The Africa Continental Free Trade Area: An opportunity to deepen cooperation on regional public goods

The Africa Continental Free Trade Area (AfCFTA) signed in March 2018 aims to establish a single market across the continent. This challenge is also an opportunity to extend the provision of regional public goods beyond hard infrastructure. Peace and security, mining, and energy are such examples covered in the Africa Economic Outlook 2019.

Until now, evaluation of the progress of integration across Africa has centered on the eight African Union-recognized Regional Economic Communities—and seven other economic organizations—all primarily aimed at deepening intra-regional trade. But regional integration has always been about more than an exchange of market access and cooperation. At the very least, there is always a need for rail, road, and other means of communication. In its assessment of progress and prospects for the recently signed African Continental Free Trade Area (AfCFTA), the Africa Economic Outlook 2019 concentrates on the progress of cooperation to develop regional public goods. A tally of regional organizations dealing with regional public goods shows that five deal with energy, 15 with the management of rivers and lakes, three with peace and security, and one with the environment.

The key distinctive feature of regional public goods is that, unlike national public goods, no single body with the authority of a state exists to ensure the supply of the good. Since all Regional Economic Communities have more than two members, some collective action is necessary to provide these regional public goods. Governance (implementing shared standards and policy regimes) is the intermediate public good necessary to generate the desired regional public goods: knowledge (education and scientific research), construction and operation of cross-border infrastructure, environment, health, peace, and security.

From an economic perspective, the application of the principle of subsidiarity requires that the scope of the established regional institutions should match the region benefiting from the spillover. This is not an easy task across Africa’s landscape where the benefits of common policies are high because of widespread cross-border physical (i.e., environmental) and policy (air transport, corridors) spillovers. The costs are also high because of policy preference differences across member countries. Common decisionmaking internalizes the spillovers but it moves the common policy away from its preferred national policy (i.e., a loss of national sovereignty). Because of low trust in Africa, but also in other regions, most regional cooperation is intergovernmental. Each state then retains veto power, and the regional organization is a secretariat that coordinates and/or harmonizes policies, sets standards, or provides services. In short, these regional bodies lack real authority over member states to deliver these regional public goods.

The Africa Economic Outlook 2019 gives evidence of growing cooperation in several areas: (i) peace and security; (ii) hard infrastructure (roads, ports, railways, and corridors); (iii) soft infrastructure (logistics markets including regulatory policies for mining and energy). Progress and challenges for peace and security, and soft infrastructure (mining and energy) are summarized here.

Peace and security

As political scientists have argued, the creation of supranational institutions when regional integration is deep reduces international insecurity through dialogue and the exchange of information on military capabilities. Discussions among members spill over to political issues diffusing political disputes that could escalate into political conflicts. Sufficiently deep regional trading arrangements increase the opportunity costs of conflict and reduce information asymmetries as partners know each other better. These two channels reduce the probability of costly conflicts.

Deep regional trade arrangements like customs unions and common markets require more encompassing political institutions than shallow arrangements like free trade areas. Evidence shows that membership in a deep regional trade arrangement reduces the probability of a dispute escalating into war, giving direct support to the often-mentioned objective of peace in Regional Economic Communities (e.g., Economic Community of West African States and East African Community). Viewed in this light, the costs associated with negotiating the deep African regional trade arrangements (Southern African Customs Union, Central African Economic and Monetary Community, and West African Economic and Monetary Union) have been borne by colonizers. Increased trade among members then raised the opportunity cost of future wars among members by increasing their interdependence.

The reports Assessing Regional Integration in Africa VIII and Africa Economic Outlook 2019 give examples of increasing cooperation on security across Africa. Significantly, the African Standby Force, operational since 2016, is organized along geographical lines, an application of the principle of subsidiarity necessary for the success of a regional public good. Among its successes, ECOWAS member states prevailed in its intervention into the 2017 presidential election in the Gambia. The African Union also has its own military mission in Somalia to destroy al-Shabaab strongholds in central Somalia.

Regionalizing infrastructure regulation

Most infrastructure industries across Africa have performed poorly. The internationalization of infrastructure reform to the regional level would help at several levels. First, inefficiencies in infrastructure become more important as barriers to trade fall if only because goods transit through infrastructure networks. Second, as trade liberalization has developed internationalized communication infrastructure, their associated networks will operate more efficiently if organized internationally. Third, the likelihood that regulation can serve as protection against international competition will be reduced if regulation is at the regional level. Coordination of policies, harmonization of regulations, and, to the extent possible, harmonization of legal institutions are important steps in the path towards deep regional integration. Taxation of mining activities and the development of power grids are examples of challenges and progress at cooperation.

Mining

Many African countries are pursuing a mineral-based industrialization strategy. This requires coordination across states for the exploitation of minerals. The African Minerals Development Centre is to help develop a regional approach to illicit financial flows in extractive industries, estimated at $25 billion per year, and to coordinate fiscal regimes. However, a summary of the fiscal regimes across 21 African gold exporters conducted by the Fondation pour les Études et Recherches sur le Développement International (FERDI) shows that the sharing of the rents between the state and multinational mining enterprises has varied greatly across countries. For instance, across the West African Economic and Monetary Union, in spite of a community directive applying to all countries, tax rates on gold exports varied between 2 percent and 16 percent in 2016.

Energy

The development of regional electricity markets continues to be a challenge worldwide. Cross-border trade in electricity is low everywhere. In 2012, exports of electricity were around 3 percent of global production while it was 17 percent for coal, 31 percent for gas, and 52 percent for oil. In Africa, with many small countries, trade in electricity would bring many benefits provided that the hard infrastructure is at scale and functioning and that the soft infrastructure (governance) is trustworthy. A huge desert solar program across the Sahel, the Desert to Power Initiative supported by the African Development Bank, is to link 250 million people to electricity. The project, expected to save 2-4 percent of the continent’s GDP every year, is to make Africa a renewable powerhouse. The Africa Economic Outlook report describes these benefits and the hurdles on the way to developing power pools.