberalisation programme will



248

therefore require the development of a regulatory framework that encapsulates the various

regulatory tasks or functions of all the actors (owner and manager of the network,

competing private and public providers and regulator) in a liberalised network industry.

According to Nahrath et al., (2011), a regulatory framework consists of a number of

regulatory tasks or functions of which content and scope will depend on the degree of the

reforms undertaken. These functions include:

• the physical management of the network (e.g. construction, maintenance,

technological innovation, security);

• the conditions of access to and use of the network (e.g. operation and other

competing uses);

• the definition of the legal and ownership status of the different operators (e.g.

privatisation of the legal form and of the ownership) that have access and use

rights to the network infrastructure at their disposal (e.g. concessions allocated

to operators);

• the definition of competition rules for private and/or public operators (e.g. speed

of market opening, categories of eligible customers, fair competition);

• the definition of public service obligations (e.g. quality, accessibility and

affordability of specific goods and services) and standards related to the other

uses of the network;

• the arbitration of rivalries and eventual conflicts between the different users of

the network (e.g. between operators, between the operators and the network

owners, between the consumers and the operators, between the network

owners and the regulators);

• the interconnection with other networks (either in the same sector, across

national borders or between sectors as is the case, for example, for the electricity

grid and the railway network).

Any reform or liberalisation programme should address the following key issues: developing

an appropriate competitive market form (corporatisation, concessions, franchises,

privatisation); establishing regulatory institutions; maintaining competition through general



249

authority and/or sector-specific regulator in order to reach the ultimate goal of introducing

more competition into sectors characterised by monopolies and high entry barriers (UN,

2001).

6.1. Developing an appropriate competitive market form

The first step toward the creation of competitive infrastructure sectors is to delink political

power and influence from the operational management of infrastructure facilities and

services, in order to improve managerial efficiency. There are various ways to involve private

participation in the provision of infrastructure facilities and services, ranging from

corporatisation to privatisation depending on a country’s economic development objectives

and political sensitivities.

The corporatisation of infrastructure sectors involves the creation of independent legal

entities subject to normal commercial liabilities and constraints including legal, accounting

and reporting practices. Government continue to set the sector’s strategy and policy, but the

state-owned enterprise is transformed to look and behave like a private commercial entity.

This also typically involves the introduction of performance agreements and management

contracts between the utility and government. Performance agreements typically require

utilities to commit to certain output and performance standards subject to government

revenue allocations. Some of the key objectives of performance agreements include:

improving governance; improving billing and customer service; improving operations (e.g.

reduction in informal connections and leakage); human resource management; and financial

and managerial objectives. The key features of performance agreements include: the setting

of performance criteria; policies for the review or amendment of tariffs; procedures for

government approval of expenditure above certain thresholds; and forms of government

support (e.g. subsidies and rescheduling or assumption of debt) (World Bank, 2012).

Management contracts govern a particular type of public-private partnership arrangement.

They are awarded to private companies to manage a range of activities for a relatively short

time subject to a fixed fee. More sophisticated agreements may oblige the operator to

maintain and operate the assets and linking a portion of the fee to performance targets. For

example, obligations in the case of road maintenance may include rehabilitation to bring

roads up to predetermined standards; improvements in response to new traffic, safety or



250

other conditions; and emergency works (e.g. after storms, flooding or earthquakes).

Management obligations in the case of power utilities, for example, may include improving

the billing system, managing network extensions and managing meter installations. The

advantage of this type of agreement is that it attracts management expertise from the

private sector. The downside is that the operator essentially remains a monopoly supplier

(World Bank, 2012).

Franchises, affermage and lease agreements are public-private partnership agreements that

combine private-sector efficiency and public financing. The private-sector partner is

responsible for the operation and maintenance but not for the financing of the investment.

Under these types of agreements, the operator carries greater commercial risks because it

does not receive a fixed fee but charges consumers an operator’s fee. The operator either

receives an operating fee from government or pays an operating fee to government (World

Bank, 2012). In the case where all revenues generated by the facility accrue to government,

the operator will carry operating-cost risk but not revenue-collection risk. It would be

important in this this case for government to devise an efficient plan for revenue collection

and performance monitoring. Competition in this case is created through competitive

tendering where contracts are awarded to the lowest cost supplier. Competition can also be

created by unbundling systems and franchising individual parts of facilities or services. This

can increase competition and reduce operation costs. However, this type of approach

requires the existence of a number of potential bidders. If not, competition must be phased

in to allow for the establishment of operators or the restructuring of the public utility.

Alternatively, the operator retains all fair revenue after the deduction of an operating fee to

government. The operator accepts both operating cost and revenue-collection risks. This

could create a high incentive to engage in predatory pricing against competitors (UN, 2001).

Another type of public-private partnership is concessions. Concessions are granted in

relation to the operation, maintenance, managing and financing of an existing asset or the

refurbishment and extension of an asset. A concession is awarded through competitive

tender or negotiation to a private company to operate and maintain an infrastructure

system for longer periods of time – times of up to 30 years. Concessions are associated with

a degree of exclusivity that protects them against new concessions within a geographical

area. Concessionaires receive all the revenues and costs of operations and can determine



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their own commercial strategy to a certain degree. Government retains ownership of assets

which revert back to government at the end of the agreement. A few issues require

consideration when it comes to concessions. Government will need to set quality and price

regulation (UN, 2001). Concessionaires will need appropriate safeguards included in the

concession agreement to ensure they can secure finance for its obligations and maintain a

profitable rate of return. Moreover, a clear basis of alternative cost recovery (e.g. general

subsidies, taxation, government loans) is needed where all operating and maintenance costs

are not covered by tariff collection alone (World Bank, 2012).

The final form of private-sector participation in infrastructure projects is privatisation. Under

this approach, government transfers full ownership and control to the private sector. In

practice, each of the infrastructure sectors will remain highly regulated and the private

operator will still require a licence to operate which may be subject to certain conditions and

limitations. In extreme cases the only regulation applying relates to general competition

legislation on abuse of dominance and restrictive practices. In some cases it is very difficult

for an economy-wide institution to exercise effective control on commercial behaviour. In

such cases it may be necessary for sector-specific institutions to exist in parallel with or as a

specialist agency of the economy-wide competition authority (UN, 2001).

6.2. Establishing regulatory institutions

The effective design of regulatory tools and institutions is necessary to effect the transition

from monopoly to competition. In many countries competition authorities coexist with

sector-specific regulators at least until the relevant markets have become reasonably

competitive. As markets become more competitive the need for sector-specific regulation

may decline or even diminish. Thereafter it is for government to determine whether

competition authorities are capable of maintaining competition or whether the regulator

needs to continue with its role.

Different regulatory needs will arise depending on the choice between the various

competitive market forms. In the case of infrastructure concessions, the concessionaire will

typically be subjected to price control; ensuring minimum quality standards; and maintaining

health, safety and environmental rules. Government must be able to monitor and enforce

conditions that are set either by law or within concession contracts. Changing market



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conditions may necessitate the renegotiation of contracts after they have been rewarded. In

such cases the contractual provisions must stipulate the scope and limits of modification and

what disputes will be referred for international arbitration or for adjudication in the

domestic courts. Equally, developing franchising arrangements would require the creation of

a competitive market structure and may include the fragmentation and corporatisation of

existing state-owned monopoly into a number of separate legal entities or removal of legal

barriers to private participation. Restructuring should be undertaken prior to franchising.

Where enterprises remain in public hands special attention should be given to avoid cross-

subsidisation by them to support their activities in the competitive segment of the market.

The monitoring of performance should be undertaken by the procuring agency and

enforcement of contracts by legal or quasi-legal entities (UN, 2001).

The sector-specific regulators possess technical and sector-specific expertise to deal with

complex issues; they have the ability to act proactively by setting market-access conditions

such as terms for interconnection and prices; they can apply noncompetition related policies

such as universal access conditions; and they can monitor and determine licence conditions,

quality and technical standards. Competition authorities, on the other hand, have an

economy-wide scope with narrowly defined powers and remedies; they tend to react to

anticompetitive behaviour; and are complaint or investigation driven.

Regardless of whether government decides on a competition authority and/or a sector-

specific regulator, both need to be sufficiently independent from their political masters. This

requires them to be insulated from political pressures and from the regulated enterprises.

Independence is essential for containing opportunistic behaviour but regulators can

maintain independence and avoid capture by building a reputation for being competent and

credible. Independence also requires that regulators (board members and executives) are

appointed on professional and not political criteria. Regulators should have a healthy dose of

discretion to make effective decisions based on rules and not be restricted to an advisory

role. It is also important for regulators to have financial independence. Regulators should

not rely on budgetary allocations decided by politicians but should have their own sources of

funding. The imposition of levies on regulated firms or customers is a common alternative

and can be annually determined by government. In addition, regulators should be able to

acquire all the resources necessary for the efficient execution of their functions. This may



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mean that they are free to recruit the necessary staff with appropriate expertise and

experience outside the restrictions of public services’ terms and conditions of employment.

In addition, regulators must have autonomy regarding the monitoring of compliance and the

ability to impose appropriate penalties that correspond to damage caused (UN, 2001).

6.3. Maintaining competition

Even if market entry has been completely liberalised, there remains a need for regulation to

curb predatory practices, collusion, and monopolising behaviour (including merger and

acquisition). The regulatory and competition agencies should not only create competition

but also maintain it. Firms that hold a dominant market position can engage in

anticompetitive behaviour or ‘abuse of dominance,’ conduct that reduces consumer surplus

or limits market entry or forces market exit. Examples of such conduct include refusal or

delay in the provision of essential facilities to competitors; access to facilities on

discriminatory terms or at excessive prices; and predatory pricing and /or cross-subsidisation

of activities that are subject to competition with revenues from less competitive or exclusive

activities. In addition to abuse of dominance by individual firms, two or more firms can

engage in restrictive practices to limit competitors’ ability to compete independently

(horizontal agreements) or restrict competition and reduce consumer welfare (vertical

agreements). Examples include price fixing, bid rigging and market allocation. Price fixing

among competitors can occur through joint price increases, restricting price reductions, joint

removal of low-price products to shift demand to high-price products or fixing charges to

consumers. Bid rigging involves collusion among franchise or licence bidders to influence

who wins an auction. Market allocation, on the other hand, occurs where firms divide a

particular market among them and agree not to compete in each other’s allocated

geographical market. Remedies for abuse of dominance include enforcing orders against the

firm to cease its abusive behaviour, imposing fines, revoking licences or restructuring the

dominant firm through divestment (UN, 2001).

Mergers and acquisitions are commonly approved and reviewed by competition authorities

to evaluate their potential impact in a market. Mergers can promote economies of scale and

innovation. The reason for merger controls is to prevent a firm from accumulating and

exercising market power to the detriment of competition. Horizontal mergers could



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potentially give rise to market dominance and lead to anticompetitive behaviour and abuse

of dominance. Vertical integration between firms that engage in upstream or downstream

activities could lead to discriminatory prices or terms of access to essential facilities in favour

of a firm’s own subsidiary. Competition authorities are usually unconcerned about other

types of mergers between firms engaged in unrelated businesses.

Potential remedies for the removal of anticompetitive effects of mergers include the

prohibition in its entirety or its breakup if the merger has already occurred; approval of the

merger provided the merging parties divest those activities or assets which could potentially

give rise to anticompetitive behaviour; or, approval on condition that the firm will not

engage in anticompetitive behaviour post-merger. This latter remedy will require continuous

competition regulation (United Nations, 2001).

While many Tripartite FTA member states (including Egypt, Kenya, Namibia, Malawi, South

Africa, Swaziland, Tanzania, Zambia and Zimbabwe) have introduced competition legislation

the landscape for competition policy and enforcement is changing in Africa. In reality, many

markets extend beyond national borders. Equally, anticompetitive practices and mergers

and acquisitions in one country can adversely affect competition in another (Van Djik, 2009).

For example, two producers in South Africa recently admitted to the South African

Competition Commission that they took part in a cement cartel to divide the market through

the allocation of market shares and so indirectly fixing the price of cement in the South

African Customs Union (SACU) consisting of South Africa, Botswana, Lesotho, Namibia and

Swaziland. In an attempt to the address these issues, COMESA adopted regional Competition

Regulations and is establishing a competition authority. Apart from a few exceptions, the

regulations apply to all economic activity within the region whether it is conducted by public

enterprises owned by government or private companies. The regulations also have primary

jurisdiction over all industries that are subject to sector-specific regulators including utilities

such as electricity and telecommunication (COMESA, 2004). They will regulate

anticompetitive practices which may affect trade between two COMESA members and have

as their object or effect the prevention, restriction or distortion of competition in the

COMESA region. This would include the authority to investigate conduct which, whilst

occurring outside COMESA, may nonetheless have an impact on trade between COMESA

members (Van Djik, 2009). In addition, the regulations also include obligations on the



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notification of mergers where either of the two merging parties operates in two or more

COMESA countries, provided the financial thresholds are met. In other words, even if one of

the merging parties operates outside COMESA, but the other merging party operates inside

two or more COMESA countries, notification to the COMESA Competition Commission is

obligatory (Van Djik, 2009).

Similarly, the Draft Agreement Establishing the COMESA, EAC and SADC Tripartite Free Trade

Area provides in its Annex on Competition Policy and Consumer Protection for the

prohibition of anticompetitive practices, regulation of mergers and acquisitions, and the

protection of consumers from unfair trade practices. In an attempt to harmonise

competition policies, member states are obliged to adopt national and regional competition

laws. Apart from creating mechanisms for closer cooperation between regional and national

authorities on the exchange of information, coordination of actions and notifications, the

annex also established a voluntary Competition Policy and Consumer Protection Forum for

national and regional authorities for undertaking peer review and monitoring the

implementation of competition laws and policies across the region (Annex on Competition,

2010).

The annex obliges Tripartite FTA members to prohibit anticompetitive practices which may

affect trade between Tripartite FTA members, and have as their object or effect the

prevention, restriction or distortion of competition within the Tripartite FTA region (Annex

on Competition, 2010). The annex also requires notification of mergers and acquisitions to

relevant national and/or regional competition authorities, failing which such mergers or

acquisitions shall be void. The annex provides for the possibility of appeal to the Tripartite

Council in cases where the competent authority objects to a merger or an acquisition (Annex

on Competition, 2010). The Tripartite Council, consisting of all the ministers of the Tripartite

FTA member states, may approve a merger or acquisition if it ‘is to fulfil an overriding public

interest’ (Annex on Competition, 2010). Giving politicians the ability to overrule competition

authority decisions raises serious concerns over regulatory governance and may ultimately

work in the private rather than the public interest.



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7. Infrastructure development through public-private partnerships

The First Communiqué of the COMESA-EAC-SADC Tripartite Summit of Heads of State and

Government ‘directed the three RECs to develop joint financing and implementation

mechanisms for infrastructure development’. The Draft Agreement also provides in Article

44 that the ‘Tripartite Member States shall establish a Development Fund for trade and

infrastructure development programmes within the context of existing regional trade and

infrastructure development funds’. The particular article provides further that the ‘Tripartite

Member States shall determine the machinery and formula for resource mobilisation and

disbursement’. The three RECs have initiated cooperation in the funding of infrastructure

projects through joint corridor investor conferences such as the Tripartite-IGAD

Infrastructure Investment Conference in September 2011. The Conference resolved to

prioritise the development of transport corridors and regional energy transmission

interconnectors. Most infrastructure projects are implemented at the national level but

regional coordination is critical for cross-border or multi-country projects. The conference

also agreed to prioritise reforms to enable participation of external development partners

and the implementation of public-private partnerships and regional procurement legislation

(Communiqué of the Tripartite and IGAD, 2011).

With an ever increasing number of priorities competing for public funds, governments are

increasingly forced to make use of private-sector participation in the development of

infrastructure projects to achieve their infrastructure aims. Apart from limitations in public

funds to cover infrastructure investment needs, private-sector involvement is also sourced in

an effort to increase the quality and efficiency of public services. The Tripartite FTA member

states acknowledge the role of the private sector in the development or improvement of

energy, transport and communications infrastructure and expressed their commitment to

involve the business community through the promotion of public-private partnerships

(Annex on Trade and Development, 2010). Public-private partnerships provide governments

with the opportunity to tap into the technical expertise and resources of the private sector

through the sharing of substantial financial, technical and operating risks and

responsibilities. This enables government to focus on policy development, planning and

regulating instead of being involved in day-to-day operations. The extent of private sector

involvement can vary depending on the terms and conditions under which the private sector



257

must operate. At the one end of the spectrum, private sector involvement may not be

possible or desirable at all. In these cases, government may choose to restructure or

corporatise a monopoly to improve performance. A limited form of private sector

involvement may be through procurement for civil works such as laying pipes or cables or

through the outsourcing of certain services such as back-office or customer services. Public-

private partnerships can range from various types of arrangement in which the private

sector can be responsible for managing, operating, maintaining and financing the

investment. At the other end of the spectrum, government transfers full control and

ownership of the assets of the monopoly to the private sector (World Bank, 2012).

The central policy question is to determine the appropriate mixture of private- and public-

sector participation in achieving maximum public value. A public-private partnership is

embodied in agreements that clearly define the responsibilities of each party and allocate

risk. Responsibility must be assigned to either the public or private sector for each of the

following elements: design, construction, operation, maintenance and finance. The

allocation of each of these elements with their related risks will determine the structure of

the partnership (Deloitte, 2010).

However, successful partnerships require strong relationships and political commitment to

reduce the private sector’s perception of risk. One such risk is consumers’ reluctance to pay

additional costs for services such as improved roads, rail or access to water that it believes

are part of government’s responsibility. For example, the public protests and threat of civil

disobedience against the implementation of toll fees on upgraded highways between

Johannesburg and Pretoria in South Africa sent a negative signal to potential private-sector

partners and increased their risk perceptions. The crux of the matter is that the private

sector will only put its money in projects it deems to be financially viable. Hagerman quoted

William Dachs, senior executive manager of South Africa’s only high speed train and former

head of South African Treasury’s Public Private Partnership Unit as saying that ‘PPPs work

best when there is a competitive and well-subscribed market of service providers combined

with a high willingness to pay by users of the service operating in an investment

environment that is well regulated and certain’.



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8. Conclusion

The Tripartite FTA members acknowledge the importance of a proper regulatory framework

to underpin the development of the three identified infrastructure sectors. The First

Communiqué prioritises the harmonisation of members’ ICT and infrastructure policies and

regulatory frameworks as one of its key objectives. It is still unclear how this will be

achieved. The rules of the WTO provide a multilateral framework within which such a

possible regulatory framework should be developed and operated. GATS creates specific

obligations, particularly on the adoption of domestic regulation and the monitoring and

regulation of monopolies and exclusive service providers. The WTO’s precedent-setting

Reference Paper introduced, for the first time, enforceable competition and regulatory

elements in the telecommunications sector into a trade framework. This approach deserves

consideration. It is not clear whether the Tripartite FTA members will adopt the same or a

similar approach for the development of a harmonised regulatory framework in the

telecommunications sector or in the other infrastructure sectors.

Nonetheless, the adoption and implementation of policies and regulations normally take

place at a domestic level. The creation of a competitive market for the infrastructure

services sectors requires the development of an appropriate regulatory reform programme.

This may include restructuring existing monopoly providers to allow domestic and foreign

services suppliers to enter the market. The regulatory framework must strike a balance

between commercial interests, regulatory concerns and public policy objectives. Once the

restrictions on competition have been removed, the creation of regulatory capacity through

the establishment of sector-specific or economy-wide competition authorities is essential to

promote and maintain competition.

One of the objectives of the Tripartite FTA members is to attract private investment through

public-private partnerships to fill the infrastructure deficit. These partnerships can be

structured in a variety of forms depending on national economic development objectives

and political sensitivities.

Given all the complexities involved it can take considerable time and effort to complete a

regulatory reform and liberalisation programme. However, it is important to address all

these interrelated issues simultaneously, because failure to do so could jeopardise the whole



259

exercise. Trade negotiations can facilitate necessary regulatory reforms and contribute to

the development of a competitive and conducive investment environment for the

communications, energy and transport sectors.

References

Adlung, R. 2005. Public Services and the GATS. Geneva: World Trade Organization.

Annex on Competition Policy and Consumer Protection, Draft Agreement Establishing the COMESA,

EAC and SADC Tripartite Free Trade Area, December 2010.

Annex on Trade Development and Competitiveness, Draft Agreement Establishing the COMESA, EAC

and SADC Tripartite Free Trade Area, December 2010.

COMESA. 2004. User Guide for Business and Industry on the COMESA Competition Regulations.

[Online]. Available: www.comesacompetition.org [15 March 2012].

Communiqué of the Tripartite and IGAD Infrastructure Investment Conference. 28-29 September

2011. Nairobi: Kenya.

Corporate Communications Consultants. 2010. Effective public private partnerships (PPP) for

infrastructure development. Johannesburg: Deloitte. [Online].

Available:http://pressoffice.mg.co.za/deloitte/PressRelease.php?StoryID=213047 [8 March 2012].

Crampes, C. 1997. Network industries and network goods. [Online]. Available:

http://idei.fr/doc/by/crampes/network.pdf [16 March 2012].

Cronje, J.B. 2011. Infrastructure services, regulation and competition. [Online]. Available:

http://www.tralac.org/2011/08/24/infrastructure-services-regulation-and-competition/ [8 March

2012].

Dee, P. and Findley, C. 2008. Trade in Infrastructure Services: A Conceptual Framework. In Matto, A.,

Stern, R.M., Zanini, G. (eds.). A handbook of international trade in services. New York: Oxford

University Press, pp. 338 – 355.

Draft Agreement Establishing the COMESA, EAC and SADC Tripartite Free Trade Area, December

2010.



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First Communiqué of the COMESA-EAC-SADC Tripartite Summit of Heads of State and Government,

22 October 2008.

Gamberale, C. and Mattoo, A. 1999. Domestic Regulation and Liberalization of trade in services.

[Online]. Available: http://siteresources.worldbank.org/INTTRADERESEARCH/Resources/Part_4.pdf

[16 March 2012].

Groebel, A. 2011. Competition policy and pro-competitive regulation in network industries – avoiding

overkill and gaps. Network Industries Quarterly, 13(1): 7-10.

Hagerman, E. 2012. Tide may be turning for private-sector investment. [Online]. Available:

http://www.businessday.co.za/articles/Content.aspx?id=166867 [8 March 2012].

Investment Climate Advisory Services, 2010. Regulatory governance in developing countries. [Online].

Available:

http://jacobsandassociates.com/pdfs/Regulatory%20Governance%20Jacobs%20Ladegaard%202010.

pdf [11 March 2012].

Kulkarni, P. 2009. Impact of GATS on Basic Social Services. Journal of World Trade, 43(2): 245-283.

Nahrath, S., Pflieger, G., Varone, F. 2011. Institutional Network Regime: a new framework to better

grasp the key role of infostructure. Network Industries Quarterly, 13(1), pp. 27-30.

PPP IRC. 2012. PPP in Infrastructure Resource Center for Contracts, Laws, and Regulation (PPPIRC).

[Online]. Available: http://ppp.worldbank.org/public-private-partnership/ [16 March 2012].

UN. 2001. The Economic Regulation of Transport Infrastructure Facilities and Services: Principles and

Issues. [Online]. New York: United Nations. Available:

http://www.unescap.org/publications/detail.asp?id=466 [16 March 2012].

Van Djik, J. 2009. African Competition Law Development. Denyes Reitz M&A and Competition Law

Seminar., July 2009.

Chapter 7 – Industrial development in the Tripartite Free Trade Area


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Chapter 7

Industrial development in the Tripartite Free Trade Area

Sean Woolfrey

1. Introduction

At the Second Tripartite Summit of the Heads of State and Government of the Common

Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and

the Southern African Development Community (SADC) held in South Africa in June 2011,

negotiations for the establishment of a Tripartite COMESA-EAC-SADC Free Trade Agreement

(T-FTA) comprising the 26 member states of the three regional economic communities were

officially launched. At the summit, it was agreed that a ‘developmental approach’ would be

taken towards the T-FTA integration process, and that integration would go beyond a narrow

focus on the removal of tariffs and other barriers inhibiting trade between and within the

three regional economic communities (REC). More specifically, the integration process is to

be based on three pillars, namely market integration, infrastructure development and

industrial development to address constraints on productive capacity in the T-FTA region.

The explicit focus on industrial development as part of the integration process is notable

given that the development of productive manufacturing capabilities is generally considered

a vital engine for economic development, and that almost all of today’s developed countries

have at one time or another actively pursued an industrial development strategy in order to

develop economically and boost domestic living standards. The inclusion of industrial

development in the T-FTA agenda is also important as the past industrialisation efforts of

many T-FTA countries largely failed to bring about significant industrial capacity, and most

countries in the region continue to have relatively small and weak manufacturing sectors. As

a result, these countries remain heavily dependent on the production and export of primary

commodities, leaving them vulnerable to volatile global commodity prices and declining

terms of trade.

While in theory regionalism should be able to play a positive role in facilitating industrial

development, past attempts to use regional cooperation or regional integration to promote



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industrialisation in Sub-Saharan Africa (SSA) have generally failed. Nonetheless, this chapter

argues that despite these failures, there are good reasons for thinking that the T-FTA could

turn out to be more successful in promoting industrial development, especially given its

broad and comprehensive approach to regional integration. Of course, this does not mean

that it will necessarily be successful, as regional industrialisation efforts under the T-FTA will

undoubtedly face numerous challenges.

The rest of this chapter is structured as follows. Section 2 highlights some prominent

arguments for the importance of manufacturing as an engine of economic growth and

development. Section 3 then outlines the record of past – and mostly unsuccessful –

attempts to promote industrialisation in SSA, before Section 4 uses data from organisations

such as the World Bank and the United Nations to provide a snapshot of the current state of

manufacturing in SSA, and in the T-FTA countries in particular. Next, Section 5 suggests that

the current realities of the global political economy are making efforts to promote

industrialisation at the national level arguably more difficult for today’s developing countries

than they were for countries that developed earlier.

Section 6 provides theoretical arguments as to how and why regionalism can be used to

foster industrial development, before Section 7 points out that past attempts have been

made in SSA to use regionalism to promote industrialisation, and that these largely failed to

bring about industrial development in the region. Section 8 argues that the comprehensive

and multipronged integration agenda of the T-FTA may mean that it is more likely than

previous regional initiatives to successfully facilitate industrialisation in the region, even if

this process is likely to face numerous challenges. Finally, Section 9 concludes with a few

suggestions to help guide industrial development efforts under the T-FTA.

2. The importance of manufacturing for economic development

A large body of literature emphasises the role of structural transformation from low to high

productivity economic activities as the key driver of sustained economic growth and

development in developing countries (Lall, 2005; Rodrik, 2007; Hesse, 2008). This process of

structural transformation is generally associated with industrialisation due to the fact that,

historically, the industrial sector has tended to exhibit higher levels of productivity than the

agricultural sector. Typically, industrialisation has involved the movement of significant



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portions of a country’s population from agricultural to industrial activities, and hence, a

large-scale shift from less to more productive activity.

The argument that industrialisation is the key to economic development has been

strengthened in recent decades by the performance of a number of newly-industrialised

economies in East Asia. Countries such as Korea, Taiwan, Malaysia and China experienced

decades of economic growth resulting in significant increases in per capita incomes and

living standards. One element common to these success stories has been the emphasis these

countries placed on developing domestic manufacturing capacity in order to leverage

benefits from growing world demand for manufactured goods (Wade, 2003). Indeed,

significant anecdotal and empirical evidence suggests that focused industrial development

strategies were key to the attainment of sustained growth and development in these

countries (Amsden, 1989; Wade, 2003).

As Chang (2001) and Szirmai (2009) have shown, however, it is not only in the recently

industrialised countries of East Asia that industrialisation has played a central role in

generating economic growth and development. In fact, virtually all cases of successful

economic development have been associated with industrialisation and, in particular, with

the growth of manufacturing capacity (UNCTAD, 2011). Industrialisation played as significant

a role in promoting development in early developers such as the United States, as it did in

more recent cases of development, such as those of Korea and Taiwan (Chang, 2001; Marti

& Ssenkebuge, 2009).

Strictly speaking, industrialisation refers to the development of an industrial sector, covering

activities such as mining, manufacturing and construction. The literature focusing on

industrialisation as a driver of economic growth and development suggests, however, that it

is manufacturing in particular that provides the greatest opportunities for sustained growth,

employment creation and poverty reduction in developing countries (UNCTAD, 2011). A

number of specific reasons have been advanced for why manufacturing promotes economic

growth and development, and these are briefly illuminated below.

First, manufacturing has historically played a special role in the promotion, generation and

diffusion of new technologies and innovation, which in turn are crucial elements for

increasing productivity levels and fostering economic development (Ibid.). Innovation and



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technological advances have long been driven by the research and development activities of

manufacturing firms, and manufacturing activity has also generally been the major channel

for the diffusion of these advances to other sectors of the economy (Ibid.).

The ability to diffuse innovations and new technologies through spill-over and other effects

reflects a second feature of manufacturing which is supposed to be beneficial for economic

development, and that is that, unlike other sectors, manufacturing tends to generate strong

backward and forward linkages with other economic sectors and activities (Szirmai, 2009).

The manufacturing sector is an important source of demand for sectors such as the

transport, communication and financial services and also provides a stimulus for primary

sector activities such as agriculture and mining (UNCTAD, 2011). Through these forward and

backward linkages manufacturing contributes to domestic investment, employment and

output (Ibid.).

A third pro-developmental feature of manufacturing is that as incomes rise, the share of

agricultural expenditure in total household spending falls, while the share of manufactured

goods rises, a phenomenon known as ‘Engel’s Law’. One implication of this ‘law’ is that

countries which specialise in activities such as agriculture and mining are less able than

those that specialise in manufacturing to benefit from expanding world markets for

manufactured goods (Szirmai, 2009). In recent decades it has been countries focusing on

growing domestic manufacturing capacity, that have reaped the greatest developmental

gains from rapidly expanding increases in global merchandise trade (UNCTAD, 2011).

