The real business of regional integration
Posted Oct 09, 2008
In recent years, national economies in all parts of the world have benefited from greater regional integration, with one notable exception: Africa.
There are at least two key reasons why this opportunity has not yet been realised.
First, African countries trade on average just 10% of their goods with each other. Why? Because African products lack complementarity. What’s more, more than 98% of the world economy lies outside the continent. It is therefore almost inevitable that African producers will aim to get a slice of the external market first.
The second, related, reason is the high cost of doing business in Africa. Indeed, greater competitiveness is crucial to lessening the costs to African producers and improving their returns.
Trade costs form a high percentage of the costs of African exports and imports. The high cost of transport in Africa, which is about 30% to 40% above that in other developing regions, seriously undermines the continent’s growth prospects. The direct and indirect effect of these costs is to reduce the volume and worsen the terms of trade.
For almost half of the 48 sub-Saharan countries, transport payments absorb more than 20% of foreign export earnings. For some landlocked nations, these costs absorb over 50%. Particularly significant is the negative impact of poor transport infrastructure on rural development, making it difficult for African farmers to specialise in high value fruit crops for export.
Take the case of Rwanda. The country wants export-led growth, but about 45% of Rwandan export value comprises transport and insurance costs, compared to an average of 14% for landlocked countries, and 17% for least developed countries. Therefore, Rwandan goods are too expensive and they struggle on the world market.
These are not only transportation charges due to poor infrastructure, but trade costs caused by inefficient customs and clearance procedures, themselves the product of a closed mindset and an uncompetitive policy environment.
There is much that can be done in the short term to improve this situation in East Africa and much of it does not involve big-ticket ‘hard’ infrastructure projects. Indeed, quick gains are centred on the things that are within the power of Africans to most easily change: policies and procedures.
Of course, the long-term work of planning, financing and constructing better and more efficient road, rail, air and port infrastructure must go on apace. But better policy – and the better procedures that flow from it – could reduce the time to and cost of moving goods between Kigali and the coast substantially.
Such detailed policy work should deliver easy-to-implement procedures, and should focus on five interconnected areas.
First, delays must be reduced.
In a route diagnostic the Brenthurst Foundation recently completed for the Rwanda government, the truck used to move a container of coltan over five days from Kigali to Mombasa did not move for 60% of the time. Personal reasons (sleeping, eating, chatting to friends) accounted for 40% of this, while construction delays accounted for 0.3%, accidents 4.3%, roadblocks 1.5% and border procedures 13.6%. Truck accidents were caused mainly by the difficulty of having a left-hand/right-hand drive region (it is hard to believe that after 100 years of the motor car we have not got this basic right!)
In addition to the delays during driving time, there were major delays at both the beginning and end of the Northern Corridor. At the beginning: Export declarations can take 2-3 days and two separate bonds are needed. At the end: it can take 4-5 days to get onto the boat at best, and more than two weeks at worst.
Second, customs procedures should be standardised and streamlined.
It takes a minimum of 72 hours to clear a container in Mombasa. In Singapore, most are cleared in little over two minutes. The reason for this is that the Singaporeans have computerised procedures, do not manually search every container but rather profile goods, and pride themselves on moving goods, not checking and collecting taxes and duties. Electronic paperwork will not only reduce the time it takes, but will reduce the scope for corruption.
Third, borders should be kept open 24 hours a day, seven days a week.
Our route diagnostic showed that the greatest delay was on the Kenyan side of the Uganda/Kenya border where more than 21 hours were spent due to heavy congestion caused by a lack of 24-hour operations. MaGeRwa’s (Rwandan Customs Authority) limited opening hours - between Monday and Friday from 8am to 5pm - can also delay trucks for up to 5-6 days. Each day of idle time for a truck incurs a loss (and cost to producers) of US$300-$400.
(The government of Kenya, under pressure from business associations, has subsequently introduced 24-hour operations at the port of Mombasa and various border posts, while Uganda and Rwanda have extended the working hours to 10pm with a view to further improvements).
Fourth, a zero tolerance policy and practice towards corruption should be adopted. At the very least it should be the exception rather than the rule.
Our diagnostic showed that corruption along the Northern Corridor happened in three types of places: Police roadblocks; weighbridges; and border gates. In all cases, an explicit bribe was never solicited. Rather, a small story was constructed to elicit the bribe. The total of petty bribery totaled US$158. Weighbridges cost the most, accounting for 84% of the total value of bribes. Corruption occurred at only 34% of roadblocks, but there were 15 such cases in Kenya and one in Rwanda.
Fifth, and finally, these measures cannot be carried out in isolation. They must form part of an overall effort to reduce costs with the aim of spurring business.
Costs will, of course, go down if the region’s countries had more to export. It is estimated that the ratio of container imports to exports is 2:1 in Kenya, and at least 3:1 in Rwanda. Put differently, two out of three trucks leave Rwanda empty. This can only be improved if countries in the region work together to build up their export industries. However, this is a vicious circle. If transport costs remain high, exports will continue to be penalised in world markets.
Africa’s regional routes have many shortcomings, but they are not the main drivers of high transport costs. And fixing infrastructure, important as it is, will also not in itself drastically improve transit time. Rather, the root cause of the problem of delays and high costs is unwieldy bureaucracy, government policies and the simple economics of business.
Over the past decade there has been much talk about regional integration as a means to reduce onerous costs and spark growth and development. The reality, however, has lagged some way behind the rhetoric. There have also been many studies and international meetings on the subject of regional integration. Few – if any – have delivered concrete results, aside from happy consultants.
A declaration or a treaty cannot establish regional integration. It can only come about through steps taken to improve efficiencies and reduce costs, not the other way around. If Africa’s regional economic communities mean business, now is the time for walking the talk of integration through more action and less talk.
. Dr Mills heads the Johannesburg-based Brenthurst Foundation, and has, during 2008, been on secondment to the Government of Rwanda as the strategic adviser to the president.