Manufacturing also offers unique opportunities to benefit from economies of scale,

opportunities that are not present in agriculture and traditional services (Ibid.; Szirmai,

2009). While shortages of land and resources tend to constrain the growth of agriculture and

extractive industries, manufacturing benefits from falling unit costs of production as it

expands, especially in today’s world where domestic market size is no longer an important

constraint (Ibid.). One consequence of this is that manufacturing has a higher potential for

employment creation relative to many other sectors and can play a vital role in rapidly

developing and urbanising countries by absorbing labour displaced from agriculture and

other activities (UNCTAD, 2011).



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Other reasons that have been given in the literature for why manufacturing is important for

economic development include a correlation between industrialisation and per capita

income in developing countries; a structural change bonus that derives from the higher

productivity associated with manufacturing; manufacturing’s perceived greater dynamism;

the special opportunity for capital accumulation that spatially concentrated manufacturing

provides (Szirmai, 2009); the denser cross-sectoral and interregional linkages fostered by

manufacturing; the higher skill levels of job opportunities in manufacturing; the greater

stability of prices of manufactured goods, which are less susceptible to long-term

deterioration; and the tendency of manufacturing to create a domestic middle class (Marti &

Ssenkubuge, 2009).

3. Promoting industrialisation in Sub-Saharan Africa

The importance of industrialisation as a driver of economic development has long been

recognised in Sub-Saharan Africa, and industrialisation strategies have formed a central pillar

of economic policy in the region for much of the last fifty years. Following independence in

the 1950s and 1960s, most governments in SSA adopted state-led development strategies

focused on promoting industrial development. Industrialisation and, in particular, the

growth of domestic manufacturing capacity, were considered vital for reducing dependence

on primary commodity exports to developed countries and for transforming African

countries from primarily agricultural to modern industrial economies, thereby raising

incomes and living standards. These aims underpinned the import substituting

industrialisation (ISI) policies adopted by many countries in SSA during the 1960s and 1970s

(UNCTAD, 2011.).

As in other parts of the developing world, ISI in SSA initially focused on the domestic

production of consumer goods that had previously been imported. The belief was that

existing domestic markets for these goods could be used as a basis for sustained

industrialisation which would in time progress to the domestic production of the

intermediate and capital goods required by domestic manufacturers (Ibid.). It was also

hoped that the substitution of imported goods with domestically produced goods would

promote self-reliance and prevent balance-of-payment difficulties. The implementation of

ISI generally involved significant government support for domestic firms and protection from



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foreign competition. Some of the measures used by SSA governments to nurture domestic

industries included high import tariffs and non-tariff trade barriers, licensing arrangements,

import duty drawbacks and rebates, subsidised interest rates, foreign exchange quotas,

provision of direct loans and direct government ownership of and participation in industry

(Marti & Ssenkubuge, 2009).

While ISI policies resulted in the development of domestic manufacturing industries in a

number of SSA countries and helped bring about an increase in the share of manufacturing

in the region’s gross domestic product (GDP) during the 1970s, growth in manufacturing

value added (MVA) across the region remained low. By the end of the 1970s it became clear

that industrial development through ISI was unsustainable, not least because the capacity

created by ISI policies often did not correspond to domestic demand and supply conditions

(UNCTAD, 2011). Two other factors hastening the demise of the ISI model in SSA were that

few domestic firms in the region became fully competitive in global markets, and that

foreign exchange earnings were largely neglected, resulting in a scarcity of foreign exchange

across the region.

In the 1980s and 1990s, the design of industrial policies in SSA countries was strongly

influenced by the Structural Adjustment Programmes (SAPs) promoted by the International

Monetary Fund (IMF) and the World Bank. These institutions saw the balance of payments

crises that affected many SSA countries in the early 1980s as resulting largely from poor

domestic policies. The SAPs made a number of recommendations aimed at restoring

equilibrium in the balance of payment and fiscal and monetary regimes of countries in SSA.

These included eliminating subsidies and controls, devaluing currencies, allowing market

forces to determine prices, liberalising internal and external trade and enacting tight

monetary and fiscal policies (Marti & Ssenkubuge, 2009). The adoption of these

recommendations led governments in the region to curtail specific policy efforts to foster

industrialisation.

It had been hoped that the competitive pressures unleashed by these policies would

stimulate economic activity, make domestic firms more competitive and thereby trigger

sustainable industrial development in SSA, but these goals largely failed to materialise, as

the growth of MVA in SSA during the 1980s and 1990s was again disappointing (Ibid.). In



267

addition, liberalisation and the phasing-out of support policies drove many domestic

manufacturing firms out of business, resulting in declining capacity in existing industries such

as textiles and leather, and de-industrialisation in many countries in the region (UNCTAD,

2011). Critics of the SAPs claim that the policies they inspired failed to boost industrialisation

in SSA, trapped the region in a low-growth trajectory and undermined economic

diversification efforts, leaving the region marginalised in world trade (Ibid.).

In recent years, the idea of national industrial development policies has re-emerged in SSA,

and a number of countries in the region have adopted policies aimed at boosting domestic

manufacturing capacity. There is also some evidence that governments have learned from

past failures with import substitution and structural adjustment policies, and are seeking to

adopt policies that are better suited to current needs and realities (Marti & Ssenkubuge,

2009). This new approach is important, especially given the poor performance of SSA

manufacturing sectors over the last couple of decades and the fact that the region remains

the least industrialised in the world.

4. The current state of manufacturing in the T-FTA countries

Overview

The current state of manufacturing in the 26 T-FTA countries is broadly representative of the

state of manufacturing in Sub-Saharan Africa as a whole. SSA remains the world’s least

industrialised region, contributing negligibly to global manufacturing output and global

exports of manufactured goods (AU, 2007). Furthermore, the region’s share of global

manufacturing value added (MVA) has declined in many sectors over the last couple of

decades (Marti & Ssenkubuge, 2009). While some of the T-FTA countries have experienced

significant growth in domestic MVA in recent years, others have exhibited signs of de-

industrialisation and an erosion of their domestic manufacturing base. The region as a whole

has been slow to industrialise and has largely failed to benefit from shifting patterns of

global manufacturing production.

In many T-FTA countries the contribution of MVA to GDP continues to be negligible.

Manufacturing in the region is also generally dominated by the production of low-

technology products such as clothing, textiles, leather, footwear and food products, and very



268

few of the T-FTA countries have been able to participate significantly in the medium and

high technology (MHT) segments of global manufacturing that have experienced such

explosive growth in recent decades (AU, 2007). This failure of T-FTA countries to leverage

gains from globalisation and new patterns of production and trade as well as their inability

to use their abundant natural resource as a platform for processing and significant local

value addition means that the majority of countries in the region remain heavily reliant on

the production and export of a narrow range of agricultural, fuel and mining products, which

in turn exposes them to the challenges associated with commodity booms and busts (Ibid.).

The poor state of manufacturing capacity and performance in the T-FTA countries is

reflected in the Competitive Industrial Performance (CIP) Index of the United Nations

Industrial Development Organisation (UNIDO). The index assesses the industrial

performance of individual economies using various indicators that reflect the ability of an

economy to produce and export manufactured goods competitively (UNIDO, 2011).

Unsurprisingly, SSA was the worst performing region in the 2009 CIP Index. Of the 15 T-FTA

countries included in the 2009 index, Swaziland was ranked the highest, at 48th out of 118

countries (See Table 1 below). The only other country ranked in the top half of the 2009

sample was South Africa, at 49th, while more than half of the T-FTA countries ranked in the

bottom 20% of the 2009 index. Interestingly, approximately half the T-FTA countries

included in the 2009 index improved on their ranking in the 2000 CIP index, indicating a

degree of variance in the recent industrial performance of individual T-FTA countries.



269

Table 1: T-FTA country rankings in the Competitive Industrial Performance (CIP) Index

Country CIP rank (2009)* CIP Rank (2000)** CIP Index (2009) CIP Index (2000)

Swaziland 48 58 0.186 0.243

South Africa 49 48 0.184 0.260

Egypt 62 50 0.157 0.259

Mauritius 70 55 0.144 0.247

Botswana 78 83 0.131 0.182

Rwanda 87 114 0.119 0.101

Madagascar 97 104 0.101 0.133

Uganda 98 116 0.100 0.094

Zimbabwe 99 77 0.100 0.200

Kenya 100 102 0.094 0.135

Eritrea 106 105 0.076 0.129

Tanzania 110 117 0.068 0.087

Ethiopia 111 122 0.068 0.044

Malawi 112 107 0.059 0.127

Sudan 118 100 0.035 0.139

Source: UNIDO, 2009; UNIDO, 2011 * The 2009 rankings covered 118 countries ** The 2000 rankings covered 122 countries

Stylised facts about manufacturing in the T-FTA countries

There is a large degree of heterogeneity in the economies of the T-FTA countries, and levels

of industrial development vary quite significantly from one T-FTA country to another. In

addition, a lack of detailed research makes it difficult to provide a comprehensive picture of

the state of manufacturing in the region. Nevertheless, this subsection attempts to use

United Nations and World Bank production and trade data to derive some fairly generalised

facts about the recent performance and current state of manufacturing in the T-FTA

countries. No attempt is made, however, to present a breakdown of the region’s

manufacturing sectors into particular industries or activities, instead manufacturing, itself, is

taken as the unit of analysis.



270

It must also be noted, that as is often the case when relying on African economic data, it is

important to avoid reading too much into the data. This is especially so in this context given

the significant discrepancies and gaps that are present in the datasets used, and the fact that

different measurement techniques mean that particular indicators are not always entirely

consistent across countries. At best this data provides a very broad outline of the state of

manufacturing in the region, one that can be used as the basis for further research and

investigation. For those not interested in the specifics of manufacturing performance in the

region, the rest of this section can be skipped.

The first general point to note about manufacturing in the T-FTA countries is that over the

last couple of decades, industrial capacity has increased in some countries while declining or

stagnating in others. As can be seen from Table 2, countries such as Uganda, Namibia and

Mozambique experienced significant growth in per capita MVA between 1990 and 2010,

while others, such as Congo (DRC) and Zimbabwe saw significant declines in per capita MVA

over the same period.



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Table 2: Manufacturing value added per capita (constant (2000) US$) in the T-FTA countries

Country MVA per capita

(1990)

MVA per capita

(2000)

MVA per capita

(2010)

Growth in MVA

per capita

(1990-2010)*

Angola 26 - 66 4.8

Botswana 124 147 171 1.6

Burundi 16 - 9 -2.9

Comoros 14 - 12 -0.9

Congo (DRC) 16 - 5 -5.7

Djibouti 37 - 20 -3.0

Egypt 177 265 369 3.7

Eritrea 9 18 9 0.2

Ethiopia 8 6 9 0.3

Kenya 49 43 47 -0.3

Lesotho 44 73 103 4.3

Libya 319 - 237 -1.5

Madagascar 30 27 25 -0.8

Malawi 21 18 17 -1.0

Mauritius 522 774 801 2.2

Mozambique 15 25 52 6.0

Namibia 92 180 348 6.9

Rwanda 56 27 17 -5.9

Seychelles 692 - 1 193 2.8

South Africa 551 521 581 0.3

Sudan 19 31 34 2.8

Swaziland 311 331 451 1.9

Tanzania 19 18 29 2.2

Uganda 9 22 26 5.6

Zambia 36 32 44 1.1

Zimbabwe 106 79 34 -5.5

Source: UNIDO, 2009; UNCTAD, 2011 * Compound Annual Growth Rate, 1990-2010



272

For the majority of T-FTA countries, however, MVA per capita, an important indicator of

industrial capacity, remains significantly below not only the global average, but also the

average for developing countries. Indeed, as shown in Table 3, the MVA per capita of SSA as

a whole is by some way the lowest of all developing regions.

Table 3: Manufacturing value added per capita (constant US$), select regions and countries

Region MVA per capita (2009) Country MVA per capita (2009)

World 1 107 Japan 7 929

Developed countries 4 712 US 5 334

Developing countries 437 Italy 2 894

East Asia & the Pacific* 724 Poland 1 351

Latin America & the Caribbean* 721 Turkey 950

Middle East & North Africa* 459 China 754

South & Central Asia* 111 Brazil 594

Sub-Saharan Africa 81 India 99

Source: UNIDO, 2011 * Excluding developed countries

The somewhat mixed industrial performance of T-FTA countries in recent years is also

reflected in Table 4, which shows that the industrialisation intensity – measured in terms of

MVA as a share of GDP – of domestic economies, has increased in some T-FTA countries over

the last couple of decades, while declining or stagnating in others over the same period.

Growth in industrialisation intensity, such as that witnessed in Lesotho and Namibia,

suggests progress in terms of industrial development, while decreases, such as those

experienced in Malawi and Mauritius, suggest a possible erosion of the industrial bases of

these economies.

From a historical perspective, the contribution of manufacturing to GDP in SSA peaked

around 1990, following two decades of growing industrial intensity (UNCTAD, 2011). During

the 1990s and 2000s, the share of MVA in the GDP of the region declined significantly (See

Table 5). In the T-FTA region as a whole, the share of MVA in GDP declined from 15% in 1989

to 13.6% in 2009, even though shares of MVA in GDP in certain countries within the T-FTA

region grew during the same period (See Table 4). While this apparent de-industrialisation of



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the region is mirrored in a similar decline in the relative importance of manufacturing in

other developing regions, such as Latin America and the Caribbean, and in the world as a

whole, it is particularly notable in the case of SSA, given that the share of manufacturing in

economic activity in the region is significantly lower than in any other region of the world.

Table 4: Manufacturing value added as a share of GDP in T-FTA countries (%)

Country 1989 1999 2009 Change 1989-2009

Angola 3.9 2.7 4.7 0.8

Botswana 5.1 4.8 4.3 -0.8

Burundi 13.3 - - -

Comoros 4.1 4.1 4.6 0.5

Congo (DRC) 8.4 5.0 5.5 -2.9

Djibouti - - - -

Egypt 14.7 17.6 17.8 3.1

Eritrea - 10.6 5.6 -

Ethiopia 7.4 5.1 4.7 -2.8

Kenya 10.9 10.3 10.1 -0.8

Lesotho 8.2 11.8 18.2 9.9

Libya - - - -

Madagascar 11.4 11.0 12.1 0.7

Malawi 14.9 12.2 9.8 -5.1

Mauritius 20.5 20.8 16.1 -4.4

Mozambique - 9.3 11.6 -

Namibia 4.7 4.3 12.9 8.2

Rwanda 13.8 7.5 6.4 -7.4

Seychelles 10.7 14.8 16.2 5.5

South Africa 18.5 16.6 15.0 -3.5

Sudan 7.5 8.3 6.5 -1.0

Swaziland 33.3 35.3 30.7 -2.5

Tanzania - 8.8 9.9 -

Uganda 4.1 6.9 6.6 2.4

Zambia 8.9 10.2 10.0 1.2

Zimbabwe 17.5 14.8 13.7 -3.7

Source: World Bank, African Development Indicators



274

When one excludes the T-FTA region’s two most important industrial economies, South Africa and

Egypt, the share of MVA in GDP in the T-FTA region (8.3%) is little over half the global share of MVA

in GDP, and not much more than a quarter of the share of MVA in GDP in East Asia and the Pacific

(Table 5). Clearly, manufacturing plays a much more limited role in the T-FTA countries than in other

developing countries. Given such low levels of industrial intensity, however, one would assume rising

shares of manufacturing in economic activity, yet over the last couple of decades the trend for the T-

FTA region as a whole has been a decline in the relative importance of manufacturing’s contribution

to GDP.

Table 5: Manufacturing value added as a share of GDP, select regions (%)

Region MVA share of GDP (1989) MVA share of GDP (2009)

T-FTA countries 15* 13.6**

T-FTA countries excl. South Africa & Egypt 9.5* 8.3**

East Asia & Pacific^ 30.8 30.5

Latin America & Caribbean^ 25.3 16.9

Middle East & North Africa^ 14 14.8~

Sub-Saharan Africa 17.8 12.7

OECD countries 22.8 15

World 23.2 15.8

Source: World Bank, World Development Indicators * All T-FTA countries excluding Djibouti, Eritrea, Libya, Mozambique and Tanzania ** All T-FTA countries excluding Burundi, Djibouti and Libya ^ Excluding developed countries ~ Source: UNIDO, 2011

Relatively small shares of MVA in GDP reflect low levels of industrial intensity in the T-FTA

region, and so too does the fact that the shares of MHT production in MVA in the T-FTA

countries tend to be much lower than in other developing regions. Table 6 shows that the

share of MHT production in MVA in T-FTA countries is much lower than the developing

country average of 43%. Of the 15 T-FTA countries included in the table, Botswana has the

highest share of MHT production in MVA (28.%), while only two other T-FTA countries (Egypt

and Rwanda) have shares above 25%. This suggests that the technological complexity of

manufacturing in the T-FTA region (and indeed in SSA as a whole) is much lower than in

other parts of the world.



275

Table 6: Medium and high technology production as a share of MVA, 2009

Country Share of MHT

production in MVA (%) Region

Share of MHT

production in MVA (%)

Botswana 28.6 World 55.8

Egypt 25.7 Developed Countries 63.6

Eritrea 12.0 Developing Countries 43

Ethiopia 7.7 East Asia & Pacific* 46

Kenya 5.2 Latin America & Caribbean* 33.3

Madagascar 3.3 Middle East & North Africa* 35.6

Malawi 9.2 South & Central Asia* 47.3

Mauritius 3.0 Sub-Saharan Africa 24.2

Rwanda 27.4

South Africa 21.6

Sudan 9.2

Swaziland 0.0

Tanzania 1.4

Uganda 10.6

Zimbabwe 30.6


The poor performance of manufacturing in the T-FTA countries is also evident when

assessing the contribution of the region’s economies to global manufacturing and global

trade in manufactured goods. The T-FTA region as a whole contributes just less than one

percent of global MVA and accounts for significantly less than one percent of global exports

of manufactured goods. As can be seen from Table 7, of individual T-FTA countries, only

South Africa (0.40%) and Egypt (0.39%) contribute significantly to global MVA, and the same

two countries are the only T-FTA economies with a notable share of global exports of

manufactured goods (0.38% and 0.15% respectively).

Given that SSA’s share of world MVA has also fallen in recent years, and that the region’s

share of manufactured exports remains the lowest in the world, it would appear that SSA

countries have not taken advantage of the various opportunities offered by new patterns of

global manufacturing and trade in manufactured goods (UNIDO, 2011). Indeed, it appears



276

that, with perhaps a few exceptions, T-FTA countries remain largely marginalised in global

manufacturing production and trade.

Table 7: T-FTA country shares of global MVA and global manufactured exports, 2009

Country Share of global

MVA (%)

Share of global

manufactured exports (%)

Botswana 0.00 0.03

Egypt 0.39 0.15

Eritrea 0.00 0.00

Ethiopia 0.01 0.00

Kenya 0.03 0.02

Madagascar 0.01 0.01

Malawi 0.00 0.00

Mauritius 0.01 0.02

Rwanda 0.00 0.00

South Africa 0.40 0.38

Sudan 0.02 0.00

Swaziland 0.01 0.01

Tanzania 0.02 0.01

Uganda 0.01 0.01

Zimbabwe 0.01 0.01

Source: UNIDO (2011)

Furthermore, as already alluded to above, MVA within the T-FTA region is dominated by

South Africa and Egypt, which have consistently contributed around 80% of the region’s

MVA over the last couple of decades (See Table 8). Interestingly though, while Egypt’s share

of T-FTA MVA increased from 25.2% in 1989 to 39.8% in 2009, South Africa’s decreased from

57% to just 40.1% over the same period.



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Table 8: T-FTA country MVA (constant US$ millions) and country shares in total T-FTA MVA (%)

Country MVA

(1989)

Share of

T-FTA* MVA

(1989)

MVA

(1999)

Share of

T-FTA^ MVA

(1999)

MVA

(2009)

Share of

T-FTA~ MVA

(2009)

Angola 331.1 0.9 242.3 0.5 1 136.6 1.7

Botswana 163.6 0.5 253.7 0.5 345.6 0.5

Burundi - - - - - -

Comoros 7.1 0.0 8.2 0.0 11.0 0.0

Congo (DRC) 690.6 1.9 230.2 0.5 - -

Djibouti - - 12.4 0.0 - -

Egypt 9 129.6 25.2 16 661.2 35.6 27 162.7 39.8

Eritrea - - 77.3 0.2 37.6 0.1

Ethiopia 449.6 1.2 392.4 0.8 773.1 1.1

Kenya 1 101.5 3.0 1 300.3 2.8 1 816.1 2.7

Lesotho 39.0 0.1 83.3 0.2 176.8 0.3

Libya - - - - - -

Madagascar 361.4 1.0 405.3 0.9 606.6 0.9

Malawi 175.3 0.5 208.8 0.4 252.1 0.4

Mauritius 520.9 1.4 872.3 1.9 1 009.6 1.5

Mozambique - - 392.8 0.8 987.8 1.4

Namibia 118.5 0.3 163.1 0.3 746.0 1.1

Rwanda 236.1 0.7 121.0 0.3 - -

Seychelles 39.4 0.1 87.1 0.2 105.3 0.2

South Africa 20 615.2 57.0 21 208.0 45.4 27 352.5 40.1

Sudan 562.4 1.6 945.4 2.0 1 483.9 2.2

Swaziland 313.4 0.9 477.2 1.0 565.6 0.8

Tanzania - - 853.1 1.8 1 845.9 2.7

Uganda 125.1 0.3 416.7 0.9 786.3 1.2

Zambia 270.5 0.7 318.1 0.7 521.7 0.8

Zimbabwe 929.3 2.6 1,006.3 2.2 495.2 0.7

Source: World Bank, African Development Indicators * All T-FTA countries excluding Burundi, Djibouti, Eritrea, Libya, Mozambique and Tanzania ^ All T-FTA countries excluding Burundi and Libya ~ All T-FTA countries excluding Burundi, Congo (DRC), Djibouti, Libya and Rwanda



278

The relative lack of capacity within the T-FTA region (and within SSA as a whole) for

exporting manufactured goods is also reflected in Table 9, which compares levels of T-FTA

country manufactured exports per capita with those of other economies and developing

regions. Of the 15 T-FTA countries included in the table, Botswana has the highest level of

manufactured exports per capita (US$1 667), and is also the only T-FTA country with a level

of manufactured exports per capita above the world level (US$1 490). In addition, only three

other T-FTA countries in the table (Mauritius, Swaziland and South Africa) have levels higher

than the developing country average (US$665), while a number of T-FTA countries have

levels significantly below the level of Sub-Saharan Africa as a whole (US$98), which is by far

the lowest of all developing regions. It is notable too, that of the four best performing T-FTA

countries in the table, only one (South Africa) has a population of over three million.

Table 9: Manufactured exports per capita (current US$)

Country Manufactured exports

per capita (2009) Region/Country

Manufactured exports

per capita (2009)

Botswana 1 667 World 1 490

Egypt 182 Developed countries 5 927

Eritrea 1 Developing countries 665

Ethiopia 2 East Asia & the Pacific* 1 209

Kenya 56 Latin America & the Caribbean* 767

Madagascar 40 Middle East & North Africa* 639

Malawi 13 Sub-Saharan Africa 98

Mauritius 1 265 Japan 4 133

Rwanda 13 US 2 625

South Africa 743 Italy 6 293

Sudan 8 Poland 3 146

Swaziland 905 Turkey 1 143

Tanzania 27 China 860

Uganda 25 Brazil 494

Zimbabwe 65 India 124

Source: UNIDO, 2011



279

The data presented in Table 10 suggests that manufactured exports comprise a very

significant share of total exports from T-FTA countries, representing more than 90% of total

exports from Botswana, Mauritius and Swaziland, and more than 50% from at least five

other T-FTA countries. While these figures may appear dubious given much of the foregoing

analysis, they could be explained by the categorisation of processed and semi-processed

natural resources (such as diamonds, copper and other metals) as manufactured goods.

What is clear, however, is that T-FTA manufactured exports are dominated by low and

medium-to-low technology exports. As also shown in Table 10, MHT products comprise less

than 50% of manufactured exports in all the T-FTA countries examined, and less than 20% in

six of the T-FTA countries.

Table 10: T-FTA countries manufacturing export performance, 2009

Country Manufactured exports as a

share of total exports (%)

MHT products1 as a share of


Botswana 93.4 6.2

Egypt 58.9 27.6

Eritrea 38.9 20.6

Ethiopia 12.5 44.1

Kenya 49.8 25.7


Malawi 16.4 18.9

Mauritius 91.8 8.7

Rwanda 51.7 36.0


Sudan 3.4 15.6

Swaziland 92.9 29.8

Tanzania 40.5 20.4

Uganda 52.8 31.4

Zimbabwe 39.3 15.5

Source: UNIDO, 2011

1 MHT products include machinery and equipment, motor vehicles, trailers and semitrailers, medical, precision

and optical instruments, chemical products and metal alloys.



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The fact that T-FTA manufactured exports generally reflect low technological complexity is

highlighted when one compares the data in Table 10 to that in Table 11, which displays the

share of MHT products in manufactured exports for a selection of developing regions and

other economies. Notably, none of the T-FTA country shares of MHT products in

manufactured exports are above the share for developing countries as a whole (55.8%) and

SSA’s share of MHT products in manufactured exports is higher only than that of South and

Central Asia.

Table 11: Medium and high technology (MHT) products as a share of manufactured exports, 2009

Region MHT products as a share of

manufactured exports (%) Country

MHT products as a share of


World 61.6 Japan 78.7

Developed countries 65.1 US 67.8

Developing countries 55.8 Italy 54.9

East Asia & Pacific* 62.3 Poland 59.2

L. America & Caribbean * 51.9 Turkey 42.3

Middle East & North Africa* 39.8 China 59.8

South & Central Asia* 26.7 Brazil 40.2

Sub-Saharan Africa 37.5 India 28.9


The low share of MHT products in the T-FTA region’s manufactured exports reflects a

continued reliance in the region (and in SSA as a whole) on resource-based manufacturing.

Table 12 shows that MHT manufacturing contributes less than half of MVA in every one of

the 15 T-FTA countries analysed, and less than 20% of MVA in all but three of them (Egypt,

South Africa and Tanzania). By contrast, resource-based manufacturing accounts for at least

one-third of MVA in all 15 T-FTA countries analysed, and more than two-thirds of MVA in

seven of them. The most important resource-based manufactures in the region, measured

by contribution to MVA, are food and beverages and non-metallic minerals (UNCTAD, 2011).

Resource-based manufactures also dominate the region’s manufactured exports, and this

explains the low share of MHT products in the region’s manufactured exports (Table 10).



281

This dependence on resource-based manufacturing and resource-based manufactured

exports is important as, although resource-based exports can contribute to economic

growth, they generally involve low value addition and make exporting countries vulnerable

to external price shocks (Ibid.). In addition, natural resource-based manufacturing sectors

tend to exhibit lower productivity growth and have fewer linkages with the rest of the

economy than other manufacturing sectors (Ibid.).

Table 12: Breakdown of manufacturing value added (MVA) in T-FTA countries, 2009

Country Resource-based

manufacturing (%)

Low technology

manufacturing (%)

Medium and high

technology

manufacturing (%)

Angola 46 41 12

Egypt 37 16 48

Ethiopia 67 20 13

Kenya 68 19 13

Lesotho 36 55 9

Libya 81 8 11

Madagascar 79 13 7

Malawi 38 48 14

Mauritius 35 48 16

South Africa 52 17 31

Sudan 84 9 7

Uganda 58 29 13

Tanzania 68 6 26

Zambia 74 11 15

Zimbabwe 44 44 12

Source: UNCTAD, 2011

As a source of employment, manufacturing varies in importance across the T-FTA region (See

Table 13). In countries such as Madagascar and Zambia the manufacturing sector accounts

for less than three percent of total employment, while in others such as Egypt (11.4%), South

Africa (14.3%) and Mauritius (19.7%), manufacturing plays a much more important role in

providing employment opportunities.



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Table 13: Manufacturing employment in select T-FTA countries

Country Total employment

(TE)

Employment in

manufacturing (ME)

Share of ME in TE

(%)

Year

(latest)

Botswana 539 150 35 973 6.67 2006

Egypt 22 507 000 2 567 000 11.41 2008

Ethiopia 31 795 890 1 529 376 4.81 2005

Lesotho 617 566 21 795 3.53 1999

Madagascar 9 570 397 267 521 2.80 2005

Mauritius 519 000 102 200 19.69 2008

Namibia 385 329 23 755 6.16 2004

South Africa 13 713 000 1 961 000 14.30 2008

Tanzania 17 944 560 565 129 3.15 2006

Uganda 9 260 000 564 900 6.10 2003

Zambia 2 812 428 77 515 2.76 2000

Source: ILO LABORSTA Statistical Database

Other characteristics of SSA manufacturing potentially applicable to the T-FTA countries

A number of further generalisations about manufacturing in SSA have been made and some

of these undoubtedly apply to at least some of the T-FTA countries. One such feature of SSA

manufacturing is that the region’s manufacturing sectors are characterised by large numbers

of small and micro firms operating alongside a few relatively large firms that account for the

bulk of MVA and exports (UNCTAD, 2011). The small average size of SSA manufacturing

firms is a problem given the fact that smaller firms tend to be less productive than large

firms and the fact that in SSA it is difficult for small firms to become medium-sized and for

medium-sized firms to become large firms (Ibid.).

Manufacturing firms in SSA tend also to have weak technological capabilities and are largely

users rather than developers of new technologies (Ibid.). This has been attributed to, among

other things, a lack of technological support and infrastructure for domestic enterprises and

a lack of investment in technological effort (Ibid.). The competitiveness of SSA

manufacturing firms is also negatively impacted by the lack of interaction and linkages

among SSA firms. Such linkages are usually beneficial in terms of favouring innovation,

learning and skills development and increasing the availability of skilled labour and other



283

inputs (Ibid.). Low technological capabilities and weak linkages make it difficult for SSA firms

to enter and compete in export markets for MHT manufactures.

A further feature of manufacturing in SSA is the important role played by industrial clusters.

Such clusters are considered to be particularly important in the context of SSA given the

region’s poor infrastructure and weak information systems (Ibid.). Evidence suggests that in

SSA clusters are quite heterogeneous in terms of internal structure, levels of industrial

development and the activities of the firms involved in the cluster (Ibid.). Furthermore, it has

been shown that for SSA firms, and particularly for small and medium enterprises,

participating in a cluster boosts a firm’s competiveness (Ibid.).

One final feature of SSA manufacturing is the high number of informal firms. This is relevant,

as informality has been shown to correlate with low productivity (Ibid.). Evidence from SSA

firms operating outside formal legal frameworks suggests that these firms do indeed have

lower productivity than small formal firms, due to such factors as irregular production, low

human capital, lack of access to external finance and a reliance on cash-based transactions

(Ibid.). The high prevalence of informality itself stems from a number of factors, including a

lack of other options for survival, such as jobs or social security nets, as well as the presence

of niches wherein informality can be used as a strategy to compete with formal firms (ibid.).

5. Prospects for industrialisation in the 21st century

Given the theoretical arguments for the importance of manufacturing for economic growth

and development, the empirical evidence for the positive role industrialisation has played in

the development processes of almost all industrialised countries and the relatively weak

state of the manufacturing sector in the T-FTA region (and in SSA as a whole), it would

appear that the promotion of industrial development should be a key element of T-FTA

countries’ attempts to generate sustained economic growth and development. There are,

however, various aspects of today’s global political economy that are markedly different

from earlier eras and which potentially constrain the ability of T-FTA countries and other

developing countries to promote industrialisation.

For instance, multilateral trade rules such as those established under the various World

Trade Organisation (WTO) agreements decrease the domestic policy space of developing



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countries wishing to use industrial and trade policy tools to promote industrialisation

(UNCTAD, 2011). WTO rules prohibit or greatly restrict the use of measures such as export

subsidies, import and export quotas and local content requirements, all of which were used

in the historical developmental processes of today’s industrialised economies.

Similarly, bilateral and regional trade agreements and, in particular, ‘North-South’

agreements, often contain provisions which go further than multilateral rules in terms of

prohibiting or constraining the use of industrial and trade policy tools. For example, under

proposed Economic Partnership Agreements (EPAs) with African, Caribbean and Pacific

countries, the European Union has sought to restrict the use of export taxes by these

countries, thereby preventing them from making use of a tool that can play a role in

promoting domestic beneficiation and a shift away from dependence on the production and

export of primary commodities.

Furthermore, at both the multilateral and the bilateral level, developing countries have been

placed under significant political pressure to lower their import duties, especially on

manufactured goods. This pressure reflects significant hypocrisy by developed countries,

many of which made use of high tariffs to protect infant industries during the early years of

their industrialisation efforts (Chang, 2001). By committing to bind maximum tariff levels for

imports of manufactures, developing countries have blunted yet another potential tool for

promoting domestic manufacturing capacity.

Another significant aspect of today’s global environment is the change in global

manufacturing patterns that has occurred due to trade liberalisation, lower transportation

costs and improved information and communication technologies. This has resulted in the

development of global or regional trans-border production chains which involve the various

activities that go into the production of a particular good being contracted out to factories

and offices across a number of different countries. While this increased internationalisation

of industrial production offers SSA countries the opportunity to develop domestic

manufacturing capacity by specialising in certain easy-to-break-into parts of the production

process, it also provides a challenge to these countries due to the competitive pressures it

has unleashed.



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The rise and growing role of developing countries such as China, Indonesia and Thailand,

which have had significant success in attracting the labour-intensive part of global value

chains, means that firms in SSA face significant competition in attempting to manufacture

for the global market. Not only do they have to compete on price, they also have to ensure

that their products are of sufficient quality and are produced and delivered to consumers on

time. Many feel that given the challenges they face with regard to international competition,

poor quality infrastructure and a dearth of competitively-priced services, SSA firms are

unlikely to be able to make significant headway in breaking into global industrial value

chains, at least in the near future.

Finally, growing concern over climate change is resulting in pressure being placed on

countries to adopt or switch to new, more climate-friendly technologies and production

methods. Manufacturing firms, which are significant direct and indirect (through energy

consumption) producers of greenhouse gases (GHGs), are being put under particular

pressure to reduce their carbon footprint through more environmentally friendly practices. If

these pressures result in firm obligations on climate change mitigation, this is likely to place

significant constraints on the ability of SSA countries to industrialise, as a shift to cleaner

technologies and processes is likely to involve significant direct and opportunity costs for SSA

economies (Woolfrey, 2012).

None of the above means that industrial development is impossible for countries in the T-

FTA region. While climate change mitigation obligations and the proliferation of global

production networks create challenges for the region’s economies, they also provided some

opportunities in terms of developing climate-friendly technologies and processes and

leveraging technological and other benefits from multinational contracting firms.

Furthermore, while multilateral trade rules and bilateral trade agreements greatly limit what

developing countries can do to foster industrialisation, they do not completely eradicate

domestic policy space, and a number of policy options are still available to these countries.

One potential strategy that has been considered in SSA is adopting a regional approach to

industrial development.



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6. Regionalism as a driver of industrial development

While at a fundamental level, policies and initiatives to promote industrialisation need to be

rooted in the conditions and particularities of individual countries and should not be

considered ‘one-size-fits-all’ measures, there is a growing consensus that regionalism can

play a positive role in the promotion of industrial development in SSA, especially given the

myriad challenges facing the region in developing internationally competitive manufacturing

industries (Draper, 2010). In particular, regional integration can support the industrialisation

processes of SSA countries through the creation of large, regional markets; the promotion of

a trade facilitation agenda aimed at lowering the direct and indirect trading costs for firms in

the region; and the provision of regional public goods through the pooling of capacities and

resources (Ibid.).

One of the biggest obstacles to industrialisation in Africa is the fragmentation of the region

into numerous small domestic markets which limits the ability of firms and industries in the

region to benefit from economies of scale, an expanded division of labour and increased

specialisation and diversification (Ibid.). The economic integration of the continent, or parts

thereof, into a large bloc should unleash benefits for the region’s economies in the form of a

more efficient allocation of resources and production inputs, the provision of a greater

variety of products and services for consumers and firms and an increased potential for

growth and capital formation through greater trade and investment within the bloc

(UNCTAD, 2009).

The formation of a large integrated trading bloc such as the T-FTA is also likely to result in

greater levels of incoming foreign direct investment due to the attraction of increased

market size, lower costs of production, greater availability of relevant factors of production

and the presence of a larger pool of consumers (UNCTAD, 2009). The environment for

industrial development would be further enhanced if the integration process involved the

liberalisation of the movement of capital, labour and other factors of production, which

would in turn lower costs for firms in the region (Ibid.).

The costs of doing business in the region would also be greatly lowered through a regional

integration process that included a broad and comprehensive trade facilitation agenda

which extended beyond a narrow focus on market access, and which sought to address the



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day-to-day constraints facing producers and traders in the region (World Bank, 2012).

Programmes to address particular constraints resulting from high transport costs, poor

physical and non-physical infrastructure, inefficient or corrupt border procedures,

burdensome regulation and political instability can and should be adopted through

cooperation at a regional or subregional level.

Regional agreement on services liberalisation can also play an important role in facilitating

increased intraregional trade by introducing an increased level of competition – and

therefore also efficiency – into domestic services sectors in the region. The high cost, limited

availability and poor quality of services in important sectors such as energy, transport,

finance and telecommunications, act as a significant constraint on both traders and

producers in the region. While many countries in the region may be wary of completely

opening up their domestic sectors to foreign competition, opening up to regional providers

can serve to increase competition and efficiency in domestic sectors, without leaving local

providers vulnerable to global competition.

If successful, such programmes would provide a significant stimulus to intraregional trade in

SSA, which is low in comparison to intraregional trade in other parts of the world, but which

could become an important driver for SSA development, due to the region’s rapidly growing

markets and the fact that intraregional trade in SSA is more diversified than the region’s

trade with the rest of the world (Woolfrey, 2012).

An enabling environment for production and trade requires the provision of numerous

public goods, especially those that address supply-side constraints such as inadequate access

to energy, finance, telecommunications and transport (Draper, 2010). Given the oft-cited

capacity constraints facing many governments in SSA, there is surely scope for the pooling of

resources at a regional or subregional level in order to ensure the provision of vital regional

public goods which would otherwise be undersupplied in the region.

For example, regional financing bodies such as the African Development Bank or

Development Bank of Southern Africa, which draw on financial contributions and human

capital from across the region, can be used to provide finance throughout the region,

thereby improving the ability of firms in the region to access much-needed credit. Similarly,

regional bodies could be used to bring about and regulate the harmonisation of domestic



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standards and regulations across the region. Given the heterogeneity of countries in the

region, it is likely that subregional ‘leaders’, such as South Africa, Egypt and Kenya are likely

to have to play a disproportionately large role in ensuring the provision of these regional

public goods. This does not mean, however, that such a regime would not be beneficial to

these countries.

7. Regionalism and industrial development in Africa

The idea that regionalism can provide an impetus for industrialisation in Africa is not a new

one, however. Over the last five decades the continent has played host to numerous

regional initiatives aimed at fostering the industrialisation of its economies. Indeed,

regionalism, which has been supported by virtually all African countries since the

independence era, has generally been pursued for two main reasons. The first is to enhance

political unity at a pan-African level, while the second is to foster structural transformation

and economic development through market integration (UNCTAD, 2009). In the early years

of independence, the political pan-Africanist aspect of regionalism predominated, but in

recent decades, the economic rationale for market integration has taken centre stage,

especially as the earlier initiatives had failed to yield a significant improvement in the

economic conditions of most African societies, and had failed to bring about sustained

economic growth (UNCTAD, 2009).

The period from the 1960s to the 1980s – sometimes characterised as constituting a specific

wave of regionalism in Africa – saw the establishment of several intergovernmental

economic cooperation organisations and institutions, many of which continue to exist to this

day, albeit often in an altered form. These included a number of regional economic

communities as well as initiatives focusing more specifically on industrialisation in Africa.

The Conference of African Ministers of Industry (CAMI), for example, was established in

1971 as a high-level biennial forum for debating industrial development issues relevant to

the African continent (Marti & Ssenkubuge, 2009). Similarly, in 1980 African states adopted

the Lagos Plan of Action (LPA) in response to the deteriorating economic situation in Africa

(UNCTAD, 2009). The general theme of the LPA was the promotion of African self-reliance

through regional cooperation, and one of its major goals was to transform the economic

structure of the continent (Marti & Ssenkubuge, 2009)



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This emphasis on industrial development through regional cooperation has continued

through such initiatives as the Abuja Treaty Establishing the African Economic Community

(1991), the launch of the Alliance for Africa’s Industrialisation in 1996 and the New

Partnership for Africa’s Development (NEPAD), adopted by African leaders in 2001 (Ibid.).

NEPAD specifically identified economic transformation through industrialisation as a critical

means for achieving economic growth and poverty reduction in the region (UNCTAD, 2011).

To further NEPAD’s aims, the African Productive Capacity Initiative (APCI) – an outcome of

various CAMI subregional conferences – was adopted by the African Union and NEPAD in

2004 as the overarching framework for industrial development in Africa (Marti &

Ssenkubuge, 2009). More recently, in 2008, African Heads of State adopted a Plan of Action

for the Accelerated Industrial Development of Africa (AIDA).

In addition to this plethora of initiatives at the continental level, many of Africa’s RECs have

devised their own strategies and initiatives for promoting industrial development, although

for the most part these protocols and plans have been poorly implemented, if implemented

at all, and have largely failed to yield any notable results in terms of the industrial

development of Africa’s subregions. The COMESA-EAC-SADC T-FTA represents current

moves to bring continental and subregional integration and cooperation initiatives closer

together through formal integration of the RECs themselves.

8. Promoting industrial development under the COMESA-EAC-SADC Tripartite FTA

The fact that regional approaches to promoting industrial development in SSA have been

adopted in the past and have largely failed to bring about significant industrialisation in the

region, suggests that optimism over the potential ability of the T-FTA to facilitate industrial

development in the region may be misguided, even if there is good theoretical support for

the idea that regionalism can benefit industrialisation. There are, however, some good

reasons why the approach adopted under the T-FTA integration process may prove more

successful than past initiatives in facilitating industrial development in the region.

The most notable of these relate to the multipronged nature of the integration process

envisaged for the T-FTA, which goes beyond a narrow focus on the removal of tariffs and

other barriers to intraregional trade in the T-FTA region. Instead, the T-FTA integration

process seeks to address various issues under the three ‘pillars’ of market integration,



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infrastructure development and industrial development. It is hoped that the inherent

complementarities involved in addressing these separate but related issues will ensure a

more successful and effective outcome for the T-FTA integration process itself.

There are numerous synergies that can be exploited as part of this process. For instance, the

promotion of industrial development can both complement and be complemented by

infrastructure upgrading (and other trade facilitation measures) and the improvements in

market access that are to come about through tariff liberalisation, the removal of non-tariff

barriers and the harmonisation of national standards and regulations among other

measures. Furthermore, by addressing supply-side constraints in addition to market-access

considerations, the T-FTA integration process is likely to maximise the benefits that accrue

from the establishment of an integrated regional market. After all, making it easier to trade

goods in the region is not going to be of much use to the region’s economies if they remain

unable to actually produce the goods demanded in the region.

The comprehensive end multipronged approach of the T-FTA therefore makes good sense,

and could serve to bring about many of the benefits of a regional approach to industrial

development highlighted above, including benefits relating to increased market size, more

competitive industries, greater economies of scale, the transfer of technologies and know-

how from more to less developed economies within the region, enhanced provision of

regional public goods, enhanced potential for economic diversification, lower transaction

costs, a more enabling business environment and a more efficient allocation of factors of

production. To see how such an approach might boost industrial capacity in the region, one

could examine how it might positively impact on existing manufacturing industries in the

region, such as the clothing and textiles industry.

Elsewhere in this volume Fundira (2012) has argued that while the clothing and textiles

sector in the T-FTA region could play an important role in a regional industrial development

process, due to existing comparative advantages in the region, the possibility of more

adequately supplying local needs and the potential for breaking into niche markets, the

sector currently faces a number of significant challenges. These include insufficient demand

within the region for basic textiles, a lack of knowledge about potential market

opportunities, expensive and unreliable energy, insufficient supply of clean water,



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inadequate transportation infrastructure, unavailability of finance capital and inappropriate

technology (Ibid.). Given these challenges, it perhaps comes as no surprise that what foreign

direct investment (FDI) there has been in the clothing and textiles sector in the T-FTA region

over the last couple of decades, has generally been attracted by domestic production

incentives, preferential access to EU and US markets or a combination of these factors.

A traditional regional integration approach focused mainly on lowering import duties on

intraregional trade would, at best, address only the issue of a lack of demand. It might do

this through the creation of a larger market, which would incentivise increased production

by local apparel producers who would, in turn, create greater demand for locally produced

textiles. These textiles may also be relatively cheaper due to lower duties on regional

imports. This approach, however, would do little to directly address other, potentially more

debilitating supply-side constraints on the clothing and textiles sector in the region, and

hence would, in all likelihood, be unable to stimulate significant growth in the sector.

The integration approach adopted under the T-FTA, however, addresses the issue of

fragmented domestic markets (through the market access pillar), but is also likely to address

almost all the other challenges facing the clothing and textiles sector. Under the

infrastructure pillar, for instance, the issues of expensive energy and insufficient supply of

clean water could potentially be addressed through the development of regional energy and

water infrastructure that allows the region to exploit and distribute its energy and water

more efficiently. Given the region’s coal and freshwater endowments, and the possibility

that exists for hydro and solar power generation in the region, there is significant potential

for regional cooperation on energy generation and water and energy distribution among the

T-FTA member states. Regional cooperation under the T-FTA to bring about the

harmonisation of existing national legislation on energy and water distribution could also

facilitate the development of a regional market for water and energy.

Similarly, the more comprehensive market access agenda envisioned under the market

access pillar of the T-FTA integration process could also serve to remove or minimise

constraints relating to accessing finance and investment capital and improving awareness of

regional and global market opportunities. This is especially likely to be the case if progress is

made in addressing behind-the-border issues such as competition, investment, services,



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harmonisation of standards and intellectual property rights, all of which are included in the

Draft T-FTA Agreement. Finally, the cooperation that will be necessary between T-FTA

member states in addressing market access and infrastructure challenges could also serve to

generate capacity and political support for the kinds of regional institutions, such as regional

financing and skills development organisations, that could further enhance the region’s

supply-side capacity.

Nevertheless, while the multipronged approach to regional integration adopted under the T-

FTA offers the potential to address most of the constraints on industrial development in the

region, the actual promotion of industrialisation under the T-FTA integration process is likely

to run into a number of challenges, including many of those that have bedevilled previous

attempts to use regionalism to promote industrial development in SSA.

First, the model of ‘closed’ regionalism envisioned for the T-FTA, whereby discrimination is

practised against non-members in the form of generally higher tariffs could result in trade

diversion effects swamping any benefits arising through trade creation in the region. Trade

diversion is especially likely given the dearth of internationally competitive firms and

industries in the region, which in turn could mean consumers in the region switching from

low-cost international producers to higher-cost T-FTA producers due to disparities in import

duties. Although this might serve to provide infant industry protection for some T-FTA firms

and industries, it is likely to entail costs for economies in the region and could also result in

the lowest-cost producer in the region gaining disproportionately from the economic rents

created through duty differentials.

The potential for an uneven distribution of the benefits of the T-FTA could also arise through

agglomeration effects unleashed by market integration in the region. The tendency for

industrial production to benefit from a clustering effect means that individual economies in

the region which are already more industrially and economically developed, such as South

Africa and Egypt, may also see the greatest increases in investment in industrial activity

arising from the T-FTA. This could then lead to an even greater disparity in development

levels within the region and could lead to significant tension among member states.

Questions also remain regarding the role of subregional ‘hegemons’ such as South Africa and

Kenya. If the T-FTA process is to prove a success, it is vital that these economies, which



293

dominate production and trade within their respective subregions, take an active role in

driving the T-FTA process and in promoting industrial development in the region. It is

possible, however, that conflict may arise as other members of the T-FTA perceive these

countries to be pushing their domestic interests at the expense of regional interests. Such

conflict was partly responsible for the downfall of the original EAC (Bach, forthcoming).

Finally, there are also reasons to suspect that grand political pronouncements and

agreements at the regional level may not be backed up by implementation and support at

the national level. This has been a prominent theme of regional integration efforts in

southern Africa over the last couple of decades, as the adoption of protocols covering

various issue areas has largely failed to result in effective action. With regard to industrial

development, the adoption of a regional approach to industrialisation which seeks to benefit

from differing comparative advantages found in the region may pose a threat to certain

domestic interests within the various economies in the region. Pressure from these groups

may result in calls for the protection of industries deemed ‘sensitive’ or ‘strategic’ as has

been witnessed in previous trade agreement negotiations involving countries in southern

Africa. Any deference made to these interests, however, is likely to reduce the expected

benefits of market integration under the T-FTA.

9. Conclusion

The T-FTA integration process is still at a very early stage, and it would therefore be

premature to attempt any sweeping judgements as to whether or not the T-FTA is likely to

be successful in facilitating significant industrial development in southern and eastern Africa.

Certainly, given the important role manufacturing has been shown to play in economic

development and the relatively undeveloped state of the region’s manufacturing sector, the

focus in the T-FTA integration process on addressing supply-side capacity is both important

and welcome.

One of the most obvious benefits that the T-FTA is likely to generate for manufacturing in

the region is the creation of a large regional market and all the benefits with which this is

associated. As previous and recent experience with regionalism in the region has shown,

however, a simple focus on creating a larger internal market is not likely to be sufficient to

spur industrial development in southern and eastern Africa. For this reason, the adoption of



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a three-pillar approach to integration is significant, as such an approach, by leveraging

developmental gains from the complementarities inherent in improving supply-side

capacity, upgrading infrastructure and removing impediments to trade, is likely to offer a far

more comprehensive approach to facilitating industrial development in the region.

Going forward there are several broad recommendations that can be offered to enhance the

likelihood of successful industrial development under the T-FTA integration process. First,

increased intraregional trade should not be seen as the ultimate goal of the T-FTA. Certainly,

increased intra-T-FTA trade could provide benefits to economies in the region, provided that

this results from genuine trade creation and not simply trade diversion. Furthermore, given

high economic growth rates and rapidly growing consumer markets in many countries in the

region and economic stagnation in many of the region’s traditional trading partners, an

increased focus on doing business in the region makes good sense.

Nonetheless, the small size and technologically backward nature of most economies in the

region mean that they probably have more to gain from interacting with larger, more

developed and more technologically advanced economies. Ultimately, while increased

intraregional trade can play an important role, the successful development of economies in

the region will require increased engagement with the global economy, especially in sectors

with positive learning and other externalities are prevalent. Fortunately, many of the

measures that will serve to increase intraregional trade, such as those addressing inefficient

customs procedures, poor infrastructure and burdensome domestic regulation, will also

serve to facilitate increased trade with economies outside the region, and will hopefully

bring about opportunities to break into global value chains.

Second, the nature of the likely integration process – which may eventually result in the

creation of a grand customs union or even a common market – will mean that firms in the

region will benefit from a certain amount of protection in the regional market vis-à-vis

competitors from outside the region, but it is important that this protection is accompanied

by measures to enhance the competitiveness of the region’s manufacturing firms and

industries.

One important lesson that has been drawn from the contrasting experiences of

industrialisation efforts in East Asia and Latin America is the important role of measures that



295

force firms to improve their competiveness. The protection provided to firms in Latin

America through ISI policies yielded few firms able to compete globally, at least partly due to

the fact that local firms could simply enjoy the rents provided by protection. In East Asia,

however, protection was accompanied by strict performance targets, such as export targets,

which forced firms to invest in their ability to compete at a global level. It is crucial therefore

that T-FTA manufacturing firms and industries are incentivised or forced to make the

necessary investments and efforts required to become competitive, and are not simply

allowed to benefit from protection rents.

Third, while focus should undoubtedly be maintained on promoting industrial development

in the region, it is important that countries in the region do not neglect their primary sectors,

and in particular, the mining and agricultural sectors. Given the comparative advantage

many countries in the region currently have in these sectors, maximising the gains from

these sectors could be an important way of creating the surplus which funds the

improvement of manufacturing capacity in the region. Furthermore, there are strong

linkages in the region between these primary sectors and manufacturing activities. Indeed, a

significant proportion of manufacturing in southern and eastern Africa involves the

processing of primary commodities grown or extracted in the region, and opportunities for

agroprocessing, minerals beneficiation and the development of industries using natural

resources as significant inputs are likely to play an important part in attempts to boost

industrial capacity.

Fourth, the T-FTA integration process must not become a top-down process driven solely by

politicians with little input from the private sector. Instead, the private sector must be

engaged at all levels and stages of the process as, ultimately, private sector actors know best

the obstacles – be they regulatory issues or infrastructural constraints – that impede the

development of productive manufacturing industries in the region. Without the buy-in and

active participation of the private sector it is unlikely that the desired results of the T-FTA

integration process will materialise. Unfortunately, past regional integration efforts in

southern and eastern Africa have not always succeeded in ensuring proactive private sector

engagement.



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Ensuring an effective platform for private sector involvement in the T-FTA is complicated by

the fact that politicians are unlikely to be keen on ceding influence to private sector

representatives. Nevertheless, it is crucial that some form of dialogue is maintained between

the political drivers of the T-FTA process and business representatives. This could perhaps be

achieved through the formalisation and prioritisation of regular meetings between the two

groups. In addition, the deliberations and outcomes of these meetings should be well

publicised by the region’s media so as to educate and generate interest among private

sector agents throughout the region.

Finally, it is vitally important that the proposed measures, agreements and protocols that are

developed to promote industrial development under the T-FTA integration process are

actually implemented, and that there is a significant level of integration and synergy

between regional measures and national initiatives in the T-FTA countries. Too often in the

region, regional protocols and plans concluded at a political level have not been followed up

by actual implementation, rendering them pointless. At times it may also have been the case

that certain countries involved did not support the regional plans, but also did not want to

be seen as being obstructive. Agreeing and signing protocols only to ignore them later offers

an easy option for governments in such a situation.

One way to attempt to avoid repeating such scenarios would be to ensure a pragmatic and

realistic approach to regional plans, one which does not seek to create an institutional

framework which the region does not have the capacity to maintain, and which avoids

devoting too much time and effort to attempting to resolve highly contentious issues. One

likely area of contention is that of the exclusion from tariff liberalisation of so-called

‘sensitive products’. The multitude of exclusion clauses for such products in the individual

COMESA, EAC and SADC FTAs suggests that certain countries in the region will lobby to have

particular industries excluded from liberalisation under the T-FTA. While such exclusions

would obviously detract from the benefits of the T-FTA, the effort required to convince

countries of this may stall political momentum for the T-FTA, and may be better spent on

potential areas of cooperation and agreement. Whether such areas of cooperation and

agreement actually exist in the region, however, is at this stage not entirely clear.



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Ultimately, the T-FTA can only do so much to directly address the constraints facing the

development of competitive manufacturing industries in the region. Successful industrial

development in the region will also require appropriate national industrial policies and

initiatives, as well as regional cooperation on issues and processes not covered by the rules-

based regime to be established under the T-FTA.

UNCTAD (2011) identified four major constraints on industrial development in the region:

small domestic markets, poor infrastructure, low human capital and a limited

entrepreneurial base. Through its market-access pillar, and, in particular, the removal of

intraregional tariffs and non-tariff barriers and the harmonisation of the region’s rules of

origin regimes, the T-FTA integration process will serve to address the issue of small markets

through the creation of a larger, regional market.

It would also appear that the infrastructure pillar of the T-FTA integration process has been

proposed precisely so as to address constraints relating to the poor quality of the region’s

infrastructure. It is likely to be successful in this regard if it is complemented by a services

agenda which unleashes the potential for more competitive provision of important services

such as transport, energy and telecommunications in the region. Nonetheless, it is not clear

whether and how actual infrastructural projects will be covered by the formal legal

framework of the T-FTA or if they will instead simply be promoted as instances of regional

cooperation in the spirit of the T-FTA. Certainly, national initiatives will still play an

important role in the region’s infrastructural development programme, especially where the

infrastructure to be developed is country specific.

Similarly, constraints relating to low human capital and a lack of entrepreneurship in the

region are probably best addressed through national policies, and especially national

educational policies. There is, however, scope for supporting these national efforts through,

for example, regional agreements on the movement of persons, services liberalisation and

the removal of restrictions on investment, as these sorts of initiatives are likely to facilitate

the diffusion of skills and know-how.

To conclude, much of the impact the T-FTA will have on industrial development will likely be

through policies, initiatives and measures which create a more enabling environment for

industrial development in the region. To be sure, the T-FTA integration process can generate



298

some direct and positive impacts on the region’s supply-side capacity, but its major role will

be to improve the conditions for the effective implementation of national industrial policies.

It is important, therefore, that governments in the region do not use the T-FTA as an excuse

to neglect their responsibility to ensure appropriate and effective national policies.

If these and other similar points are heeded, there is every chance that the T-FTA could have

a very positive effect on the manufacturing capacity of southern and eastern Africa.

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services. Washington D. C.: World Bank.

Chapter 8 – On enhancing support to existing manufactures within the Cape to Cairo Tripartite region


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Chapter 8

On enhancing support to existing manufactures within the Cape to Cairo Tripartite region

Taku Fundira

Introduction

The world trading patterns have changed remarkably over the past few decades. As tariffs

are being phased down through trade liberalisation and countries are becoming more

globalised, we are increasingly noticing the influence on the structure of the world economy

by some major emerging markets, namely Brazil, India and China, from a developing country

perspective, but also the rise of Russia (since the collapse of the Soviet Union).

The trading environment has become ever more competitive and for countries to compete

in a globalised environment calls for the development and establishment of industries that

are globally competitive. The use of the tariff as an instrument for industrial policy is

increasingly becoming less important as countries continue to liberalise under the auspices

of the WTO Agreement or through bilateral and regional Free Trade Arrangements (FTAs).

These developments call for countries to utilise alternative strategies that from a global

perspective are not protectionist and yet promote competitiveness and efficiency.

In Africa, where poverty and unemployment remain a major constraint to economic

development, there is a growing awareness that in order for poverty and unemployment to

be reduced, there is a need not only to move away from dependence on primary

commodity exports and to focus on industrialisation, but also to promote economic

development in general. Agriculture, which is currently the largest sector in Africa, is facing

dwindling prospects, especially in the face of global climate change. As a result, African

agriculture is likely to be at a disadvantage compared to other major regions, mainly

because the majority of countries already experience hot weather and further warming will

most likely affect productivity and output. This negative impact, however, does not rule out

the importance of the sector’s ability to promote and boost any economic development

strategies that involve the promotion and development of a competitive manufacturing

base.



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In southern and eastern Africa, discussions on regional industrial strategies are ongoing.

More specifically, in June 2011, member states of the Common Market for East and

Southern Africa (COMESA), the East Africa Community (EAC), and the Southern

Development Community (SADC) launched negotiations towards the establishment of a

grand Free Trade Area. The intention behind this grand FTA commonly referred to as the

Tripartite FTA (T-FTA) is to allow the duty-free, quota-free flow of goods and services, and

the free movement of business people between the countries in these regions. The

members adopted a developmental approach to the integration process that anchors on

three pillars, namely industrial development, market integration and infrastructure

development.

The objective of this chapter is to highlight the importance of enhancing and supporting

existing manufactures through regional industrial development and increased intraregional

trade, within a free trade area.

Intraregional trade is most commonly analysed from two perspectives, namely by

estimating indices of revealed comparative advantage (RCA) and intra-industry trade (IIT)

(Visser, 2001). In this chapter IIT is used to assess existing levels of intraregional trade

between T-FTA member states.

We use the Grubel-Lloyd (G-L) index of intra-industry trade to identify manufacturing

industries within the Tripartite region where there is relatively significant intraregional intra-

industry trade.1

The motivation for using IIT is based on the premise that there will be less domestic

opposition to a regional industrial development strategy when IIT is high because the T-FTA

formation is less likely to result in the elimination of firms or industries within member

states, contrary to the case where trade is primarily inter-industry.2 In a nutshell, with IIT it

is easier to transfer displaced resources within the firm or industry than between industries.

1 We are cognisant of the fact that the GL indicator is a share measure and does not necessarily imply high

intraregional trade; we therefore put threshold levels in place to indicate relative significant trade as explained in the methodology section of this chapter. 2 Further discussion and support of this notion is discussed further in sections to follow.



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Based on the IIT indicators we focus on two major sectors in the region and look at the

current constraints and support being provided to these sectors and identify potential areas

of support and ways to mitigate existing constraints. We argue that regional industrial

development strategies should not ignore but focus on existing industries which have either

been receiving support or have competed without support, while also exploring niche

markets.

The rest of the chapter is structured as follows. We first look at the issue of why countries

industrialise. We then take a focused approach and discuss how industrialisation in Africa

and within the T-FTA is being handled. This is followed by a discussion on IIT and its

relevance to Africa and the T-FTA. This then leads into the analysis with the use of IIT to

identify specific industries for consideration within the T-FTA. After identifying these

industries as highlighted by IIT indicators, we take a case-study approach to look at two

industries whose selection is based on the number of countries that have existing supply

capability that T-FTA members can promote in their quest to industrialise. The chapter ends

with some concluding remarks.

Why industrialise?

According to Altman and Mayer (2003), industrial development is the primary foundation

upon which advanced societies have been built and is one reason why industrial policy has

become a major preoccupation of policy makers in developing countries.

A review of industrial policy literature indicates that the topic has become a popular

concept in discussions on economic development, but there seems to be no agreement on

what it means. The reason for this is because the term is used differently according to the

specific economic challenges being confronted, policy approaches being promoted and the

ideological leanings or analytical strategies of the policy makers (Altman and Mayer, 2003).

Rodrik (2004) uses the term ’industrial policy’ to apply to restructuring policies in favour of

more dynamic activities generally, regardless of whether those are located within industry

or manufacturing.

The presence of market failures which manifest through imperfect competition, public

goods, and externalities are behind the justification for intervention (ul Haque, 2007).



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According to Shapiro (2005) high productivity growth was considered the basis of rising per

capita income, which was only attainable through industrialisation. Development

economists in their arguments to promote government intervention, according to Shapiro,

focused on a ‘missing factor’ (viz. capital, technology, entrepreneurship) which if left to

market forces alone was unlikely to emerge. This then would require eliciting the missing

elements for growth.

According to Kapunda (2005), there are several advantages of industrialisation. These

include the outward movement from the primary sector and focus on export diversification

as a measure to reduce risk and vulnerability to long-term deteriorating commodity terms of

trade and the associated loss in real income. Also, unlike the primary sector, the

manufacturing sector has more forward and backward linkages with other sectors,

especially agriculture and mining, while significantly contributing to employment creation

provided the right approach is adapted. There is also the possibility of technological transfer

and adaptation and creation of technology.

Africa’s approach to industrial development

A look at Africa’s previous attempts at industrialisation reveals that they failed for many

different reasons. The focus on domestic markets which are too small and fragmented and

exhibit very slow growth reduced the viability of such a strategy. Furthermore, an oversized

state apparatus, corruption and inefficient industries were widely attributed to the failures

of these policies. According to Collier (2009), industrialisation for Africa will only be feasible

if it succeeds in breaking into global markets. This is something which African countries over

time have been prioritising through regional initiatives to boost productivity growth –

something which is considered a key determinant of a country’s living standards and its

ability to compete in the world market.

For instance, in southern and eastern Africa, discussions on regional industrial strategies are

ongoing. Earlier in March 2012, the Southern African Customs Union (SACU) member states

(Botswana, Lesotho, Namibia, Swaziland and South Africa) announced that they were

developing a regional framework for cross-border cooperation on industrialisation. The

framework targets eight sectors which are clothing and apparel, agro-processing, mineral



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beneficiation, leather and leather products, automotive components, renewable energy,

arts and crafts, and support services including infrastructure, transport and logistics, and

skills development. This approach of selective industrial policy (i.e. policies intended to

promote specific industries versus general policies to promote industrialisation) has serious

economic and political implications.

As noted earlier, the traditional rationale for intervention has been made in terms of

‘market failures’ that arise when competitive markets either do not exist or are incomplete,

in situations, for example, when there are information asymmetries, scale economies, or

externalities. The Economist (2010) notes that the topic remains controversial. While some

successes have been achieved, there are also many expensive failures as policies are usually

designed to support or restructure old sectors (such as textiles and clothing) or promote

new ones (such as the automotive secto)r. Success has been limited in both instances and

governments rarely evaluate the costs and benefits properly.

Examining these and other experiences can provide important input to the debate about a

regional industrial policy framework, both in SACU and also in the envisaged T-FTA. SACU’s

and more generally the T-FTA’s challenges in the quest for a regional industrial policy

framework are compounded by the asymmetry in industrial development among the

member states. For instance South Africa has clear industrial development interests to

protect, while the smaller countries have very limited industrial development and limited

prospects for developing a diversified industrial base. South Africa views the import tariff as

a key instrument of industrial policy, while for the others the import tariff is associated with

government revenue generation. What would define a regional industrial strategy for such a

polarised region? Success will depend on these and other considerations.

On enhancing and support to industrialisation within the T-FTA

We note that economic diversification has become an integral part of most trade and

industrial policy strategies being adopted by developing countries as a means to enhance

their competitiveness in the global economy. By devising and adopting effective strategic

trade policies, a country could engineer its economy into international competitiveness. It

should be noted, however, that increasing international competitiveness does not



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automatically guarantee access to markets for certain sectors if one has to consider the fact

that there may be existing global networks or that markets may be sewn up.

Within the context of regional integration the T-FTA provides an environment conducive to

increased intraregional trade and to the promotion of industrialisation. Regional integration

has been seen to be an important aspect of any economic growth and diversification

strategy for Africa, as the countries share certain geographic features, and because of the

small size of the domestic market. Thus, regional integration forms an integral component

for the member states as they focus more on the diversification of the export base through

increased specialisation and the production of high-value-added goods and the promotion

of intraregional trade. Indeed, according to the World Economic Forum (WEF) (2011),

African countries have much to gain by diversifying exports and by further opening up

regional trade. Benefits that accrue to diversified economies include less exposure to

external shocks, an increase in trade, higher productivity of capital and labour, and better

regional economic integration (UN, 2010).

The United Nations (UN) (2010) notes that economic diversification in Africa can deliver the

improved utilisation of the continent’s vast agricultural and mineral resources. Africa’s

economic prospects can be greatly improved through minerals processing, the expansion of

manufacturing activities, the production and export of nontraditional agricultural and

industrial products, and the further development of services sectors such as tourism. To

capitalise on these opportunities, however, African countries must become integrated into

the world economy and develop stronger and more sophisticated export sectors in order to

maintain and achieve sustained growth.

Trade theory dictates that in the final stage of economic diversification, specialisation is

likely to take place within sectors, leading to productivity gains through the exploitation of

increasing returns to scale. Access to a larger markets permits firms to increase plant size

and/or engage in more plant specialisation, resulting in longer production runs and thus

reducing unit costs. This gives rise to intra-industry specialisation and trade, and more

products being produced profitably, in this way generating export diversity (Petersson,

2005).



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Intra-industry trade loosely defined as the simultaneous import and export of goods within

the same industry becomes important and may be useful in enhancing the objectives of the

industrial development pillar of the T-FTA. According to Visser (2001), intra-industry and

inter-industry specialisation is a result of liberalisation through regional integration. Visser

notes that while in the long run inter-industry specialisation may be efficient, it produces in

the short run serious dislocation of employment and production with significant adjustment

and transaction costs associated with inter-industry relocation. By contrast, with intra-

industry specialisation, firms and plants can cease producing a particular line of goods and

start producing a closely defined variety more easily than to move to another type of

industry. Furthermore, there are relatively fewer dramatic changes in income distribution

arising from trade liberalisation under conditions of intra-industry specialisation (Visser,

2001).

In the context of the T-FTA, based on findings from a study by Peterson and Thies (2011),

the authors note that it is easier for states to form preferential trade agreements if bilateral

intra-industry trade is used as a determinant because:

(1) firms benefit from larger markets and increased efficiency, potentially gaining relative

to firms in states left out of the agreement;

(2) intra-industry trade suggests similar productivity, such that firms in members states

are less likely to be harmed by preferentially reduced trade barriers; and

(3) strategic considerations are lessened in the absence of inter-industry specialisation.

In the current environment we note, based on earlier work undertaken on the topic, that IIT

levels of T-FTA members states are relatively low compared to other regions. Table 1 below

summarises the results from the analysis that was conducted. The IIT levels range from a

mere 1% (Djibouti) to a maximum of 37% (South Africa) and averaging 14% (Sandrey and

Fundira, 2012).



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Table 1: Weighted intra-industry trade indices for manufactures for T-FTA countries and

comparator countries (total trade).

Country 2005-2007 2008-2010

Country 2005-2007 2008-2010

Angola 0.05 0.08

Seychelles 0.31 0.19

Botswana 0.09 0.21


Burundi 0.2 0.07

Sudan 0.08 0.04

Comoros 0.07 0.05

Swaziland 0.2 0.16

Djibouti 0.26 0.01

Tanzania 0.09 0.12

DRC 0.03 0.05

Uganda 0.18 0.24

Egypt 0.28 0.3

Zambia 0.06 0.12

Eritrea 0.06 0.08

Zimbabwe 0.13 0.19

Ethiopia 0.03 0.04

Kenya 0.25 0.21

Comparator developing countries

Lesotho 0.07 0.02

Brazil 0.37 0.36

Libya 0.15 0.16

China 0.4 0.4


India 0.4 0.42

Malawi 0.07 0.07

Mauritius 0.16 0.17

Comparator developed countries

Mozambique 0.09 0.1

EU 0.87 0.86

Namibia 0.16 0.16

US 0.57 0.62

Rwanda 0.06 0.06

Source: ITC TradeMap Database and author’s calculations

In trade literature, the amount or level of IIT which a country has is often taken as a

measure of ‘diversity; degree of specialisation; degree of technical sophistication of its

industrial sector’ (Havrylyshyn and Kunzel, 1997). Thus, within the T-FTA if we are to

consider the level of IIT as indicative of the level of industrial development, the data

confirms that T-FTA countries as a group do not have highly advanced industrial bases.

However, this does not imply that there is virtually no industrialisation taking place as some

countries have continued and continue to develop their manufacturing capability on a

sector-by-sector level. Analysing IIT in Africa is therefore imperative as this may be an area

where substantial benefit could be reaped if properly nurtured and could assist in expanding

regional trade. We support this notion proposed by Musonda (1997) arguing that through



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‘horizontal and vertical integration of existing infrastructure and trade flows’, IIT is a

potential avenue for increased sourcing from amongst T-FTA members in the region.

Within this context, when considering a regional industrial strategy, existing manufacturing

industries with relatively high levels of IIT3 amongst the T-FTA countries should be

considered and measures identified to enhance the development of such industries into

internationally competitive industries. The reasoning behind this notion is based on the idea

that:

a) as already noted, the particular industries will not require huge initial capital outlay or

protection at the regional level; and

b) with appropriate policy and support measures, these industries can develop and grow

into globally competitive industries.

The analysis which follows therefore aims to identify such industries where there is high IIT

at the regional level and profile two main industries in which the majority of countries

exhibit high IIT. In the next section we provide a brief discussion on measuring IIT using the

GL index and on the shortcomings of this particular index.

Measuring intra-industry trade4

A number of attempts have been made to find a suitable method of measuring intra-

industry trade and these have been discussed at length in the literature. Grubel and Lloyd

were the first economists to seek to measure the significance of intra-industry trade. They

measured IIT as the proportion (percent) of a country’s total trade in the products of a given

industry which was matched or balanced between exports and imports, and the Grubel-

Lloyd (G-L) Index remains the main formula for measurement of this trade in similar items. It

can be used to examine just individual trade lines at a given degree of disaggregation,

sectors of these trade lines, or the more aggregated index for total trade.

The Grubel-Lloyd Index varies between zero (indicating no intra-industry trade) and one

(indicating absolute intra-industry trade). However, the results that one finds for the Grubel-

Lloyd Index depend to a large extent on the degree to which one’s data is disaggregated,

3 See methodology section on how we determined level of IIT and export capacity of a country.

4 Unless otherwise stated, this section draws on a previous publication by Sandrey and Fundira (2012).



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with more disaggregation leading to less evidence of intra-industry trade. It should,

however, be noted that this measure is principally a share measure. Unless the share is

decomposed it is not directly connected with the level of gross trade in the industry. A high

IIT therefore does not necessarily reflect a high level of gross trade in the industry (Visser,

2001).

One major constraint is that the G-L Index measures trade in specific industrial sectors:

trade is generally measured by trade classification while industry is measured by industry

classifications. The standard trade classification is the internationally accepted and applied

Harmonised System (HS) which can be systematically disaggregated into more and more

specific components, while other classification systems such as Standard International Trade

Classification (SITC) and the International Standard of Industrial Classification (ISIC) apply to

industry sectors or economic activities of production and can similarly be disaggregated.

There are concordance tables to assess the transformations from SITC/ ISIC to HS codes

used in this chapter although this method is not perfect.



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To highlight how the Grubel-Lloyd index of IIT is computed we make reference to Petersson

(2005) in an excerpt of his explanation highlighted in Box 1 below.

Box 1: Annotation of the Grubel-Lloyd Index

For an individual product group or industry “i” the share of Grubel-Lloyd (GL) IIT index is formulated as

GLi = 1- (|Xi - Mi| / (Xi + Mi)) (1)

where Xi and Mi respectively denotes, for the exports and imports of industry “i”.

With balanced trade (i.e. Xi = Mi) GLi would equal 1. On the other hand, if all trade was one-way, GLi would equal zero (i.e. either Xi = 0 or Mi = 0). Thus, the closer GLi is to 1 (i.e. Xi = Mi), the more trade in industry “i” is intra-industry trade. The closer GLi is to zero (i.e. either Xi = 0 or Mi = 0), the more trade in industry “i” is inter-industry trade. Therefore the index of intra-industry trade takes values from 0 to 1 as the extent of intra-industry trade increases (i.e. 0 ≤ GLi ≤ 1).

The GL index in equation (1) can be modified to obtain the average level of intra-industry trade for a country j. Grubel-Lloyd proposed calculating a weighted mean, using the relative size of exports and imports of a particular product group as weights. The formula written as:

GLj = Σ GLi (Xi + Mi) / Σ (Xi + Mi) (2)

where the sigma (Σ) refers to all the GL is weighted by total trade (X + M) of that industry (or product group). “J” stands for the jth country and “i” is the ith of “n” industries.

For simplicity, the Grubel-Lloyd measure may be written as follows:

GLj = (Σ (Xi + Mi) – Σ |Xi - Mi|) / Σ (Xi + Mi) (3)

or

GLj = 1 – (Σ |Xi - Mi| / Σ(Xi + Mi)) (4)

for ‘n’ set of industries.

Source: Petersson (2005)



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The analysis – methodology and data issues

Our analysis will concentrate only on manufactures/value added products trade due to the

fact that countries are increasingly aiming to diversify exports and move away from trade in

primary-based products with their relatively low value-addition contributions to the

economy. We use the G-L (IIT) Index as a proxy for intraregional trade of manufactured

products.

Trade data used in the analysis is sourced from the International Trade Centre (ITC)

TradeMap database at the four-digit Harmonised System5 (HS) of classification. As we are

concentrating the analysis on manufactured products we use the International Standard for

Industrial Classification (ISIC) Revision 4 codes that are translated to the HS system to guide

us in the selection process of manufactured goods only. The ISIC is a UN classification

system which is widely used in classifying data according to kind of economic activity in the

fields of production. Translation or concordance tables were developed and used to identify

which products fall under manufacturing within the HS system.

After identifying manufactured products in the HS system, the data is then analysed at a

very aggregate level, and to get an initial broad overview of trade flows, the data at the

Harmonised System (HS) 2 level is aggregated into the 23 Section classification. In effect, the

99 chapters at HS2 level are aggregated into 23 sections. For example, Section 1 (C01)

represents commodities classified in chapters 01 – 05 of the HS classification. This reflects

the broader picture in terms of trade flows, which allows identification of major

commodities for further analysis. The reasoning behind aggregating data is that at this level

we are able to identify sectors within the T-FTA where IIT is relatively significant. We

reiterate the fact that only products that are classified as manufactured products are taken

into account; thus, at such a very aggregate level of analysis, this fact needs to be borne in

mind.

We note the limitations of trade data, and, for this section more especially, access to

reliable African trade data, as it does impact on the analysis. Furthermore, as trade data

5 The Harmonised System is a merchandise trade classification that operates in a sequentially more detailed

level from internationally harmonised (hence the name) HS2 to 4 and 6 digit levels, and often down to even HS10 for individual countries.



312

may be distorted or simply not reported for a given year, we take the averages for the years

where data was available; in this case the majority had available data for a three-year period

(2008 –2010, with 2010 the latest available year for all countries under review). We must

therefore treat the analysis as indicative of trade flows over the review period. Only data

from 20 countries out of the 26 countries was used in the analysis.

Threshold levels were considered before aggregating the data in the analysis to emphasise

economic significance of particular products. To narrow down the product lines of economic

significance, only export products with an average value of US$0.5 million at the HS4 level

were considered in the analysis. The use of export values on threshold levels was simply as a

measure of a country’s ability to supply. Furthermore, another threshold was applied to the

G-L Index. In this case, to identify products with significant IIT, the threshold of products

with a G-L (IIT) Index greater than 0.5 (50%), (i.e. IIT > 0.5) was selected to indicate relatively

high IIT. Once these thresholds were in place, data was then aggregated as discussed above.

We would caution that this analysis is one that, while perhaps providing some useful

pointers, does have limitations. These limitations include the fact that there may be non-

tariff barriers operating; tastes and preferences may be a factor; and in that product at a

detailed level the trade classifications may not be strictly comparable. Furthermore, IIT

doesn’t account for potential IIT if barriers are removed because it looks at existing IIT. Thus,

use of IIT is part of the bigger picture of identifying sectors/industries for inclusion within a

regional industrial development strategy and hence cannot be used in isolation.

The results

Overview

We note in general that intraregional trade amongst the members is low and is consistent

with the broader intraregional trade for the continent. Figures indicate that although

intraregional trade has increased since 2007, the increase has not been significant and

accounts for just above 10% of total exports in 2010 (AfDB, 2011).



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South Africa, Egypt and Kenya, the relatively diversified economies, are the top exporters

and are more likely to benefit from the T-FTA in the interim.6 Over 80% of intraregional

exports are accounted for by the top six countries highlighting the serious need for active

participation of other countries in the T-FTA in order to gain from the benefits of increased

intraregional trade (see Table 2 below).

Table 2: Top intraregional exporters amongst the T-FTA countries

Exporters

Value US$ (‘000s)

2007 2008 2009 2010

World 191 306 137 231 712 922 193 463 101 230 774 620

Tripartite Countries

Aggregation 18 795 138 23 042 154 19 318 283 23 456 885

South Africa 7 501 519 10 139 490 8 604 782 10 299 701

Egypt

1 690 659 2 002 752 2 728 802

Kenya 1 668 678 2 111 841 1 913 971 2 179 580

Zimbabwe 2 249 573 1 098 591 1 506 594 2 061 222

Zambia 1 341 404 1 436 768 1 090 687 1 430 631

United Republic of Tanzania 640 534 962 396 700 865 1 344 119

Source: ITC UN TradeMap data; author’s calculations

Table 3 below highlights the average intraregional IIT indices for manufactures of T-FTA

members and the number of product lines per sector (in brackets).

A closer look at product-specific IIT reveals that:

• The bulk of the industrial sectors in these countries is primary resource-based

concentrated in agro- and food-processing products.

• Manufacturing value addition is generally low and activities are restricted to the first

stage of processing or the final stage of blending.

• South Africa is the only T-FTA country with a complex manufacturing base. Other

countries such as Egypt, Kenya and Mauritius fare much better.

6 This latter notion is supported by analysis conducted by Sandrey et al. (2011).



314

• Zimbabwe, which before the political impasse in that country used to be the second

largest manufacturer in SADC after South Africa, has little left other than a collapsed

industrial base that is slowly recovering from the decade-long economic crisis.

• An interesting case to note is the data for Swaziland which indicates a country with

some level of industrialisation based on the IIT indices. We are, however, cautious

when interpreting this data as the data mirrors that of South Africa and indeed may

well be that of South Africa.



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Table 3: Average intraregional IIT indicators and number of product lines for manufactured products (with export value > US$ 0.5 million) C23 Desc RSA Egy Ken Zam Zim Tanz Bots Uga Moz Swaz Nam Sey Sud Djib Bur Mad Rwa Mau Mal Ethi

Live animals, animal products

0.64 (3)

0.99 (1)

0.82 (1)

0.56 (2)

0.78 (1)

0.67 (1)

0.70 (1)

0.87 1)

0.58 (1)

0.56 (1)

Vegetable products 0.91 (1)

0.58 (1)

0.75 (2)

0.85 (3)

0.79 (3)

0.69 (1)

0.93 (1)

0.54 (1)

0.94 (1)

0.73 (1)

Animal or vegetable fats & oils

0.95 (1)

0.62 (1)

Food, beverages & tobacco 0.66 (7)

0.69 (7)

0.63 (5)

0.70 (3)

0.81 (2)

0.82 (7)

0.78 (2)

0.86 (2)

0.81 (4)

0.78 (1)

0.57 (3)

0.64 (1)

0.79 (1)

0.57 (1)

Mineral products 0.62 (1)

0.73 (2)

0.69 (2)

0.94 (1)

0.57 (1)

0.82 (1)

0.58 (1)

0.78 (1)

0.80 (1)

Chemical products 0.76 (8)

0.75 (6)

0.58 (2)

0.59 (4)

0.70 (1)

0.74 (2)

0.78 (2)

0.58 (2)

0.69 (1)

0.80 (1)

0.82 (1)

0.55 (1)

Plastic products 0.61 (2)

0.86 (2)

Raw hides 0.76 (1)

0.90 (1)

0.80 (2)

0.69 (1)

Wood products 0.74 (2)

0.69 (1)

0.96 (1)

0.68 (1)

0.82 (1)

0.65 (1)

0.76 (1)

Paper products 0.85 (1)

0.95 (1)

0.60 (1)

0.95 (1)

0.96 (1)

Textiles & clothing 0.72 (3)

0.60 (5)

0.66 (2)

0.85 (1)

0.66 (2)

0.83 (4)

0.83 (3)

0.58 (1)

0.74 (1)

0.78 (1)

0.83 (3)

0.69 (4)

0.70 (4)

Footwear 0.83 (1)

0.72 (2)

0.61 (1)

0.68 (1)

Non-metallic minerals 0.63 (2)

0.68 (2)

0.86 (1)

0.57 (1)

0.86 (2)

0.63 (1)

0.58 (1)

Precious stones and metals

0.75 (1)

0.91 (1)

Base metals 0.78 (7)

0.87 (2)

0.66 (5)

0.84 (1)

0.65 (4)

0.53 (1)

0.77 (4)

0.50 (1)

Machinery 0.61 (1)

0.70 (2)

Transport equipment 0.90 (3)

0.75 (1)

0.79 (1)

0.55 (1)

0.80 (2)

0.95 (1)

0.63 (1)

0.95 (1)

0.58 (1)

Specialised equipment

0.91 (1)

0.80 (1)

0.90 (1)

0.78 (1)

0.77 (2)

Miscellaneous manufactured articles

0.97 (1)

0.95 (1)

0.77 (3)

0.85 (1)

0.76 (1)

0.93 (1)

0.85 (1)

0.61 (2)




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Table 4 below highlights the distribution of countries with manufactures export capacity at a

very aggregate level. As noted above, the majority of manufactures are primary based and

mainly concentrated in agro-foods reinforcing the importance of agriculture in the region

and hence the need to develop a strong agribusiness sector in the region. Outside of South

Africa, the agribusiness sector which is considered key to uplifting the majority of people

whose livelihood depends on agriculture remains weak and in need of development. Some

other issues worth noting include:

• Beneficiation of precious stones and metals remains largely low as highlighted by the

number of countries (two) that have an existing manufacturing and export capacity.

With the region’s rich endowments particularly in this group of products, more can be

done, thus providing an opportunity for targeted investments to boost this sector.

• Labour-intensive sectors such as agriculture, textiles and clothing are common

industries for which governments in the region have been providing some form of

support. However, global competitiveness has not yet been reached for such an

important sector, both in terms of employment and from a political perspective,

Furthermore market access issues remain contentious in this sector.

• Data indicates that the chemical products sector, in terms of number of countries, is of

importance. We support this fact and note that the sector is crucial as it provides

forward and backward linkages to important sectors such as agriculture and mining,

which are essential and provide the building blocks for any economic development in

Africa. Another important subsector is the pharmaceuticals sector which has great

potential in Africa.

• Capital-intensive industries such as machinery and specialised equipment remain niche

markets that require intensive financial investments and may well likely be boosted by

increased promotion of foreign direct investment (FDI) into this sector.



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Table 2: Number of countries producing manufactured products per sector and types of products.1

Sector/ Category Manufactured products in category

No. of T-FTA

countries

producing

(IIT>0.5)

T-FTA total

trade (IIT>0.5)

US$ (‘000s)

Live animals, animal products Dairy; meat; fish and other products of animal origin

10 1 719 465

Vegetable products Cereals, coffee, milling products, oil seed and fruit 10 527 097

Animal or vegetable fats & oils Animal or vegetable fats & oils 2 24 600

Food, beverages & tobacco Processed foods, beverages and tobacco 14 6 498 652

Mineral products Mineral fuels, oils, distillation products ; salt, sulphur, earth, stone, plaster, lime and cement

9 17 412 506

Chemical products

Albuminoids, modified starches, glues, enzymes; essential oils, perfumes, cosmetics, toiletries; explosives; fertilisers; Inorganic chemicals; organic chemicals; pharmaceutical products; soaps, lubricants, waxes, candles, modelling pastes; tanning, dyeing extracts

12 12 945 219

Plastic products Plastic and rubber products 2 3 921 150

Raw hides leather and fur-skin products 4 285 388

Wood products Manufactures of plaiting material, basketwork; wood and articles of wood, wood charcoal

7 882 683

Paper products Paper & paperboard, printed books, newspapers, pictures, etc.

5 1 804 448

Textiles & clothing Textiles & clothing 13 3 649 161

Footwear Footwear, headgear, umbrellas 4 86 124

Nonmetallic minerals Glass and glassware; stone, plaster, cement, asbestos, mica

7 1 428 641

Precious stones and metals Pearls, precious stones, metals, coins, etc 2 214 083

Base metals

Aluminium; iron or steel products; copper products;iIron and steel; lead; nickel; tools, implements, cutlery, etc. of base metal; zinc products

8 6 971 609

Machinery Electrical, electronic equipment; machinery, nuclear reactors, boilers, etc.

2 17 111 462

Transport equipment

Aircraft, spacecraft, and parts thereof; railway, tramway locomotives, rolling stock, equipment; ships, boats and other floating structures; vehicles other than railway, tramway

9 13 067 810

Specialised equipment Clocks and watches and parts thereof; optical, photo, technical, medical, etc. apparatus

5 205 894

Miscellaneous manufactured articles

Furniture, lighting, signs, prefabricated buildings; miscellaneous manufactured articles; toys, games, sports requisites

8 1 957 323


1 For country breakdown see Annex 1.



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Case study - sector analysis

This section profiles two major sectors – the ‘agro-industry’ sector and the ‘textile and

clothing’ (T&C) sector which could possibly be sectors that T-FTA members can coordinate

and collaborate through the development of a regional industrial strategy. We note that this

is in no way a prescriptive exercise but rather one that is based on the premise that:

a) The majority of countries have a comparative advantage in the production of either

primary, intermediate or even finished goods that fall under these particular sectors.

b) A regional industrial strategy for the T-FTA should not ignore existing sectors, but

rather enhance and support them, while also looking at other niche markets.

c) The barriers to entry in these sectors is relatively low and new entrants and existing

industries can build their domestic value chains, improve management and

technologies and draw on advances in branding and distribution over time.

We note that these sectors not only have the advantage of having relatively high linkages

with other sectors and high employment multipliers, but are also sectors where productive

enterprises can engage in a process of searching and learning to catch up with the

competitors at the leading edge of production globally. Therefore with the support of

national and regional industrial policy these sectors

a) have the potential to become more productive more quickly;

b) can absorb unskilled and semiskilled labour; and

c) involve incremental productivity improvements, through a process of skills

development and on-the-job training, that will move them beyond domestic and

regional markets into global markets over time.

Agro-industry and agribusiness

The recognition that agriculture and rural development must play a central role in economic

growth, poverty reduction, and food security is widely accepted and is evident in recent

efforts by governments to redirect as well as make commitments to allocate greater



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resources to agriculture and rural development (e.g. commitments undertaken by countries

under the Comprehensive Africa Agriculture Development Programme (CAADP)).2

The CAADP notes that boosting agricultural production is not only vital for reducing hunger

in Africa, ’but it also makes economic sense’. Agriculture constitutes the backbone of the

economy in virtually all African countries as it provides the main source of food, income and

employment to their rural populations. In most African countries agriculture contributes

over 20% to the gross domestic product (GDP), 70% to employment, over 50% to export

earnings and about 40% to government revenue (Fundira, 2011).

Edwards et al. (1997) note that while significant policy reforms and regulatory changes were

undertaken to enhance agricultural competitiveness, many reforms have not yet resulted in

significant increases, mainly because the implementation of the policy reforms to encourage

private investment in agricultural marketing and export activities have been less effective

than was anticipated. The emerging consensus in Africa that if agriculture is to be the main

sector to stimulate economic growth, then investments should go beyond improvements in

on-farm productivity to also cover agribusiness and agro-industrial development.

According to the Food and Agricultural Organisation (FAO)3, agribusiness denotes the

collective business activities that are performed from farm to fork. It covers the supply of

agricultural inputs, the production and transformation of agricultural products and their

distribution to final consumers. Agribusiness is one of the main generators of employment

and income worldwide. It is characterised by raw materials that are mostly perishable,

variable in quality and not regularly available. The sector is subject to stringent regulatory

controls on consumer safety, product quality and environmental protection.

In the context of the T-FTA, developing an agro-industrial sector becomes crucial as this not

only creates opportunities that lead to poverty eradication, but also boosts the

manufacturing base of these particular countries, which to date has not played a dynamic

role in the economic development of Africa. Roepstorff et al. (2011) notes that at country

level, provided data is available, the share of total manufacturing value added of the two

2 See http://www.nepad-caadp.net/.

3 See http://www.fao.org/ag/ags/agribusiness-development/en/.



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primary agro-industrial subsectors (food and beverages, and tobacco) ranges from 17% in

South Africa to 47% in Ethiopia.

A strong case for agro-industrial development therefore exists in order to capitalise on the

positive economic, social and political forces that are prompting a renewed impetus for

growth and development in Africa. These forces encompass the potential offered by

domestic and regional agrofood markets, the opportunities for import substitution of higher-

valued foodstuffs and the rapid rates of urbanisation in the continent (3ADI, 2010).

However, the success of any strategy to be employed has to take into account the

interrelationship between production, processing, distribution and consumption, thus

emphasising the need to develop and strengthen the whole agribusiness sector (i.e. from

farm to fork). Box 3 below provides a definition of agro-industry.

Box 3: Defining Agro-industry

Agro-industry comprises all the post-harvest activities that are involved in the transformation,

preservation and preparation of agricultural production for intermediary or final consumption of

food and nonfood products. It consists of six main groups according to the International Standard

Industrial Classification (ISIC), namely food and beverages; tobacco products; paper and wood

products; textiles, footwear and apparel; leather products; and rubber products. The term captures a

diverse range of primary and secondary post-harvest activities, ranging from basic village-level

commodity preparation to modern industrial processing and involving widely differing levels of scale,

complexity and labour, capital and technology intensity. Food-processing industries tend to dominate

this sector in developing countries, including Africa.

Source: Roepstorff and Wiggins (2011)

The 3ADI (2010) notes that cumulative global investments required until 2050 in agriculture

and downstream support services will reach US$940 billion (in current (2009) US$) in Sub-

Saharan Africa alone. Of this amount about 66% will be required for agribusiness and agro-

industries capital outlays, covering items such as:

• cold and dry storage (US$78 billion);

• rural and wholesale market facilities (US$159 billion);

• first-stage processing (US$207 billion);



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• mechanisation (US$59 billion); and

• other power sources and equipment (US$115 billion).

These investments will have to be made primarily by the private sector. The public sector

will therefore be confronted with the need to create and maintain conditions that favour

investment in agribusiness and agro-industries by the private sector (including farmers).

Areas that will require public action to ensure higher and sustained growth include (FAO,

2012):

• Facilitating agricultural markets and trade;

• Improving agricultural productivity;

• Investing in public infrastructure for agricultural growth

• Reducing rural vulnerability and insecurity; and

• Improving agricultural policy and institutions.

Roepstorff and Wiggins (2011) note that evidence emerging from the successful experience

from countries such as Brazil, Malaysia, Thailand and Chile shows that ‘agribusiness and

agro-industrial development was the result of deliberate government policy and strategy

towards diversification of their economies and the development of competitive industries.

Apart from benefiting from substantial agricultural resources, great emphasis was placed on

increasing productivity by applying science and technology as well as institutional support in

an enabling private sector environment’. Indeed Africa and in particular the T-FTA members

have an opportunity to ensure that this sector becomes competitively viable and supports

and boosts economic growth in the region. Some lessons can be learnt from the experiences

of other developing countries highlighted above, bearing in mind that conditions and

environmental settings have changed which require Africa to develop strategies that suit its

own local environment.



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Textiles and clothing sector4

The global textiles and clothing (T&C) sector is in a phase of change which started in January

2005 following decades of trade restrictions that characterised the Multi-Fibre Agreement

(MFA) quota system. The abolishment of the MFA has resulted in increased competition and

downward pressure on prices which have affected many developing countries as the

industry consolidates around a relatively small number of players who still hold a

competitive edge.

A look at global trade indicates that the T&C sector accounts for about 4% of total export,s

and in 2010 this translated into about US$ 600 billion in value terms. As noted already, the

T&C sector is important, particularly for some developing and least developed countries

where clothing accounts for a large proportion of total exports. Developing countries

produce half of the world’s textile exports and nearly three-quarters of the world’s clothing

exports. Sub-Saharan Africa, with its poor infrastructure, logistical problems and poor

capacity for large-volume orders, accounts for a mere 2% share of total T&C exports (WTO,

2011).

The T&C value chain falls into distinct segments (USITC, 2009):

a) the production of raw materials (natural and man-made fibres);

b) the manufacture of yarn and fabric;

c) the making of clothing; and

d) the retailing of the finished items.

From a developing country perspective, it is the labour-intensive garment manufacturing

stage which is of greatest relevance when poverty alleviation concerns are raised, albeit not

disregarding the importance of the textiles production which tends to be a capital-intensive

business. Other end-uses of fibres and textiles include household furnishings and various

industrial products.

4 Although textiles and apparel are considered as agro-industry subsectors using the SITC classification system,

in this chapter we treat them as a separate industry.



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The importance of the T&C sector cannot be overemphasised; there is a wealth of

information available that focuses on how countries have attempted to remain competitive

in the face of competition. One instance is the EU which despite the abolition of the MFA has

remained competitive due to higher productivity and competitive strengths such as

innovation, quality, creativity, design and fashion (EC, 2012). For Africa and especially Sub-

Saharan Africa where the majority of T-FTA countries are located, the same cannot be said.

The sector which is now viewed as a ‘sunset’ sector has seen both domestic and export

demand continue to decline with massive job losses being the order of the day. A study

undertaken by the United States International Trade Commission (USITC, 2010) on the T&C

sector in Sub-Saharan Africa provides a comprehensive analysis of the potential

opportunities and challenges inherent to this sector. Below in Box 2 we provide a summary

of some of the findings from this study.

Box 2: Potential opportunities and challenges associated with the T&C sector in SSA

Opportunities

Cotton textile products: Most countries in the region have a comparative advantage in the production

of cotton, and most cotton-based products, especially ’large volume basics’ require less complex

production techniques and represent many companies’ initial venture into global textile and apparel

trade.

Niche textile products: These require smaller volumes or are unique; thus SSA countries may be

potentially competitive, as these products sometimes garner premium prices that can cover the

larger production and transport costs associated with producing in many SSA countries.

Products for local and regional markets: Products targeting domestic or regional markets are often

competitive because they are too costly to import, or because they address specific local or regional

needs. In many instances the products are of lower quality.

Challenges

Insufficient demand from the apparel sector: A larger sustainable apparel sector is required to

encourage new or increased investment in the production of yarn, fabric, and trim.

Lack of knowledge of regional and international market opportunities: market intelligence is a critical

factor which needs to be addressed in order to integrate into the global value chains.



324

Expensive and unreliable energy input source: The electricity rates in many countries in the SSA

region are among the highest in the world, and an unreliable supply of electricity reduces efficiencies

and decreases quality in the production process.

Insufficient supply of clean water: An abundant supply of clean water required for yarn and fabric

production, particularly for finishing and dyeing operations, is lacking.

Inadequate transportation infrastructure: Poor roads, railways, and ports, as well as capacity

constraints, cause delays and add to the cost of importing raw materials and exporting finished

goods.

Access to cheap investment capital: The high cost of capital, when available, not only deters new

investment in the production of yarn, fabric, and other inputs, but it also increases the costs of

existing production.

Inappropriate technology: Most of the older textile mills that spin yarn and/or weave fabric use

dated and inefficient machinery, thus producing products that do not fulfil minimum export quality

requirements.

Source: USITC (2009)

With all these challenges, most of which are typical of common constraints experienced by

enterprises in Africa, the T&C sector continues to be of significant economic and political

importance. Current and existing enterprises can attribute their success or survival to

support at the national level and the foreign direct investment that has trickled in as a result

of global companies’ attempts to capitalise on preferential treatment accorded to

developing countries’ T&C exports in the major markets of the US and the EU among others.

According to some industry representatives speaking at the 2010 ‘At Source Africa B2B’

conference in Cape Town, the T&C sector in Africa ‘would not even have been considered an

attractive destination for inward investment by foreign textile and clothing companies were

it not for the tariff-free opportunities AGOA provides’ (just-style.com, 2010). There is

therefore need to ensure that the sector not only recovers from the decline experienced but

through targeted and appropriate intervention becomes attractive for inward investment

and competitive on a global scale, thus supporting the livelihoods that depend on it for

survival.



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Concluding remarks

This chapter has attempted to raise a number of important issues that Africa and more

specifically T-FTA countries need to address in order to ensure that they achieve their

industrial development objectives. Export competitiveness and diversification are central to

ensure sustained economic growth in these economies, and intraregional trade liberalisation

can play a significant role within the regional economic space through enhanced trade

opportunities that elicit decisions for the expansion of productive capacity at firm-level.

We made use of IIT as a measure of intraregional trade and focused our analysis on

manufactured products. Note that although the use of IIT in identifying industries cannot be

treated as a proxy for industrialisation or industrial capacity, evidence from studies indicate

that IIT provides a potential opportunity to enhance and support industrialisation. Several

reasons highlighted the ease with which states are able to accept a preferential trade

arrangement where IIT exists rather than where inter-industry trade exists, which makes a

compelling case for further promotion of intraregional trade through intra-industry trade.

However, the real value in focusing on boosting intraregional trade lies in the fact that it

creates an opportunity to address the many constraints that African countries in general

have in common that hinder trade. These include addressing ’inefficient customs

procedures, poor infrastructure, complex domestic regulation and a lack of productive

capacity’ (Woolfrey, 2012). In so doing, African countries will enhance their ability to trade

both at the regional and global level and thus reap the benefits of economic globalisation.

Manufacturing in Africa, which is small relative to other developing-country regions,

particularly developing Asia, is key to any strategy employed in Africa. According to a report

by the United Nations Conference on Trade and Development (UNCTAD) and the United

Nations Industrial Development Organisation (UNIDO) entitled ‘Economic Development in

Africa 2011: Fostering Industrial Development in Africa in the New Global Environment’, it is

argued that, given manufacturing’s potential to create more direct and indirect jobs than is

the case in the primary and services sector, governments should recommit to intensifying

efforts to develop manufacturing enterprises. We note and emphasise, however, that

priority be given to existing industries that have the potential to become sustainable and

competitive through appropriate support. This notion is not a new one but rather one that



326

has been previously recommended, accepted and integrated into the African Union’s New

Economic Partnership for Africa Development (NEPAD)5 agenda.

Overall success will depend on the implementation of any suggested policies undertaken at

national level. This will require greater commitment and political will. Among other factors

industrial policies (UNIDO, 2011)

• should be integrated with other macroeconomic policy measures that are also

supportive of improving the overall investment climate.

• should take account of key international themes such as the emergence of green

industries and the potential to benefit from, or be disadvantaged by, integrating into

global supply chains.

• should also take account of the changing global trading rules and the potential created

by regional integration for accelerating industrial development, owing to the fact that

larger markets will be created.

Regardless, however, of the type of support measures that T-FTA countries will ultimately

develop, there are some guiding principles that they can employ from the East Asian

experience in developing a regional industrial policy. It should be noted, however, that the

lessons from East Asia need to be examined within the particular context; some of the

instruments used to great effect are no longer available as a result of changes to the global

(including WTO) governance environment. It is, however, worth taking a look at the use of

performance benchmarks, making the beneficiaries accountable for their performance, and

specifying time limits for protection (ul Haque, 2007). It is also very important that T-FTA

governments engage and consult with the private sector to identify regulatory and other

challenges to industrial development and what is responsible for high costs of doing business

and areas where restructuring or support may be appropriate.

According to Rodrik (2004) what matters is not so much the specification of the outcome as

the process through which policy decisions are made. ‘The right model for industrial policy is

not that of an autonomous government applying Pigouvian taxes or subsidies (.e. lump sum

taxes or subsidies), but of strategic collaboration between the private sector and the

5 See the African Productive Capacity Initiative (APCI): http://www.unido.org/index.php?id=537.



327

government with the aim of uncovering where the most significant obstacles to

restructuring lie and what type of interventions are most likely to remove them’(Ibid.). This

is where the challenge for a successful industrial strategy for the T-FTA lies.

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Chapter 9 – Review of South Africa’s industrial policy and implications for SACU


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Chapter 9

Review of South Africa’s industrial policy and implications for SACU

Ron Sandrey

1. Introduction

South Africa is currently reviewing and formulating its industrial policy. The objective of this

chapter is not so much to present an examination of the South African Industrial Policy per

se but rather to assess its industrial policy in a wider sense as to how it relates to and

integrates and interacts with other policies that may or may not be thought of as industrial

policy proper.

A comprehensive understanding of South Africa’s approach to industrial policy is important

in the context of the Tripartite Free Trade Agreement (T-FTA) between the Common Market

for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the

Southern African Development Community (SADC) for at least two reasons. The first is that

South African policy makers have been of the belief that there are important synergies

between the country’s industrial policy and its policy for the region, and this has led to South

Africa actively championing the T-FTA agenda. Second, industrial development is to be a

central focus of the T-FTA, and given South Africa’s economic weight within the T-FTA

region, its industrial policy goals are likely to find their way into any forthcoming regional

industrial development plan promoted under the T-FTA.

The starting point in the assessment undertaken in this chapter will be the South African

Economic Sectors and Employment Cluster 2010/11 – 2012/13 Industrial Policy Action Plan

(IPAP) of February 2010. This document was supplemented and updated in February 2011 by

the Department of Trade and Industry (dti) in what may be regarded as a ‘progress report’

since it contains little or nothing in the way of policy.

Many of the ‘and’ policies are rather obviously part of industrial policy: wage and

employment conditions, trade policies, infrastructural development (in the wider sense), for

example, are evident ones. Others, for example environmental policies, are perhaps not so



331

obvious, although these issues are becoming more ingrained into industrial policies globally.

Importantly, the 2010 IPAP sets the framework for this analysis, as it examines many of the

“ands” in detail. The IPAP starts from the basic premise that profitability is a prerequisite

and that factors inhibiting this profitability include an exchange rate which is volatile and

generally overvalued, the cost and allocation of capital to labour-intensive and value-adding

sectors of the economy, a failure to address government procurement policies and

opportunities, monopolistic provision and pricing in many sectors, a relatively weak skills set

in South Africa, and a damming report on infrastructural problems (including electricity

supply). In general, the IPAP sees the seven areas of linkages between macro- and

microeconomic policies; investment and finance priorities; procurement; trade policies;

competition and regulation policies; skills and innovation development; and the

coordination of all these policies to strengthen the industrial sector as formulating the new

industrial policy.

Recognising the need for a broader approach the South African government also published

the 2011 National Development Plan – Vision for 2030, a report that comprehensively lays a

blueprint for taking South Africa into the future. Here the central challenges of

unemployment, education standards, infrastructure, the reliance on an unsustainable

resource extraction economy, the quality of the public sector and associated corruption, and

inequity and division in society are all recognised. These challenges are an essential part of

the overarching problems addressed in the IPAP, and as such they provide a strong linkage

to the IPAP and industrial policy. In particular, the National Development Plan recognises

that labour-intensive manufacturing and medium-skilled services exports are essential if

South Africa is going to combine growth and jobs in the future.

The IPAP represents an impressive platform for industrial growth, and this is complemented

by the National Development plan. The objective of this study is to examine and build upon

that platform, and, as outlined above, the dti seems on course for publishing annual

‘progress reports’ as noted by the dti 2011 report. This coordination is essential.

The background setting

In searching for examples where industrial policy has powered nations to dramatic economic

growth one needs to look no further than East Asia, home of the so-called East Asian



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miracle, a term immortalised by the World Bank Report ’The East Asian Miracle’ of 1993 that

provided a definitive (although not undisputed) account of how many economies in East Asia

achieved rapid growth using what seemed to be standard policy instruments. The general

thesis of the report is that growth was associated with carefully limited government

activism, an overall ‘market friendly’ approach focused on getting the fundamentals right

and emphasising education1, an investment friendly regime, open trade policies2 and stable

macroeconomic policies3. The report does also, however, acknowledge the role of selective

intervention in some sectors of most economies, but argues that these interventions were

carefully targeted and, more importantly, performance monitored to the extent that they

were ‘allowed to fail’ in the more open-market sense. The World Bank categorised policies

as the broader ‘fundamental’ ones and ‘selective interventions’ such as the low interest rate

policies and directed investment along with selected industrial promotion and trade policies

promoting exports. For the latter, it stressed that ‘pragmatic flexibility’ or the capacity and

willingness to change policies was as much a hallmark of the landscape as any single policy

instrument.

Moving on from the original World Bank (1993) report, the updated paper by John Weiss

from the Asian Development Bank (ADB) in 2005 examined the role of export growth and

industrial policy in economic development (with industrial policy defined broadly, as we

have done, to cover a range of interventions) to change the structure and raise the growth

of exports. He considers that there is general agreement on the standard package for export

growth. This package is based on a combination of appropriate price incentives, access to

imported inputs at world prices, a sound base of physical and social infrastructure, and

adequate finance for export production. However, the main thesis from Weiss is that the

international environment has changed, although we would argue that the empirical

evidence from China’s astonishing growth may refute this. In any case, we agree with Weiss

that the globalisation of trade flows and investment is now much stronger, and that in

particular the rules-based World Trade Organisation (WTO) inhibits domestic policy space.

1 This included rapid technological catch-up.

2 We must qualify and perhaps dispute this particular claim, as most of these economies had (and still have)

high protection levels on many imports such as agricultural imports. 3 This included careful control over exchange rates to ensure that these rates remained at a level to assist

exports (i.e., undervalued exchange rates).



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A more recent picture affirms the views of Weiss in that updating to the present time we can

highlight the role that the well-known Chinese manufacturing export growth plays in African

manufacturing. We contend that not only are Chinese imports dominating African domestic

manufacturing in almost all small industries but they are simultaneously making it extremely

difficult for those African countries that do have some industrial capacity to export both

within Africa and globally. The clothing sector is a case in point, but the argument equally

applies to the multitude of goods stamped ‘made in China’ that are sold by street vendors

throughout the continent. We furthermore contend that South Africa has in fact ‘missed the

bus’ in that when emerging from the troubled years of the early 1990s it eschewed a low-

wage Asian approach to manufacturing and instead of capitalising upon its undoubted

industrial capacity of the time ended up with more of a ‘no wage’ economy as the high

unemployment rates attest. Meanwhile, the growth magnet of the US market for industrial

goods is both saturated with Chinese products and, in the face of economic problems that

include a burgeoning trade deficit, is losing some of its powers that fuelled Asian growth.

Furthermore, Europe has been the traditional market for Africa in general and South Africa

in particular, and that continent is facing even deeper economic woes.

This general pattern for manufacturing in Africa is confirmed by Sandrey and Edinger (2009)

who show that while a succession of Asian countries have exhibited dramatic growth over

the last thirty to fifty years, African manufacturing has largely stagnated. The Asian

expansion has been driven on the demand side by manufacturing exports to the US in

particular over a prolonged period when the US was sucking in huge imports, and enabled

on the supply side through an overall constructive policy package that opened markets,

implemented favourable trade and exchange rate policies, and provided a sound and stable

government that inspired investment and secured property rights. Conversely, Africa has

been unable to put a comprehensive package in place, and this has resulted in a

manufacturing sector whose contribution to both Gross Domestic Product (GDP) and export

shares is significantly below the continent’s developing country peers. Growth in natural

resource-rich developing countries in general has lagged behind those with a manufacturing

focus, and this is especially the case in Africa with its poor linkages into unskilled labour and

its appetite for rent-seeking activities. A key recommendation from Sandrey and Edinger is

that the linkages between tariff and trade policies on the one side, and industrial policies on



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the other, both essential parts of the ‘umbrella’ of the full policy package, need to be

considered in tandem. But in some instances, and South Africa is an outstanding example, a

combination of earlier unilateral liberalisation and bilateral, regional and multilateral

agreements means that the necessary policy space to nurture industrial development has

been lost. This will be examined in more detail in this chapter.

Policy space

One theme that emerges from the discussion above is that with the advent of the WTO in

particular and regional trade policies in general through the 1990s there may be limited

‘policy space’ for South Africa in the sense that the rules-based environment limits many

policies that may have been successful in the past. These strictures apply to the supports

and tariffs associated with trade policies per se as well as a raft of other areas that are

associated with the WTO such as the restrictions on direct assistance to the manufacturing

sector. In addition, there are several other factors that limit the abilities of the South African

(or any other) government to enable industrial production, and these include the

globalisation of the world’s production and trade and, as outlined above, the dominant

position of China as the competitor.

The linkages between the WTO and industrial policies is examined in Bora et al. (2000), who

concur that the context of industrial policies has changed since the classic East Asian

‘miracle’ as the global economy is very different from what is was during the ‘miracle’

period. Indeed, the term ‘industrial policy’ is not well defined, and they cite a working

definition from the World Bank that considers industrial policy as being ‘government efforts

to alter industrial structure to promote productivity based growth’. Especially relevant to

South Africa, they also emphasise that the term ‘industrial’ should not neglect the

processing of agricultural and mining products and the role of services in providing support

in a ‘flanking’ role. Their conclusions are that in general the case for direct government

supports is weak, and that the new WTO disciplines on subsidies (including export subsidies),

the new provisions on patents and copyright under Trade-Related aspects of Intellectual

Property Rights (TRIPS), local content and other measures is indeed restricting the use of a

number of policies. However, the effect of these rules is positive in that it shifts the



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emphasis of government to the supply side and more generic policies that concentrate upon

infrastructure, human capital formation, innovation, technology and competition policies.

In a more recent update Shelia Page (2007) also examines the extent to which the WTO is

preventing development by restricting policy space. While South Africa is a developing

country in the WTO sense, it does have many of the characteristics of a developed country,

with the result that we are somewhat uncomfortable with analysing the country in this less

restrictive context. Certainly, the WTO imposes constraints on tariff levels, but it must be

emphasised that these restrictions apply to bound and not applied tariffs – and,

furthermore, it is often the case that bilateral and regional agreements are more

constraining. Although not generally thought of as industrial policies, agriculture-related

restrictions are not often binding enough to constrain policy space on their own, and

similarly, not binding enough for services where countries virtually ‘self declare’ their space.

TRIPS does restrict policy space, but that is what it was designed to do, while little extra in

the way of constraints was imposed on investment policies. In conclusion, Page considers

that in actuality the WTO has limited space constraints upon developing countries and

moreover that bilateral and regional agreements may be more restrictive. She even goes as

far as to suggest that ‘locking in’ policies may well be in the best interests of most countries

anyway.

Again, although not strictly industrial policy, Sandrey et al. (2008) examine the degree to

which South Africa is constrained in its ability to increase agricultural tariffs, the classic tool

of trade policy. The answer was that at that time some 14.1% of the imports were ‘locked’

by the WTO bound rates, with an additional 7.5% almost at those bound rates. Another

22.9% were effectively ‘locked’ and an additional 15.2% ‘almost locked’ by the South Africa-

EU Trade, Development and Cooperation Agreement (TDCA) and the Southern African

Development Community (SADC) Free Trade Agreement, giving some 59.7% of total imports

that were, for all practical purposes, locked into the current tariff policy regime. Another

14.6% were classified as animal feed inputs, thereby raising the caution flag that increasing

these tariffs would directly pass a cost increase on to South African poultry and meat

producers. The researchers isolated the imports of wheat (6.7% of the total) and argued that

while there was policy space to increase wheat tariff rates they were staple foodstuffs; they

provided supporting analysis that showed that increasing these tariffs was welfare reducing



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for South Africa. This left only 19% of all agricultural imports where there was some policy

space, but the majority of these imports are subject to WTO tariff rate quota (TRQ)

obligations and thus not totally under the control of South African trade policy authorities.

Similarly, it quickly became apparent when South Africa was seeking ways to protect its

clothing and textile sector that the most common bound tariff of 45% left little extra

protection from the generally applied rate of 40%.

Examining South Africa’s industrial policy

Kaplan (2007) outlines the issue for South Africa very succinctly, and we believe that his

views are worth repeating verbatim:

The two key institutional requirements for an effective industrial policy are the

professionalism and capacities of the government and the effectiveness of the strategic

collaboration as between government and business. As outlined above, both are currently

very limited in South Africa. Moreover, the limited capacities of the government are

currently exacerbated by a lack of focus and cohesion around the objectives, content and

conduct of industrial policy. In addition, distributional conflicts make it difficult to develop

institutions and practices that manage the rents that are a constituent feature of active

industrial policies. Finally, the principal objective of industrial policy, namely to enhance

technological capacities and raise firm level productivity, is severely constrained by the

current scarcity of skills and the limited training being undertaken. Two broad conclusions

emerge from this analysis. The first is that government should not expect too much of

industrial policy. Under current conditions, industrial policy is likely to have only a limited

impact on GDP growth. The second conclusion is that the design of industrial policy needs

to be fundamentally re-examined. The constraints and institutional limitations outlined

above should be factored into a consideration of the scope and content of industrial

policy.

We concur with Kaplan’s statement. We believe that more recently the South African

government has taken heed of these comments and moved to develop a new plan for

industrialisation that is cognisant of these views. This is set out in the 2010 IPAP.

This IPAP starts with an excellent introduction setting out the objectives of the approach to

industrialisation. These are to diversify beyond the current South African reliance on



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traditional commodities and non-tradable services to a knowledge economy that can absorb

more labour (and in particular previously disadvantaged members of society) and lead South

Africa to make a greater contribution to Africa’s wealth. The report considers that many of

the ‘easy to do’ actions have been done in recent years. These actions include strengthening

competition activities, giving more certainty to the automotive sector and the clothing and

textile sector (as both the automotive and clothing and textile sectors are crucial

components of the current industrial sector in South Africa), attracting more investment into

business process services, lowering input costs by examining tariffs on imported inputs and

helping to ameliorate the electricity supply crisis through energy efficiency. While these

actions are commendable, the report fully recognises that the government must move from

the ‘easy to do’ to the much harder ‘need to do’ actions.

The problem statement outlines how South African GDP growth has lagged behind its peers

in recent years, and, even more worrying is the fact that this growth has been dominated by

consumption that is not underpinned by growth in the productive sectors. The divergence in

manufacturing growth has seen growth in capital-intensive sectors such as natural resource

sectors and the automotive industry rather than in employment-intensive sectors where

growth remains precariously dependent upon the credit-driven retail sector. This is

accentuated by the low profitability in manufacturing relative to sectors such as finance

(thus highlighting the high cost of capital), a weak skills endowment, poor infrastructure that

includes uncertainty in electricity supply and public procurement that is not considered to be

doing enough to support local industry.

The policy response to strengthen the productive side of the economy clearly shows that the

government fully appreciates both (a) the lessons from past global success stories and (b)

industrial policy in the new global economy. These seven sets of critical policies (except

perhaps the need to develop and strengthen infrastructure in the broadest sense) deserve to

be repeated here, as we consider that they are very comprehensive and consist of:

i. Stronger articulation between macro- and microeconomic policies.

ii. Industrial financing channeled to real economy sectors.

iii. Leveraging public and private procurement to raise domestic production and

employment in a range of sectors, including alignment of Broad Based Black Economic



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Empowerment (B-BBEE) and industrial development objectives, and influence over

private procurement.

iv. Developmental trade policies which deploy trade measures in a selected and strategic

manner, including tariffs, enforcement and standards, quality assurance and metrology

(SQAM) measures.

v. Competition and regulation policies that lower costs for productive investments and

poor and working-class households.

vi. Skills and innovation policies that are aligned to sectoral priorities.

vii. Deploying these policies in general and in relation to more ambitious sector strategies,

building on work already done.

Section 5 of the IPAP highlights the report in relation to other policies and shows how clearly

the need to integrate industrial policy with other actions of government is appreciated. The

IPAP and industrial policy are integrated into generating a new growth path that has the

objective of combining value-adding with employment opportunities throughout the

economy. This is followed by Section 6 which again stresses the need for coherence between

macro- and microeconomic policies. In particular, the macroeconomic focus should be on a

competitive and stable exchange rate regime and competitive real interest rates, while

microeconomic policies of importance include competition policies, lowering the cost of

inputs and promoting investment.

In the next four sections the report identifies the four key areas of industrial financing,

procurement, trade policies and competition policies as being a crucial part of industrial

policy. Each of these is discussed in turn with their opportunities and constraints followed by

Key Action Plans (KAPs) for each one and closing with detailed key milestones and timetables

to be reached in each area.

The section on industrial finance laments the low profitability of manufacturing and follows

up on the analysis given earlier in the report that shows South Africa’s cost of capital relative

to major trading partners is very high. Indeed, the 2007 data shown gives South Africa as

having the second highest real interest rate of the 18 economies given. Most of the 18 are

under two percent, with only the United Kingdom (3.1%), Australia (4.4%), South Africa



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(4.9%) and Brazil (7.5%) being above 3.0%. The IPAP makes a case for increased use of

concessional funding from the government through the Industrial Development Corporation,

and uses the example of Brazil’s Banco Nacional De Desenvolvimento Econômico e Social

(BNDES) to justify an expansion of development lending. The problem is, of course, that

while in theory such an approach seems fine, in practice the real outcome is often an

expensive failure from poor governance as such institutions become lenders of last resort.

Care must be exercised in providing concessionary finance, and the example of the BNDES

does not negate the fact that examples of global failures with concessionary finance abound.

An issue not touched upon in the IPAP and supporting documents is the role of foreign direct

investment (FDI). In a companion chapter in this book Sandrey 2012 writes that the National

Development Plan (2011) is strangely silent on FDI. It recognises the need to raise the rate

of investment, but dedicates little over one page discussing how this is to be achieved and

what the benefits are of doing so. It sees this increased investment being sourced from

(1) higher levels of public-sector fixed capital formation with an emphasis on infrastructure

building, (2) more private sector investment, and (3) foreign investment. The plan considers

that, ‘over time, a larger share of investment should be funded domestically, but this will

depend on how well resources are used in the short term to raise productivity, incomes and

employment’. It is almost as though foreign investment is seen as a failure of South Africans

to be able to fund their own development with the grudging admission that foreign

investment is needed. Perhaps this view is based upon the analysis of Sandrey (2012) that

the manufacturing sector is not the most significant recipient of FDI into South Africa; it has

received around one-quarter to one-third of the total in recent years, a figure very similar to

that of both (a) mining and (b) business and financial services.

Government procurement is highlighted as an essential element in the IPAP, and detailed

proposals are outlined to ensure that more local content is used in major projects. In

addition, linkages between B-BBEE and industrial policy have not been adequately

articulated to date and the IPAP emphasises that more needs to be done in this area.

Several KAPs are outlined to advance domestic procurement, but as always when sourcing

from the second-best provider caution must be exercised that the discretionary margins do

not impose costs elsewhere in the economy. Globally, the Agreement on Government

Procurement is a legally binding agreement in the WTO focusing on the subject of



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government procurement, with its present version having entered into force on

1 January 1996. However, South Africa is neither a signatory nor an observer to this

agreement so it is therefore not bound by its provisions. Were South Africa a signatory, it

would be obliged ‘to accord to the products, services and suppliers of any other Party to the

Agreement treatment “no less favourable” than they give to their domestic products,

services and suppliers’ under the terms of the agreement. Perhaps it is appropriate to add a

quote from the dti (2011): ’Parts of South Africa’s agro-processing sector have an

unfortunate history of engaging in anti-competitive conduct, thereby contributing to the

high prices of basic food products’.

The IPAP next moves to examine trade policies and their linkage to industrial policies. Here

the report is on fertile ground, as there are numerous aspects of trade policy that directly or

indirectly impact upon domestic production. The first and most obvious one is tariff policy,

and here the report recognises that multilateral, regional and bilateral trade agreements are

putting pressure on tariffs as a strategic instrument. The converse, of course, is that these

same agreements also open preferential access for South Africa. Earlier in this chapter we

outlined tralac research that shows how limited the ‘policy space’ for agricultural protection

through the use of tariffs has become, and how the WTO allowed South Africa to raise tariffs

on clothing and textile imports from their 40% applied rates to the WTO bound maximum of

45% as the experiment in placing quotas on Chinese clothing and textile imports proved to

be ineffectual (Van Eeden and Sandrey, 2007). A detailed examination is needed to assess

the so-called ‘water’ between WTO bound and applied rates and the influence of other trade

agreements product by product to assess just how much protection there potentially is.4 It is

also relevant to point out that a tax on imports is, all other things considered, a tax on

consumers who are obliged to pay more for goods by either increased prices on imports or

purchase domestically made goods that were originally unable to compete with imports of

these goods.

Similarly, the IPAP is acutely aware of the role that technical barriers to trade (TBTs) and

non-tariff barriers (NTBs) to trade play in restricting global trade. While generally thought of

as barriers to exports, the IPAP moves beyond this misconception and discusses how

4 This, of course, ignores the generally accepted end result that tariffs hurt the imposing country and not the

target.



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addressing TBTs and NTBs can assist local producers. For example, internal transport costs in

South Africa and southern Africa are high and on occasions perversely make it cheaper to

use imported merchandise within the region. Special emphasis is given to technical

standards and how strengthening these are likely to give flow-on benefits. This is a major

responsibility for government, and several KAPs outline proposed steps to take. Here one

must add that the IPAP is fully aware of some of the ‘new’ barriers becoming important in

international trade. These include the use of carbon tax regulations and geographical

indicators, both areas on which South African technology and historical trade items should

be able to capitalise.

Next, considerable attention is given to the area of customs fraud and illegal imports such

as smuggling and under-invoicing. This is closely associated with corruption, and this

corruption is generally perceived as being a disincentive to development in South Africa; the

World Bank ranks South Africa at 101 out of the 210 countries it surveyed in 2010.5 While

this is not a good place to be, we must note that it ranks just one place behind Malaysia and

two above Brazil, both of which are considered to be among the new ‘tigers’, suggesting that

corruption may not necessarily be a barrier to development. tralac research has examined

two aspects relating to this. The first was the clothing imports from China, where detailed

analysis of both the South African SARS import data and the Chinese Ministry of Customs

export data highlights that the value of imports from China into South Africa was only at 80

per cent of the value of the exports from China to South Africa in recent years, and for

volume data average prices for imports were at a lower unit value than exports (Van Eeden

and Sandrey, 2007). The second was an examination of informal trade in southern African

agricultural products that concluded this to be a very minor problem in South Africa but

much more prevalent in neighbouring countries (Sandrey and Jensen, 2010). The set of KAPs

outlined in the IPAP clearly indicate that these border problems are recognised and are

being addressed.

Competition policy is examined in a separate section, and rightly so. This is an important

area where South Africa has both strong legislation in place and an increasing appetite to

enforce this legislation.

5At http://info.worldbank.org/governance/wgi/resources.htm.



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Section 11 then changes focus and lists the 13 sectors that have been grouped into ‘clusters’

and singled out for consideration in the IPAP. These sectors, as listed, are:

Cluster 1 – Qualitatively new areas of focus

• Realising the potential of the metal fabrication, capital and transport equipment

sectors, particularly arising from large public investments

• ‘Green’ and energy-saving industries

• Agro-processing, linked to food security and food pricing imperatives

Cluster 2 – Scale up and broaden interventions in existing IPAP sectors

• Automotives, components, medium and heavy commercial vehicles

• Plastics, pharmaceuticals and chemicals

• Clothing, textiles, footwear and leather

• Biofuels

• Forestry, paper, pulp and furniture

• Strengthening linkages between cultural industries and tourism

• Business process servicing

Cluster 3 – Sectors with potential for long-term advanced capabilities

• Nuclear

• Advanced materials

• Aerospace

Of special mention are the automotive sector, the textile/clothing/footwear (TCF) and

leather sectors, cultural industries and the tourism and business-processing sectors. The

latter three sectors show how comprehensive the IPAP is insofar that it reaches into areas

that traditionally would be simply regarded as services. The business processing sector is one

that has demonstrated rapid growth in Asian economies such as India, Malaysia and the

Philippines, and it is a welcome entry to an industry plan.



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The challenges of the TCF sector have been the focus of considerable attention in recent

years as the importation of Chinese clothing and textiles have made serious inroads into

South African manufacturing capacity. It is an important sector as it provides employment

opportunities for many who have limited alternatives, but the sector has been in trouble in

recent times. Chaddha et al. (2009) from the Harvard Porter project provide an excellent

background to the sector in a framework that perfectly complements the IPAP report. In

particular, they outline that labour cost in South Africa is much higher than that of the

competitors and that the sector is losing in the price competition to cheaper imports with

declining employment. They develop a future direction similar to that outlined in the IPAP

that concentrates on price competition for low-end firms, high-end manufacturing for

mainly export and an emphasis on what they call ‘diversify to value-added products’ for new

niche market in value-added unique products. As recognised by IPAP ‘the key opportunity is

to recapture domestic market share by improving competitiveness through a range of

interventions. These include a focus on product, process and delivery efficiencies and

harnessing proximity to local retailers’. After a futile attempt to protect the sector by

imposing Chinese import quotas the government raised tariffs to the WTO bound maximum

and then, recognising the basic problem, sensibly adopted an encompassing plan to improve

skills and hence productivity. Whether this will be enough to return the bolting horse to the

stable is a moot point.

The automotive sector is both the major and the most controversial of South Africa’s

industrial sectors. It is undoubtedly a sector that is technically efficient by international

standards. But analysts such as Frank Flatters6 are concerned about the economic efficiency

of the sector and, despite the protection afforded the sector, South Africa is a net importer

of vehicles. In a global environment that is extremely distorted despite WTO rules against

industrial subsidies, the importance of the sector to South Africa is outlined in the IPAP. The

Automotive Production and Development Programme (APDP) aims to strengthen, broaden

and deepen the automotive, components and medium and heavy commercial vehicles

sector to keep the sector a cornerstone of South African industry. Tariff reviews are

mentioned as part of the possible policy package, but here the TDCA with the EU may well

limit policy space. As above with the TCF sector, will the IPAP actions be enough?

6 See Frank Flatter’s home page at http://qed.econ.queensu.ca/faculty/flatters/.



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Productivity

If there is one term that encapsulates the objectives of the policies discussed in this chapter,

it is ‘productivity’. Sandrey and Jensen (2012) discuss how in its classical form an economy is

driven by production or total output, and this is a function of the land, labour and capital

inputs used. This total output can be increased by (a) increasing the inputs or (b) increasing

the efficiency with which these inputs are combined; and this latter, in its simplest form, is

productivity. Earlier in this chapter we discussed how industrial policies have sequentially

powered the East Asian growth economies over the last half century: the base factor in this

growth has been productivity. Sandrey and Jensen emphasise that the total factor

productivity (TFP) in both China and India is significantly superior to other countries

analysed, and that these countries are similarly forecast to have significantly higher growth

rates than the rest of the world through to 2020. They then proceed to use the widely

accepted Global Trade Analysis Project (GTAP) computer model to simulate how increasing

the TFP rates in South Africa to levels that are still below the best Asian benchmarks can

dramatically power GDP growth in South Africa. They do this by treating TFP as exogenous

(i.e. adjusted from outside the model) and re-running simulations to ascertain the impacts

on both growth rates and trade performance. They find that keeping everything else

constant and increasing the TFP in South Africa to an average annual increase of 0.6% over

the period from its currently forecast rate of 0.2% increases South African GDP by an

additional 4.0% (i.e. to 7.8%) over and above the baseline.

One factor driving this GDP increase is changes in global capital flows, where South Africa

and its neighbours benefit at the marginal expense of others. Capital accumulation in the

GTAP model summarises the long-term welfare consequences of changes in the stock of

capital due to changes in net investment. Rising income will increase demand for produced

goods, pushing up factor returns and thus attracting more investments. Generally,

economies with the highest growth will be prepared to pay the largest rate of return to

capital, and will obtain most of the new investments. Therefore we will tend to see that the

long-term welfare gains from capital accumulation reinforce the short-term welfare gains

deriving from allocative efficiency and terms of trade.



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Reinforcing the relevance of the IPAP shows that the baseline projection for South Africa

with continued TFP at 0.2% annually is not sufficient to change current unemployment rates

from their 23%. South Africa must increase TFP to 0.6% which will reduce unemployment to

17%, while an even larger increase to the current 1.0% TFP levels of China and India will have

a spectacular result as South African unemployment is forecast to reduce to 12% in this

scenario. The policy implication is clear: TFP holds the key for growth and employment.

South Africa’s aggregate welfare would be around US$250bn higher over the period to 2020

from a 2007 base should the TFP be increased to even 0.6%. The main contributions to this

increase in order of importance are from increased capital flows, the TFP changes directly,

allocative efficiency gains and labour market gains as more people enter the workforce. This

in turn increases both output and trade, consistent with the objectives of the IPAP. In

support of this we can do no better than repeat an excerpt from Kaplan’s citation: ‘Finally,

the principal objective of industrial policy (is) namely to enhance technological capacities

and raise firm level productivity…’ (Kaplan 2007).

Regional integration and coordination

In considering South African industrial policy and perhaps more specifically tariffs, it is well

worth noting that South Africa does not have a tariff schedule – SACU does. Therefore there

are wider considerations such as the views of Botswana, Lesotho, Namibia and Swaziland

(BLNS), and in particular revenue implications from SACU tariffs for these countries (CIE,

2010). Enhanced industrial production in South Africa will have a downside for the BLNS in

that these revenues will be reduced as this production displaces imports into South Africa,

and, perhaps more importantly given the free-flow of goods from South Africa to the BLNS

countries, make industrialisation even more difficult in these BLNS countries themselves.

Importantly, with respect to industrial policy, Article 38 of the 2002 SACU Agreement states

on Industrial Development Policy that ’Member States recognise the importance of balanced

industrial development of the Common Customs Area as an important objective for

economic development, and Member States agree to develop common policies and

strategies with respect to industrial development’. In examining reports on industrial

policies and overall development strategies for the BLNS we are able to report on Lesotho

and Swaziland and give a preliminary report on Namibia.



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Namibia’s Industrial Policy is anchored in the Vision 2030 statement which sets out

development goals for the nation through to that time, and the need to align these two

documents is stressed. Rosendahl (2010) provides a very good ‘warts and all’ background

report on Namibia and considers that while many good things are taking place more needs

to be done to activate this Vision 2030. Earlier, Kadhikwa and Hdalikokule (2007) in assessing

the potential for the manufacturing sector in Namibia identified a number of constraints

facing the sector. These included high input costs, particularly electricity, transport and

harbour charges, the limited availability of quotas for the fishing industry, limited economies

of scale in the meat-processing industry, unfair competition from South African companies,

and again limited economies of scale in the manufacturing sector overall. This is accentuated

by low levels of labour productivity and the impact of the HIV/AIDS pandemic on the

workforce, the lack of domestic shelf space for Namibian manufacturers in supermarkets,

and the low level of branding and marketing of Namibian products. They also lamented the

availability of highly skilled professionals and suggested that technology and

entrepreneurship centres be set up for local industry to address this problem.

Although we are unable to cite the draft document from the Namibian Ministry of Trade and

Industry, Namibia’s Industrial Policy, newspaper reports suggest that Rosendahl in particular

may have been heeded. However, a cautionary flag is raised by Duddy (2011a) who quoting

from the draft states that ‘Government is aware that opening the economy too much or too

quickly might come with additional regulation and control, which may, in turn, result in

undesirable investment and unintended consequences that may thwart and negate local

industrialisation efforts and initiatives’. Infant and strategic industries will therefore, from

time to time, be protected by government. Namibia’s industrial policy will not be based on a

‘one-size-fits-all’ approach. As such, it may be targeted and clear framework documents will

highlight priority areas. The policy will be integrated, building on market integration,

infrastructural development, and industrial development. In his response, Duddy (2011b)

reports that the Namibian Government is aware that "ineffective and inefficient governance

can seriously hamper economic development", and will therefore only intervene where

necessary. In addition, interference will be "based on the principle of sustainable and

prudent economic management”.



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Heita (2011) reports that the draft proposes pragmatic reforms to allow competitiveness and

productivity, calling for a review of the labour environment seen as too rigid. It suggests

flexibility to enhance productivity without taking away workers' rights. The role of the state

in the economy is clearly defined as ’pro-developmental’, where the state sets the course of

economic direction, and does not leave it to market forces to dictate. The private sector is

asked to take ownership and increase its contribution to skills development, because

ultimately it is the private sector that benefits from a skilled pool. State treasury is requested

to consider spending a significant portion of funds on innovation, research and development

in social areas where Namibia faces serious challenges, such as housing, health issues and

access to financing.

Heita (2011) also states that the discussions and the industrial policy draft come at a time

when SACU and the entire southern Africa region is seized with domestic regulation reforms

that promote competitiveness along with regional integration. We consider that both South

Africa and Namibia need to carefully consider the SACU Agreement as discussed earlier. We

consider that there are two important aspects of regional plans that must be considered.

The first is regional integration and industrialisation, while the second is the crucial need for

coordination coupled with constant monitoring and evaluation. In these respects the

Namibian programme must be aligned with the South African approach as discussed in this

study.

Lesotho has also released a draft National Strategic Development Plan that parallels the

plans from both South Africa and Namibia. This plan recognises up-front that the most

binding constraints to growth in Lesotho are an uncompetitive business environment, poor

infrastructure, low productivity and limited institutional capacity. In order to achieve high,

sustained and job-creating growth, Lesotho needs to transform its economy by undertaking

structural reforms to address these constraints.

Again, the Lesotho plan closely parallels South Africa’s IPAP in its comprehensiveness

relating to all the ‘flanking policies’ rather than industrial policy per se. It also considers that

there is considerable potential to expand export-led growth in labour-intensive

manufacturing and assembly for the SACU/SADC market, and given that the only

manufacturing capability in Lesotho is TCF we presume it would have to be this sector. An



348

interesting aspect of regional industrial development is that there currently seems to be

limited linkages between the TCF sector in Lesotho, a sector that exists almost entirely due

to its ability to capitalise on the combination of cheap local labour, Asian finance and

managerial expertise, and access through tariff preferences to the US market. On the one

hand and the domestic market in South Africa that has been under siege from mostly

Chinese imports that face 40% (now 45%) tariff walls. This should be an opportunity for

regional cooperation and industrial development for Lesotho in particular.

Finally, the linkages between industrial and trade policies in Botswana have also been

studied (Zizhou, 2009). The study considers that trade policy has largely been disengaged

from industrial policy considerations as there has been a ceding of the latter to South Africa

in recent years. This has been accentuated by the dominance of diamonds in Botswana’s

economy and trade, and although the country has targeted industrialisation as a strategy,

this has not yielded positive results for manufacturing and manufacturing exports in

particular. Most exports rely on preferential access to markets to survive, and the policy of

empowering citizens through local preference schemes in Botswana runs counter to SACU

free trade principles.

Summary

In summary, the IPAP and its update in dti (2011) carefully outline strategies that recognise

the challenges of industrial policy in the modern era. These policies are about strengthening

the wider operating environment (‘flanking policies’) rather than any direct supports. In

particular, the IPAP is to be commended for its forward-looking approach to where South

Africa needs to be. This approach is superbly complemented by the 2011 National

Development Plan – Vision for 2030, which widens the operating environment to cover

every conceivable aspect. This includes the entire physical infrastructure of South Africa, the

need to comprehensively upgrade skills, and the need to comprehensively involve more

previously disadvantaged people in the economy. Perhaps it is overly ambitious and

unrealistic, but then many Asian economies have shown how to achieve such levels of

sustainable and equitable development. Indeed, Brazil, an economy with many similarities to

South Africa, is also showing that Asian achievements are possible outside of Asia. Industrial



349

policy has changed comprehensively in recent years, and the IPAP clearly shows that this is

recognised in South Africa. The key is increased productivity.

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the SACU Secretariat. Sydney and Canberra: Centre for International Economics.

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Chapter 10 – Trade in environmental goods in southern and eastern Africa


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Chapter 10

Trade in environmental goods in southern and eastern Africa

Willemien Viljoen

1. Introduction

Climate change is seen not only as an environmental problem, but also as a developmental issue,

especially for developing countries which are the most affected by the impact of climate change.

African countries are most vulnerable to the effects of climate change due to the reliance of their

economies on agriculture as a major source of exports, growth and development. It is projected that

by 2020, 75 to 250 million people in Africa will be exposed to increased water stress, and yields from

rain-fed agriculture could be decreased by up to 50%. This poses a severe challenge for food security

in the region.

A rise in sea levels also poses a threat to developing countries due to their low adaptation capacities

and large concentration of the population in these low-lying coastal regions. In order to address

these potentially negative impacts developing countries need to build a low-carbon economy which

largely depends on technological innovation and the dissemination of low-carbon technologies,

facilitated by international trade and investment.

The International Energy Agency (IEA) estimates that US$26 trillion in investments are required in

the energy sector between 2005 and 2030 under the business-as-usual scenario with an additional

US$1.4 trillion investment required to limit an increase in the rise of global temperature to 2 degrees

Celsius.

International trade plays a very important role in the facilitation of the required investments, but

there are various trade barriers that can have a negative impact on trade and investment in

environmentally friendly goods and technologies. These barriers include a lack of fiscal incentives for

clean energy production, weak environmental regulation and enforcement, tariffs on environmental

goods and services, non-tariff barriers and subsidies for fossil fuels and other conventional energy

sources.



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The World Bank estimates that a complete elimination of tariffs and non-tariff barriers on

environmentally friendly technology can lead to an average increase of trade in clean coal

technologies, wind and solar power generation and efficient lighting technologies by 13.5%

compared to current levels, while the elimination of tariffs alone can increase trade by an average of

7%. Evidence also suggests that countries with higher levels of trade in environmental goods and

services have lower levels of pollution and a more efficient consumption of energy sources.

The aim of this chapter is to give a brief overview of trade and trade-related issues in environmental

goods in southern and eastern Africa. Firstly, the chapter gives a broad overview of the issues related

to trade and the environmental negotiations on the multilateral level in the World Trade

Organisation (WTO). Secondly, the focus is on the current trade patterns in various environmental

goods in the Common Market for Eastern and Southern Africa (COMESA), the East African

Community (EAC) and the Southern African Development Community (SADC). The analysis looks at

trade in (i) 153 environmental products proposed to the WTO member countries in 2007 by the

Friends of Environmental Goods and Services Group; (ii) the 43 environmental products listed by the

World Bank; and (iii) specific single-use environmental goods. Thirdly, a brief summary of barriers,

tariff and non-tariff barriers, to trade in environmental goods is provided. Lastly, the current intra-

and extra-regional trade patterns and Most-Favoured Nation (MFN) applied tariffs of selected

countries are evaluated to investigate areas of potential bilateral trade in specified environmental

goods. The evaluation is done through trade chilling analyses of different exporting and importing

countries and the MFN tariffs applied to imports of the (i) WTO 153 environmental product list;

(ii) World Bank 43 environmental product list; and (iii) specific single-use environmental goods.

2. Background to the multilateral trade and environment negotiation in the WTO

The relationship between trade and the environment was highlighted in the Doha Ministerial

Declaration in 2001 in paragraph 31(iii) in which the parties agreed to negotiate on ‘the reduction or,

as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services’.

One of the contentious issues in the WTO negotiations is the definition of environmental goods and

services in context of the Doha Declaration. The issue arose in the discussions surrounding tariff cuts

on environmental goods. A reduction in tariffs is negotiated on the basis of the Harmonised System

(HS) Codes of commodity classification. This system is an international standardised system of names

and numbers for classifying traded products. The system is only harmonised up to the six-digit level



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(HS 6) but countries are able to use additional digits (up to 10 digits) if this is warranted. Any

classification beyond the HS 6 level is not standardised among the WTO member states. At the HS 6

level most goods which can be classified as environmentally friendly goods are aggregated with non-

environmentally friendly goods. This is the problem of dual-use products. For instance, HS 831381 is

described as ‘pumps for liquids, whether or not fitted with a measuring device; other pumps’. These

pumps can be used by wind turbines for energy storage. However, at the HS 6 level it is not possible

to separate the pumps used for wind turbines from those used in other applications. Thus, if tariffs

are reduced at the HS 6 level on dual-purpose goods it means that tariffs are reduced on a product

which has an environmental-friendly application, but can also be used in non-environmental goods.

This has led to WTO member countries, especially developing countries, being reluctant to reduce

and eliminate tariffs on dual-use goods.

Two broad categories of environmental goods and services have featured in the WTO discussions:

traditional environmental goods and environmentally preferred products (EPPs). The purpose of the

goods in the first category is to address or remedy an environmental problem, while the second

include any product with certain environmental benefits arising during production, use or disposal

relative to a substitute or like product. However, the WTO member countries have not given any

clarity on the meaning or definition of environmental goods and services in relation to the WTO

negotiations.

Due to the lack of a universal accepted definition and list of products which are environmental

goods, various WTO members have tabled proposals on their interpretation and understanding of

environmental goods and services. The OECD (1999) has defined the environmental goods and

services industry to include ‘activities which produce goods and services to measure, prevent, limit,

minimise or correct environmental damage to water, air and soil and problems related to waste,

noise and ecosystems’. This includes cleaner technologies, products and services that reduce

environmental risk and minimise pollution and resource use. WTO members known as the Friends of

Environmental Goods and Services Group tabled a proposal in 2007 which includes 153 products the

countries deem as environmental-friendly goods. Out of this list the World Bank has drafted a

narrow list of 43 environmental-friendly goods. However, both these product lists have been

criticised in terms of including various dual-use products. There are only a few cases in which there

are an almost perfect match between an environmental good associated with climate-related

technologies and products that are included in the HS Codes at the six-digit level. This includes



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HS 850231: ‘wind powered generation sets’.

The lack of progress on a workable definition for environmental goods and services has led to a lack

in any progress on the liberalisation of trade in environmental goods and services on the multilateral

level. The lack in progress has also been associated with other issues members have raised in the

context of liberalising environmental goods and services trade:

• Trade liberalisation may not provide developing countries with environmental benefits;

• WTO negotiations may not provide an appropriate solution for the liberalisation of climate

mitigation goods;

• Any liberalisation agreement under the WTO needs to be matched with financial and technical

assistance packages; and

• An institutional and enabling environment is necessary for trade liberalisation.

Currently, WTO discussions are more focused on determining the scope and definition of

environmental goods and possible tariff reductions. So far, discussions by WTO members on the

importance of liberalising environmental services and eliminating non-tariff barriers on

environmental goods have been limited. This has resulted in many countries implementing

unilateral, bilateral and regional measures, including tariff reductions, border adjustment measures

and cap-and-trade systems to facilitate the trade in environmental goods and mitigate the effects of

climate change.

3. Trade in environmental goods in eastern and southern Africa

This section will give a brief overview of trade in environmental goods in COMESA, EAC and SADC

according to (i) 153 products on the list proposed by the Friends of Environmental Goods and

Services, (ii) the 43 products on the World Bank list and (iii) specific single-use environmental goods.

The data was sourced from Trade Map, International Trade Centre, at the HS 6 level and are in

US$ (million).

Due to the different interpretations of environmental goods there are differing results when

analysing the patterns of trade in environmental goods. Using the list of 153 products identified by

the Friends Group, world imports of environmental goods increased by 6.5% between 2006 and

2010, while world exports increased by 6% over the same time period. The World Bank list of



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43 products shows that there has been a more significant increase in trade in environmental goods,

world imports increased from approximately US$138 billion in 2006 to approximately US$236 million

in 2010, while world exports increased from approximately US$142 billion to approximately

US$233 billion in the same time period. In terms of specific goods, which can be defined as single-

used environmental goods, world imports of wind turbines, solar photovoltaic (PV), solar water

heaters and compact fluorescent lamps increased by 10%, 37%, 9% and 11% respectively from 2006

to 2010. Over the same time period, world exports of wind turbines increased by 9%, solar PV by

38%, solar water heaters by 7% and compact fluorescent lamps by 16%. However, irrespective of the

environmental goods used, the data shows that trade by southern and eastern African countries

have been limited. Although there has been significant growth in the trade of environmental goods

by some southern and eastern African countries, their share of world trade is currently negligible.

a) WTO list of 153 products

In 2007 a proposal was submitted to the WTO Committee on Trade and Environment by some WTO

members, including the United States, the European Union, Canada, New Zealand and Japan which

identified 153 products under paragraph 31(iii) of the Doha Declaration as environmental goods to

serve as a basis for negotiations and further work among the WTO members. The proposing

countries consider these products to be the products which are important for environmental

protection and workable in terms of customs facilitation and have the potential for convergence

among WTO member countries. The 153 products are identified at the HS 6 level and are divided

into 12 categories: air pollution control; management of solid and hazardous waste and recycling

systems; clean-up or remediation of soil and water; renewable energy plant; heat and energy

management; waste water management and potable water treatment; environmentally preferable

products; resource efficient technologies and products; natural risk management; natural resource

protection; noise and vibration abatement; and environmental monitoring, analysis and assessment

equipment.

The table below shows imports and exports by and from COMESA, EAC and SADC as well as the top

importing and exporting member countries. According to Table 1 the member countries of COMESA

imported the most environmental goods in 2010, followed by SADC and the EAC. In terms of exports,

SADC member countries exported more environmental goods in 2010 than COMESA and the EAC

combined.



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Table 1: Imports and exports of the 153 products list

Imports

2006 2007 2008 2009 2010

COMESA 2 623.58 2 746.46 8 263.39 8 830.55 8 994.41

Egypt 0.00 0.00 4 023.30 3 962.41 3 887.92

Libya 872.15 973.30 1 462.16 1 839.56 1 839.95

Ethiopia 205.16 314.28 497.83 530.64 627.94

Sudan 580.41 0.00 329.00 573.15 499.98

Kenya 188.16 295.39 375.72 421.94 434.95

SADC 5 797.66 7 224.93 8 640.89 7 633.84 8 629.54

South Africa 3 898.60 4 251.12 5 172.30 4 035.91 4 806.37

Angola 696.71 1 235.69 1 540.56 1 724.50 1 762.81

Madagascar 52.58 89.04 356.03 389.03 381.13

Botswana 122.01 157.05 0.00 180.16 309.35

Tanzania 215.61 275.43 372.81 285.49 264.46

EAC 523.75 763.37 1 090.38 1 016.25 1 037.69

Kenya 188.16 295.39 375.72 421.94 434.95

Tanzania 215.61 275.43 372.81 285.49 264.46

Uganda 91.26 150.87 222.83 217.30 235.80

Rwanda 17.56 29.21 92.38 72.12 64.70

Burundi 11.17 12.47 26.64 19.41 37.78

Exports

2006 2007 2008 2009 2010

SADC 3 685.62 4 691.53 5 003.97 3 039.93 3 813.68

South Africa 3 542.42 4 530.66 4 744.84 2 794.66 3 619.03

Angola 21.44 23.57 17.30 24.09 47.90

Tanzania 29.84 31.09 16.60 34.40 39.98

Mauritius 23.55 19.96 23.63 20.01 25.84

Zambia 3.61 8.66 11.12 9.68 22.14

COMESA 142.85 162.80 789.93 897.50 722.42

Egypt 0.00 0.00 485.28 597.16 486.13

Kenya 52.62 61.74 62.28 62.80 75.24

Uganda 15.58 27.87 46.01 40.06 35.51

Mauritius 23.55 19.96 23.63 20.01 25.84

Zambia 3.61 8.66 11.12 9.68 22.14

EAC 99.46 121.88 125.86 141.69 152.41

Kenya 52.62 61.74 62.28 62.80 75.24

Tanzania 29.84 31.09 16.60 34.40 39.98

Uganda 15.58 27.87 46.01 40.06 35.51

Rwanda 0.48 0.64 0.65 3.11 1.13

Burundi 0.94 0.55 0.32 1.31 0.55

Source: Trade Map, International Trade Centre (2011)



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• Trade in the 153 listed products by COMESA, the EAC and SADC have been limited. As a

percentage of world imports and exports the member countries of the regional configurations

accounted for only 2.19% of world imports and 0.67% of world exports in 2010.

• Between 2006 and 2010, imports by COMESA, EAC and SADC member countries increased by

36%, 19% and 11% respectively, while exports increased by 50% 11% and 1% respectively over

the same period.

• South Africa and Angola are the major importing countries in SADC accounting for 76% of the

total SADC imports in 2010. Kenya, Tanzania and Uganda accounted for 90% of the imports

into the EAC, and Egypt and Libya for 64% of the imports into COMESA in the same year.

• Exports of environmental goods are more concentrated, South Africa exporting 95% of the

total SADC exports, Kenya 49% of the total exports for all EAC countries and Egypt 67% of the

total exports from all COMESA members in 2010.

b) World Bank list of 43 environmental products

The World Bank also identified a list of products seen as being relevant to climate change. This

product list was drawn up from the 153 products proposed by the Friends Group and includes only

43 products, including solar collectors, wind turbine parts and components, and hydrogen fuel cells.

Table 2 shows the trade values for COMESA, the EAC and SADC in the 43 environmental products.

The table shows that there has been a significant increase in the trade of these environmental goods

from 2006 to 2008 for most of the member states.



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Table 2: Imports and exports of the 43 environmental goods listed by the World Bank

Imports

2006 2007 2008 2009 2010

SADC 1 526.92 1 471.45 2 240.74 1 930.16 2 287.46

South Africa 1 029.81 877.41 1 437.90 1 071.32 1 477.25

Angola 195.32 197.83 263.31 402.54 263.64

Madagascar 12.98 26.74 142.28 104.45 100.15

Botswana 32.23 31.93 0.00 45.36 90.86

Tanzania 48.48 119.63 116.56 79.44 64.56

COMESA 670.00 694.37 1 903.03 2 081.82 2 121.39

Egypt 0.00 0.00 659.32 754.85 625.75

Libya 205.27 257.99 383.28 451.80 550.52

Ethiopia 55.58 74.28 141.08 226.79 215.63

Kenya 48.83 88.37 114.34 100.23 153.28

Uganda 42.70 60.67 121.44 93.93 103.18

EAC 145.25 278.71 399.87 321.90 362.86

Kenya 48.83 88.37 114.34 100.23 153.28

Uganda 42.70 60.67 121.44 93.93 103.18

Tanzania 48.48 119.63 116.56 79.44 64.56

Rwanda 3.54 8.19 42.00 38.13 28.35

Burundi 1.70 1.85 5.52 10.17 13.48

Exports

2006 2007 2008 2009 2010

SADC 388.29 439.57 577.24 412.67 464.67

South Africa 369.24 422.49 552.40 394.41 429.86

Angola 2.83 0.13 1.40 5.44 15.48

Tanzania 0.68 1.28 1.10 2.21 4.97

Zambia 1.34 0.97 1.13 1.38 3.03

DRC 0.13 0.21 0.19 0.10 2.69

COMESA 27.03 30.58 188.56 231.14 222.86

Egypt 0.00 0.00 139.39 198.80 184.54

Kenya 14.30 21.46 21.73 20.09 21.16

Zambia 1.34 0.97 1.13 1.38 3.03

DRC 0.13 0.21 0.19 0.10 2.69

Uganda 0.73 1.15 3.34 0.94 2.14

EAC 15.74 24.08 26.47 24.40 28.50

Kenya 14.30 21.46 21.73 20.09 21.16

Tanzania 0.68 1.28 1.10 2.21 4.97

Uganda 0.73 1.15 3.34 0.94 2.14

Burundi 0.00 0.09 0.04 0.20 0.16

Rwanda 0.03 0.10 0.27 0.97 0.08

Source: Trade Map, International Trade Centre (2011)



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• Between 2006 and 2010 world imports and exports increased by 14% and 13% respectively.

Imports into COMESA, the EAC and SADC increased by 33%, 26% and 11% respectively over the

same period. Exports from COMESA, the EAC and SADC increased by 69%, 16% and 5%,

respectively.

• In terms of world trade, the member countries of COMESA, the EAC and SADC imported a total

of 2% of total world imports and accounted for only 0.3% of total world exports in 2010.

• South Africa and Angola were the main importing countries in SADC in 2010, accounting for

76% of the total SADC imports. Kenya, Uganda and Tanzania were the major importers in the

EAC, accounting for 89% of total EAC imports; and Egypt, Libya and Ethiopia were the major

importers in COMESA importing 66% of the environmental goods imported in COMESA in the

same year.

• South Africa exported 93% of total SADC exports, Kenya 74% of the total EAC exports and

Egypt 83% of total COMESA exports in 2010.

c) Trade in specific single-use environmental goods

Although it is difficult to identify single-use environmental goods at the HS 6 level there are some

goods at the HS 6 level which can be seen as goods which are used exclusively or predominantly for

environmental purposes. These include wind turbines (HS 850231); solar PV devices and light-

emitting diodes (HS 854140); solar water heaters (HS 841919); biofuels (HS 220710 and HS 220720);

hydraulic turbines (HS 841011 and HS 841012); heat pumps (HS 841861); thermostats (HS 903210);

compact fluorescent lamps (HS 853931) and electric cars and certain hybrid vehicles (HS 870390).

The analysis below focuses on imports, exports and average most-favoured nation (MFN) applied

tariffs for four of the identified single-use environmental goods: (i) solar water heaters; (ii) wind

turbines; (iii) compact fluorescent lamps; and (iv) solar PV. The average MFN applied tariffs were

obtained from two different sources. For those countries which are WTO members, tariff data was

sourced from the WTO statistical tariff database. Tariffs for Ethiopia, Libya and Sudan were sourced

from the Market Access Map, published by the International Trade Centre.



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(i) Solar water heaters

Solar water heaters are an efficient and inexpensive way to utilise renewable energy and are

produced in many developing countries. Solar water heaters are included in HS 841919 which also

includes other non-electric water heaters. The US breaks the HS 6 Code of solar water heaters down

into three 10-digit codes: instantaneous water heaters (HTSUS 8419190020); solar water heaters

(HTSUS 8419190040) and other non-electric water heaters (HTSUS 8419190060). However, the

analysis below includes the full HS 6 category as solar water heaters.

Table 3: Imports, percentage of world imports and average applied tariff

2008 2009 2010

Percentage of

world trade (2010)

Average MFN

applied tariff

US$ (million) % %

World 2 066.71 1 913.23 1 893.67

EU 1 193.37 1 158.16 947.86 50.1 2.6

US 387.32 330.97 368.36 19.5 0.0

Canada 89.81 96.55 106.26 5.6 6.5

Switzerland 61.81 68.80 74.46 3.9

40 francs/ 51 francs/10 francs

per 100 brut

Russia 50.00 40.38 52.84 2.8 10.0

South Africa 6.10 4.14 16.15 0.9 7.5

Madagascar 0.20 0.26 6.70 0.4 20.0

Egypt 6.90 5.69 4.37 0.2 5.0

Mauritius 1.45 4.09 3.30 0.2 0.0

Namibia 0.59 0.49 2.95 0.2 7.5

Kenya 1.37 0.88 1.33 0.1 0.0

Source: Trade Map, International Trade Centre (2011); WTO statistical database (2011)

Table 3 above shows that there was a decrease in the world imports of solar water heaters between

2008 and 2010. Imports decreased from approximately US$2 billion to approximately US$1.8 billion

over the time period. Four of the five top importing countries are developed countries. The EU is a

major importer of solar water heaters, accounting for 50% of the total world imports in 2010. Russia

is the only developing country under the top five importers, accounting for 2.8% of the total world

solar power heater imports.



362

South Africa was the main importing country in southern and eastern Africa, followed by

Madagascar and Egypt. However, the share of all southern and eastern African country imports as a

percentage of world imports is insignificant. The top three importing countries accounted for only

1.5% of global imports in 2010.

The data on the average applied MFN tariffs shows that solar water heaters can be imported duty-

free into the US, Mauritius and Kenya. Madagascar has the highest average applied tariff, followed

by Russia and South Africa. Switzerland currently applies a specific duty per 100 kilogram brut on

imports of solar water heaters.

Figure 1: Main exporters of solar water heaters, 2010

Source: Trade Map, International Trade Centre (2011); author’s calculations

Figure 1 shows the top five exporting economies of solar water heaters. The top exporting

economies are divided into three developed economies (the EU, the US and Switzerland) and two

developing countries (Mexico and China). The EU accounted for almost 60% of the total exports of

solar water heaters in 2010. The top five exporting economies accounted for 94% of the total world

solar water heater exports.

In southern and eastern Africa, the main exporting countries for 2010 were South Africa, Egypt,

Kenya, Tanzania and Zambia. However, these countries accounted for only 0.08% of global solar

water heaters exports in 2010.

0%

10%

20%

30%

40%

50%

60%

70%

EU Mexico US China Switzerland Other



363

(ii) Wind turbines

Wind turbines are one of the few HS 6 codes that include only single-use environment goods

associated with the deployment of renewable energy technologies. In 2009 the global market for

wind turbine installations was approximately US$63 billion, with more than 38 gigawatt (GW) of new

wind power capacity installed in 2009. Global installed wind-energy capacity has been growing faster

than that of any other renewable energy technology. In 2009 more than three-quarters of global

wind power additions were concentrated in five countries: China, the US, Spain, Germany and India.

Apart from China and India, various developing countries have been developing wind energy

capacity. In 2010, 13 other developing countries collectively added 1.4 GW of installed capacity. This

includes Turkey, Brazil, Chile, Morocco, Mexico and Korea.

Table 4: Imports, percentage of world trade and average applied MFN tariff

2008 2009 2010

Percentage of

world trade

Average MNF

applied tariff

US$ (million) % %

World 6 924.43 6 822.00 5 903.31

EU 2 263.90 2 313.76 2 525.44 42.78 2.7

US 2 679.09 2 300.55 1 197.50 20.29 1.3

Canada 545.19 435.76 889.59 15.07 0.0

Turkey 285.01 506.17 405.22 6.86 1.4

Mexico 85.43 195.29 295.26 5.00 7.5

Ethiopia 0.00 0.04 4.92 0.08 5.0

Djibouti 0.00 0.00 2.55 0.04 26.0

Madagascar 0.08 0.06 0.84 0.01 10.0

South Africa 0.74 0.55 0.71 0.01 0.0

Kenya 0.11 0.16 0.25 0.00 0.0

Source: Trade Map and Market Access Map, International Trade Centre (2011); WTO statistical database (2011)

Table 4 shows that the world imports of wind turbines decreased by 4% from 2008 to 2010. The EU

was the main importer of wind turbines in 2010, accounting for 42% of world imports, followed by

the US (20%), Canada (15%), Turkey (7%) and Mexico (5%). Turkey and Mexico (developing country

importers) combined accounted for 12% of the total world imports of wind turbines in 2010.

The top five southern and eastern African importing countries had a negligible share of total world



364

imports in 2010, accounting for a combined total of 0.16% of total world imports. The average

applied tariff of the top five importers is low, ranging from duty-free (Canada) to a moderate rate of

7.5% in Mexico. Wind turbines are imported duty-free into South Africa and Kenya. Djibouti has a

high average tariff (26%) on wind turbine imports, but is the second largest importer in southern and

eastern Africa.

Figure 2: Main exporters of wind turbines; 2010


According to Figure 2 the EU accounted for the majority of world wind turbine exports in 2010,

exporting 87% of total exports. India, China and Brazil are all developing countries under the top five

exporters in the world. However, they only accounted for a combined share of 5% of total world

turbine exports. Countries in southern and eastern Africa exported an insignificant percentage of

world wind turbine exports in 2010. South Africa, Kenya and Mozambique were the top exporters,

accounting for only 0.004% of total world exports.

(iii) Compact fluorescent lamps

Compact fluorescent lamps are energy-efficient light bulbs which are classified under HS 853139.

Government interventions, especially regulations and incentives are an important driver for the

introduction of energy-efficient lighting. Several governments have implemented regulation and

subsidies to promote the replacement of inefficient lamps with more efficient ones.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU US India China Brazil Other



365

Table 5: Imports, percentage of world trade and average MFN applied tariff

2008 2009 2010

Percentage of

world imports

(2010)

Average MFN

applied tariff

US$ (million) % %

World 5 461.94 4 819.00 5 495.08

EU 2 291.21 2 165.69 2 030.80 36.96 2.70

US 1 028.94 752.41 891.45 16.22 2.40

Brazil 136.03 132.97 310.59 5.65 18.00

Russia 83.83 86.90 187.47 3.41 15.00

South Africa 57.44 26.68 35.11 0.64 17.50

Libya 4.05 6.63 12.78 0.23 0.00

Egypt 14.44 10.76 12.74 0.23 17.50

Sudan 0.60 0.29 7.12 0.13 10.00

Kenya 2.15 1.99 5.68 0.10 25.00

Source: Trade Map and Market Access Map, International Trade Centre (2011); WTO statistical database (2011)

Table 5 shows that the EU countries were the main importing countries of compact fluorescent

lamps in 2010, followed by the US, Brazil and Russia. In terms of the top four countries, the

developed countries (the EU and the US) accounted for a combined share of 53% of world imports in

2010, while the developing countries’ (Brazil and Russia) combined share of total imports for 2010

was 9%. What is interesting to note is the divergence in the average applied tariff between the top

two developed country importers and developing country importers. The average tariff of the EU

and the US is low at 2.7% and 2.4% respectively, while Brazil (18%) and Russia (15%) levy moderate

tariffs on compact fluorescent lamp imports.

South Africa, Libya and Egypt are the top importers in southern and eastern Africa. However, their

share of world imports in 2010 was negligible. The average applied tariffs of the countries might

explain the low import figures. Libya is the only country importing compact fluorescent lamps duty-

free. The rest of the top five importing countries levy moderate to high tariffs; Kenya levies the

highest average tariff at a rate of 25%.



366

Figure 3: Main exporters of compact fluorescent lamps; 2010


According to Figure 3, China (59%), exported the majority of the world’s compact fluorescent lamps

in 2010, followed by the EU (29%), Indonesia (3%), the US (2%) and Canada (1%). These countries

accounted for 95% of the total world exports in 2010. In southern and eastern Africa, South Africa,

Egypt and Lesotho were the top exporters of compact fluorescent lamps in 2010. Although the

combined share of these three countries as a percentage of total world exports in 2010 was only

0.08%, exports from these countries have shown significant growth over the last years. Exports from

South Africa and Egypt increased by 29% and 17% respectively from 2006 to 2010.

(iv) Solar PV

Solar energy is an important source of energy due to its environmental and economic benefits and

proven of being a reliable technology. Photovoltaic power has been experiencing high growth rates

and consequently declining costs. China has become an important producer and exporter in solar PV

devices. HS 854140 is considered to be a single-use good because light-emitting diodes (LEDs) also

included in the HS 6 code is considered to a climate-related good. The EU has the largest solar PV

market with Germany the market leader. However, PV modules prove an increasing market

opportunity for production and export for developing countries.

0%

10%

20%

30%

40%

50%

60%

70%

China EU Indonesia US Canada Other



367

Table 6: Main importers of solar PV, percentage of world trade and average MFN applied tariff

2008 2009 2010

Percentage of

world imports

Average MFN

applied tariff

US$ (million) % %

World 41 952.01 38 278.10 70 417.64

EU 24 875.08 21 648.37 43 001.45 61.07 0.0

China 4 422.13 4 308.10 7 264.42 10.32 0.0

US 2 760.19 2 591.73 4 411.53 6.26 0.0

Hong Kong 1 983.79 2 109.07 3 204.73 4.55 0.0

Korea 785.07 1 443.91 2 883.02 4.09 0.0

South Africa 161.41 118.26 156.63 0.22 0.0

Kenya 7.13 10.28 13.20 0.02 0.0

Botswana 0.42 5.30 12.12 0.02 0.0

Uganda 7.43 6.18 8.47 0.01 0.0

Angola 8.55 1.98 6.82 0.01 2.0

Source: Trade Map, International Trade Centre (2011); WTO statistical database (2011)

The top five importing countries accounted for 86% of the total solar PV device imports in 2010

(Table 6). The EU imported 61% of the total world imports, followed by China (10%) and the US (6%).

All solar PV devices imported into the EU, China, US, Hong Kong and Korea are imported duty-free.

The top five importing countries in the eastern and southern African region accounted for only

0.28% of the total world imports in 2010. From 2008 to 2010, imports by South Africa and Angola

decreased, while imports into Kenya, Botswana and Uganda slightly increased over the same time

period. Four of the five top importing countries import solar PV devise duty-free; Angola is the only

top importing country levying a tariff of 2%.



368

Figure 4: Main exporters of solar PV, 2010

Source: Trade Map, International Trade Centre; author’s calculations

Figure 4 shows that China, the EU, Chinese Taipei, Japan and Korea were the main exporters of solar

PV devices in the world for 2010. China and the EU combined accounted for 59% of the total solar PV

device exports in 2010. South Africa, Egypt and Kenya were the major exporters in southern and

eastern Africa; South Africa accounted for 0.23% of the total share of world exports, Egypt 0.004%

and Kenya 0.002%. There has also not been significant growth in solar PV exports from countries in

eastern and southern Africa over the last five years.

4. Barriers to trade in environmental goods

Trade liberalisation is seen as an important driver of technological innovation and the diffusion of

climate-friendly technologies. However, tariffs and non-tariff barriers can hinder the trade in

environmental goods and the transfer of environmental technologies.

4.1 Tariffs

Most developed countries and some developing countries have low tariffs on imports of

environmental goods. However, some developing countries want to keep a certain level of tariff

protection to build their domestic production capacities, as has been the case for wind power in

India. Other developing countries, like South Africa in the case of solar water heaters, wish to reduce

tariffs in single-use finished environmental products to meet national renewable energy targets

while developing domestic manufacturing capacity.

0%

5%

10%

15%

20%

25%

30%

35%

40%

China EU Chinese Taipei

Japan Korea Other



369

Some large emerging economies have used tariff protection to support the development of their

domestic capacity to manufacture environmental products associated with renewable energy

deployment. The MFN applied tariff on single-use environmental goods range between 8% and 12%

in China. In India, most MFN applied tariffs are either 7.5% or 10%, while the average applied tariff in

Brazil is approximately 12%.

Looking at the average applied tariff in different developing countries on specific single-use

environmental goods reveals that in general the average applied tariff on solar PV devices and wind

turbines is relatively low, while the average tariff on electric vehicles is quite high. Figures 5 and 6

below show the average MFN applied tariffs of 11 countries in southern and eastern Africa for

specific single-use environmental goods. The analysis includes average tariff data on wind turbines,

solar PV devices, solar water heaters, heat pumps, thermostats and compact fluorescent lamps at

the HS 6 level and was sourced from the WTO statistical tariff database.

Figure 5: Average MFN applied tariffs on single-use goods for specific African countries (%)

Source: WTO statistical database (2011)

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Angola

Djibouti

Egypt

Kenya

Malawi

Mauritius

Mozambique

South Africa

Tanzania

Zambia

Zimbabwe

Average MFN applied tariff



370

Figure 6: Average MFN applied tariffs on specific single-use goods (%)

Source: WTO statistical database (2011)

The data shows that all single-use goods which were evaluated are imported duty-free into

Mauritius. The average applied import tariff in the majority of the importing countries is low to

moderate, ranging from duty-free (Mauritius) to 14.6% (Zimbabwe). Djibouti is the only country with

a high average applied tariff on the imports of single-use goods with an average tariff of 23.8%. Apart

from compact fluorescent lamps (average tariff of 13%) the average applied tariff on all the

evaluated single-use goods imported by Djibouti is 26%. Zimbabwe applied a 40% average tariff on

the imports of heat pumps and a 22.5% average tariff on solar water heater imports. Imports of

fluorescent lamps (average tariff of 13.68%) and heat pumps (average tariff of 12.46%) are protected

by moderate average tariffs. Wind turbines and solar PV devices are import products with the lowest

level of average applied tariffs, with an average tariff of 4.36% and 3.68% respectively. This indicates

that although some countries in southern and eastern Africa protect their domestic interest in

specific single-use environmental goods, the average tariff is not a major barrier to trade in

environmental products in the region.

4.2 Non-tariff barriers (NTBs)

Trade in environmental goods faces different NTBs. These include local content requirements and

differing industrial standards and certification requirements. Trade in biofuels, for instance, are

affected by varying fuel standards for biodiesel, subsidies to domestic producers and

0.00 2.00 4.00 6.00 8.0010.0012.0014.0016.00

Heat pumps (HS 841861)

Solar water heaters (HS 841919)

Wind turbines (HS 850231)

Compact fluorescent lamps (HS 853931)

Solar PV devices (HS 854140)

Thermostats (HS 903210)

Average MFN applied tariff



371

sustainability regulations. Biofuel certification can on the one hand ensure that biofuels contribute

to the net reduction of greenhouse gas emissions, but on the other hand can also act as an NTB.

Subsidies and incentives can also have varying implications for international trade. These measures

can be utilised to create demand for an environmental good in developing countries, and if aimed at

strengthening manufacturing capacities, they can affect the opportunities for manufacturers in

developing countries to participate in the international market.

The NTBs which have been identified as being the most prolific in trade in environmental goods,

especially in developing countries, including southern and eastern African countries, comprise the

following:

• Local content requirements have been applied in the wind-energy sector and increasingly for

solar-energy projects;

• Differing industrial standards and certification can affect trade in different environmental

goods, including wind turbines, PV panels and heat pumps;

• Governments might want to utilise subsidies and incentives to ensure the maximum benefit for

domestic manufacturers and employment in environmental products;

• Eco-labelling requirements, especially the costs associated with the technical requirements,

are imposed by developed country importers;

• Subsidies for fossil fuels and traditional energy sources can be a hindrance in promoting the

use of sustainable and renewable energy sources;

• Financial constraints and lack of knowledge regarding the development, manufacturing and

diffusion of climate-friendly goods and technologies exist;

• Intellectual property rights have regularly been highlighted as a barrier to the diffusion of

climate-friendly technologies from developed to developing countries; and

• Green protectionism in the form of taxes, charges, regulations and countervailing measures

levied on those developing countries is considered not to be contributing to the reduction of

greenhouse gas emissions.

Various identified NTBs can play a pivotal role in the opportunities available for countries in the

region to participate in the international trade of environmental goods. This is so, especially seeing



372

that the average applied tariff in most southern and eastern Africa countries is not high enough to

explain the lack of trade in these products in the region. Many African countries do not have the

financial, institutional and manufacturing capacities to facilitate the production and trade of

environmental goods. However, given Africa’s vulnerability to the effects of climate change and the

potential for utilising environmentally friendly goods and technologies, NTBs need to be addressed

to facilitate investment in environmental goods which can enhance employment, growth and

development in the region.

5. The concept of ‘trade chilling’

Traditionally quantitative and qualitative analyses and projections of the welfare effects of tariff

liberalisation focus on current trade flows. However, these approaches are unable to estimate new

trade opportunities that might open up as a consequence of tariff liberalisation. Concentrated trade

flows between countries in specific product categories can be in part due to the tariff structure

outside those specific product lines being relatively high. As a consequence of these tariff lines, trade

may have been chilled. The issue at hand is whether countries are fully exploiting potential trade

opportunities among each other or whether trade chilling is taking place. For instance, if South Africa

exports a specific product in large quantities and Egypt imports the same product in large quantities,

but there is little or no bilateral trade of this product between South Africa and Egypt, bilateral trade

may be ‘chilled’ between the countries. To establish whether this is the case a trade-chilling analysis

is conducted.

The methodology of a trade-chilling analysis has the following points of departure:

• Market opportunity (importer) is viewed through the value or volume (high) of imports.

• Supply potential (exporter) is viewed through the value or volume (high) of exports.

• The importer imports from other exporters, but not from this particular exporter.

• The exporter exports to other importers, but not from this particular importer.

Although this analysis can provide some useful insights, it has limitations. The limitations include an

inability to account for non-tariff barriers, tastes and preferences and product classification systems

that may not be strictly comparable at a detailed level.

5.1 The methodology used



373

The analyses below are done for the following three product category classifications: (i) 153

environmental products of the Friends Group; (ii) the World Bank 43 environmental products; and

(iii) specific single-use environmental goods. Within each product category classification we also

analysed different importers and exporters:

• In the 153 environmental products group we used Egypt, Kenya and South Africa as exporting

countries and Angola, Egypt, Kenya, Libya, South Africa and Tanzania as importing countries.

• In the 43 environmental products group Egypt and South Africa are analysed as exporters with

Angola, Egypt, Kenya, Libya, South Africa and Uganda analysed as importing countries.

• In the category of specific single-use environmental goods the potential bilateral trade

opportunities between South Africa and the Democratic Republic of Conge (DRC), Egypt,

Ethiopia, Kenya, Tanzania, Uganda and Zambia was analysed.

Although the product categories, importers and exporters differ across the analyses, the

methodology used to narrow the field down in each product category was kept the same. We looked

at HS6 lines where (a) the exporters’ exports to the world were at least US$200 000 a year on

average over three (Egypt) and five (Kenya and South Africa) years to denote supply potential and

(b) the importers’ imports from the world were at least US$200 000 a year on average over three

(Egypt) or five (all other importers) years to denote the demand side. Next, the lines were examined

where export from the exporter to the importer and imports into the importer from the exporter

were both below US$11 000 on average over three or five years, indicating no bilateral trade

between the countries. The selection was further narrowed down where on average world exports

from the exporter and global imports into the importer were worth at least US$800 000. This

serviced to identify the product lines where trade opportunities are most significant.

5.2 WTO list of 153 products

The analyses below focus on Egypt, Kenya and South Africa each as the exporting country and

Angola, Egypt, Kenya, Libya, South African and Tanzania as corresponding importing countries. The

trade data was sourced from Trade Map (US$ million) and tariff data from the Market Access Map

(percentage), International Trade Centre (2012). Due to a lack of complete trade data, the export-

import relationship between Egypt and the various importing countries is analysed based on the

latest three year average of the available trade data (2008-2010). The analyses for Kenya and



374

South Africa are based on the five year average of the latest available trade data (2006-2010).

5.2.1 Egypt

Table 7 below provides a summary of those environmental products in the list of 153 environmental

goods where bilateral trade between Egypt and Angola, Kenya, Libya, South Africa and Tanzania is

currently limited but have the potential for future increased bilateral trade. The table shows that the

product lines in which there could be potential for increased trade between Egypt and the other

countries are similar across the importing countries.

The top five environmental goods exported by Egypt in terms of value are towers and lattice masts

of iron or steel (HS 730820); electricity supply, production and calibrating meters (HS 902830);

boards and panels exceeding 1000 Volt (HS 853710); sanitary ware and part thereof (HS 732490);

and certain air conditioning machines (HS 841581).



375

Table 7: Summary of products Egypt exports to the world and Angola, Kenya, Libya, South Africa and Tanzania imports from the world without

bilateral trade between Egypt and the other countries

HS Code Product label

Egypt Angola Kenya Libya South Africa Tanzania

Exports world

MFN applied

tariff (%)

Imports world

MFN applied

tariff (%)

Imports world

MFN applied

tariff (%)

Imports world

MFN applied

tariff (%)

Imports world

MFN applied

tariff (%)

Imports world

'730820 Towers & lattice masts, iron or steel 44.94 − − − − − − 7.50 9.68 − −

'902830 Electricity supply, production and calibrating meters 30.91 2.00 2.16 0.00 3.53 0.00 3.04 0.00 14.64 0.00 5.13

'853710 Boards, panels etc. <=1000 V 25.60 2.00 63.94 − − − − 11.67 89.08 − −

'732490 Sanitary ware & parts thereof 21.99 10.00 3.30 − − − − − − − −

'841581 Air conditioning machine nes 10.92 5.00 2.26 − − − − 0.00 3.80 − −

'848180 Taps, cocks, valves & similar appliances, nes 9.21 2.00 145.67 − − − − 13.67 196.47 − −

'850680 Primary cells & batteries nes 5.92 2.00 1.52 − − − − 10.00 14.20 35.00 3.56

'841430 Compressors for refrigerating equipment 4.37 2.00 3.09 0.00 1.12 0.00 3.67 0.00 90.85 10.00 1.16

'841459 Fans nes 3.26 2.00 5.02 − − − − 0.00 42.42 25.00 1.86

'730900 Reservoirs, tanks etc. with capacity >300L 3.09 20.00 43.14 − − − − 0.00 10.54 25.00 6.78

'732190 Appliance parts household, cooking, camping, nes 3.09 − − − − − − 15.00 3.05 − −

'730690 Tubes, pipe & hollow profiles, iron or steel, welded, nes 2.45 15.00 13.67 0.00 2.21 − − 10.00 5.74 25.00 2.72

'392010 Film & sheet etc. (ethylene polymers) 2.11 15.00 3.96 − − − − − − 17.50 3.33

'854140 Solar PV 1.50 − − 0.00 10.21 0.00 2.15 0.00 145.43 0.00 5.29

'847990 Parts of machines & mechanical appliances nes 1.43 − − 0.00 1.87 − − − − 0.00 2.94

'848190 Parts of taps, cocks, valves/similar appliances 1.26 − − 0.00 1.45 − − − − 10.00 1.75

'903289 Automatic regulating or controlling instruments & apparatus, nes 1.22 − − − − 0.00 10.49 − − − −

Source: Trade Map and Market Access Map, International Trade Centre (2011); author’s calculations



376

The trade chilling analyses show the potential for more of these products to be exported to

the following importing countries:

• Towers and lattice masts (HS 730820) exported to South Africa with an applied tariff of

7.5%.

• Electricity supply, production and calibrating meters (HS 902830) exported to Angola

(2% applied tariff) and Kenya, Libya, South Africa and Tanzania duty-free.

• Boards and panels (HS 853710) exported to Angola (2% applied tariff) and South Africa

(11.67% applied tariff).

• Sanitary ware (HS 732490) exported to Angola with an applied tariff of 10%.

• Certain air conditioning machines (HS 841581) exported to Angola (5% applied tariff)

and South Africa (duty-free).

Based on the applied tariffs of these product lines there seems to be no evidence to suggest

that tariffs are the main factor prohibiting bilateral trade in environmental goods. This

suggests that non-tariff barriers play a significant role in the bilateral trading relationship, in

specific environmental goods, between Egypt and the specified importing countries.

The value of global imports into Angola, Kenya, Libya, South Africa and Tanzania show the

products with the most potential for Egyptian exporters. These are:

• Certain taps, cocks and valves (HS 848180) imported by Angola (2% applied tariff) and

South Africa (13.67% applied tariff).

• Solar PV devices (HS 854140) imported duty-free by Kenya, South Africa and Tanzania.

• Boards and panels (853710) imported by Angola (2% applied tariff) and electricity

supply, production and calibrating meters (HS 902830) imported duty-free by Kenya.

• Certain automatic regulating or controlling instruments and apparatus (HS 903289)

and certain compressors (HS 841430) imported duty-free by Libya.

• Reservoirs and tanks with a capacity exceeding 300 litres (HS 730900) imported by

Tanzania with an applied tariff of 25%.



377

The South African applied tariff on certain taps etc. and the applied tariff of Tanzania on

imports of certain reservoirs and tanks are the only two product lines in which moderate to

high tariffs may discourage Egyptian exporters. The lack of bilateral trade in those product

lines which are imported duty-free is indicative that non-tariff barriers may be a significant

obstacle to intra-regional trade in these specific environmental goods.

5.2.2 Kenya

Table 8 shows the environmental products in which bilateral trade between Kenya and

Angola, Egypt, Libya and South Africa can potentially be increased. The table also indicates

that Kenya currently exports a low value and limited diversity of the specified environmental

goods to the rest of world, with four of the top seven export products being types of tubes

and pipes (HS 730439, 730661, 730630 and 730690).

Table 8: Products Kenya exports to the world; Angola, Egypt, Libya and South Africa

imports from the world without bilateral trade with Kenya

Kenya Angola Egypt Libya South Africa

HS Codes Product Descriptions

Exports World

MFN

applied

tariff

(%)

Angola imp World

MFN

applied

tariff

(%)

Egypt imp World

MFN

applied

tariff

(%)

Libya imp World

MFN

applied

tariff

(%)

SA imp World

'392010 Film & sheet etc. (ethylene polymers) 4.07 15.00 2.99 0.00 9.22 0.00 4.77 10.00 37.36

'730820 Towers & lattice masts 3.61 5.00 26.57 0.00 4.33 0.00 57.17 7.50 6.73

'730690 Tubes, pipe etc. (welded iron/steel) nes 2.52 15.00 13.31 0.00 114.14 0.00 7.82 10.00 5.49

'730900 Reservoirs, tanks etc. capacity >300L 2.49 20.00 32.98 0.00 22.78 0.00 18.28 0.00 9.91

'730661 Tubes, pipes etc. (welded square/rectangular) 2.23 15.00 19.69 0.00 1.52 0.00 2.91 10.00 2.86

'730630 Tubes, pipe etc. (welded circ cross sect) nes 2.21 15.00 17.04 0.00 5.14 0.00 8.92 10.00 15.95

'730439 Tubes, pipe etc. (circ cross section) nes 2.07 5.00 3.65 0.00 26.10 0.00 3.29 7.50 20.75

'853710 Boards, panels etc. <=1000 V 1.99 2.00 51.20 0.00 91.19 0.00 56.68 11.67 82.18

'841370 Centrifugal pumps nes 1.82 2.00 14.53 0.00 153.54 0.00 39.34 0.00 50.69

'850720 Lead-acid electric accumulators nes 1.64 0.00 3.17 0.00 14.93 0.00 3.98 0.00 40.88

'841320

Hand pumps nes, other than subheading No 8413.11 or 8413.19 1.22 2.00 0.97 − − 0.00 0.85 0.00 3.76

'850680 Primary cells & batteries nes 1.18 2.00 1.42 − − − − 10.00 11.96




378

The table shows that the potential is there to increase Kenya’s top export products of

ethylene polymer film and sheet (HS 392010); towers and lattice masts of iron or steel (HS

730820); welded iron or steel tubes and pipes (HS 730690); and reservoirs and tanks

exceeding 300 litres (HS 730900) to the selected importing countries. However, medium to

high tariffs (between 15% and 20%) on Angola imports of film and sheet (HS 392010), tubes

and pipes (HS 730690) and reservoirs and tanks (HS 730900) may be a deterrent for

increased Kenyan exports. The applied tariffs on the remainder of the product lines exported

to Egypt, Libya and South Africa are all either low (7.5% to 11.67%) or products are imported

duty-free. Thus tariffs are not a major deterrent of environmental product exports from

Kenya to Egypt, Libya and South Africa, but may play a role in the exportation of some

environmental goods to Angola.

Kenya can also possibly increase exports of the following products to the different country

markets:

• Boards and panels exceeding 1000 Volt (HS 853710) imported by Angola (2% applied

tariff), Libya (duty-free) and South Africa (11.67% applied tariff).

• Centrifugal pumps (HS 841370) imported duty-free by Egypt and South Africa.

• Towers and lattice masts of iron or steel (HS 730820) imported duty-free by Libya and

with an applied tariff of 5% by Angola.

• Welded iron or steel tubes or pipes (HS 730690) imported duty-free by Egypt.

The 0% to low applied tariffs and the limited bilateral trade currently taking place between

Kenya and Angola, Egypt, Libya and South Africa seems to suggest that non-tariff barriers are

the main factors prohibiting current bilateral trade.

5.2.3 South Africa

Table 9 provides a summary of the top products South Africa exports to the rest of the

world, but which it does not currently export to Angola, Egypt, Kenya or Libya. The applied

tariffs (except 30% applied tariff on towers and lattice mast imports (HS 730820) from Egypt)

range between duty-free and 10% which suggests that tariffs are not the most important

factor prohibiting intra-regional trade in the specified environmental goods.



379

Table 9: Summary of South Africa's global exports and global imports by Angola, Egypt,

Kenya and Libya with no or limited bilateral trade with South Africa Angola

HS

Code Product label

MFN applied

tariff (%)

Angola

imp World

Angola

imp SA

SA exp

World

SA exp

Angola

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'841790 Parts of industrial/lab furnaces & ovens 2.00 6.11 0.01 4.40 0.01

'846694 Parts & accessories nes for heading 84.62 or 84.63 2.00 2.15 0.01 3.71 0.01

'842833 Cont-action elevators/conveyors nes 2.00 5.15 0.01 3.32 0.01

'841181 Gas turbines nes< 5000 KW 2.00 2.79 0.00 1.90 0.00

'841940 Distilling/rectifying plant 2.00 1.66 0.01 1.14 0.01

Egypt

HS

Code Product label

MFN applied

tariff (%)

Egypt imp

World

Egypt

imp SA

SA exp

World

SA exp

Egypt

3 yr

average

3 yr

average

3 yr

average

3 yr

average

'730820 Towers & lattice masts 30.00 4.33 0.00 97.68 0.00

'848340 Gears & gearing, ball screws, gear boxes, speed changers/torque converters 5.00 41.42 0.01 33.79 0.01

'730900 Reservoirs, tanks etc. capacity >300L 5.00 22.78 0.00 23.23 0.00

'847420 Crushing/grinding machines for earth/ stone/ores 5.00 69.87 0.00 21.13 0.00

'841490 Parts of vacuum pumps, compressors etc. 5.00 22.16 0.00 13.95 0.01

Kenya

HS

Code Product label

MFN applied

tariff (%)

Kenya imp

SA

Sa exp

Kenya

SA exp

World

Kenya

imp

World

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'851490 Parts of industrial/laboratory electric furnaces & ovens nes 0.00 0.00 0.01 10.57 0.80

'850164 AC generators > 750 KVA 0.00 0.00 0.00 1.21 5.76

'842119 Centrifuges nes 10.00 0.00 0.01 1.15 0.81


Libya

HS

Code Product label

MFN applied

tariff (%)

Libya imp

World

Libya

imp SA

SA exp

World

SA exp

Libya

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'842139 Filtering/purifying machinery & apparatus for gases nes 0.00 15.00 0.00 2,388.53 0.00

'854140 Solar PV 0.00 1.60 0.00 138.79 0.00

'732690 Articles, iron/steel, nes 0.00 61.51 0.00 68.95 0.00

'841381 Pumps nes 0.00 28.85 0.00 55.47 0.00

'840991 Parts for spark-ignition type engines nes 0.00 6.64 0.00 54.34 0.00




380

The products with the greatest potential for increased exports (based on the value of

South African exports to the world) are certain parts of furnaces and ovens (HS 841790)

exported to Angola (2% applied tariff); gears and gearing etc. (HS 848340) exported to Egypt

(5% applied tariff); certain parts of electric furnaces and ovens (HS 851490) exported duty-

free to Kenya; and certain gas filtering and purifying machinery and apparatus (HS 842139)

exported duty-free to Libya.

Based on the value of world imports Angola also presents South African exporters the

opportunity to increase their exports of certain parts of furnaces and ovens (HS 841790);

Egypt (5% applied tariff) for increased exports of certain machines to process earth, stone

and ores (HS 847420); Kenya (duty-free) for increased exports of AC generators exceeding

750 KVA (HS 850164); and Libya (duty-free) increased exports of certain irons or steel

(HS 732690).

5.3 World Bank list of 43 environmental goods

The trade chilling analyses of the World Bank product list of 43 environmental products

focus on Egypt and South Africa as exporting countries and Angola, Egypt, Kenya, Libya,

South Africa and Uganda as corresponding importing countries. The trade data and low

tariffs (except in the case of towers and lattice masts exports from South Africa to Egypt) for

both Egyptian and South African exports indicate that there may be various opportunities for

improved bilateral trade. However, seeing that the current lack of bilateral trade cannot be

attributed to high tariffs there may be non-tariff barriers affecting current trade which can

limit enhanced bilateral trade potential.

5.3.1 Egypt

Figures 7 and 8 show the following trade data and data on MFN applied tariffs: (a) Egypt’s

exports to the rest of the world for five environmental products (US$ million); (b)

South Africa’s (figure 7) and Angola’s (figure 8) imports from the rest of the world for the

corresponding five environmental products; and (c) MFN applied tariffs for the specific

goods imported into South Africa (figure 7) and Angola (figure 8) from Egypt.



381

Figure 7 shows the top five environmental goods Egypt export to the rest of the world and

represent the products with the most potential for enhanced bilateral trade with

South Africa, given the value of these products imported by South Africa from the rest of the

world, but not Egypt.

Figure 7: Egypt global exports, South Africa global imports and MFN applied tariffs for

specific environmental products


The top environmental products exported by Egypt are towers and lattice masts from iron or

steel (HS 730820), boards and panels with a voltage larger than 1000V (HS 853710) and

certain air conditioning machines (HS 841581). There is the potential to export more of these

products to South Africa, seeing that the tariffs for these products range between 0% and

11.67%, which is low. The South African market for boards and panels (HS 853710), certain

primary cells and batteries (HS 850680) and certain reservoirs and tanks with a capacity of

more than 300 litres (HS 730900) show the most potential for increased exports from Egypt.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Towers & lattice masts

Boards, panels ect. <=1000 V

Air cond mach nes

Primary cells & batteries

nes

Reservoirs, tanks

etc.>300L

Egypt exp World (US$ mil)

SA imp World (US$ mil)

MFN applied tariff (%)



382

Figure 8: Egypt global exports, Angola global imports and MFN applied tariffs for specific

environmental products


Figure 8 shows that in terms of global exports by Egypt and global imports by Angola that

the trade pattern between Egypt and South African and Egypt and Angola is quite similar.

Compared with Angola’s top import products from the rest of the rest of the world (boards

and panels with a voltage higher than 1000V (HS 853710), reservoirs and tanks with a

capacity larger than 300 litres (HS 730900) and sanitary ware and parts thereof (HS 732490))

Egypt mostly export boards and panels (HS 853710), sanitary ware and part thereof

(HS 732490) and certain air conditioning machines (HS 841581) to the rest of the world.

Angolan import duties have also not been a major barrier to current bilateral trade in these

products with the highest tariff being an import duty of 20% on reservoirs and tanks

(HS 730900).

In the case of bilateral trade between Egypt and both South Africa and Angola the data

shows that high tariffs have not played a major part in ‘chilling’ trade between the countries.

This suggests that non-tariff barriers play a significant role in trade between Egypt and South

Africa and Angola. A non-tariff barrier which can possibly play a role is high transportation

costs associated with inefficient transport infrastructure.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Boards, panels,etc. <=1000 V

Sanitary ware & parts

Air cond mach nes

Primary cells & batteries

nes

Reservoirs, tanks

etc.>300L

Egypt exp World (US$ mil)

Angola imp World (US$ mil)




383

Table 10 gives a summary of the top environmental products Egypt exports to the rest of the

world and Kenya, Libya and Uganda imports from the rest of the world, without there being

a significant value of bilateral trade between Egypt and Kenya, Libya and Uganda.

Table 10: Environmental products with the potential for bilateral trade between Egypt and

Kenya, Libya and Uganda

Kenya

HS Codes Product label MFN applied

tariff (%)

Kenya imp

World

Kenya

imp Egypt

Egypt

exp

World

Egypt exp

Kenya

3 yr

average

3 yr

average

3 yr

average

3 yr

average

'854140 Solar PV 0.00 10.21 0.00 1.50 0.00

'841990 Parts for heading No 84.19 0.00 1.49 0.00 0.93 0.00

Libya

HS Code Product label MFN applied

tariff (%)

Libya imp

Word

Libya imp

Egypt

Egypt

exp

World

Egypt exp

Libya

3 yr

average

3 yr

average

3 yr

average

3 yr

average

'854140 Solar PV 0.00 2.15 0.00 1.50 0.00

Uganda


tariff (%)

Uganda

imp World

Uganda

imp Egypt

Egypt

exp

World

Egypt exp

Uganda

3 yr

average

3 yr

average

3 yr

average

3 yr

average

'850680 Primary cells & batteries nes 7.00 10.79 0.00 5.92 0.00

'730900 Reservoirs, tanks etc. with capacity >300L 5.00 2.26 0.00 3.09 0.00

'392010 Film & sheet (ethylene polymers) 3.50 1.74 0.00 2.11 0.00

'854140 Solar PV 0.00 7.36 0.00 1.50 0.00


The trade data shows there may be the potential for Egypt to increase exports of Solar PV

(HS 854140) to Kenya, Libya and Uganda seeing that all three countries import a significant

amount from other countries (except Egypt) while import duties in all three countries are

0%. Uganda also present possible enhanced market opportunities for Egyptian exports of

primary cells and batteries (HS 850680), reservoirs and tanks with a capacity exceeding

300 litres (HS 730900) and ethylene polymer films and sheet (HS 392010) with low import

duties of 7%, 5% and 3.5% respectively.



384

5.3.2 South Africa

Table 11 shows the top two environmental products South Africa export to the rest of the

world and Angola, Egypt, Kenya, Libya and Uganda imports from the rest of the world with

limited bilateral trade between South Africa and the other countries.

Table 11: Top products South Africa exports to the world; Angola, Egypt, Kenya, Libya and

Uganda import from the world with limited bilateral trade with South Africa

Angola


tariff (%)

Angola

imp World

Angola

imp SA

SA exp

World

SA exp

Angola

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'840290 Parts of steam /vapour generating boilers nes 2.00 0.46 0.01 3.23 0.01

'841181 Gas turbines nes <5000 KW 2.00 2.79 0.00 1.90 0.00

Egypt


tariff (%)

Egypt imp

Word

Egypt

imp SA

SA exp

World

SA exp

Egypt

3 yr

average

3 yr

average

3 yr

average

3 yr

average

'730820 Towers & lattice masts, iron or steel 30.00 4.33 0.00 97.68 0.00

'848340 Gears & gearing, ball screws, gear boxes, speed changers/torque converters 5.00 41.42 0.01 33.79 0.01

Kenya


tariff (%)

Kenya imp

World

Kenya

imp SA

SA exp

World

SA exp

Kenya

5 yr

average

5 yr

average

5 yr

average

5 yr

average



Libya


tariff (%)

Libya imp

World

Libya imp

SA

SA exp

World

SA exp

Libya

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'854140 Solar PV 0.00 1.60 0.00 138.79 0.00

'853710 Boards, panels etc. <=1000 V 0.00 56.68 0.01 34.53 0.01

Uganda


tariff (%)

Uganda

imp Word

Uganda

imp SA

SA exp

Word

SA exp

Uganda

5 yr

average

5 yr

average

5 yr

average

5 yr

average

'392010 Film & sheet etc (ethylene polymers) 17.50 1.59 0.01 11.15 0.01





385

In terms of South African exports, South Africa mostly exports Solar PV devices (HS 854140),

towers and lattice masts of iron or steel (HS 730820) and boards and panels with a voltage

higher than 1000V (HS 853710). The countries with the best opportunity for enhanced

bilateral trade are Libya as an export destination for exports of boards and panels

(HS 853710), Egypt for exports of gears and gearing etc. (HS 848340) and Uganda for exports

of AC generators exceeding 750 KVA (HS 850164). These are the top imported products by

the individual countries with boards and panels (HS 853710) and AC generators (HS 850164)

imported duty-free and gears and gearing imports (HS 848340) at a low 5% import duty.

Moderate to high tariffs can only be seen as a possible barrier to trade in the case of towers

and lattice masts (HS 730820) imported into Egypt (30% tariff) and ethylene polymer film

and sheet (HS 392010) imported into Uganda (17.5% tariff).

This indicates that non-tariff barriers may play a significant role in intra-regional trade of the

43 environmental goods analysed which must be address in order to facilitate countries’

utilisation of potential opportunities to enhance intra-regional trade in these goods.

5.4 Single-use environmental products

The analysis of the single-use environmental goods focuses on the following products:

• Wind turbines (HS 850231);

• Solar PV devices and light-emitting diodes (HS 854140);

• Solar water heaters (HS 841919);

• Biofuels (HS 220710 and 220720);

• Hydraulic turbines (HS 841011 and 841012);

• Insulation materials (HS 680610, 680690, 700800 and 701939);

• Heat pumps (HS 841861);

• CFLs (HS 853931);

• Electric and certain hybrid vehicles (HS 870390); and

• Thermostats (HS 903210)


The Tripartite Free Trade Area – towards a new African integration paradigm?© Trade Law Centre for Southern Africa, Swedish International Development Cooperation Agency, 2012

The figure below shows the potential trade opportunities between S

exporter) and Egypt, Ethiopia, Kenya and Uganda (as importers) in CFLs, certain electric and

hybrid vehicles and heat pumps. The graph denotes the following data: (a) South Africa’s

global exports of the specific products (US$ million);

global imports of the specific products (US$ million); and (c) the MFN applied tariff for each

specific product in the individual importing country (percentage).

Figure 9: South Africa's global exports and various countries' global imports

applied tariffs for CFLs, electric and hybrid vehicles and heat pumps


The graph shows Egypt, Ethiopia, Kenya and Uganda all as potential markets for

South African exports of CFLs. However, the current bilateral trade between South Africa

and all the other countries are minimal. The tariff data gives a possible explanation for the

‘chilled’ bilateral trade. Tariffs on South African imports for all products into all the indicated

countries (except heat pumps imported into Egypt) are medium to high tariffs, ranging

between 15% and 56.25%. The imports with the highest import duties are electric and hyb

vehicles exported to Egypt (56.25%) and Ethiopia (35%) and CFL’s imported by Ethiopia

(30%), Kenya (25%) and Uganda (25%). High tariffs are an important barrier to trade and can

explain the lack of bilateral trade.

0

20

40

60

EgyptEthiopia Kenya

CFLs


towards a new African integration paradigm? © Trade Law Centre for Southern Africa, Swedish International Development Cooperation Agency, 2012

The figure below shows the potential trade opportunities between South Africa (as the



global exports of the specific products (US$ million); (b) the individual importing countries’


specific product in the individual importing country (percentage).

bal exports and various countries' global imports

for CFLs, electric and hybrid vehicles and heat pumps


Ethiopia, Kenya and Uganda all as potential markets for

African exports of CFLs. However, the current bilateral trade between South Africa


al trade. Tariffs on South African imports for all products into all the indicated


between 15% and 56.25%. The imports with the highest import duties are electric and hyb



explain the lack of bilateral trade.

UgandaEthiopia Egypt

EthiopiaEgypt

Electric & hybrid vehicles Heat pumps


386

outh Africa (as the



(b) the individual importing countries’


bal exports and various countries' global imports and MFN


Ethiopia, Kenya and Uganda all as potential markets for

African exports of CFLs. However, the current bilateral trade between South Africa


al trade. Tariffs on South African imports for all products into all the indicated


between 15% and 56.25%. The imports with the highest import duties are electric and hybrid



Country imp World (US$ mil)SA exp World (US$ mil)




387

Heat pumps imported from South Africa by Egypt is the only product indicated by the graph

which shows potential for improved bilateral trade with a low tariff of 5%. However, the lack

of current trade may be due to non-tariff barriers not accounted for by the trade chilling

exercise.

Table 12: Products South Africa and Egypt are trading with the rest of the world but not

with each other

Egypt


tariff (%)

Egypt imp

World

Egypt

imp SA

SA exp

World

SA exp

Egypt

3 yr

average

3 yr

average

3 yr

average

3yr

average

'680610 Slag wool, rock wool & similar mineral wools in bulk, sheets or rolls 5.00 5.46 0.00 3.38 0.00

'841919 Solar water heaters 5.00 5.65 0.00 1.22 0.00

'903210 Thermostats 0.00 25.07 0.01 1.00 0.00

'680690 Articles of heat/sound insulating, etc, nes, excl 6811&12 10.00 3.22 0.00 0.94 0.00

'701939 Webs, mattresses, boards and similar nonwoven products of glass fibres 5.00 3.27 0.00 0.91 0.00


Table 12 shows other single-use environmental products South Africa and Egypt are not

currently trading but have the potential for increased bilateral trade. The MFN applied tariff

for each of the products are 10% or less, showing that high tariffs are not the main factor

prohibiting the bilateral trade of various insulating materials, solar water heaters and

thermostats. However, there may be other barriers prohibiting bilateral trade, including

sanitary and phytosanitary requirements on insulating materials imported into Egypt.

6. Conclusion

There are various issues surrounding the liberalisation of environmental goods and services.

These include the lack of clear definitions in the context of the WTO discussion under the

Doha Declaration on the meaning of environmental goods and services, single versus dual-

use goods, the relative environmental friendliness of goods, constant evolving technology,

the implication of trade for developing countries, tariffs and NTBs, evaluating the

opportunities for developing countries and dealing with agricultural environmental issues.

The chapter shows that international trade plays a pivotal role in technological innovation

and the dissemination of low carbon technologies. International trade can assist African



388

countries, most vulnerable to the effects of climate change, to facilitate investment in

environmental goods and create opportunities for growth, development and employment.

Due to the lack of a workable definition the different interpretations of environmental goods

lead to differing results when analysing the patterns of trade. However, irrespective of the

environmental goods used in the trade data analysis, the data shows that trade by southern

and eastern African countries have been limited. Although there has been significant growth

in the world trade of environmental goods and also African countries’ trade in

environmental goods over the last five years, the share of trade by countries in the region as

a percentage of world trade is currently negligible.

It seems that the lack of trade cannot be attributed to high tariffs on most environmental

goods in the majority of the countries in southern and eastern Africa. The trade chilling

analyses show tariffs have not been the main barrier to trade in environmental goods in the

region. Although moderate to high tariffs are applied on the importation of some goods by a

few countries, these are minimal when compared to the product lines which can be

imported duty-free. Matching the specific global exports and imports with MFN applied

tariffs shows the potential exists to increase intra-regional trade in a wide variety of

environmental goods. However, considering the fact that the data shows the lack of bilateral

trade cannot be attributed to high tariffs is indicative to the importance of non-tariff barriers

as an obstacle to intra-regional trade. These NTBs can include subsidies on fossil fuels and

other conventional energy sources; a lack of financial, institutional and manufacturing

capacities; eco-labelling specifications; and local content requirements.

To facilitate technological development and the diffusion of environmentally friendly

technologies these NTBs need to be assessed and eliminated to enable countries in the

region to harness the potential benefits associated with increased opportunities in the

international market for environmental goods.



389

References

ICTSD. 2009. Liberalisation of climate-friendly environmental goods: Issues for small developing

countries. Information Note Number 4, October 2009. [Online]. Available: http://ictsd.org

International Trade Centre. 2011a. Market Access Map. [Online]. Available: http://www.macmap.org

International Trade Centre. 2011b. Trade Map. [Online]. Available: http://www.trademap.org

Meyer-Ohlendorf, N. and Gerstetter, C. 2009. Trade and climate change: Triggers or barriers for

climate friendly technology transfer and development. [Online]. Available: http://library.fes.de/pdf-

files/iez/global/06119.pdf

OECD/Eurostat. 1999. The Environmental Goods and Services Industry: Manual on Data Collection

and Analysis, OECD, Paris. [Online]. Available:

http://unstats.un.org/unsd/envaccounting/ceea/archive/EPEA/EnvIndustry_Manual_for_data_collec

tion.PDF

Vossenaar, R. 2010. Climate-related single-use environmental goods. ICTSD Issue Paper Number 13.

[Online]. Available: http://ictsd.org

World Trade Organisation. 2011. WTO Statistical tariff database. [Online]. Available:

http://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm

Authors’ profiles


390

Authors’ profiles

Hartzenberg, Trudi is the Executive Director of the Trade Law Centre for Southern Africa

(tralac). She is an economist whose area of specialisation includes trade, industrial trade,

industrial and competition policy, regional integration and industrial organisation. She has

taught at the Universities of Natal, Cape Town, Western Cape and Copenhagen, as well as

the Graduate School of Business at the University of Cape Town and the Copenhagen

Business School. She has worked on assignment for a number of international institutions

including the IMF, African Development Bank and the Commonwealth Secretariat. Contact:

[email protected].

Erasmus, Gerhard is a tralac Associate. He is also a founder of tralac. He holds degrees from

the University of the Free State, Bloemfontein (B.Iuris, LL.B), Leiden in the Netherlands (LLD)

and a Master’s from the Fletcher School of Law and Diplomacy. He has consulted for

governments, the private sector and regional organisations in southern Africa. He has also

been involved in the drafting of the South African and Namibian constitutions. He grew up

in Namibia.

McCarthy, Colin is Professor Emeritus in Economics of the University of Stellenbosch where

he is still on contract to teach graduate courses in international trade. He is a member of the

South African International Trade Administration Commission and an Associate of the Trade

Law Centre for Southern Africa. He has consulted widely on issues of trade policy and

regional integration and has also published extensively in these fields. Contact:

[email protected].

Pearson, Mark is currently Programme Director at TradeMark Southern Africa. He has been

working as an economist for about thirty years, mainly in Africa. Previously he was the

Programme Director of the Regional Trade Facilitation Programme (RTFP). As the director

he has developed and supervised implementation of pro-poor trade programmes; acted as

adviser to the WTO LDC Group; been involved in trade policy and trade facilitation efforts at

a regional level; and been instrumental in developing and implementing the COMESA-EAC-

SADC tripartite process. As Regional Integration Adviser with COMESA he assisted in the

implementation of the COMESA Free Trade Area and in the development of instruments to

Authors’ profiles


391

be used in the Customs Union. Prior to working with COMESA, Mark worked for six years as

an Adviser in the Zambian Ministry of Finance and Economic Development. He has also

worked in Nigeria, Sudan and Northern Ireland.

Jensen, Hans G. is a researcher at the University of Copenhagen, Institute of Food and

Resource Economics, International Economics and Policy Division. His field of expertise has

focused on the Common Agricultural Policy, World Trade Organisation, European Union

enlargement and general equilibrium modelling for the past ten years. He was awarded the

Global Trade Analysis Project Research Fellow distinction in recognition of his significant

contribution to the development of the GTAP database and is a member of the GTAP

advisory board. He has published international articles focusing on the EU enlargement, the

EU sugar regime, and the decoupling of domestic support in the EU among others. He has

also had his work published in various book chapters. Contact: [email protected].

Sandrey, Ron is an associate at the Trade Law Centre for Southern Africa (tralac) and is

Professor Extraordinaire at the Department of Agricultural Economics at the University of

Stellenbosch. He came to Africa in 2005 following a career in New Zealand as an economist

with the New Zealand Ministry of Foreign Affairs and Trade and the Ministry of Agriculture

and Fisheries in that country. Since coming to South Africa he has worked extensively on

trade and trade related issues in southern Africa. He holds a PhD in Economics from Oregon

State University. Contact: [email protected].

Cronjé, JB is a researcher and coordinator of tralac training programmes. He holds a LL.M.

(International Trade) and LL.B. from the University of Stellenbosch. His primary research

interests include international trade law, specially trade in services and regional economic

integration.

Authors’ profiles


392

Fundira, Taku is a researcher whose main interests are trade statistics, trade policy and

trade in agriculture. He holds a Masters degree in Agricultural Economics from Stellenbosch

University and is a member of the Agricultural Economics Association of South Africa

(AEASA). He is also part of the Trade Reference Group which brings together researchers to

share ideas on topical agricultural trade related issues.

Kruger, Paul is a researcher with special interests in services negotiations, foreign

investment, industry competitiveness and other behind the border issues. He is a qualified

trade lawyer and has been involved in wide range of regional and international trade and

trade related projects.

Viljoen, Willemien holds a BComm Honours degree in Economics and a Bachelor of Laws

degree (LLB) from the University of Stellenbosch. Her research interests are non-tariff

barriers to trade, trade data analysis and modelling, regional integration and international

trade policy.

Woolfrey, Sean holds a BSocSc (Honours) in Politics, Philosophy and Economics from the

University of Cape Town and an MPhil in Development Studies from the University of

Cambridge. His research interests are in the fields of political economy, development

economics and international trade, and include issues related to regional integration, trade

and industrial policy and the developmental state.

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